Annex 7

Tax Measures:

Supplementary Information and

Notices of Ways

and Means Motions

Table of Contents

Tax Measures: Supplementary Information

Overview

Personal Income Tax Measures

General income tax relief

Canadian Opportunities Strategy

Improving Canada's health care system

Retirement income system

Support for families

Strengthening communities and the voluntary sector

Other measures

Business Income Tax Measures

International Taxation

Sales Tax Measures

Excise Tax Measures

First Nations Taxation

Appendix

Measures for tax fairness and to achieve

economic and social objectives

Notice of Ways and Means Motion

to Amend the Income Tax Act

Supplementary personal tax credit

Individual surtax

Credit for interest on student loans

RRSP withdrawals for learning

Part-time education

Registered education savings plans (RESPs)

PHSP premiums

Alternative minimum tax

Child care expense deduction

Canada Child Tax Benefit

Caregiver Tax Credit

Home Buyers' Plan (HBP): general

Home Buyers' Plan: disabled persons

Medical expense tax credit

Disability tax credit

Volunteers

Meal and entertainment expenses

Relocation expenses

Employee loans

Certified cultural property

Mutual fund trust unit options

Part VI surtax

Countervailing and anti-dumping duties

Distributions by mutual fund trusts after year-end

Large corporations tax: prescribed

financial institutions

Scientific research and experimental development

Indirect assistance

Treaty exempt income

Foreign tax credit: treaty-protected

foreign income

Dual-resident individuals

Treaty-based exemption: information return

Deemed residence

Former residents' foreign employment income

Immigrating corporations

Surplus stripping

Foreign tax credit: short-term

securities acquisitions

Foreign tax credit: where profit not material

Non-residents' certificates of exemption

Amounts owing by non-residents

Mergers of foreign corporations

Taxpayer information

Notice of Ways and Means Motion to

Amend the Income Tax Conventions

Interpretation Act

Notice of Ways and Means Motion

to Amend the Excise Tax Act

Direct sellers

Services supplied by certain charities to registrants

Charities operating bottle return depots

Visitors' Rebate Program

Respite care for individuals with an

infirmity or disability

Tax Measures: Supplementary Information

Overview

This budget begins a process of general tax relief targeted at low- and middle-income Canadians: an increase in tax-free income for low-income individuals through the introduction of a supplement to the basic personal, spousal, and equivalent-to-spouse amounts; and the elimination for most, and reduction for many others, of the 3-per-cent general surtax.

The budget proposes many tax measures to achieve the nation's economic and social objectives. The budget also proposes a number of measures designed to enhance the fairness of the Canadian tax system. The appendix to this annex provides a summary table of these measures and those announced in the four previous budgets to enhance tax fairness. The budget also contains an extension of the temporary tax on the largest deposit-taking institutions and the recently announced increase to the excise tax on tobacco products.

Table A7.1

Federal revenue impact of new measures

1998-1999 1999-2000 2000-2001 ($ millions) Personal income Tax Measures General income tax relief Increasing tax-free income for low-income

Canadians

-170

-270

-315 General surtax -710 -1,175 -1,365 Canadian Opportunities Strategy Tax relief for interest on student loans -80 -130 -145 Tax-free RRSP withdrawals for lifelong

learning

-15

-40

-45 Tax relief for part-time students -25 -90 -90 Canada Education Savings Grants1 -150 -200 -275 Improving Canada's health care system Deductibility of health and dental premiums

for the self-employed

--

-90

-110 Retirement income system Alternative minimum tax & RRSPs -70 -20 -20 Support for families Raising limits for child care expense

deduction

-20

-45

-45 Further increase in Canada Child Tax Benefit2 -- -320 -750 New tax credit for caregivers -30 -120 -125 Enhanced tax assistance for persons with

disabilities

-5

-5

-5 Strengthening communities and the voluntary sector Emergency volunteers -5 -10 -10 Other measures Underground economy: reporting of federal

and construction contracts

--

--

-- Meal expenses -- -- -- Clarify the tax treatment of relocation

expenses

--

--

-- Strengthening the integrity of certified

cultural property regime

--

--

-- Tax treatment of employee options to acquire

mutual fund trust units

--

--

-- Business Income Tax Measures Temporary capital tax surcharge on large

deposit-taking institutions

25

50

-- Countervailing and anti-dumping duties -- -- -- Distributions by mutual fund trusts after

year-end

--

--

-- Large corporations tax: Prescribed financial

institutions

--

--

-- Earthquake reserves -15 -20 -25 Prevent unintended benefits under the SR&ED

regime

--

--

-- Indirect assistance -- -- -- International Taxation -- -- -- Sales Tax Measures The Visitors' Rebate Program -5 -5 -5 Measures relating to charities -- -- -- Respite care -- -- -- Direct sellers -- -- -- Excise Tax Measures Tobacco tax increases 70 70 70 First Nations Taxation -- -- -- Total -1,205 -2,420 -3,260 --	Small, non-existent or prevents revenue loss.

1	Affects both spending and tax revenues.

2	The Canada Child Tax Benefit is proposed to increase by a further $425 million on July 1, 1999 and another $425 million on July 1, 2000. The fiscal cost estimates reported are somewhat smaller as they reflect increase over only three-quarters of the fiscal years.

Personal Income Tax Measures

General income tax relief

There are two tax measures providing general personal income tax relief to low- and middle-income Canadians in this budget. They are: increasing the amount of tax-free income for low-income Canadians; and eliminating the 3-per-cent general federal surtax for Canadians earning up to about $50,000, and reducing the surtax for Canadians earning between $50,000 and $65,000. These measures will result in a $1.4 billion personal income tax reduction in 1999-2000.

Increasing tax-free income for low-income Canadians

The income tax system currently includes basic personal and spousal/equivalent-to-spouse credits to allow individuals to receive a basic amount of income on a tax-free basis. These credits are available to all individuals.

The amount used to establish the basic personal credit is $6,456, while the spousal and equivalent-to-spouse amounts have a maximum value of $5,380. The spousal and equivalent-to-spouse amounts are reduced on a dollar-for-dollar basis by the income of the claimed dependant in excess of $538.

These non-refundable tax credits provide federal tax relief equal to 17 per cent of the gross amounts ($1,098 in the case of the basic personal amount, and up to $915 for the spousal and equivalent-to-spouse amounts). The credit effectively eliminates income tax on taxable income equal to the basic personal and spousal/equivalent-to-spouse amounts claimed.

This budget proposes to introduce a supplement of $500 to the basic personal, spousal, and equivalent-to-spouse credits for low- income tax filers. This effectively increases the amount of income received on a tax-free basis by up to $500 for single individuals with incomes under $20,000, and up to $1,000 for individuals with incomes up to about $40,000 who also have an eligible dependant. This will reduce federal income tax by up to $85 for a single individual, and up to $170 for a family.

The increase to the basic personal and spousal/equivalent-to-spouse amounts will be implemented by way of a supplementary non-refundable amount, calculated separately on the tax form. Single individuals will have the $500 supplementary amount reduced at a rate of 4 per cent of income in excess of $6,956. Individuals with an eligible dependant may claim an additional amount equal to the lesser of $500 or their dependant's adjusted income, defined as $6,956 minus the dependant's income. The total amount claimed by an individual with an eligible dependant will be reduced by 4 per cent of the filer's income minus the total of $6,956 and the dependant's adjusted income. If the dependant's net income is greater than $6,956, then the additional amount in respect of the dependant will be zero, and the dependant must file a tax return to claim a supplementary personal amount directly.

Under the current provisions relating to the transfer of tax credits between spouses, an individual must first use transferable credits to eliminate any tax liability on income in excess of $6,456 before any unused portion of these credits can be transferred to a spouse. Effective with the supplementary credit amount increases, individuals will be required to eliminate their tax liability on income in excess of $6,956 before any transfer of unused non-refundable credits to a spouse can be made. This increases the potential amount of credits that can be transferred between spouses.

This measure targets tax relief to low income Canadians. It effectively removes approximately 400,000 low income individuals from the tax rolls, and provides tax relief to an additional 4.6 million low-income individuals.

For a single parent with $20,000 in employment income, this measure will reduce federal income tax by $108 (table A7.6). A one-earner couple with $20,000 in income will pay $132 less in income tax (Table A7.4), while a one-pensioner elderly couple with income of $20,000 will benefit from a tax reduction of $103 (Table A7.8).

This measure will come into effect July 1, 1998, and will reduce taxes paid by low income individuals and families by $170 million in 1998-1999, and $270 million in 1999-2000.

Chart A7.1 (See BPA7-1E.WMF or .WPG)

General surtax

Individuals are currently required to pay a general surtax of 3 per cent of basic federal tax. This surtax raises about $2.2 billion in annual revenues, and has been in place since 1986 when it was introduced as a temporary measure to reduce the deficit.

The budget proposes to eliminate the general surtax for individuals with income up to about $50,000. Individuals with income between approximately $50,000 and $65,000 will see their surtax reduced on a sliding scale.

To ensure that tax relief is focused on low- and middle-income levels, the surtax reduction will have a maximum value of $250 per taxable individual by 1999, and will be reduced at a rate of 6 per cent of basic federal tax over $8,333. For 1998, individuals will receive half the full value of the 1999 surtax reduction.

Approximately 13 million individuals, or 83 per cent of all taxable filers, will no longer pay any surtax whatsoever, while another one million individuals having incomes between approximately $50,000 and $65,000 will see their surtax reduced.

For a typical single individual earning $35,000, this measure provides an annual tax reduction of $150 (Table A7.3). A typical one-earner family of four with $50,000 in wage income will receive surtax relief of $238. (Table A7.4)

This measure will provide tax relief of $710 million in 1998-1999, and $1,175 million in 1999-2000.

Chart A7.2 (See BPA&2E.WMF or WPG)

Table A7.2

Impact on taxpayers -- 1999

Number of taxpayers General tax relief Increasing tax-free income for low income Canadians Those made non-taxable 400,000 Those with tax reductions 4,600,000 Total number of taxpayers benefiting 5,000,000 General Surtax Those with surtax eliminated 12,600,000 Those with surtax reductions 1,400,000 Total number of taxpayers with surtax relief 14,000,000

Table A7.3

Typical Single Individual -- 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax

Tax relief measures

Total

income Current federal tax1

Low-income supplement Surtax elimination/

reduction

Total change in federal tax $ $ $ % federal tax2 $ % federal

tax2 $ % federal tax2 7,500 -97 -84 n.a.3 -1 n.a.3 -85 n.a.3 10,000 264 -66 -25.1 -14 -5.2 -80 -30.2 12,500 640 -49 -7.6 -26 -4.1 -75 -11.7 15,000 1,051 -31 -3.0 -39 -3.7 -70 -6.6 17,500 1,461 -14 -0.9 -51 -3.5 -65 -4.4 20,000 1,872 0 0 -63 -3.4 -63 -3.4 25,000 2,693 0 0 -87 -3.2 -87 -3.2 30,000 3,756 0 0 -112 -3.0 -112 -3.0 35,000 5,141 0 0 -150 -2.9 -150 -2.9 40,000 6,445 0 0 -188 -2.9 -188 -2.9 45,000 7,784 0 0 -227 -2.9 -227 -2.9 50,000 9,123 0 0 -219 -2.4 -219 -2.4 55,000 10,462 0 0 -141 -1.3 -141 -1.4 60,000 11,826 0 0 -61 -0.5 -61 -0.5 65,000 13,341 0 0 0 0 0 0 75,000 16,473 0 0 0 0 0 0 100,000 24,303 0 0 0 0 0 0 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table A7.4

Typical One-Earner Family of Four -- 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax

Total income Current federal tax1 Tax relief measures Low-income supplement Surtax elimination/ reduction Total change in federal tax $ $ $ % federal tax2 $ % federal tax2 $ % federal tax2 13,500 -3,705 -169 n.a.3 -5 n.a.3 -174 n.a.3 15,000 -3,458 -168 n.a.3 -7 n.a.3 -175 n.a.3 17,500 -3,048 -150 n.a.3 -20 n.a.3 -170 n.a.3 20,000 -2,637 -132 n.a.3 -33 n.a.3 -165 n.a.3 25,000 -992 -97 n.a.3 -57 n.a.3 -154 n.a.3 30,000 461 -62 -13.5 -83 -18.0 -145 -31.4 35,000 2,246 -27 -1.2 -122 -5.4 -149 -6.6 40,000 3,953 0 0 -160 -4.1 -160 -4.0 45,000 5,542 0 0 -199 -3.6 -199 -3.6 50,000 7,131 0 0 -238 -3.3 -238 -3.3 55,000 8,720 0 0 -195 -2.2 -195 -2.3 60,000 10,335 0 0 -116 -1.1 -116 -1.1 65,000 12,078 0 0 -29 -0.2 -29 -0.3 75,000 15,485 0 0 0 0 0 0 100,000 23,315 0 0 0 0 0 0 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table A7.5

Typical Two-Earner Family of Four -- 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax

Tax relief measures Total Income Current federal tax1 Low-income supplement Surtax elimination/ reduction Total change in federal tax $ $ $ % federal tax2 $ % federal tax2 $ % federal tax2 20,000 -3,342 -169 n.a.3 -4 n.a.3 -173 n.a.3 25,000 -2,683 -141 n.a.3 -24 n.a.3 -165 n.a.3 30,000 -1,363 -108 n.a.3 -49 n.a.3 -157 n.a.3 35,000 2 -52 -- -68 -- -120 -- 40,000 1,324 -70 -5.3 -92 -6.9 -162 -12.2 45,000 2,624 -56 -2.1 -116 -4.4 -172 -6.5 50,000 3,733 -42 -1.1 -141 -3.8 -183 -4.9 55,000 5,082 -28 -0.5 -174 -3.4 -202 -4.0 60,000 6,432 -14 -0.2 -206 -3.2 -220 -3.4 65,000 7,789 0 0 -239 -3.1 -239 -3.1 75,000 10,464 0 0 -305 -2.9 -305 -2.9 100,000 16,530 0 0 -198 -1.2 -198 -1.2 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table A7.6

Typical Single Parent with One Child -- 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax

Tax relief measures Total income Current federal tax1 Low-income supplement Surtax elimination/ reduction Total change in federal tax $ $ $ % federal tax2 $ % federal tax2 $ % federal tax2 17,500 -1,826 -122 n.a.3 -5 n.a.3 -127 n.a.3 20,000 -1,489 -108 n.a.3 -15 n.a.3 -123 n.a.3 25,000 -764 -77 n.a.3 -37 n.a.3 -114 n.a.3 30,000 659 -42 -6.3 -62 -9.4 -104 -15.8 35,000 1,986 -7 -0.3 -91 -4.6 -98 -4.9 40,000 3,663 0 0 -129 -3.5 -129 -3.5 45,000 5,127 0 0 -168 -3.3 -168 -3.3 50,000 6,591 0 0 -207 -3.1 -207 -3.1 55,000 8,055 0 0 -246 -3.1 -246 -3.1 60,000 9,519 0 0 -180 -1.9 -180 -1.9 65,000 11,040 0 0 -99 -0.9 -99 -0.9 75,000 14,232 0 0 0 0 0 0 100,000 22,062 0 0 0 0 0 0 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table A7.7

Typical Elderly Single -- 1999

Full-year impact of proposed measures on the low-income

supplement to personal amounts and surtax

Tax relief measures

Total income Current federal tax1

Low-income supplement Surtax elimination/ reduction

Total change in federal tax $ $ $ % federal tax2 $ % federal tax2 $ % federal tax2 12,500 -30 -49 n.a3 -7 n.a3 -56 n.a3 15,000 407 -31 -7.7 -20 -4.9 -51 -12.5 17,500 845 -14 -1.6 -33 -3.9 -47 -5.5 20,000 1,283 0 0 -46 -3.6 -46 -3.6 25,000 2,158 0 0 -72 -3.3 -72 -3.3 30,000 3,383 0 0 -101 -3.0 -101 -3.0 35,000 4,953 0 0 -144 -2.9 -144 -2.9 40,000 6,424 0 0 -187 -2.9 -187 -2.9 45,000 7,894 0 0 -230 -2.9 -230 -2.9 50,000 9,341 0 0 -206 -2.2 -206 -2.2 55,000 10,877 0 0 -132 -1.2 -132 -1.2 60,000 12,765 0 0 -66 -0.5 -66 -0.5 65,000 14,785 0 0 0 0 0 0 75,000 18,947 0 0 0 0 0 0 100,000 27,962 0 0 0 0 0 0

1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table A7.8

Typical Elderly Couple -- 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax

Tax relief measures Total income Current federal tax1 Low-income supplement Surtax elimination/

reduction Total change in federal tax $ $ $ % federal tax2 $ % federal tax2 $ % federal tax2 20,000 -295 -103 n.a.3 0 0 -103 n.a.3 25,000 438 -97 -22.2 -22 -4.9 -119 -27.2 30,000 1,498 -62 -4.2 -47 -3.2 -109 -7.3 35,000 2,713 -27 -1.0 -78 -2.9 -105 -3.9 40,000 4,183 0 0 -122 -2.9 -122 -2.9 45,000 5,654 0 0 -165 -2.9 -165 -2.9 50,000 7,124 0 0 -207 -2.9 -207 -2.9 55,000 8,572 0 0 -250 -2.9 -250 -2.9 60,000 10,107 0 0 -177 -1.7 -177 -1.7 65,000 11,995 0 0 -111 -0.9 -111 -0.9 75,000 16,059 0 0 0 0 0 0 100,000 25,589 0 0 0 0 0 0

1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income level receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Canadian Opportunities Strategy

Tax relief for interest on student loans

To ease the burden of student debt, the budget proposes to allow all individuals repaying student loans to claim a credit on the interest they pay.

