FEDERAL BUDGET SUMMARY – 2017
when renounced to shareholders under a flow-through share agreement. CEE are
fully deductible in the year they are incurred.
Budget 2017 proposes to no longer permit small oil and gas corporations to treat
the first $1M of CDE as CEE.
This measure will apply in respect of expenses incurred after 2018 (including
expenses incurred in 2019 that could have been deemed to have been incurred in
2018 under the look-back rule) with the exception of expenses incurred after 2018
and before April 2019 that are renounced under a flow-through share agreement
entered into after 2016 and before Budget Day.
ELECTION FOR MARK-TO-MARKET RULES FOR DERIVATIVES
The recent Federal Court of Appeal decision of Kruger Inc. permitted a nonfinancial institution taxpayer to compute its gains and losses from derivatives on a
mark-to-market basis rather than on a realization basis. In response the
government has introduced the ability for taxpayers to elect to use the mark-to-market method with respect to eligible derivatives held on income account. Once
the election is made the taxpayer is required to report on a consistent manner
unless the election is revoked with the consent of the Minister. The recognition of
any accrued gains or losses on eligible derivatives as at the beginning of the
taxpayer’s election year will be deferred and taxed on a realization basis. The
election is available for taxation years that begin on or after Budget Day.
The realization of gains and losses on derivative transactions can be treated as
being on income account depending upon the situation. Certain transactions, for
example a straddle transaction, would allow taxpayers to selectively trigger gains
and losses. A straddle can be effected over two taxation years such that the
taxpayer triggers a loss on its derivative position in the first taxation year with the
income realized in the next taxation year. The realized loss can be used to offset
other income with the income being deferred to future tax years (and in extreme
situations the income could be deferred indefinitely by entering into additional
The government is currently challenging such transactions under existing
provisions including the general anti-avoidance rule; however, Budget 2017
proposes to introduce specific anti-avoidance rules for such transactions. The new
stop-loss rules will apply to defer the loss on a taxpayer’s “position” to match it
with the gain on an unrealized “offsetting position.” A taxpayer’s position is
defined to include one or more properties that are commodities, forward
contracts, shares, partnership interests and trusts. An offsetting position is one
that is held by a taxpayer (or a non-arm’s length, affiliate or connected person)
that would eliminate the holder’s risk of profit or loss in respect of the position.
These rules will not apply to a position where:
• It is held by a financial institution as defined for purposes of the mark-to-market rules or by a mutual fund trust or mutual fund corporation;