A non-refundable federal credit of 17 per cent will be provided on the interest portion of student loan payments made in the year. The proposed credit covers interest only, not repayments of principal. It does not apply to interest accrued but not paid or to any forgiven interest.

The credit applies to interest payments on loans, both new and outstanding, approved under the Canada Student Loans Program and provincial student loan programs.

The credit may be claimed in the year it is earned or in any of the following five years. It is not transferable.

Statements reporting eligible interest payments will be provided to taxpayers by financial institutions or, where appropriate, by the Department of Human Resources Development Canada and provincial government departments administering these loans.

This measure is effective for 1998 and subsequent years, and is expected to provide tax relief of about $130 million in 1999-2000.

Tax-free RRSP withdrawals for lifelong learning

Lifelong learning is a key factor in preserving future employment income. However, individuals may have limited access to financial resources when the need for training occurs. For many people, the most readily available source of funds is their registered retirement savings plans (RRSPs). Although saving for retirement is important, keeping or finding a job is crucial to preserving retirement income.

The budget therefore proposes to allow RRSP withdrawals for skills enhancement. Eligible individuals will be able to make tax-free withdrawals from an RRSP (other than a locked-in RRSP) to finance full-time training or education for themselves or their spouses. Withdrawals may not exceed $10,000 in a year. More than one withdrawal may be made in any given year from any number of specific RRSP accounts, provided that the annual limit is not exceeded. Withdrawals under this plan are permitted for a withdrawal period of up to four calendar years, provided that the total amount withdrawn does not exceed $20,000. However, the withdrawal period for a participant in the plan must end before the start of a year for which repayment by the participant is required in accordance with rules described below.

RRSP funds may be withdrawn under the plan where the recipient, or the recipient's spouse, is enrolled, or committed to enrol, as a full-time student in a qualifying educational program of at least three month's duration at an eligible educational institution. However, a disabled student may qualify as a student under the plan whether or not studying on a full-time basis. Where RRSP funds are withdrawn before the enrolment of the recipient or the recipient's spouse, the enrolment must occur in the year of the RRSP withdrawal or in January of the following year.

Special rules apply where RRSP funds are withdrawn under the plan and the student does not finish the qualifying educational program. Under these circumstances, an RRSP withdrawal in respect of a program is still considered to have been received under the plan if any of the following three conditions are met: (a) the student withdraws from the program more than two months after the year of the RRSP withdrawal; (b) less than 75 per cent of the student's tuition is refundable as a consequence of leaving a program; or (c) the student enrols in another qualifying educational program on a timely basis. In all other cases, the RRSP withdrawal will be included in the recipient's income unless the recipient repays the RRSP withdrawal and files an approved form with Revenue Canada. Where this procedure is followed, the RRSP withdrawal is not included in computing income and the recipient is treated as having not participated in the plan.

Where RRSP withdrawals have been made under the plan for a student's education, the recipient is not permitted to withdraw RRSP funds under the plan for the education of the student's spouse while the recipient has an outstanding balance under the plan. This restriction will limit administrative complexity associated with the calculation of repayments required under the plan.

RRSP withdrawals under the plan will generally be repayable by the recipient, without interest, in equal instalments over a period of 10 years to any RRSP under which the recipient is the annuitant. The first repayment must be made no later than 60 days after the fifth year following the year of the first withdrawal. However, repayments will be required to start earlier if the student fails to qualify for a full-time education tax credit for at least three months in each of two consecutive years in the four years following the year of the first withdrawal. Where this is the case, the earlier repayment is required to start no later than 60 days after the second of those two years. As under the Home Buyers' Plan, any amount not repaid for a year as required by a recipient will be included in computing the recipient's income for the year, and a recipient will be permitted to repay amounts faster than required.

There is no specific limit on the number of times an individual can participate in the plan. However, an individual may not participate in a new plan before the end of the year in which all repayments from any previous participation have been made.

Recipients of RRSP withdrawals under the plan must be Canadian residents. If a recipient subsequently emigrates from Canada, the recipient's outstanding balance under the plan will generally be included in the recipient's income to the extent that the recipient does not repay the balance within 60 days from the time of emigration. This is consistent with a similar rule under the Home Buyers' Plan. Rules on the death of a participant under the plan will also parallel those under the Home Buyers' Plan.

As the purpose of the plan is to provide access to existing RRSP funds, no deduction will be provided for an RRSP contribution made less than 90 days before its withdrawal under the plan.

RRSP withdrawals may be made under the plan after 1998.

This measure is expected to cost about $40 million in 1999-2000.

Tax relief for part-time students

More than one-third of all students, including a significant number of adults, are enrolled in part-time studies. However, apart from the tuition credit, little tax relief is available to those engaged in part-time education. The budget proposes to increase tax assistance to part-time students by allowing them to claim the education credit and the child care expense deduction. This measure is effective for 1998 and subsequent years.

To be eligible for the part-time education credit, students will be required to be enrolled at an educational institution in Canada in an eligible program lasting at least three consecutive weeks, and involving a minimum of 12 hours of courses each month. For each month during which these conditions are satisfied, the student will be entitled to an education amount of $60, on which a 17-per-cent tax credit is provided. An eligible student may claim either one part-time education credit or one full-time education credit in respect of a particular month, but not both. As with the full-time education credit, the unused portion of the part-time credit arising in any year may be transferred to a supporting person or carried forward for future use by the student.

In general, the child care expense deduction is available in respect of child care services which enable an individual either to earn income or to study on a full-time basis. The budget proposes to extend this deduction to cover child care expenses incurred by an individual in order to pursue part-time education. The child care expense deduction for part-time education will largely parallel the existing deduction.

For two-parent families where one spouse is a part-time student while the other is in the workforce, the working spouse may claim a deduction while the other spouse is studying. The deduction will be equal to the least of:

(1) actual expenses;

(2) two-thirds of earned income of the working spouse; and

(3) $175 per child under age 7, and $100 per child age 7 to 16, for each month for which a part-time education credit is claimed.

Child care expenses incurred by a single parent in order to attend school part-time will be deductible against all types of income. This will also apply to two-parent families when both parents are attending school at the same time. The budget also proposes that part-time attendance at secondary school be recognized for the purpose of the child care expense deduction. In the case of secondary education, the student is not entitled to the education credit, but must meet the requirements concerning the duration of the program and the number of hours of courses.

These two measures will provide tax relief of $90 million per year.

Canada Education Savings Grants

The budget proposes significant measures to make registered education savings plans (RESPs) a more attractive vehicle for saving for children's education, by introducing Canada Education Savings Grants.

Background on Registered Education Savings Plans

Registered education savings plans provide a vehicle for individuals to accumulate income for post-secondary education. Contributions to RESPs are held in trusts in order to generate income to be used to finance the full-time post-secondary education costs of the beneficiaries under the plan. In practice, most contributors are parents saving for their children's education. Contributions to RESPs are not deductible from the income of the contributor and normally return to the contributor on a tax-free basis. However, the income generated by the contributions is tax sheltered until paid out to named beneficiaries, when it is included in beneficiaries' incomes. Since beneficiary students typically have little other income, they pay little or no tax on educational assistance payments out of an RESP.

To ensure that the amount of tax-assisted savings sheltered by an RESP bears a reasonable relationship to the costs of full-time post-secondary education, there is an overall lifetime limit of $42,000 on contributions per beneficiary. To encourage regular savings for education over a long period, contributions to a particular RESP may be made for up to 22 years, and there is an annual limit of $4,000 on contributions in respect of a beneficiary. The $4,000 limit provides flexibility by allowing taxpayers to make up for missed contributions, and recognizes that many parents may not be in a financial position to set money aside for their children's education when the children are very young. An RESP must be terminated by the end of the year that includes the twenty-fifth anniversary of the plan.

Canada Education Savings Grant

To provide additional assistance to individuals saving for children's education, the budget proposes a new Canada Education Savings Grant (CESG) for RESP contributions made after 1997. Subject to certain limits, the Canada Education Savings Grant will be equal to 20 per cent of annual contributions made to RESPs for beneficiaries up to and including age 17. The Canada Education Savings Grant will be provided directly to the plan trustee to be invested in the plan into which the relevant contributions are made. The Canada Education Savings Grant itself is not included in calculating the annual and lifetime RESP contribution limits. Together with the accumulating investment income, the Canada Education Savings Grant will be available to be paid to a student as part of educational assistance payments made out of the RESP. If the beneficiary does not pursue higher education or training, the Canada Education Savings Grant will be required to be repaid to the government.

Beginning January 1, 1998, each child under age 18 will accumulate CESG contribution room of $2,000 per year, up to and including the year in which they attain age 17. The CESG will be payable on contributions made in the year to the extent that the contributions in respect of the child do not exceed the lesser of $4,000 and the unused CESG contribution room available in the year. While unused CESG contribution room will be carried forward for use in future years, contributions made in one year that exceed the amount of available CESG contribution room cannot be carried forward for purposes of attracting a CESG payment in a subsequent year. Contributions made by any subscriber in respect of a beneficiary can qualify for the CESG. The maximum total amount of CESG that can be paid in respect of any individual born after 1997 will be $7,200 (i.e. 20 per cent x $2,000 x 18 years).

Example

A child is born in February 1999. The child's CESG contribution room for that year is $2,000. In March 1999, the father makes an RESP contribution of $800 in respect of the child. A CESG of $160 (20 per cent of $800) is paid to the plan trustee. In November of the same year, the child's grandmother makes a $2,500 contribution to another RESP on behalf of the child. Since only $1,200 of the child's CESG contribution room is available at the time of the grandmother's contribution, only $1,200 of the grandmother's contribution qualifies for a CESG. The remaining $1,300 will not qualify for a CESG in the following year.

If no contributions other than the father's contribution were made, the remaining $1,200 worth of CESG contribution room would be carried forward for use in the future.

CESGs will not be paid in respect of RESP beneficiaries for years in which they are age 18 or older since, at this point, most will be pursuing, or preparing to pursue, their post-secondary education. When beneficiaries are age 18 or older, family resources are typically directed to assisting children to meet current needs, not directed to saving for the future. However, to accommodate beneficiaries whose higher education begins after age 18, subscribers may continue to make RESP contributions up to the end of the year that includes the twenty-first anniversary of the plan, but are not eligible to receive the CESG for the years in which the child is age 18 or older.

To encourage systematic savings over the longer term, contributions in a year in respect of beneficiaries attaining age 16 or 17 in the year will receive a CESG only where:

▪	a minimum of $4,000 of RESP contributions were made in respect of the beneficiary before the year in which the beneficiary attains 16 years of age; or

▪	a minimum of $300 in annual RESP contributions were made in respect of the beneficiary in any four years before the year in which the beneficiary attains 16 years of age.

Subject to certain limits described below, CESGs paid into family plans (i.e. plans with multiple beneficiaries, all of whom are related to the subscriber by blood or adoption) on contributions made in respect of a particular beneficiary can be used for the education of other beneficiaries under the plan. Similarly, CESGs paid to an RESP that is part of a group arrangement may, under certain circumstances, be reallocated to other RESPs in the group arrangement.

CESGs will not be paid in respect of an RESP beneficiary who is not resident in Canada. In addition, CESGs will not be paid on contributions made after 1999 to an RESP submitted for registration before 1999 unless the plan has been amended in accordance with the registration requirements that apply to plans submitted for registration in January 1999.

To ensure compliance with administrative requirements in respect of CESG repayments, trustees for RESPs will be required to maintain a notional account recording all transactions relating to CESG payments made into and out of the plan.

Educational assistance payments

The income of an RESP can be paid out to a beneficiary once the beneficiary enrolled as a full-time student in a qualifying educational program at a designated educational institution. Such payments are referred to as educational assistance payments (EAPs). A specific portion of each EAP will be considered to be attributable to CESGs paid into the plan. The CESG portion of an EAP will be based on the ratio of CESGs paid into the plan to total investment earnings held in the plan, and will reduce the remaining balance in the plan's CESG account. In certain situations, the CESG portion of an EAP will be considered to be nil. This can occur, for example, when an EAP is paid to an RESP beneficiary who became a beneficiary under the plan after attaining 21 years of age, or when an EAP is paid to an RESP beneficiary who is not resident in Canada.

There will be a lifetime limit of $7,200 on the amount of CESG money that a student can receive out of RESPs. Since the maximum CESGs that will be paid into RESPs in respect of a beneficiary will also be limited to $7,200, this lifetime limit will be relevant only for beneficiaries where CESG money is "shared" with other beneficiaries (e.g., family plans and group plans). In this regard, each RESP will be required to limit the total portion of EAPs paid as CESGs to $7,200. Thus, for example, if the total amount of CESGs paid into a family plan with two beneficiaries was $10,000 and only one beneficiary pursues post-secondary education, only $7,200 of the CESGs may be paid to that beneficiary. The remaining $2,800 in the plan's CESG account would be required to be repaid.

If an individual is a beneficiary under more than one RESP, the total amount of CESGs paid to the individual may exceed $7,200, even though each plan must limit CESG payments to that amount. In such a case, the individual will be required to repay the excess amount to the government. Since EAPs (including the CESG portion) are included in computing the individual's taxable income, the individual will be entitled to claim an offsetting deduction for the excess amount.

CESG repayments

Generally, RESPs may retain CESG money until it is used to assist in the beneficiary's post-secondary education (through EAPs) or it has been determined that it will not be used for that purpose. This section describes in more detail the circumstances in which an RESP trustee will be required to make CESG repayments to the government.

When contributions are withdrawn for non-educational purposes from an RESP which has received a CESG, the RESP trustee will be required to make a CESG repayment equal to 20 per cent of the withdrawal. Where a plan also contains unassisted contributions (i.e. any contributions made before 1998, and contributions made after 1997 that were not eligible for a CESG), assisted contributions will be considered to be withdrawn before unassisted contributions.

Example

A father establishes an RESP for his new-born daughter in 1998 and contributes $1,500 a year for six years. Total CESGs paid to the plan equal $1,800. In 2005, the father withdraws $3,000 of contributions from the plan. In this situation, the RESP trustee is required to make a $600 CESG repayment to the government (20 per cent of $3,000).

An RESP trustee will also be required to repay CESG money in the following situations:

▪	when the plan is terminated or revoked;

▪	when a payment of RESP income is made for non-educational purposes;

▪	when a beneficiary under the plan is replaced, except where the new beneficiary is under 21 years of age and either the new beneficiary is a brother or sister of the former beneficiary or both beneficiaries are related to the subscriber by blood or adoption; and

▪	when there is a transfer from the plan to another RESP involving either a change of beneficiaries or a partial transfer of funds.

The requirement to repay CESG money when an RESP beneficiary does not pursue post-secondary education will generally not apply to group plans which operate on the basis of age cohorts, provided the CESG money is reallocated to other RESPs in the group arrangement. The $7,200 limit on the amount of CESG money that can be paid for educational purposes to any RESP beneficiary under the group arrangement will apply.

An RESP trustee will be prohibited from making a refund of contributions, or a payment of RESP income for non-educational purposes, that would result in the value of the remaining property in the RESP being insufficient to cover the CESG repayment requirement.

Loss of CESG contribution room

With certain exceptions as noted below, the withdrawal after February 23, 1998 of unassisted contributions from an RESP for non-educational purposes, or a transfer after that date of unassisted contributions from one RESP to another, will result in restrictions on future CESG payments in respect of beneficiaries under the plan. Specifically, contributions made to any RESP during the remainder of the year of the withdrawal, or in the following two years, in respect of such beneficiaries will not be eligible for the CESG. In addition, the beneficiaries will not earn new CESG contribution room for those two following years. However, these restrictions will not apply to a withdrawal in a year of unassisted contributions if the total withdrawals of unassisted contributions in the year are not more than $200. Nor will they apply where there is a full transfer of funds held in an RESP and there is no change in beneficiaries. These restrictions are intended to prevent unassisted RESP contributions from being recycled in order to attract a CESG and are designed to be administratively simple. The government intends to monitor future withdrawals of unassisted contributions with a view to determining whether further adjustments to the calculation of CESG assistance room may be warranted to take into account large withdrawals of such contributions.

Example

An RESP with two beneficiaries contains $10,000 of pre-1998 contributions. In March 1998, the RESP subscriber withdraws $4,000 from the plan and, in April 1998, recontributes that amount ($2,000 in respect of each beneficiary) to a newly established RESP.

Results:

1.	Although the CESG contribution room available for each beneficiary in 1998 is $2,000, no CESG is paid on the contributions made to the new RESP. Furthermore, there will be no CESG paid on any other RESP contributions made in respect of either beneficiary before 2001.

2.	Neither beneficiary earns new CESG room in 1999 or 2000. Thus, the amount of unused CESG contribution room carried forward to 2001 is $2,000.

Administrative and interim arrangements

The Canada Education Savings Grant program will be administered by the Department of Human Resources Development (HRD), while Revenue Canada will continue to administer the registration of RESPs and the auditing of compliance. The departments will be provided with the authority to share information necessary to ensure the integrity of the CESG program.

The government and the RESP industry will work together to put in place, as soon as possible, the administrative arrangements needed to implement this program. When these administrative arrangements are complete, CESGs will be paid on all eligible contributions made since January 1, 1998. Thereafter, the government will transfer CESG funds to the plans on a regular and ongoing basis. Authority will be provided to the government to pay interest in the event that there is any substantial delay in making CESG payments.

Trustees of RESPs to which CESGs are paid will be required to maintain notional accounts for each such plan recording contributions which have attracted a CESG, the amount of those CESGs and the extent to which CESG amounts are paid out to beneficiaries as part of educational assistance payments. In addition, RESP trustees will be required to report the following information for all plans on a timely basis: all transactions involving contributions or withdrawals of capital; and educational assistance payments and accumulated income payments, indicating the date of the transaction and the contributor and beneficiaries involved. HRD will be authorized to provide information to RESP trustees on whether CESG contribution room is available for any particular beneficiary.

While RESPs may be established without the Social Insurance Number (SIN) of the beneficiary, CESGs will only be paid when the SIN has been provided to the government.

Additional resources will be provided to HRD and Revenue Canada to ensure that the requirements associated with eligibility for educational assistance payments are met, that the RESP registration rules and the reporting requirements applicable to RESP trustees are complied with, and that systems are in place to audit compliance.

Additional RESP changes

A contributor may set up a "family plan" in which each of the beneficiaries is related to the subscriber by blood or adoption. Family plans, which are typically established for several siblings under age 18, are subject to the same contribution limits per beneficiary, but provide additional flexibility for the contributor because educational assistance payments need not be limited to the proportion of each child's "share" of the contributions. This allows a contributor who has named his or her three children as beneficiaries, for example, to direct the entire income to the two children pursuing education if the third child is not eligible. To ensure that family plans do not provide unintended benefits, no contributions may be made to a family plan in respect of a beneficiary who is added to that plan when that beneficiary is 21 years of age or older. The budget proposes to extend this restriction by prohibiting the addition of any beneficiary age 21 or older to a family plan. This change will apply to new plans submitted for registration after 1998.

As indicated earlier, contributions made after 1999 to an RESP submitted for registration before 1999 will not qualify for CESG payments unless the plan has been amended to restrict new beneficiaries to those under 21 years of age. In addition, no portion of an educational assistance payment made to an individual who became an RESP beneficiary after attaining 21 years of age will be attributable to CESG payments made to the plan.

The budget proposes to extend relief from the overcontribution penalty when an individual who is under 21 years of age replaces another individual as a beneficiary under an RESP and both beneficiaries are related to the subscriber by blood or adoption. Currently, the new beneficiary must be a brother or sister of the former beneficiary. This measure will provide comparable treatment of individual and family plans. The proposed measure will apply after 1997.

The purpose of an RESP is to help post-secondary students, and the vast majority of children named as beneficiaries do pursue higher education. However, if the beneficiary named by the subscriber does not pursue higher education, and no replacement beneficiary has been named, subscribers may receive the investment income under certain conditions. A number of conditions must be met before investment income can be returned to the subscriber, in the form of "accumulated income payments". In particular, the plan must have been existence for at least 10 years, all beneficiaries must be at least 21 years of age and not pursuing higher education, and the subscriber must be resident in Canada. If these conditions are met, the subscriber is allowed to receive an accumulated income payment. The subscriber may choose to transfer the payment to a registered retirement savings plan, without penalty, if the subscriber has sufficient room to absorb the amount of the transfer. To the extent that an accumulated income payment is not fully offset by RRSP deductions, a charge of 20 per cent applies in addition to the inclusion in income of the RESP amount. There is a lifetime limit of $40,000 of the amount of accumulated income payments that may be transferred to an RRSP tax free. To provide additional flexibility to individuals attempting to save for education and retirement with limited resources, the budget proposes to increase the lifetime limit to $50,000. This change will apply after 1998.

At present, a beneficiary may receive the entire amount of investment income in an RESP as an educational assistance payment in one payment, if the terms of the plan allow it. In some instances, a beneficiary enrolled in an educational program of as little as three weeks may qualify for an EAP. The additional assistance provided by the CESG requires more stringent criteria regarding eligible education and training programs in order to maintain the integrity of the tax and transfer system. Therefore, to ensure that bona fide short-term courses remain eligible while minimizing abuse of the advantages offered by contributions to an RESP, the budget proposes to limit EAPs in respect of courses of less than three months to the costs of tuition plus $300 per week of study (or any higher amount approved by HRD on a case-by-case basis). This change will apply to new plans submitted for registration after 1998. As previously noted, contributions made after 1999 to an RESP submitted for registration before 1999 will not qualify for CESG payments unless the plan has been amended to restrict EAPs in this manner.

Legislation to implement the Canada Education Savings Grant program will be tabled shortly.

Improving Canada's health care system

Deductibility of health and dental premiums

for the self-employed

Currently, self-employed individuals cannot deduct amounts paid for private health services plan (PHSP) coverage, while owner-managers of incorporated businesses may receive tax-exempt coverage through their business. The budget seeks to improve the fairness of the tax system by introducing provisions governing deductibility of amounts paid for PHSP coverage for the self-employed.

Individuals will be allowed to deduct amounts paid for their PHSP coverage in computing business income provided they are actively engaged alone or as a partner in their business, and either self-employment is their primary source of income in the current year or their income from other sources does not exceed $10,000.

The following provisions will apply to amounts paid for PHSP coverage for the self-employed:

▪	Amounts paid for PHSP coverage will qualify for a deduction provided equivalent coverage is extended to all permanent full-time arm's-length employees. A similar condition already applies to owner-managers of incorporated businesses. Provisions will be introduced to ensure this condition cannot be avoided by hiring employees through a management corporation.

▪	Coverage will be deductible to a maximum of $1,500 each for the individual and spouse and $750 per child. No limits will apply where the number of arm's-length employees receiving coverage represents at least one-half of the total number of employees in that business.

▪	A PHSP will only be recognized if it is purchased from a third party normally in the business of selling insurance, or it is operated by trustee that is in the business of operating such plans.

▪	Where a deduction is claimed, no amount paid for PHSP coverage will be eligible for the medical expense tax credit.

These changes will improve access to supplementary health and dental coverage for the self-employed. They will be effective for fiscal periods commencing after 1997.

Retirement income system

Alternative minimum tax and RRSPs

Under the alternative minimum tax (AMT), a number of tax preferences are added back to taxable income. The adjusted taxable income is reduced by a basic exemption of $40,000 to ensure that individuals whose total tax preferences do not exceed that amount are not subject to AMT. The remainder is then subject to tax at a rate of 17 per cent, plus applicable surtax and provincial income taxes. The AMT gives rise to additional tax where the tax liability calculated with the AMT is greater than the regular tax liability. Most individuals subject to AMT are able to recoup the additional tax through a seven-year carry-forward mechanism.

Recent developments suggest that the existing rules are unduly restrictive and have unintended consequences in certain circumstances. Of particular importance is the increase in recent years in the number of people who are subject to the AMT due to severance packages they have received on lay-off or voluntary downsizing. In many cases, taxpayers can recover this tax through the seven-year carry-forward provision. However, workers who have low incomes in the years following the termination of employment often cannot do so. This could be the case, for example, where a 50-year-old worker has been laid off and has little or no income until "normal" retirement age. This worker could be forced to draw on after-tax assets -- such as guaranteed investment certificates (GICs) or a house -- or on RRSP savings, in order to pay the AMT, without the possibility of recovering it within the seven-year period.

Improvements to tax assistance for retirement savings introduced in recent budgets include the indefinite carry-forward of unused RRSP contribution room and the introduction of the pension adjustment reversal which allows individuals to make extra RRSP contributions to compensate for the loss of employer- provided pension benefits. These measures contribute to a continuing increase in high one-time RRSP contributions.

Given the importance of retirement savings to Canadians, and the fact that comprehensive limits already apply to the tax assistance provided for them, the AMT should not further limit the ability of taxpayers to set aside income for their retirement.

Accordingly, the budget proposes that RRSP roll-overs and contributions, as well as contributions to registered pension plans, be exempted from the AMT.

To reflect recent increases in the volume of severance arrangements, this change will be effective from 1994. For taxation years prior to 1998, Revenue Canada will identify affected taxpayers and refunds will be made once the enabling legislation has received Royal Assent.

This measure will provide $70 million in tax relief in 1998-99, as a result of its application to previous years, and about $20 million annually thereafter.

Support for families

Raising limits for the child care expense deduction

The child care expense deduction recognizes the additional financial burden borne by families incurring those expenses.

To better reflect the costs incurred by those paying for child care on a full-time, full-fee basis, the budget proposes that the deduction limits be increased by $2,000 for children under age 7 and by $1,000 for older children. For 1998 and subsequent years, the maximum annual child care expense deduction that may be claimed will be:

▪	$7,000 for each eligible child who is under age 7 at the end of the year or in respect of whom a disability tax credit has been claimed; and

▪	$4,000 for each eligible child who is over age 7 and under age 16 at the end of the year or who is not eligible for the $7,000 deduction but has a mental or physical infirmity.

This measure will provide about $45 million in additional tax assistance to about 65,000 Canadian families.

The Canada Child Tax Benefit

The Child Tax Benefit (CTB) currently provides about $5.3 billion in assistance to families with children under age 18. The CTB provides an annual basic benefit of $1,020 per child, a supplement of $75 for the third and each subsequent child, and an additional supplement of $213 for each child under age 7 when no child care expenses are claimed. The basic benefit is reduced by 5 per cent of family net income in excess of $25,921 (2.5 per cent for one-child families). The Child Tax Benefit includes a Working Income Supplement (WIS) that was enriched by $195 million and restructured from a per-family to a per-child benefit as of July 1997. The maximum WIS is $605 for a one-child family and $1,010 for a two-child family. For larger families, the maximum WIS is $1,010 plus $330 for the third and each additional child. The WIS is phased in over the family-earned income range of $3,750 to $10,000, and is phased out based on family net income in excess of $20,921. The reduction rates are 12.1 per cent for a one-child family, 20.2 per cent for a two-child family and 26.8 per cent for larger families.

The 1997 federal budget announced that the federal-provincial- territorial governments had agreed to establish a National Child Benefit (NCB) System. That budget indicated that this new initiative would become effective in July 1998 and would involve actions from both levels of government. As an initial step, the federal government committed to increase by a total of $850 million its existing income support to low-income families with children. At the same time, provinces and territories agreed to adjust the child component of their social assistance programs and redirect savings to provide benefits and services more broadly to all low-income families.

As outlined in the 1997 budget, the government proposes to meet this commitment by replacing the existing Child Tax Benefit and WIS by an enriched and simplified program, the Canada Child Tax Benefit (CCTB). Effective in July 1998, the CCTB will provide benefits of $1,625 for the first child and $1,425 for each additional child for all families with net income up to $20,921. The CCTB will have two major components: the CCTB basic benefit and the CCTB National Child Benefit Supplement. The basic benefit will have the same level and structure as the existing basic benefit and will include the existing supplements of $75 and $213 described above. The CCTB National Child Benefit Supplement will provide $605 for the first child, $405 for the second child and $330 for each additional child for all families with net income up to $20,921. The supplement will be phased out based on family net income above $20,921 in the same manner as the existing WIS.

In this budget, the government is announcing the allocation of a further $850 million annually -- phased in at $425 million as of July 1999 and the remaining $425 million as of July 2000 -- to meet the federal government's commitment to further enrich the Canada Child Tax Benefit. Details of the benefit increases will be announced in the 1999 budget following discussions with provincial and territorial partners and Canadians.

Caregiver tax credit

Many Canadians provide care and support for family members who are seniors or who have disabilities. The tax system includes various measures that assist caregivers and supporting individuals. For example:

▪	individuals supporting a spouse, child, grandchild, parent or grandparent with a severe and prolonged mental or physical impairment may claim unused amounts of the disability tax credit;

▪	supporting individuals may claim the medical expense tax credit for qualifying expenses incurred on behalf of a dependent relative (spouse, child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew);

▪	expenses for an attendant providing respite care may be claimed under the medical expense tax credit. The limit on the amount of this expense that can be claimed was increased from $5,000 to $10,000 last year;

▪	single individuals may claim the equivalent-to-spouse credit for dependent parents, grandparents, or other relatives either under age 18 or dependent because of a mental or physical infirmity; and

▪	individuals supporting a relative (child age 18 or over, parent, grandparent, brother, sister, aunt, uncle, niece or nephew) with a mental or physical infirmity may claim the credit for infirm dependants. The credit was enriched in 1996 by increasing the maximum credit amount from $270 to $400 and increasing the threshold at which the phase-out of the credit begins from $2,690 to $4,103 of the dependant's net income. The change provided more tax assistance to individuals supporting infirm relatives with less than $6,456 of net income.

To provide additional tax assistance to Canadians providing in-home care for elderly or infirm relatives, the budget proposes to introduce a new tax credit for caregivers.

The caregiver tax credit will reduce federal tax by up to $400 for individuals residing with and providing in-home care for a parent or grandparent (including in-laws) 65 years of age or over or an infirm dependent relative. The credit amount will be reduced by the dependant's net income in excess of $11,500. This change will increase or extend assistance to about 450,000 caregivers providing in-home care for relatives with less than $13,853 of net income. Many of these individuals could not claim the infirm dependant credit before because they were providing care to elderly relatives with Old Age Security and Guaranteed Income Supplement benefits that put them beyond the net income threshold for dependants.

This measure is effective for 1998 and subsequent years.

With the introduction of the new caregiver tax credit, tax relief provided by the existing infirm dependant credit will be of benefit primarily to individuals providing care and support for infirm relatives who qualify as dependants even if they do not live in the same residence.

Enhanced tax assistance for persons with disabilities

The government is committed to continue helping Canadians with disabilities and their families by building on the significant level of tax assistance provided under existing legislation. Last year, a number of tax measures were introduced to better recognize disability-related costs. These included the addition of several new expenses to the medical expense tax credit and the introduction of a refundable supplement for low-income working Canadians with high medical expenses.

The budget proposes to further improve tax assistance for persons with disabilities.

The Home Buyers' Plan (HBP) and people with disabilities

The HBP allows first-time home buyers to withdraw up to $20,000 of their RRSP funds on a tax-free basis to purchase a home or an interest in a home. Amounts withdrawn under the HBP are repayable in instalments over a period of 15 years. To the extent a scheduled repayment for a year is not made, it is added in computing the participant's income for the year.

The budget proposes to change the HBP so that, in certain circumstances, an individual will not be prevented from participating in the plan because the individual has previously owned a home. This extension of the HBP will apply to RRSP withdrawals by an individual where:

▪	the individual qualifies for the disability tax credit (DTC) and is buying a home which is more accessible for the individual or is better suited for the care of the individual;

▪	the individual is related to a disabled individual who qualifies for the DTC and the individual is buying a home for the benefit of the disabled individual which is more accessible for, or better suited for, the care of the disabled individual; or

▪	the individual is related to a disabled individual who qualifies for the DTC and the individual is withdrawing an amount for the disabled individual to buy a home which is more accessible for, or better suited for, the care of the disabled individual.

The HBP will also be changed to allow an individual to participate in the HBP more than once in the individual's lifetime, provided the individual's outstanding HBP balance is satisfied by the beginning of the year in which a subsequent participation occurs. However, except where the above special rules apply, a participant must still qualify as a first-time home buyer under the HBP.

These new measures apply to RRSP funds withdrawn after 1998.

Training expenses for caregivers

The medical expense tax credit (METC) recognizes the burden of above-average medical expenses by providing tax relief for eligible medical expenses. For 1998, the METC reduces the federal tax of a claimant by 17 per cent of qualifying unreimbursed medical expenses in excess of the lesser of 3 per cent of net income and $1,614.

The budget proposes to allow supporting individuals to claim under the METC expenses for training courses related to the care of dependent relatives with mental or physical infirmities.

This measure is effective for 1998 and subsequent years.

Certification of the DTC by occupational therapists and psychologists

The DTC provides tax relief to individuals with a severe and prolonged mental or physical impairment that markedly restricts their ability to perform basic activities of daily living: perceiving, thinking and remembering; feeding and dressing oneself; speaking; hearing; eliminating (bowel or bladder functions); and walking. Eligibility for the credit must currently be certified by either a medical doctor, an optometrist (for sight impairments), or an audiologist (for hearing impairments).

To improve the DTC application process, the budget proposes to allow occupational therapists and psychologists to certify eligibility for the credit after February 24, 1998. Occupational therapists will be allowed to certify eligibility in respect of mobility impairments while psychologists will assess eligibility in respect of intellectual impairments.

Strengthening communities and the voluntary sector

Emergency volunteers

Volunteer firefighters currently enjoy a $500 tax exemption for the allowances they receive from a public authority in the course of their duties. The budget proposes to increase the $500 exemption for volunteer firefighters to $1,000. In addition, this treatment will be extended to ambulance technicians and other emergency service volunteers who, in their capacity as volunteers, are called upon to assist in emergencies or disasters. The $1,000 exemption will be reduced by any compensation in excess of $3,000 received by the taxpayer from the same public authority for the same or similar services.

The budget also proposes to convert the current exemption to a deduction in computing employment income. Eligible volunteers will be required to include in their income compensation they receive from a public authority in respect of their volunteer duties, but will benefit from a corresponding deduction of up to $1,000.

This provision is effective beginning January 1, 1998.

Other measures

Underground economy: reporting of federal and construction contracts

The federal government has a comprehensive strategy to fight the underground economy. The budget proposes further measures to improve tax compliance and the fairness of the tax system.

Experience has shown that the accuracy of income reporting for tax purposes is better for sources of income for which information slips are issued. For instance, virtually all wages and salaries are voluntarily reported for income tax purposes compared to approximately 85 per cent of self-employment income. The higher tax compliance for wage and salary income is partly due to the mandatory requirement on employers to report to Revenue Canada the wage and salary payments made to each of their employees. To further improve tax compliance, the budget proposes enhanced reporting requirements for contract payments.

Federal government departments and agencies will begin issuing information slips for contract payments made after 1997, as will federal Crown corporations for contract payments made after 1998.

The construction contract reporting system introduced in the 1995 budget will become mandatory for payments made after 1998. Contract reporting was first introduced in the construction industry because Revenue Canada's compliance activities revealed an active underground economy and consultations with industry associations indicated that it was becoming difficult for complying businesses to remain competitive. The construction contract payment reporting system was introduced to help restore a level playing field in the industry by improving compliance in the reporting of income.

The reporting system was introduced on a voluntary basis in 1995 to allow the federal government to develop, with the construction industry, a system that would be simple for the industry to comply with and would deliver the information needed by Revenue Canada for enforcement. The industry's suggestions have resulted in numerous modifications to the original reporting system. Experience with the voluntary system also demonstrated that mandatory reporting is necessary to obtain the level of participation needed to achieve effective compliance.

Subject to further consultation with industry stakeholders, it is intended that:

▪	mandatory reporting be required of individuals, partnerships, trusts and corporations whose principal business is construction;

▪	reporting to Revenue Canada be required on an annual basis for payments made to contractors for construction services;

▪	construction services include activities such as erection, installation, alteration, modification, repair, improvement, demolition, dismantling and removal of a structure, surface or subsurface construction or any similar property; and

▪	reporting be required for service and mixed service and goods contracts, but not goods-only contracts.

Revenue Canada will consult with representatives of the construction industry on the specifics of the reporting system. It will also consult on how best to ensure that the intended purposes are achieved. The Minister of National Revenue will shortly issue a press release with details on the consultation process.

Finally, the federal government will continue discussing contract reporting with provincial governments and assessing the extent of underground activity in other sectors of the economy to determine if further action is warranted.

Meal expenses

Generally, only 50 per cent of the cost of otherwise deductible expenses for meals or entertainment is deductible for income tax purposes. This limitation is intended to reflect the personal consumption element inherent in these expenses. However, there is an exception to this rule that allows 100-per-cent deductibility for meal expenses incurred by employers in respect of employees at remote work sites. Currently, remote work sites are considered by Revenue Canada to be those that are at least 80 kilometres from the nearest established community of over 1,000 people. Employers have suggested that the remote work site criteria are too strict and exclude many sites which are significantly removed from urban areas.

The budget proposes that the exception for meals provided at a remote work site be expanded to include meals provided at work sites which are at least 30 kilometres from the nearest urban area of at least 40,000 people, where the employee is not expected to return daily to his or her principal residence. Reasonable meal expenses incurred by employers at these work sites will be fully deductible. This change will better reflect the type of work sites that pose logistical difficulties for employers and employees such that full deductibility by the employers is warranted. Benefits received by northern residents in respect of meals at these work sites will not affect their northern residents deductions.

The budget will also clarify that the full deductibility of the cost of meals and entertainment provided by employers for the general benefit of all employees is restricted to those meals and entertainment expenses incurred by employers for occasional events, not exceeding six such events in any calendar year, and not regularly provided meals or allowances.

These measures will apply to expenses incurred after February 23, 1998.

Clarify the tax treatment of relocation expenses

To facilitate labour mobility within Canada, taxpayers who move to take up employment or carry on a business may currently deduct many of the costs associated with relocation, where the new residence is at least 40 kilometres closer to the new job location. The budget proposes changes to the moving expense deduction that will provide further assistance to individuals who relocate to take advantage of new employment or business opportunities in Canada. The budget also seeks to improve the fairness of the tax system by ensuring that certain employer-provided relocation benefits are included in the income of relocated employees.

Moving expenses deductible for income tax purposes will now include certain costs of maintaining a vacant former residence (including mortgage interest and property taxes). The deductibility of these expenses will be limited to the least of the following amounts: the actual amount of the maintenance expenses, the portion of the expenses attributable to a period of three months, and $5,000. In addition, a number of incidental moving expenses such as the costs of changing the address on legal documents, replacing automobile and driving licenses and utility hook-ups and disconnects will become deductible.

This change is effective for expenses incurred after 1997.

To improve the fairness of the tax system, the budget also proposes changes to the tax treatment of amounts paid by employers for a loss on a sale or diminishment in value of a former residence and for higher mortgage interest payments at the new location. The exclusion from income of these amounts provides a significant tax advantage to employees who are reimbursed by their employer for such expenses compared to those who must bear the costs themselves. The budget proposes that these employer-paid relocation expenses be included in the employee's income. However, to recognize that many employers require employees to relocate in circumstances where the employee would not have chosen to do so, the first $15,000 of amounts paid by the employer for a loss or diminishment in value of a former residence will not be taxed. One-half of such amounts in excess of $15,000 will be included in the employee's income.

These provisions apply to employees who commence employment at their new work locations after June 1998, in respect of payments made after February 23, 1998. For payments to employees commencing employment at the new work location before July 1998, these provisions will apply for 2001 and subsequent years.

In response to the recent Siwik decision, the budget proposes to clarify that, where an employer provides an interest-free or low- interest housing loan to an employee, the provisions of the Income Tax Act determining the value of the benefit of the loan will apply effective for loans made after February 23, 1998. The provisions of the Act allowing a deduction in computing taxable income in respect of benefits included in income from a home relocation loan of up to $25,000 will continue to apply.

Strengthening the integrity of the

certified cultural property regime

The budget proposes two measures to secure the benefits of Canadian cultural property donations for all Canadians and to ensure that the generous tax incentives for charitable donations are based on the fair market value of the property donated, as determined by the Canadian Cultural Property Export Review Board.

It is important that Canadian cultural properties are retained in Canada and made accessible to the public. Consequently, tax incentives are provided to encourage the donation of cultural property that meets certain criteria contained in the Cultural Property Export and Import Act to designated institutions such as museums and art galleries. In addition to the charitable donations tax credit for individuals and the charitable donations tax deduction for corporations, capital gains that arise through donations of eligible cultural property to designated institutions are exempt from capital gains taxation. An institution that receives a donation of cultural property is required to retain it for a minimum period of five years. If disposition is made within the five-year period, the institution is liable to pay a special penalty tax.

The budget will increase the effectiveness of this policy by lengthening, from five to 10 years, the period during which cultural property must be retained by designated institutions to avoid the imposition of the penalty tax. The longer period will apply in respect of dispositions made after February 23, 1998. Extending the mandatory retention period will ensure that these donated cultural properties will remain accessible to the public.

In addition, the budget proposes that, where the fair market value of a property has been determined by the Canadian Cultural Property Export Review Board, that value will apply to the property for all income tax purposes related to charitable donations and gifts for a period of two years from the date of the determination. This measure will apply to determinations of fair market value made by the Canadian Cultural Property Export Review Board after February 23, 1998.

Tax treatment of employee options to

acquire mutual fund trust units

Existing income tax rules provide preferential treatment with regard to options granted by a corporation to its employees to acquire shares issued by the corporation. No income arises for an employee because of the granting of such an option. Instead, the recognition of income is deferred until the option is exercised or, in the case of Canadian-controlled private corporations, generally until the share acquired pursuant to the option is disposed of. In addition, in many cases, only 75 per cent of the gain arising from the exercise of an option is subject to tax.

However, the existing rules do not apply to options granted to employees of mutual fund trusts. In order to provide a level playing field, the budget proposes to extend the existing income tax rules for options granted to employees of public corporations to options granted after February 1998 to employees of mutual fund trusts.

Business Income Tax Measures

Temporary capital tax surcharge on large

deposit-taking institutions

The temporary capital tax surcharge on large deposit-taking institutions, which was introduced in the 1995 budget, and extended in the 1996 and 1997 budgets, will be further extended to October 31, 1999.

This temporary surcharge applies to financial institutions as defined under Part VI of the Income Tax Act except life insurance companies. The surcharge will continue to apply at a rate of 12 per cent of the capital tax imposed under Part VI, calculated before any credit for income taxes and with a capital deduction of $400 million. The surcharge is not eligible to be offset by tax payable under Part I of the Act.

For taxation years that include October 31, 1999, the surcharge will be prorated on the basis of the number of days in the taxation year that are before November 1, 1999.

Countervailing and anti-dumping duties

In accordance with the rules established under the World Trade Organization, countervailing and anti-dumping duties may be imposed by countries to offset the injurious effect of imports which are subsidized or dumped. These actions may result in Canadian taxpayers paying such amounts in order to sell their products. The amount of the duty to be paid is not under the control of the taxpayer. While these amounts may be subsequently refunded, in whole or in part, this process can take several years.

In view of these facts, the budget proposes that cash outlays for duties be deductible in computing income subject to tax in the year that they are paid. Any refunds or additional amounts received by the taxpayer, such as interest, as a result of the final determination of the liability would have to be included in income in the year of receipt.

This amendment will be effective for duties that become payable and are paid after February 23, 1998.

Distributions by mutual fund trusts after year-end

Mutual fund trusts typically attempt to make sufficient distributions of trust income in a taxation year to their beneficiaries such that there is no tax payable at the trust level. Under the existing rules, trust distributions of income for a taxation year must be fixed by the end of the year in order to ensure that this result is obtained. Particularly in cases where foreign assets are involved, it may be difficult for mutual fund trusts to make accurate determinations of income on a timely basis.

The budget proposes to allow mutual fund trusts to elect to fix such distributions for a taxation year within one month after the end of the year. Where this election is made, the distribution is treated as if it had been made before the trust's year-end. The election applies for the purposes of determining the tax position of both the trust and its unitholders. Consequently, taxable unitholders will be required to add the deemed distributions in computing their income for the earlier year and to take the deemed distributions into account in computing the adjusted cost base of their trust units.

This measure applies to income calculations for taxation years that end after November 1998. Input from the mutual fund industry with regard to details of the design of this proposal is welcome.

Large corporations tax:

Prescribed financial institutions

The large corporations tax (LCT) is levied at the rate of 0.225 per cent on a corporation's "taxable capital employed in Canada" in excess of $10 million. For most corporations, taxable capital employed in Canada is the amount of a corporation's debt and equity, less the amount of its inter-corporate investments, that is considered to be used in connection with its activities carried on in Canada.

The tax base of a financial institution under the LCT is different. The most important difference is that a financial institution's taxable capital employed in Canada does not include short-term debt or secured long-term debt.

Corporations that are not "traditional" financial institutions, but compete with financial institutions in their day-to-day business, may be prescribed as financial institutions for the purposes of the LCT, in order to be subject to these special rules. This ensures that such corporations are subject to a tax regime comparable to that applying to their traditional financial institution competitors.

Currently, a corporation may be prescribed as a financial institution for LCT purposes without necessarily being treated as a financial institution for other purposes of the Act. Those other purposes include the "mark-to-market" rules in Part I of the Act, and the Act's special rules relating to preferred share financing. Such inconsistent treatment runs counter to the basic objective of prescribing these corporations: to tax them in the same manner as their competitors.

The budget proposes that companies that are prescribed financial institutions for the purposes of the LCT be treated as financial institutions for the purposes of Part I, and as specified financial institutions and restricted financial institutions for the purposes of the Act generally. This measure will apply after 1998.

Earthquake reserves

There are presently no special reserves for insurance companies in respect of earthquake losses. Over the past few years, both the property and casualty insurance industry and the federal regulator (the Office of the Superintendent of Financial Institutions (OSFI)) have become increasingly concerned that in the case of a major earthquake in an urban area -- such as south-western British Columbia and the St. Lawrence Valley, which are two of the most earthquake-prone regions of Canada -- losses would be so great that many insurance companies would not be financially prepared to pay for the insured losses to property.

This concern has led to the development of a framework to build the financial capacity of insurers to prepare for the cost of a major earthquake. This framework is set out in an OSFI guideline on Earthquake Sound Practices (Guideline B-9) issued in August 1997. The guideline establishes sound practices for the management and measurement of earthquake exposures.

Based on this guideline, federally regulated insurance companies selling earthquake protection will be required to meet target levels of preparedness to ensure they have sufficient financial capacity to pay insured earthquake losses when they occur. The specific requirement is set out in a draft appendix to the guideline released in November 1997. The draft appendix proposes an earthquake reserve to be composed of two parts: the first element, the "earthquake premium reserve", is based on a percentage of net earthquake premiums written; the second element, the "earthquake reserve complement", takes into account the earthquake exposure reinsured with another insurance company and a proportion of the capital and surplus of the company. Both elements are combined to assess whether companies meet the required level of preparedness. These reserves will first be required in 1998.

The budget proposes that the first element, the "earthquake premium reserve" set aside pursuant to OSFI's guideline, will be deductible for income tax purposes. This will help ensure that sufficient capacity is achieved in a timely fashion. No deduction will be allowed for tax purposes for the "earthquake reserve complement". This measure is effective starting with the 1998 taxation year.

Prevent unintended benefits under the SR&ED regime

The cost of materials used in scientific research and experimental development (SR&ED) does not generally qualify for the SR&ED tax incentives unless it is consumed in the course of performing the SR&ED. At the outset of an SR&ED project, a taxpayer may not know whether materials used in a project will be consumed or will instead be incorporated into a product that has some value either to the taxpayer or to another party.

Therefore, the budget proposes to allow as eligible SR&ED inputs, both materials that have been consumed as well as materials that will be transformed into another product in the course of performing SR&ED. Where, however, the product of the SR&ED project is sold or converted to commercial use, taxpayers will be required to reduce their SR&ED investment tax credit (ITC) pools by the lesser of the proceeds of disposition of property and the cost of the SR&ED materials included in the property. If these calculations result in an investment tax credit pool balance that is less than zero, the taxpayer will be required to repay the negative ITC that year.

This "netting" provision will apply to dispositions and conversions of property after February 23, 1998.

Indirect assistance

Some taxpayers receive funding from certain not-for-profit entities that have, in turn, obtained their funds from government or from other persons. In some of these situations, the amounts received may not be considered to be assistance under the current rules by reason only of the interposition of the not-for-profit entity in the flow of funds. The budget proposes to ensure that taxpayers are treated consistently, whether they receive the funding directly or indirectly from government or other persons. The change will apply to amounts received by a taxpayer after February 23, 1998, other than such amounts received before 1999 pursuant to an agreement in writing entered into by the taxpayer before February 24, 1998.

International Taxation

Co-ordinating Canadian tax rules and tax treaties

Canada has over 60 income tax treaties with other countries. Tax treaties help to ensure that the same income is not taxed by more than one country. For example, a resident of Canada who earns income in another country might be subject to both Canadian tax and that other country's tax. A tax treaty between Canada and the other country will establish how the income is to be taxed. In some cases, the treaty will limit the rate of tax one country can apply to the income, and require the other country to give credit for that tax. In other cases, the treaty will give one country or the other the exclusive right to tax the income.

Canada's large and growing network of tax treaties is an essential tool for Canadian business. It is also important for the many individual residents of Canada who own property in other countries, work abroad or invest internationally. Tax treaties also help tax authorities co-operate to prevent tax evasion.

For the Canadian income tax system to work properly, it must take the effects of tax treaties into account. The budget proposes several measures designed to harmonize Canada's domestic tax rules with the rules in our tax treaties, and to ensure that the treaties themselves are applied appropriately.

Treaty-exempt income

Under the Income Tax Act, non-residents of Canada are generally taxed on their income, including capital gains, from sources in Canada. The total amount on which a non-resident is taxed for a year under Part I of the Act is referred to as the non-resident's "taxable income earned in Canada" for the year. This total includes, among other things, the non-resident's income from employment performed in Canada, income from businesses carried on in Canada, and taxable capital gains on taxable Canadian property.

The definition of "taxable income earned in Canada," however, does not currently take certain effects of tax treaties into account. As a result, a non-resident's income that is not subject to tax in Canada may fall within the definition. A non-resident may thus be able to apply certain losses to reduce the non-resident's Canadian tax liability, even though any income or gain from the loss property or business itself would have been exempt under a tax treaty.

As part of updating Canada's income tax system to take better account of tax treaties, the budget proposes to compute non-residents' taxable income earned in Canada without reference to income, gains or losses from businesses and property where those amounts are exempt from tax under Part I of the Act because of a tax treaty. This change will apply for the 1998 and subsequent taxation years. In addition, the budget proposes that income, gains and losses from a taxpayer's "treaty-protected" businesses and properties not be taken into account in calculating losses for other years that can be applied to reduce the taxpayer's taxable income or taxable income earned in Canada for the 1998 and subsequent taxation years.

Foreign tax credit and treaty-protected foreign income

Canadian residents are subject to income tax on their worldwide income. To prevent double taxation of income earned in foreign countries, Canada allows taxpayers to claim a foreign tax credit (FTC) for income tax paid in foreign jurisdictions.

Generally speaking, under current rules a resident taxpayer is entitled to deduct from the taxpayer's Canadian tax the amount of foreign income tax paid in a country to the extent the foreign tax does not exceed that proportion of the taxpayer's Canadian tax otherwise payable that the taxpayer's income in that country bears to the taxpayer's total income. This formula reflects the notion that the FTC should only be available to reduce Canadian tax that is attributable to the foreign income. Given the effect of tax treaties, however, this formula in some cases applies too broadly.

Income of a Canadian resident from a source in a foreign country is sometimes made exempt from tax in that country by the terms of a tax treaty between Canada and that country. Under the current FTC formula, Canadian tax on the exempt foreign income is available for reduction by the credit even though no foreign tax is payable with respect to that income. To correct this anomaly, the budget proposes to amend the FTC limit so that such treaty-protected foreign income is excluded from foreign income in determining the ratio of income from that country to total income. Treaty-protected foreign income will continue to enter into the formula, however, if it is subject to an income or profits tax to which the treaty does not apply (such as a tax imposed by the government of a political subdivision of the foreign country).

This proposal applies in calculating FTCs for the 1998 and subsequent taxation years.

Dual-resident individuals

In some circumstances, two countries' tax systems may each treat an individual as resident in that country. Since most countries tax residents on their income from all sources, this raises the possibility of double taxation. To prevent that result, tax treaties include rules that can be used to decide in which country the individual is resident for the purposes of the treaty.

Currently, however, Canada's income tax system does not explicitly take these treaty "tie-breaker" rules into account. An individual may attempt to argue that the individual is at one and the same time resident in Canada under Canadian domestic rules (and therefore not subject to Canadian non-resident tax), and resident in the treaty country under the treaty (and therefore not subject to taxation as a resident of Canada).

To ensure that treaty and domestic rules cannot be set off in this contradictory manner, the budget proposes to treat as a non-resident any individual who would otherwise be resident in Canada but has become entitled under a tax treaty, as a resident of another country, to an exemption from or reduction in Canadian income tax. This change, which is comparable to a rule that already applies to corporations, will apply to individuals who become entitled to treaty benefits after February 24, 1998.

Treaty-based exemption -- information return

Under Part I of the Income Tax Act, non-residents of Canada are taxable on the income from businesses they carry on in Canada. Where a person resides in a country with which Canada has a tax treaty, however, Canada's ability to tax such income may be constrained. In particular, Canada may be able to tax income from a business carried on by the non-resident person only if it is attributable to a permanent establishment situated in Canada.

In most cases, Revenue Canada will not know that a non-resident has relied on a tax treaty to claim an exemption from Canadian income tax. To help Revenue Canada administer such treaty-based claims, the budget proposes to require non-resident corporations to file an information return where they claim a treaty exemption from tax under Part I of the Act on their Canadian-source business income. The reporting requirement will apply to taxation years that begin after 1998.

Income Tax Conventions Interpretation Act

Given the large number of Canada's tax treaties and the growing variety of international business and other transactions, it is important that the treaties be applied consistently and in conformity with the intentions of Canada and its treaty partners. To make consistent application easier, the Income Tax Conventions Interpretation Act sets out a number of interpretive rules and definitions.

One important area in which some tax treaties lack precision is the tax treatment of amounts paid to non-residents of Canada out of Canadian RRSPs, RRIFs and other retirement income arrangements. The budget therefore proposes changes to the Income Tax Conventions Interpretation Act to confirm the appropriate treatment of these amounts.

In particular, these changes will provide that:

▪	pension payments are not annuities for the purposes of tax treaties;

▪	where a treaty does not define "pension," the term nonetheless includes payments under registered pension plans, RRSPs, registered retirement income funds (RRIFs) and other retirement arrangements; and

▪	where a treaty does define "pension," the term extends to include as well periodic payments under the above arrangements.

These clarifying changes will apply to amounts paid after 1996.

The Income Tax Conventions Interpretation Act will also be changed to clarify the connection between Canada's rules for taxing gains and the rules in Canada's tax treaties. The change confirms that, where a taxpayer disposes of a "taxable Canadian property" (a defined term which includes, among other things, Canadian real estate and certain shares of corporations) for the purpose of applying a treaty, any income, losses or capital gains are considered to arise in Canada. This clarification applies to dispositions after February 23, 1998.

Deemed residence

The distinction between residence and non-residence for tax purposes is an important one. Residents of Canada pay Canadian tax on their worldwide income; non-residents pay Canadian tax only on their Canadian-source income.

In most situations, whether or not an individual is resident in Canada is a question of fact: the answer depends on the nature of the individual's ties to Canada and the individual's intentions. In some cases, however, the Income Tax Act deems an individual to be resident in Canada whether or not those factual tests are met.

One of the deeming rules treats members of the Canadian Forces, certain development workers, Canadian Forces school staff, and officers and employees of the Government of Canada or a province (including ambassadors, ministers, high commissioners and others) as residents of Canada irrespective of where they are posted. In its current form, the rule also deems the spouses and dependent children of these persons to be Canadian residents.

The budget proposes to eliminate the special rule for spouses. In its place, a new rule is proposed which will deem as residents those individuals who, by virtue of their relationship to a Canadian resident, are exempt from tax in another country under a tax treaty or international agreement.

These changes will apply to individuals who would, but for the current deeming rule, cease to be residents of Canada after February 23, 1998. Individuals who, but for the current rule, would have ceased to be resident prior to February 24, 1998 will be permitted to elect that these changes also apply to them after February 23, 1998. If they make this election, they will be treated as having ceased to be resident in Canada on February 24, 1998.

Example

Louise is an employee of the Government of Canada who in 1996 was posted to the Canadian Embassy in Country X. Louise, her spouse David and their dependent child Celeste all moved to Country X, and all ceased to be factually resident in Canada. Under the existing rules, however, Louise, David and Celeste are all deemed to have remained resident in Canada.

Under the proposed new rule, Louise will still be treated as a Canadian resident, as will Celeste (assuming Celeste depends for support on Louise and does not have income exceeding the basic personal exemption amount). However, David will be treated as a Canadian resident only if, because of his relationship with Louise, a tax treaty or international agreement prevents Country X from taxing him.

Since David would, but for the special deeming rule, have ceased to be resident in Canada before February 24, 1998, he can choose whether or not the new rule will apply to him after February 23, 1998. If he chooses to have the new rule apply, and if he is not exempt from Country X tax, David will be treated as having ceased to be resident in Canada on February 24, 1998. It should be noted that this change in residence may itself have income tax consequences for David.

Canadian tax on former residents'

foreign employment income

It is a general principle of Canada's tax system that non-residents are taxable in Canada only on their Canadian-source income. Employment income is usually considered to be sourced where the employment is exercised, not where the employer happens to reside. Thus, a non-resident who works in Canada will pay Canadian tax (assuming no tax treaty applies) whether or not the non-resident's employer is itself resident in Canada. Similarly, a non-resident who works outside Canada will not ordinarily be subject to Canadian tax, even if the employer happens to be a Canadian resident.

A special exception currently applies, however, to former residents of Canada. These individuals are taxable by Canada on income paid to them by a Canadian resident in respect of their employment abroad, unless the income is subject to tax in their new country of residence. This special rule was originally enacted to ensure that individuals temporarily absent from Canada (e.g., teachers on sabbatical leaves) could not escape taxation on the salaries paid to them by Canadian employers by ceasing to be resident in Canada. However, subsequent changes to Canada's tax treaties have largely eliminated the problem by removing the limits on other countries' rights to tax such persons.

The budget proposes that the rule taxing former Canadian residents on foreign employment income be repealed. In its place, a new rule is proposed that allows Canada to tax the foreign employment income of an expatriate only if the other country has agreed to refrain from doing so in a tax treaty or other international agreement with Canada.

These changes will apply to the 1998 and subsequent taxation years.

Immigrating corporations

Section 128.1 of the Income Tax Act provides a set of rules applying to taxpayers that become resident in Canada. For corporations, these rules include a deemed year-end immediately before becoming resident, a deemed disposition and reacquisition of all property (other than property which would, ignoring any relevant tax treaty, be subject to tax in Canada), and an adjustment to the corporation's paid-up capital designed to reflect the new net tax cost of its property.

The current rules are designed to defer, but not eliminate, the taxation in Canada of the immigrating corporation's accrued gains on Canadian property, of its surplus from Canadian business operations, and of the surplus of Canadian corporations of which it is a shareholder. However, the sale of the immigrating corporation's shares, before it becomes resident, to a corporation resident in Canada can frustrate this objective.

Example

A non-resident individual owns all the shares of a non-resident corporation (call it "Forco") whose only property is the stock of a Canadian subsidiary ("Canco"). The individual sells the Forco shares to a new Canadian corporation ("Newco") for Newco shares that have a cost and paid-up capital equal to the fair market value of the Forco shares. Such a sale would generally be non-taxable in Canada, since it involves the sale by a non-resident of shares of a non-resident company. After the sale, Forco becomes resident in Canada, with no effect on the tax cost of its shares in Canco. At this point, the surplus of Canco could potentially be remitted through the (now Canadian) corporate chain as non-taxable dividends, and distributed to the non-resident individual as a tax-free return of capital; alternatively, Newco might be sold to an arm's-length purchaser, with the non-resident individual having precluded the application of Canadian capital gains tax as a result of the fair market value cost base created on the prior sale of the Forco shares to Newco.

Although the general anti-avoidance rule may apply in cases such as this, it is also appropriate to address more specifically the opportunity for such schemes. To that end, the budget proposes that corporations that become resident in Canada after February 23, 1998 be treated as having disposed of all of their property, including Canadian property, at its fair market value at the time of immigration. Where the immigrating corporation owns a share of a corporation resident in Canada (other than a share on which any gain of the immigrating corporation is taxable in Canada), a dividend equal to the amount by which the share's value exceeds its paid-up capital will be deemed to have been paid to the immigrating corporation before it became resident. In this way, the corporation's immigration is treated in the same manner as a sale of the share for fair market value proceeds by the non-resident corporation to a resident company. Finally, the immigrating corporation will be unable to claim an investment allowance under Part XIV of the Act for its last taxation year in which it was non-resident and, as a result, will be held to account for any branch tax arising in the year or deferred in respect of previous years.

As a consequence of these changes, the current rule in subsection 128.1(2) of the Act will be modified to establish the total paid-up capital of the immigrating corporation, upon it becoming resident in Canada, at a level representing the fair market value of its net assets.

Surplus stripping

Section 212.1 of the Income Tax Act is an anti-avoidance rule designed to prevent a non-resident shareholder of a Canadian corporation from withdrawing taxable surplus from the corporation in the form of tax-free proceeds of disposition on the sale of the corporation's shares to another Canadian corporation with which the non-resident does not deal at arm's length.

The budget proposes three changes, applying to dispositions after February 23, 1998, to ensure that this anti-avoidance rule fulfils its original purpose.

First, the rule currently applies only to dispositions of shares of Canadian corporations to Canadian corporations; it will be extended to apply to transfers of shares of any corporation resident in Canada to any other corporation resident in Canada. This change reflects the fact that the concern with the potential avoidance of tax under Part XIII of the Act exists equally with respect to all resident corporations, whether or not they are Canadian corporations.

Second, the rule will be amended to apply explicitly to partnerships of which a non-resident person (or non-resident-owned investment corporation) is a majority interest partner.

Finally, the rule will not apply where the transferred shares are taxable Canadian property on which Canada's right to tax gains is not limited by tax treaty. Where Canada retains the right to tax the transaction as a share disposition generating proceeds of disposition, no tax avoidance exists and thus the recharacterization of the proceeds as taxable surplus may be viewed as unnecessary and inappropriate.

Foreign tax credit limits

A taxpayer may earn a foreign tax credit (FTC) as a result of paying foreign tax on foreign-source income but be unable to use the credit. This may occur because the taxpayer is either exempt from Canadian tax (as in the case of pension funds, RRSPs and other deferred income plans) or not currently taxable because of current losses, loss carry-forwards, or other tax preferences. A non-resident likewise may pay foreign taxes for which a credit is not available in the non-resident's country of residence.

A person who is subject to a foreign withholding tax on particular income, but is unable to obtain an FTC, can sometimes effectively transfer that income to another person who is able to use the tax as a credit against Canadian tax on income from other sources in that foreign country. This type of trading in tax credits is inappropriate if the amount of foreign tax credited is excessive relative to the pre-tax profit generated by the transaction.

In order to limit this type of activity, the budget proposes two new rules. The first rule applies only to short-term securities acquisitions and only when the more general second rule described below does not deny an FTC. The first rule will restrict the amount of foreign withholding tax in respect of dividends and interest on a foreign security that is creditable under the foreign tax credit by reference to the gross profit realized by the taxpayer from the underlying security. The second rule will deny the credit where the profit from a property, net of foreign tax, is not material relative to the amount of foreign tax. These rules will apply to property acquired after February 23, 1998.

Short-term securities acquisitions

The application of withholding taxes to dividend and interest payments on foreign shares and debts can create opportunities to trade in FTCs by means of trading in the securities themselves. For example, a taxpayer (the buyer) purchases a foreign share or bond from its owner (the holder) before payment of a dividend or interest. The after-tax value of the income payment is greater to the buyer than to the holder because the buyer is able to claim a credit for the foreign tax. The purchase price reflects the value of the underlying security plus the value of the declared dividend or the accrued interest (net of any foreign withholding tax payable). The buyer receives the dividend or interest, out of which foreign tax has been withheld, and then resells the share at its value net of that payment either to the holder (possibly at a pre-agreed price) or in the market.

In this type of transaction, the time period between purchase and sale is typically quite short. If the security is resold to the original owner at a pre-agreed price, that party effectively retains its economic interest in the security while it is in the hands of the buyer. In all cases, the purchase price may be set so that some of the benefit of the FTC is transferred to the original holder as compensation for entering into the arrangement. This type of transaction is illustrated in the first example below.

To counter this type of arrangement, the budget proposes to introduce a new rule applicable where a taxpayer disposes of a share or debt not held as capital property within one year of its acquisition. In general terms, the amount of foreign withholding tax eligible to be recognized for FTC purposes will be limited to 40 per cent or 30 per cent (depending on whether the foreign tax constitutes business or non-business income tax) of the taxpayer's gross profit from the share or debt. Withholding tax for this purpose includes any tax levied on the gross amount of the income payment. Gross profit from the security will include both the income payment and any gain or loss on resale. This rule will ensure that the FTC provisions continue to prevent double taxation of the net income earned from the share or debt, while limiting the tax benefits that can shelter other unrelated income.

Denial of credit where profit is not material

Trading in FTCs is not limited to situations involving short-term securities acquisitions. A case of FTC trading through an interest rate swap is set out in the second example below.

In response, the budget proposes a more general rule that will apply where a taxpayer has acquired a property and it is reasonable to expect that the profit from the property, and from other transactions entered into as part of the arrangement in which the property was acquired, will not be material in relation to the amount of foreign income tax paid on income from the property that would otherwise be eligible for the FTC. This rule will apply more broadly to income and profits taxes and not only to withholding taxes.

Under this rule, profit will be calculated by deducting the expected direct costs of acquiring, holding and disposing of the property and any foreign tax expected to be payable on income from the property. Direct costs of acquisition would include, for example, financing costs incurred for the purpose of acquiring the property. Where the profit thus calculated is not material in relation to the foreign tax, that tax will not be eligible to be recognized for purposes of calculating the taxpayer's FTC. Instead, a deduction from income will be allowed, but only to the extent of the taxpayer's income in respect of the property.

Example

Holder has a bond of a foreign corporation with an underlying value of $100, on which a regular $5 interest payment is about to be paid. The interest is subject to a 15-per-cent withholding tax in the source country, so that Holder would receive $4.25 net after 75 cents in foreign tax had been withheld. Holder is not able to use an FTC.

Buyer purchases the foreign bond just prior to the interest payment date for $104.50, and receives the $5 interest payment on which 75 cents has been withheld. A few months later, Buyer sells the bond either back to the Holder or on the market, for $101, the appreciation reflecting the interest accrued during the holding period. This transaction on its face is moderately profitable to Buyer:

Proceeds	$101 .00

Interest	5 .00

Less: Acquisition cost	(104 .50)

Taxable income	1 .50

Less: Foreign tax withheld	(0 .75)

Economic profit (loss) before Canadian tax	$0 .75

Under existing rules, however, Buyer would be entitled to include the full 75 cents of foreign tax in its pool of foreign business or non- business income tax eligible for the FTC in respect of that particular country. Assuming that Buyer faces a 30-per-cent Canadian federal tax rate, 45 cents of the FTC would be needed to offset the tax payable on the $1.50 of taxable income from the transaction. This would leave Buyer with an FTC balance of 30 cents, which could be used to offset tax on income from other sources in that country. The availability of the FTC significantly enhances Buyer's return from the transaction:

Economic profit (loss) before Canadian tax	$0 .75

Unused foreign tax credit balance	0 .30

Profit after Canadian tax	$1 .05

The proposed rule would limit the amount of foreign taxes eligible for credit to 30 per cent (assuming the income is not connected with a foreign business) of Buyer's gross profit from the share ($1.50): 45 cents. Therefore, while the FTC would eliminate the Canadian tax payable in respect of the transaction, no excess credit would be available to offset tax on income from other sources.

Example

Assume a tax-exempt investor (Investor) wishes to borrow funds at short-term interest rates (say, 7 per cent) in order to purchase a $1,000 long-term foreign bond which pays interest at 8 per cent. Investor is not able to use the credit for the 15-per-cent non-resident withholding tax payable in the country of source on the bond interest. (Even though the return after withholding tax is only 6.8 per cent, which is lower than the 7 per cent cost of funds, Investor anticipates that the bond will appreciate due to interest rate movements.)

If the foreign interest payments are channelled through Taxpayer who is able to use an FTC, both parties can effectively obtain some benefit from the foreign tax credit. Taxpayer borrows funds at the short-term rate and buys the bond. At the same time, it enters into an interest rate "swap" agreement with Investor: Investor agrees that it will reimburse Taxpayer for the 7 per cent interest expense on the short-term loan, while Taxpayer agrees to pay over to Investor the net interest payments received on the bond, which Investor would otherwise have received directly (6.8 per cent), plus an additional 0.3 per cent to make the arrangement attractive to Investor. The arrangement could be set up to operate over a period of several years.

Before Canadian tax, the transaction would create a loss for Taxpayer:

Interest income on bond	$80 .00

Income (loss) on swap agreement ($70 from

Investor minus $71 to Investor)	(1 .00)

Interest expense on short-term loan	(70 .00)

Taxable income	9 .00

Less: Foreign tax withheld	(12 .00)

Economic profit (loss) before Canadian tax	$ (3 .00)

Taxpayer, however, would be entitled under existing rules to add the $12.00 of withholding tax to its pool of potentially creditable foreign tax. Assuming that taxpayer faces a 40 per cent Canadian tax rate, $3.60 of the FTC would be needed to offset the tax payable on $9.00 of taxable income from the transaction. This leaves an FTC balance of $8.40 which could be used to offset taxes on income from other sources in the foreign country. The availability of the FTC makes an otherwise unprofitable transaction attractive for Taxpayer:

Economic profit (loss) before Canadian tax	($3 .00)

Unused FTC balance	8 .40

Profit (loss) after Canadian tax	$5 .40

In this case, the second proposed rule would apply since, after foreign taxes, the anticipated profit to Taxpayer from the bond and the related swap agreement -- in fact, a $3.00 loss -- is not material in relation to the foreign tax of $12.00 otherwise creditable. The rule would deny the FTC. Instead, Taxpayer would be entitled to deduct the $12.00 in foreign tax from its $9.00 in income in respect of the property, to the extent of that income. Taxpayer's income for Canadian tax purposes from the transaction therefore could be reduced to zero, but no credit would be available to shelter other income.

Non-residents' certificates of exemption

Interest income paid to non-residents from Canadian sources is normally subject to withholding tax under Part XIII of the Income Tax Act. This tax is, however, often modified by Canada's tax treaties and by exceptions within Part XIII itself. Under one of the exceptions, Canada provides an opportunity for certain foreign pension funds to apply for an exemption from the tax which would otherwise be payable. Provided that they meet certain eligibility restrictions, such as being tax exempt in their own country, the Minister of National Revenue may grant them a certificate of exemption for interest payments they receive from arm's-length persons in Canada.

The budget proposes changes to the elegibility criteria for certificates of exemption to provide more certainty in their application. While the continuation of this exemption is justified for active foreign pension funds, the current wording of the Act requires only that the fund have been established or incorporated for the purpose of providing benefits under a pension or superannuation fund. There is currently no obligation that the fund continue to be principally engaged in providing benefits under such funds.

The budget proposes that, to be eligible for a certificate of exemption, a foreign pension fund demonstrate not only that it was established or incorporated to provide benefits under pension, retirement or superannuation funds but also that it continues to do so as its principal activity. This requirement will apply to all certificates of exemption issued after February 23, 1998.

Amounts owing by non-residents

Subsection 17(1) of the Income Tax Act deems a corporation resident in Canada to have earned a prescribed rate of interest on loans outstanding for one year or longer made to a non-resident person at less than a reasonable rate. This rule currently applies only to loans that are made by corporations resident in Canada. An exemption to this rule is provided in subsection 17(2) of the Act where tax has been paid on the loan under Part XIII of the Act. A further exemption is provided in subsection 17(3) of the Act where the loan has been made to a "subsidiary controlled corporation" and the money was used in the subsidiary controlled corporation's business for the purpose of gaining or producing income.

The budget proposes to extend the rule in subsection 17(1) of the Act to apply to all amounts owing to corporations resident in Canada, trusts with such corporate beneficiaries and partnerships with such corporate partners by non-residents where interest is not paid at a reasonable rate. The amendments also ensure that the rule in subsection 17(1) of the Act applies where amounts are owing either directly or indirectly by a non-resident. The exception in subsections 17(2) and (3) of the Act will be modified to refer to "amount owing" rather than to "loans". The budget also proposes to modify the exception in subsection 17(3) so that it only applies where the amount owing arose in the course of the carrying on of an active business by the subsidiary controlled corporation.

This measure applies to taxation years and fiscal periods beginning after February 23, 1998.

Mergers of foreign corporations

Currently, the Income Tax Act provides shareholders of a taxable Canadian corporation (a predecessor) a tax-deferred rollover in respect of a disposition of shares of the predecessor where it amalgamates with one or more other taxable Canadian corporations and those shareholders receive in exchange for their shares of the predecessor either:

▪	shares of the new corporation formed as a result of the amalgamation (a vertical or horizontal amalgamation); or

▪	shares of the taxable Canadian corporation that controls the new corporation formed as a result of the amalgamation (triangular amalgamation).

The Act also provides taxpayers who are shareholders of a foreign corporation (a predecessor) a tax-deferred rollover in respect of a disposition of shares of the predecessor where it undergoes a vertical or horizontal merger with one or more other foreign corporations and the other corporation and the predecessor are resident of the same foreign jurisdiction. The Act does not, however, provide for such a tax-deferred rollover in respect of a disposition of shares in the case of a triangular foreign merger of such foreign corporations. In the case of a triangular foreign merger, the shareholders of the predecessor receive shares of the foreign corporation that controls the new corporation formed on the merger, rather than shares of the new corporation.

The budget proposes that taxpayers that are shareholders of a foreign corporation be allowed a tax-deferred rollover in respect of a disposition of shares of the foreign corporation where the foreign corporation has been the subject of a triangular foreign merger. This proposal will apply to a disposition of shares as a result of a triangular foreign merger that occurs after February 24, 1998. As well, where a taxpayer elects, the proposal will apply to any other such disposition in any taxation year of the taxpayer for which the normal reassessment period has not expired before 1999.

Sales Tax Measures

This budget proposes a number of measures designed to simplify the goods and services tax (GST) and harmonized sales tax (HST) and to ensure consistency and fairness in their application. These measures relate to:

▪	the Visitors' Rebate Program;

▪	certain activities undertaken by charities;

▪	respite care provided to individuals with an infirmity or disability; and

▪	the alternate collection mechanism for direct sellers.

The Visitors' Rebate Program

The 1997 budget announced a review of the GST/HST Visitors' Rebate Program in order to determine whether the current design and administration of the program could be improved to target resources more effectively, promote Canada as a tourist destination and support the tourism industry in the creation of employment.

The Visitors' Rebate Program provides rebates of GST/HST to non-residents on eligible goods exported from Canada, short-term accommodation and certain goods and services used in the course of a foreign convention.

Since the review was announced, extensive consultations have been undertaken with the tourism industry. These consultations indicated that the program is generally viewed as an important tool in promoting tourism, particularly the accommodation and convention measures.

This budget proposes several enhancements to the design and delivery of the program to further promote Canada as a tourist destination and a place to convene conventions.

Extension of the rebates for foreign conventions

to include food and beverages

Sponsors and non-registered organizers of foreign conventions (i.e., where at least 75 per cent of participants are non-residents) are permitted to claim rebates of the GST/HST paid on eligible expenses, such as the rental of meeting rooms, short-term accommodation and certain other purchases of goods and services used in the course of the convention. Currently, the list of eligible expenses excludes food, beverages and catering services.

The budget proposes that the existing rebate to a sponsor or organizer of a foreign convention be extended to rebate 50 per cent of the tax paid in respect of food, beverages and catering services relating to the convention. This extension of the rebate will increase the competitiveness of Canadian convention facilities marketed to non-resident non-registrant businesses. This proposal applies to foreign conventions held after February 24, 1998 where no admissions to the convention have been sold on or before that day.

Extension of short-term accommodation rebate to campsites

Non-resident individuals and businesses are entitled to a rebate of the GST/HST paid on accommodation in a hotel, motel or similar establishment for a period of less than one month. Currently, a short-term accommodation rebate is available for campsites only if the campsite is part of a tour package that also includes food and the services of a guide.

The budget proposes that visitors to Canada be able to claim a rebate in respect of the GST/HST on campsite fees, including any charge for hook-ups. In the case of a separate supply of a campsite, the claimant will be able to choose between claiming the actual amount of tax paid and $1 per night. Similarly, the formula for calculating the rebate for tour packages based on a flat amount per night will be amended to allow a rebate of $1 per night for each night for which a campsite is included in the package. The $5-per-night amount will continue in effect for any accommodation currently qualifying as short-term accommodation. This measure will ensure equitable tax treatment of campsite rentals whether or not they are included as part of a tour package.

This proposal applies to campsites not included in a tour package where the campsite is made available after June 1998. The extension of the rebate to campsites included in a tour package applies where any accommodation in Canada (whether short-term accommodation or a campsite) that is part of the tour package is first made available after June 1998.

Program administration

The review of the Visitors' Rebate Program also focused on how the administration of the program could be improved in order to deliver the rebate in the most efficient and effective manner.

There are two principal methods by which a non-resident visitor may claim a rebate of GST/HST:

▪	in person, when departing Canada at certain land-based crossings at duty-free shops operating under contract with Revenue Canada, provided the rebate amount does not exceed $500; or

▪	by mailing an application form to Revenue Canada, in which case the rebate is subsequently mailed to the foreign visitor at his or her home address.

As well, private sector operators have set up businesses at certain international airports and other locations to provide instant cash rebates to non-residents.

Currently, non-resident individuals may file only one rebate application each calendar quarter and non-resident businesses can file only one rebate claim each month. In order to enhance the delivery of the rebate, the budget proposes to eliminate these filing restrictions. The proposal applies to rebate applications received after February 24, 1998.

Revenue Canada uses a number of methods to verify the validity of rebate claims. To continue to ensure the integrity of the program, Revenue Canada will implement an enhanced verification procedure relating to rebate claims filed in respect of goods exported from Canada. This will entail inspection of goods at border crossings, airports and other exit points. This verification method is consistent with procedures in other value-added tax jurisdictions that relieve the tax on purchases made by non-residents.

In addition, Revenue Canada will continue to consult with industry members on additional measures which may enhance the delivery and accessibility of the program.

Measures relating to charities

The budget proposes two measures intended to improve the fairness of the GST/HST as it applies to charities.

Services provided by charities

Under the GST/HST, a general exemption is provided for most services supplied by charities. Input tax credits are not available to the extent that a charity makes exempt supplies, although the charity is able to recover, by way of rebate, 50 per cent of the otherwise unrecoverable tax.

The budget proposes a measure for charities whose main purposes include the provision of care, employment, employment training or employment placement services for individuals with disabilities or the provision of instructional services to assist such individuals in securing employment. Where these charities supply services on a regular basis that are in whole, or in part, performed by individuals with disabilities, the charity may apply to the Minister of National Revenue to have all services it supplies to registrants excluded from the general exemption for charities. However, this will not affect services that are specifically exempt under other provisions, such as educational or health care services. Moreover, the charity's services of providing care and employment-related assistance for individuals with disabilities will remain exempt when supplied to a public sector body or to a board, commission or other body established by a government or a municipality.

This measure addresses the special circumstances faced by these designated charities. It will enable them to charge tax on their supplies of services to registered customers and to claim input tax credits on their related purchases. Their registered customers may, in turn, be entitled to claim input tax credits for the tax charged and collected on the charities' services. As a result, the GST/HST will not place these charities at a competitive disadvantage vis-à-vis other suppliers who provide services to registered businesses. While the mandatory streamlined accounting method for charities will not apply to these designated charities, they will be eligible to use the existing special quick method that applies to other public sector bodies for the purpose of calculating their net tax remittances. This measure applies to supplies made by designated charities in reporting periods commencing after February 24, 1998.

Charities operating bottle return depots

Special rules apply to deposits paid on returnable beverage containers for taxable consumer products, such as soft drink bottles, liquor bottles and beer cans. These rules provide for the return of the GST/HST paid on the refundable deposit where the container is returned to a retailer or an authorized depot engaged in taxable activities. However, where a charity operates an authorized depot in the course of exempt activities and refunds a provincially mandated refundable deposit, the special rules do not provide for the recovery of the GST/HST originally paid on the refundable deposit.

The budget proposes that, in the latter circumstances, a charity operating a bottle return depot in a province be allowed to claim a net tax deduction or refund equal to 7 per cent (or 15 per cent where the province is an HST-participating province) of the refundable deposit. The charity must pay the refundable deposit, plus an amount equal to the deduction or refund, to the person from whom it collects the container. This measure will ensure fairer treatment of charities operating bottle return depots. The measure applies in respect of containers returned after March 1998.

Respite care

The budget proposes that an exemption from the GST/HST be provided for care and supervision of individuals who have limited capacity for self-supervision and self-care due to an infirmity or disability. The exemption applies where the service is rendered principally at an establishment of the supplier. For example, this would include daytime or overnight care of an individual with an infirmity or disability while the individual's primary caregiver is working or otherwise unavailable. The measure would extend to situations where care and supervision, including lodging, is provided during the transition from a health care facility to a home environment, or vice versa. This measure complements GST/HST relief already available for nursing home and home care services. Together with the proposed increased income tax assistance for caregivers, this measure enhances federal support for Canadians striving to meet the growing demands of caring for family members with an infirmity or disability. This measure applies to services performed after February 24, 1998.

Direct sellers

Under the GST/HST, direct sellers have the option of determining their net GST/HST liability as if sales of their exclusive products had been made by them directly to final purchasers, rather than through independent sales contractors, for the suggested retail price of those products. The legislation also provides that, where a distributor of a direct seller has jointly elected with the direct seller, it is the distributor who calculates its net GST/HST liability as if its sales had been made directly to final purchasers for the suggested retail price of the exclusive products.

As a result, independent sales contractors are treated, under these rules, as "small suppliers", regardless of their level of sales, and do not have to register and file returns.

The budget proposes two changes to improve the operation of the special rules for direct sellers and independent sales contractors.

Shipping, handling and order processing charges

Under the current rules, charges for shipping, handling and order processing from the direct seller to an independent sales contractor or between independent sales contractors are taxable to the independent sales contractor. In order to recover the GST/HST paid on these charges, the independent sales contractor must be a registrant. This reduces the benefits of the special rules for direct sellers and independent sales contractors.

The budget proposes that the GST/HST not apply to shipping, handling and order processing fees relating to exclusive products of the direct seller or sales aids when charged by the direct seller or the distributor to the independent sales contractor, or between independent sales contractors. This measure applies to amounts that become due after February 24, 1998 and are not paid on or before that day.

Bad debts

Currently, the general bad debt provisions under the GST/HST cannot be applied with respect to remittances under the special rules for direct sellers and independent sales contractors. The bad debt rules provide relief only to the person who made the sale giving rise to the bad debt, and do not accommodate the "deemed sale" under the special rules for direct sellers and independent sales contractors.

The budget proposes bad debt relief in respect of bad debts relating to an account receivable of an independent sales contractor (ISC) on a sale to a final purchaser in circumstances in which the sale was accounted for under the special rules as if it were made by the direct seller or a distributor instead of the ISC. The direct seller or the distributor, as the case may be, may claim a deduction in determining its net tax where it has paid or credited the amount of the deduction to the ISC who has written off the bad debt in the ISC's books of account. The allowable deduction is calculated on the basis of the same formula as is used by other registrants in claiming bad debt relief under the GST/HST.

Similar to the general rules under the GST/HST relating to bad debts, the direct seller or distributor who has taken a bad debt deduction is required to add an amount to its net tax in respect of any subsequent recovery of the bad debt.

These measures apply to bad debts in respect of supplies made after February 24, 1998.

Excise Tax Measures

Tobacco tax increases

The federal government will be introducing legislation amending the Excise Tax Act to implement increases in the excise taxes on tobacco products proposed on February 13, 1998.

These proposals include:

▪	an increase in the federal excise tax on cigarettes by 60 cents per carton of 200 cigarettes for retail sale in Ontario, Quebec, Nova Scotia and Prince Edward Island; and 40 cents per carton for retail sale in New Brunswick; and

▪	an increase in the federal excise tax on tobacco sticks by $1.52 per carton of 200 tobacco sticks for sale in Ontario and Quebec; 94 cents per 200 tobacco sticks for sale in Prince Edward Island; and 80 cents per 200 tobacco sticks for sale in other parts of Canada.

These tax increases apply to cigarettes and tobacco sticks sold or imported after February 13, 1998.

These changes are part of the co-ordinated federal-provincial process for the restoration of tobacco taxes in a gradual and sustainable manner so as not to encourage contraband activity.

Phase-out of the air transportation tax

Legislation will be introduced to implement reductions in the air transportation tax announced in 1997 as part of the government's program to commercialize air navigation services. The air transportation tax is being reduced and will be phased out this year as Nav Canada, a private Canadian corporation that now owns and operates the air navigation system, implements user fees to be paid by air carriers to fund its services. Further details on these tax reductions are contained in press releases of August 13 and December 4, 1997.

First Nations Taxation

In the 1997 budget, the federal government indicated its willingness to put into effect taxation arrangements with interested First Nations. Since that time, Parliament has passed legislation that allows the Cowichan Tribes and the Westbank First Nation to levy taxes on tobacco products sold on their respective reserves. In the case of the Westbank First Nation, a tax collection agreement has been concluded under which Revenue Canada will collect Westbank's tax.

The federal government has also been working, this past year, with the self-governing First Nations in the Yukon to facilitate the exercise of taxation powers provided in their self-government agreements. The discussions have focused on the co-ordination of the First Nations tax system with that of Canada through the use of tax collection agreements. The successful conclusion of these first tax collection agreements will open a new and important revenue source for these communities. The first such agreements will address the co-ordination of our respective personal income tax systems. The government has also identified co-ordination of corporate income taxes and sales taxes as subjects for discussion in the next year.

Building on the work of the last year, the federal government is once again expressing its willingness to continue discussions and to put into effect taxation arrangements with the First Nations that indicate an interest in exercising taxation powers.

Appendix

Measures for tax fairness and to achieve economic and social objectives

The budget reiterates the government's commitment to enhance fairness in the tax system and to provide targeted tax relief to achieve economic and social objectives. As explained in the 1997 budget, revenues must be raised in accordance with the following key principles:

▪	taxes must reflect the ability to pay -- those with similar incomes and in similar circumstances should pay similar taxes, but those with higher incomes must pay more. When feasible, those with higher incomes should pay progressively more taxes. Corporations whether Canadian or foreign owned, must also pay taxes in Canada on their profits;

▪	those who need help get it -- the tax system must recognize special circumstances that affect the ability to pay tax and should be capable of actually providing assistance to, rather than levying taxes on, those in greatest need; and

▪	taxes that are owed must be paid -- this involves compliance with the tax system. The government must ensure that Canadians clearly understand their legal obligations and that Revenue Canada collects taxes that are owed in a fair and efficient manner both for the government and taxpayers.

Maintaining tax fairness requires a constant monitoring of the tax system. Tax measures which were appropriate when introduced may no longer be suitable due to changes in the economy, new social priorities, aggressive tax planning and the need to improve compliance.

Since 1994, the government has introduced a number of tax measures to enhance fairness and achieve economic and social objectives. The following table summarizes measures taken in previous years and in this budget.

Measures to enhance tax fairness and

achieve economic and social objectives (1994-1998)

Families and seniors

1996

•	introduced new tax treatment of child support payments with payments non-deductible for the payer and non-taxable for the recipient.

•	announced two-step enrichment of the Working Income Supplement (WIS) of the Child Tax Benefit (CTB) of $250 million.

•	proposed new Seniors Benefit, which is more progressive, fully indexed and tax free, will replace Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

•	replaced the seven-year limit by an unlimited carry-forward of unused RRSP room.

1997

•	announced a $6 billion Canada Child Tax Benefit by simplifying and enriching the current Child Tax Benefit, starting July 1998.

•	enrichment of the WIS in July 1997 from the $125 million announced in the 1996 budget to $195 million and restructuring from a per-family to a per-child basis.

1998

•	proposing to raise the limits to $7,000/$4,000 under the child care expense deduction.

•	proposing to enrich the Canada Child Tax Benefit by another $425 million on July 1, 1999 and a further $425 million on July 1, 2000.

•	removing contributions to registered retirement savings plans (RRSPs) and registered pension plans RPPs from the base for the alternative minimum tax.

Education

1996

•	increased the education amount from $80 to $100 per month.

•	raised the annual limit on the transfer of the tuition fee and education amounts to those who support students from $4,000 to $5,000.

•	increased the annual limit on contributions to registered education savings plans (RESPs) from $1,500 to $2,000, and the lifetime limit from $31,500 to $42,000.

•	broadened eligibility for the child care expense deduction to assist parents who undertake education or retraining.

1997

•	doubled the basis for the education credit over two years to $200 per month.

•	made ancillary fees eligible for the tuition credit.

•	allowed a carry-forward of unused tuition and education credits.

•	increased annual contribution limits for RESPs from $2,000 to $4,000.

•	allowed transfers of RESP funds to an RRSP or to the contributor.

1998

•	proposing to provide a Canada Education Savings Grant of 20 per cent on annual contributions of $2,000, along with carry-forward flexibility.

•	proposing to introduce a tax credit for interest on student loans.

•	proposing to allow RRSP withdrawals for lifelong learning.

•	proposing to enhance tax support for part-time education through the education credit and the child care expense deduction.

Tax assistance for charities and public institutions

1994

•	lowered the threshold at which charitable donations begin to earn the 29-per-cent tax credit from $250 to $200.

1996

•	increased the limits on charitable donations eligible for tax credits from 20 per cent to 50 per cent of net income, and to 100 per cent of net income in the year of death and the preceding year.

•	expanded zero-rating of hospital beds to all health care facilities, including long-term care facilities.

•	allowed most charitable and public organizations to raise funds without collecting and remitting goods and services tax (GST) on sales.

•	extended GST relief on purchases of vehicle modifications necessary to serve individuals with disabilities.

•	provided a 100-per-cent GST rebate on books purchased by public libraries, educational institutions and other specified bodies.

1997

•	reduced the inclusion rate on capital gains arising from the donation of publicly listed securities from 75 per cent to 37.5 per cent.

•	changed the income limit for donations to 75 per cent.

•	included 25 per cent of capital cost allowance (CCA) recapture in the net income limit.

•	sanctioned a new method of valuation for easements of ecologically sensitive lands.

•	increased resources for Revenue Canada to enhance information and compliance from charities.

•	simplified GST accounting, reporting and remittance requirements for charities.

1998

•	proposing to increase tax free allowances for emergency service volunteers.

•	proposing to allow designated charities to treat certain services they supply to business customers as GST/HST taxable, thereby competing on an equal footing with other suppliers.

•	proposing to provide equivalent GST/HST treatment to charities operating authorized bottle return depots vis-à-vis commercial operators.

Persons with disabilities

1996

•	expanded zero-rating of orthopaedic and orthotic devices under GST.

•	enriched the tax credit for infirm dependants.

1997

•	broadened the medical expense tax credit.

•	removed the limit on the attendant care deduction.

•	introduced a refundable medical expense credit for earners.

•	broadened the definition of preferred beneficiary for trusts benefiting people with disabilities.

1998

•	proposing a new tax credit for caregivers who care for related seniors and persons with disabilities.

•	proposing to extend the Home Buyers' Plan to persons with disabilities.

•	proposing eligibility of training expenses for caregivers for the medical expense tax credit.

•	proposing to allow certification for the disability tax credit by occupational therapists and psychologists.

•	proposing to exempt respite care services from GST/HST.

•	proposing to allow RRSP withdrawals for lifelong learning for full-time or part-time education.

Personal income tax measures to better target tax preferences

1994

•	eliminated the $100,000 lifetime capital gains exemption.

•	extended the base for the alternative minimum tax.

•	restricted the use of tax shelters.

•	extended the taxation of employer-paid life insurance premiums to the first $25,000 of coverage.

•	introduced income-testing of the age credit.

1995

•	eliminated tax advantages available through trusts.

•	reduced the overcontribution allowance for RRSPs from $8,000 to $2,000.

•	capped the RRSP and money purchase RPP dollar limits at $13,500 through 2003 and 2002 respectively.

•	eliminated the retiring allowance roll-overs for years of service after 1995.

•	eliminated double claims of personal credits in year of personal bankruptcy.

1996

•	released new rules on taxpayer migration to ensure that gains that accrue while a taxpayer is a resident of Canada are subject to Canadian tax.

•	capped the maximum pension limit for defined benefit RPPs at $1,722 per year of service until 2005 (only affecting individuals earning over $75,000).

•	reduced the maximum age limit for deferring tax on savings in RRSPs and RPPs from age 71 to 69.

•	further constrained tax shelters relying on a mismatch of income and expenses.

1998

•	proposing to allow deductibility of health and dental premiums for the self-employed.

•	proposing to expand the remote worksite concept.

•	proposing to clarify the tax treatment of relocation expenses.

•	proposing to strengthen the integrity of the certified cultural property regime.

•	proposing to expand rules regarding employee options to allow the acquisition of units of mutual fund trusts.

Business income tax measures to better target tax preferences

1994

•	eliminated the small business deduction and phased out enhanced scientific research and experimental development (SR&ED) benefits for large private corporations.

•	reduced the deduction for business meals and entertainment expenses from 80 per cent to 50 per cent to better reflect the personal consumption element of these expenditures.

•	increased the rate of tax on corporate dividends received by private investment corporations.

•	implemented measures to ensure that the income of financial institutions is measured appropriately for tax purposes.

•	eliminated the preference for sole-purpose SR&ED performers.

•	reduced regional investment tax credits.

•	modified the basis upon which insurance companies may claim reserves for income tax purposes.

•	phased out accelerated depreciation deductions for air and water pollution equipment and reduced CCA rate for energy conservation equipment.

•	eliminated "purchase butterflies".

•	tightened the rules applicable to foreign affiliates.

•	tightened the rules applicable on forgiveness of debt.

1995

•	increased the large corporations tax (LCT) and corporate surtax.

•	introduced temporary surcharge on banks and other large deposit-taking institutions.

•	eliminated the deferral of tax on unincorporated business income.

•	eliminated the deferral advantage for investment income earned by private holding companies.

•	replaced film tax shelter mechanism for certified Canadian films with a tax credit.

•	tightened rules relating to non-arm's-length contract SR&ED.

•	introduced voluntary measure for construction industry reporting.

•	tightened rules concerning superficial losses.

1996

•	reduced tax assistance for labour-sponsored venture capital corporations.

•	repealed joint exploration corporation rules.

•	restricted eligibility of seismic data for flow-through share treatment.

•	limited SR&ED benefits for non-arm's-length wages.

1997

•	replaced tax shelters used to finance non-Canadian films with a tax credit.

1998

•	proposing to extend temporary capital tax surcharge on large deposit-taking institutions.

•	proposing to allow deductibility of countervailing duties and anti-dumping charges.

•	proposing to allow more time for year-end distributions for mutual fund trusts.

•	proposing to harmonize financial institution designation for LCT and other purposes.

•	proposing to allow earthquake reserve deduction.

•	proposing to prevent unintended benefits under the SR&ED regime.

•	proposing to improve a range of international taxation rules.

Sales tax measures to better target tax preferences

1996-97

•	tightened the GST rules governing the claiming of input tax credits and rebates by large businesses and exempt entities.

•	reinforced the GST rules relating to trusts, estates and partnerships to ensure fair and consistent treatment of similar businesses that are organized differently.

•	refined the criteria for businesses to be treated for GST purposes as being in competition with financial institutions.

•	permitted warranty companies to recover GST paid on reimbursements to warranty holders.

•	extended the GST accommodation rebate for visitors to Canada to non-resident businesses.

•	expanded zero-rating and rebate provisions for exported goods and services.

•	tightened the GST real property rules to ensure that all builders of multiple-unit residential buildings are treated equitably.

1998

•	proposing to enhance the GST/HST Visitors' Rebate Program.

•	proposing to enhance alternate collection mechanism for direct sellers.

Simplifying tax administration and improving enforcement

1994-97

•	strengthened outreach and education programs.

•	enhanced easy-to-understand automatic telephone information systems.

•	met with special taxfiler groups such as senior citizens and immigrants to help them comply.

•	established a single Business Number for streamlining registration for GST remitters, employers, corporations and importers/exporters.

•	new "Business Window" initiative to provide one-stop service for small businesses.

•	simplified payroll reporting for small businesses.

•	reduced compliance costs for small and medium-sized businesses by co-ordinating GST, income tax and excise tax audits.

•	streamlined procedures to simplify and expedite Customs clearance.

•	implemented a new approach to large business audits including audit protocol.

•	reinforced measures to target the underground economy.

•	earlier identification of abusive tax avoidance and tax shelter schemes.

•	continued improvement of sophisticated risk models to identify areas of high risk and a sector approach to compliance for small and medium-sized businesses.

•	forgiveness of penalties on voluntary tax disclosures to encourage taxpayers to comply voluntarily.

•	included exchange of information provisions to help deal with tax havens.

•	new rules requiring residents of Canada to file an information return when they own foreign assets in excess of $100,000 in value.

•	required adequate documentation of transactions relating to transfer pricing and introduced new penalty provisions related to Revenue Canada reassessments.

•	increased resources for Revenue Canada for transfer pricing audits.

1998

•	proposing to introduce mandatory reporting of federal and construction contracts.

Notices of Ways and Means Motions

Notice of Ways and Means Motion

to Amend the Income Tax Act

That it is expedient to amend the Income Tax Act to provide among other things:

Supplementary personal tax credit

(1) That, for the 1998 and subsequent taxation years, an individual (other than a trust) be allowed to deduct in computing the individual's tax payable for the year under Part I of the Act 17 per cent of the amount by which the total of

(a) $500, and

(b) where a spouse tax credit or equivalent-to-spouse tax credit is deducted in respect of another person in computing the individual's tax payable under Part I of the Act for the year (or would have been deducted if that person had no income for the year), the lesser of

(i) $500, and

(ii) the amount by which the total of $500 and the basic personal amount for the year exceeds the other person's income for the year

exceeds

(c) 4 per cent of the amount by which

(i) the individual's income for the year

exceeds

(ii) the total of

(A) the total of $500 and the basic personal amount for the year, and

(B) the amount determined under clause (b)(ii) for the year

and that the amount of $500 be adjusted to reflect the portion of annual increases in the Consumer Price Index in excess of 3 per cent, except that, for the 1998 taxation year, this tax credit be equal to 50 per cent of the credit otherwise determined.

Individual surtax

(2) That, for the 1998 and subsequent taxation years, the 3 per cent surtax required to be paid by an individual for the year be reduced by the amount by which

(a) $250

exceeds

(b) 6 per cent of the amount by which

(i) the individual's tax payable under Part I of the Act

exceeds

(ii) $8,333

except that, for the 1998 taxation year, this surtax reduction be equal to 50 per cent of the surtax reduction otherwise determined.

Credit for interest on student loans

(3) That, for the 1998 and subsequent taxation years, an individual be entitled to deduct, in computing tax payable for the year under Part I of the Act, 17 per cent of amounts paid in the year or in any of the 5 preceding taxation years ending after 1997 on account of interest on a loan under the Canada Student Loans Act or a provincial statute governing the granting of financial assistance to students at the post-secondary school level.

RRSP withdrawals for learning

(4) That provisions be introduced governing withdrawals from registered retirement savings plans used for learning in accordance with the proposals described in the Budget Papers tabled by the Minister of Finance in the House of Commons on February 24, 1998.

Part-time education

(5) That provisions relating to the part-time education of individuals be introduced in accordance with the proposals described in the Budget Papers tabled by the Minister of Finance in the House of Commons on February 24, 1998.

Registered education savings plans (RESPs)

(6) That measures consequential on the introduction of the Canada Education Savings Grant (CESG) program be introduced in accordance with the proposals described in the Budget Papers tabled by the Minister of Finance in the House of Commons on February 24, 1998.

(7) That, for 1998 and subsequent years, measures be introduced to provide for

(a) the recovery of CESGs to the extent that the total of all amounts each of which is the CESG portion of an educational assistance payment made under an RESP to a taxpayer in the year or a preceding year exceeds $7,200, and

(b) a deduction in respect of the CESG recovery amount in computing the taxpayer's income.

(8) That, for 1999 and subsequent years, the lifetime limit on RESP income distributions that can be exempted from the 20 per cent tax payable under Part X.5 of the Act, where there are corresponding deductions in respect of contributions to registered retirement savings plans, be increased from $40,000 to $50,000.

(9) That, as a condition for registration, an education savings plan submitted after 1998 for registration prohibit educational assistance payments to an individual enrolled in an educational program of less than 3 months duration, unless the program is of at least 3 weeks duration and either

(a) the payment does not exceed the individual's cost of tuition plus $300 times the number of weeks in the program, or

(b) the payment is approved by the Department of Human Resources Development.

(10) That, as a condition for registration, an education savings plan submitted after 1998 for registration that allows more than one beneficiary at any one time not allow an individual to become a beneficiary after the individual attains 21 years of age.

(11) That, where an individual under 21 years of age replaces another individual as a beneficiary under an RESP after 1997 and both individuals are connected to the RESP's subscriber by blood relationship or adoption, none of the contributions made to the RESP in respect of the other individual be taken into account in determining the amount of overcontributions to RESPs that have been made in respect of the new beneficiary.

PHSP premiums

(12) That amounts paid or payable in a fiscal period that begins after 1997 as a premium, contribution or other consideration to a private health services plan, in respect of one or more of an individual and the individual's spouse and children be deductible in computing the individual's income for the period from a business carried on by the individual, alone or as a partner actively engaged in the business, if

(a) either

(i) the total of the individual's incomes from all such businesses for all fiscal periods ending in the taxation year in which the fiscal period of the business ends exceeds 50 per cent of the individual's income for the year, or

(ii) the portion of the individual's income for the year that exceeds the total referred to in clause (i) does not exceed $10,000,

on the assumption that all such incomes are computed without reference to this paragraph and subdivision e of Division B of Part I of the Act,

(b) the amounts are paid or payable under a contract between the individual and a person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or the business of offering to the public its services as trustee,

(c) none of the amounts paid is included, in whole or in part, in computing an individual's medical expense tax credit for any taxation year, and

(d) where the individual employs, directly or indirectly, one or more persons on a full-time basis (other than persons employed on a temporary or seasonal basis) with whom the individual is dealing at arm's length who have accumulated at least three consecutive months of service with the individual, all such persons are entitled to benefits under the plan that are at least equivalent to the benefits to which the individual is entitled under the plan

except that, where in the period the individual does not employ, directly or indirectly, any person to whom subparagraph (d) applies or the number of persons employed by the individual in the business with whom the individual deals at arm's length and to whom coverage is extended under the plan is less than 50 per cent of the number of persons employed by the individual in the business, no such amount be deductible for the period except to the extent of $1,500 for each of the individual and the individual's spouse and $750 for each of the individual's children, on an annual basis.

Alternative minimum tax

(13) That the provisions relating to the alternative minimum tax be modified

(a) for the 1998 and subsequent taxation years, to allow an individual to deduct, in computing the individual's adjusted taxable income for the year, amounts paid to a registered pension plan or a registered retirement savings plan to the extent that they are deductible in computing the individual's income for the year, and

(b) for the 1994 to 1997 taxation years, to provide for the refund to an individual who at the end of 1997 is resident in Canada and is not bankrupt of an amount equal to the portion of that tax that

(i) can reasonably be regarded as being attributable to the non-deductibility of one or more amounts referred to in subparagraph (a) in computing the individual's adjusted taxable income for the year, and

(ii) has not been deducted in computing the individual's tax payable under Part I of the Act for any other taxation year.

Child care expense deduction

(14) That, for the 1998 and subsequent taxation years, the maximum annual amounts deductible for child care expenses be increased

(a) from $5,000 to $7,000 for each eligible child under 7 years of age or in respect of whom a disability tax credit may be claimed, and

(b) from $3,000 to $4,000 for each other eligible child.

Canada Child Tax Benefit

(15) That, with respect to payments arising during months after June 1998, an eligible individual be entitled to the full amount of the National Child Benefit Supplement of the Canada Child Tax Benefit to the extent that the individual's adjusted income does not exceed $20,921.

Caregiver Tax Credit

(16) That where, during the 1998 or a subsequent taxation year, an individual maintains (alone or jointly with another individual) a self-contained domestic establishment which is the ordinary place of residence of the individual and of a person who

(a) has attained the age of 18 years before the end of the year,

(b) is the individual's

(i) child or grandchild, or

(ii) parent, grandparent, brother, sister, aunt, uncle, nephew or niece, resident in Canada, and

(c) is, except where the person is the individual's parent or grandparent and has attained the age of 65 years before the end of the year, dependent on the individual by reason of mental or physical infirmity,

the amount by which

(d) $400

exceeds

(e) 17 per cent of the amount by which the person's income for the year exceeds $11,500

be deductible in computing the individual's tax payable under Part I of the Act for the year, except that no such amount be deductible by the individual for a taxation year if an amount is deducted for the year by any individual as an equivalent-to-spouse tax credit or a dependant tax credit in respect of the person and that the amounts of $400 and $11,500 be adjusted to reflect the portion of annual increases in the Consumer Price Index in excess of 3 per cent.

Home Buyers' Plan (HBP): general

(17) That where, by the beginning of 1999 or a subsequent year, an individual has repaid all amounts previously received under the HBP, the individual's eligibility to subsequently participate in the HBP be determined as if no amounts had previously been received under the HBP.

Home Buyers' Plan: disabled persons

(18) That the restriction of the HBP to first-time homebuyers be eliminated in connection with a payment received at any time after 1998 by an individual in a taxation year out of an RRSP where

(a) the individual is entitled to claim a deduction under subsection 118.3(1) of the Act in computing tax payable for the year or would be so entitled if that subsection were read without reference to paragraph (c) thereof, and

(b) the purpose of receiving the payment is to enable the individual to acquire and live in a dwelling

(i) that is more accessible by the individual or in which the individual is more mobile or functional, or

(ii) that is better suited for the personal needs and care of the individual.

(19) That the restriction of the HBP to first time homebuyers be eliminated in connection with a payment received out of an RRSP at any time after 1998 by an individual (referred to below as the "supporting individual") in a taxation year where

(a) a disabled individual is entitled to claim a deduction under subsection 118.3(1) of the Act in computing tax payable for the year or would be so entitled if that subsection were read without reference to paragraph (c) thereof,

(b) the supporting individual is related to the disabled individual, and

(c) the purpose of receiving the payment is to enable the supporting individual or the disabled individual to acquire a dwelling for the disabled individual to live in

(i) that is more accessible by the disabled individual or in which the disabled individual is more mobile or functional, or

(ii) that is better suited for the personal needs and care of the disabled individual.

Medical expense tax credit

(20) That, for the 1998 and subsequent taxation years, there be added to the list of expenses eligible for the medical expense tax credit reasonable expenses for the training of an individual in connection with care to be provided to a person who

(a) is related to the individual,

(b) has a mental or physical infirmity, and

(c) is a member of the individual's household or is dependent on the individual for support.

Disability tax credit

(21) That, after February 24, 1998 for the purpose of the disability tax credit, persons authorized to practice as

(a) occupational therapists be allowed to certify the existence of a severe and prolonged impairment with respect to an individual's ability to walk or to feed and dress oneself, and

(b) psychologists be allowed to certify the existence of a severe and prolonged impairment with respect to an individual's ability to perceive, think and remember.

Volunteers

(22) That, for the 1998 and subsequent taxation years, the $500 exemption applicable to allowances paid to a volunteer firefighter be replaced by a deduction equal to the lesser of

(a) $1,000, and

(b) the total of all amounts received by an individual from a government, municipality or other public authority that are included in computing the individual's income for the year from the discharge of the individual's duties as

(i) a volunteer ambulance technician,

(ii) a volunteer firefighter, or

(iii) a volunteer who assists in the search or rescue of individuals or in other emergency situations

and that the amount of the deduction be reduced by the amount by which

(c) the total of amounts included in computing the individual's income and that are received in the year from the government, municipality or authority for the discharge of the duties referred to in subparagraph (b) or similar duties

exceeds

(d) $3,000.

Meal and entertainment expenses

(23) That the provisions relating to the deductibility of expenses for meals and entertainment be modified, for expenses incurred after February 23, 1998, to

(a) extend the exception in paragraph 67.1(2)(d) of the Act to expenses that

(i) would be required to be included in computing the income of an employee but for subparagraph 6(6)(a)(i) of the Act, and

(ii) are incurred in respect of employees working at work sites which are at least 30 kilometres away from the nearest urban area having a population of at least 40,000 persons, and

(b) limit the exception in paragraph 67.1(2)(e) of the Act, relating to expenses incurred for food, beverages or entertainment generally available to all of a taxpayer's employees at a particular place of business, to such expenses incurred in respect of occasional events, not exceeding six such events per year.

(24) That the receipt of amounts or enjoyment of benefits described in subparagraph (23)(a) not be taken into account in computing the amount of a taxpayer's northern residents deduction.

Relocation expenses

(25) That, for expenses incurred after 1997, the definition of "moving expenses" in subsection 62(3) of the Act be amended to include

(a) mortgage interest, property taxes, insurance premiums and costs associated with maintaining heat and power, to a maximum of $5,000, payable in respect of a vacant "old residence" of the taxpayer for a period that begins after 1997 and does not exceed three months, during which reasonable efforts are being made to sell the "old residence", and

(b) the cost of revising legal documents to reflect the taxpayer's new address, replacing driving licenses and automobile permits, and obtaining utility connections and disconnections.

(26) That,

(a) for the 2001 and subsequent taxation years, for relocations effected in circumstances where the employee has begun employment at the "new work location" before July 1998, and

(b) for the 1998 and subsequent taxation years, in respect of amounts provided or paid after February 23, 1998 for relocations effected in circumstances where the employee has begun employment at the "new work location" after June 1998,

an employee be required to include in income, to the extent that it is not otherwise so included,

(c) any reimbursement or compensation provided directly or indirectly in the year by an employer in respect of the employee's financing for his or her residence, and

(d) one-half of the amount in excess of $15,000 paid directly or indirectly to an employee by an employer in respect of a decrease in value or impairment of proceeds of disposition of the employee's residence.

Employee loans

(27) That, for loans made after February 23, 1998, the provisions relating to employee loans be amended to clarify that section 80.4 of the Act applies to loans provided directly or indirectly by an employer, where it is reasonable to conclude that, but for the employee's office or employment, the loan would not have been made.

Certified cultural property

(28) That where, at any time after February 23, 1998, the Canadian Cultural Property Export Review Board makes a determination of the fair market value of a property, the amount of the determination be deemed to be the fair market value of the property for the purposes of all provisions of the Act relating to charitable donations and gifts of property for a period of two years from the date of the determination.

(29) That the period during which an institution or public authority will incur a liability to pay a penalty tax under Part XI.2 of the Act, if it disposes of a property which it received as a gift of certified cultural property, be increased from five years to ten years from the date of acquisition of the property, applicable to dispositions by such institutions or authorities that occur after February 23, 1998.

Mutual fund trust unit options

(30) That the provisions of the Act governing the tax treatment of options granted by public corporations to their employees to acquire shares be extended to options granted after February 1998 by mutual fund trusts to their employees to acquire trust units.

Part VI surtax

(31) That the 12 per cent surtax on financial institutions (other than life insurers) be extended to October 31, 1999, prorated for taxation years that end after October 1999.

Countervailing and anti-dumping duties

(32) That

(a) amounts that become payable by a taxpayer after February 23, 1998 in respect of countervailing or anti-dumping duties be deductible by the taxpayer in the year in which they are paid, and

(b) where the taxpayer has deducted an amount described in subparagraph (a), any refund or repayment made to the taxpayer in respect of the amount be included in the taxpayer's income in the year in which the refund or repayment is received.

Distributions by mutual fund trusts after year-end

(33) That, for taxation years that end after November 1998, a mutual fund trust that fails to pay or make payable an amount of its income for the year by the end of the year and that satisfies the amount within one month after the end of the year be permitted to elect that its income and the income of its unitholders at the end of the year be determined as if the satisfaction of the amount had occurred at the end of the year.

Large corporations tax:

prescribed financial institutions

(34) That corporations prescribed to be financial institutions for the purposes of Part I.3 of the Act be treated after 1998 as financial institutions for the purposes of Part I of the Act, and as restricted financial institutions and specified financial institutions for all purposes of the Act.

Scientific research and experimental development

(35) That, for the purpose of determining the amount of a taxpayer's investment tax credit in respect of scientific research and experimental development, where

(a) the cost of a material was included in an amount a percentage of which was included in the taxpayer's investment tax credit at the end of any taxation year, and

(b) after February 23, 1998, the taxpayer disposes of, or converts to commercial use, a property that contains the material,

the taxpayer's investment tax credit be reduced by the amount obtained by applying that percentage to the lesser of

(c) either

(i) where the material was acquired by the taxpayer from a person with whom the taxpayer was dealing at arm's length, the cost to the taxpayer of the material, or

(ii) in any other case, the fair market value of the material at the time it was acquired by the taxpayer, and

(d) either

(i) where the property is disposed of to a person who deals at arm's length with the taxpayer, the proceeds of disposition of the property, or

(ii) in any other case, the fair market value of the property at the time of the disposition or conversion to commercial use

and, for these purposes, where the amounts required to be deducted from a taxpayer's investment tax credit exceed the amounts required to be added thereto at the end of a taxation year, the excess be added to the taxpayer's tax payable under Part I of the Act for the year.

Indirect assistance

(36) That, for amounts received after February 23, 1998 (other than amounts received before 1999 by a taxpayer pursuant to an agreement in writing made by the taxpayer before February 24, 1998), paragraph 12(1)(x) of the Act be amended to clarify that an amount described in subparagraph (iii) or (iv) thereof, and received by a taxpayer in circumstances in which it is reasonable to conclude that the indirect source of the amount is a payer, government, municipality or public authority described in subparagraph (i) or (ii) thereof, is included in the taxpayer's income to the same extent as if the amount had been received directly.

Treaty-exempt income

(37) That, for the 1998 and subsequent taxation years,

(a) a non-resident taxpayer's taxable income earned in Canada be computed without reference to

(i) the taxpayer's income or loss for the year from a business (referred to as a "treaty-protected business") carried on in Canada, where any income of the taxpayer for the year from the business could, under an agreement between Canada and another country, be exempt from tax under Part I of the Act, and

(ii) the taxpayer's income, gain or loss from a property (referred to as a "treaty-protected property"), where any income or gain of the taxpayer from the disposition of the property in the year could, under an agreement between Canada and another country, be exempt from tax under Part I of the Act, and

(b) the amount deductible by reason of section 111 of the Act in computing a taxpayer's taxable income or taxable income earned in Canada for the year, in respect of a loss for another taxation year, be determined without reference to any income, gain or loss of the taxpayer for the other year from a treaty-protected business or treaty-protected property.

Foreign tax credit: treaty-protected

foreign income

(38) That, for the purposes of determining the foreign tax credit for taxation years that end after 1997, there be included in computing a taxpayer's income, but excluded in computing the taxpayer's income from a country other than Canada,

(a) the taxpayer's income or loss for the year from a business carried on in that country, where any income of the taxpayer for the year from the business would be tax-exempt in that country,

(b) the taxpayer's property income or loss for the year from a source in that country, where any income of the taxpayer for the year from the property would be tax-exempt in that country,

(c) the taxpayer's capital gain or loss in the year from a property, where any gain of the taxpayer from a disposition of the property in the year would be tax-exempt in that country, and

(d) the taxpayer's income or loss for the year from the duties of an office or employment performed in that country, where any income for the year from such duties would be tax-exempt in that country,

and, for the purposes of this paragraph, income or gain shall be considered to be tax-exempt in a country where

(e) under an agreement between Canada and that country, the income or gain could be exempt from any income or profits tax, imposed in that country, to which the agreement applies, and

(f) the income or gain would not be subject to any income or profits tax imposed in that country to which the agreement does not apply.

Dual-resident individuals

(39) That any individual who

(a) would otherwise be resident in Canada for the purposes of the Act at a particular time, and

(b) became after February 24, 1998, and is at the particular time, under an agreement between Canada and another country, entitled as a person resident in the other country for the purposes of the agreement to an exemption from, or a reduction in the rate of, a tax otherwise payable under the Act,

be deemed not to be resident in Canada at that time.

Treaty-based exemption: information return

(40) That, for taxation years that begin after 1998, a corporation (or a partnership of which a corporation is a member) that carries on a business in Canada in a taxation year be required to file an information return for the year if the corporation claims that it is, under an agreement between Canada and the corporation's country of residence, exempt from tax under Part I of the Act on any part of the income for the year attributable to the business.

Deemed residence

(41) That paragraph 250(1)(e) of the Act, which deems spouses of government employees and certain others to be residents of Canada, be repealed for spouses who, but for that paragraph, would cease to be residents of Canada after February 23, 1998 and for spouses who, but for that paragraph, would have ceased to be residents of Canada before February 24, 1998 and elect not to be subject to that paragraph after February 23, 1998.

(42) That a new rule be added to the Act, with application after February 23, 1998, to deem as a resident of Canada any person who, under an international agreement, is exempt from tax in their country of residence because of their relationship to a Canadian resident.

Former residents' foreign employment income

(43) That, for the 1998 and subsequent taxation years, the provision of the Act that applies tax under Part I of the Act to the foreign income of former Canadian residents from employment by Canadian residents be repealed and a new rule be added to tax those former residents on such income only if their country of residence has agreed, in an agreement with Canada, not to tax the income.

Immigrating corporations

(44) That, where a corporation becomes resident in Canada at any time after February 23, 1998,

(a) it be deemed, immediately before that time, to have disposed of each of its properties for proceeds equal to the property's fair market value and to have reacquired each such property at a cost equal to those proceeds,

(b) the paid-up capital of each class of its shares be proportionately increased or reduced at that time so that the total paid-up capital of the corporation upon becoming resident is equal to the amount by which the fair market value of its property exceeds its liabilities,

(c) where the immigrating corporation owned a share of the capital stock of another corporation resident in Canada at that time (other than a share described in subparagraph (45)(b)), that other corporation be deemed to have paid a dividend to the immigrating corporation, immediately before it became resident, equal to the amount by which the share's fair market value exceeds its paid-up capital at that time, and

(d) for the purpose of computing the immigrating corporation's branch tax payable under Part XIV of the Act for its last taxation year ending before that time, its investment allowance be deemed to be nil.

Surplus stripping

(45) That, with respect to dispositions after February 23, 1998,

(a) subject to subparagraph (b), section 212.1 of the Act apply with respect to the disposition of a share of the capital stock of a corporation resident in Canada by

(i) a non-resident person,

(ii) a non-resident-owned investment corporation, or

(iii) a partnership of which a non-resident person or non-resident-owned investment corporation is a majority interest partner,

to a corporation resident in Canada, and

(b) section 212.1 not apply in respect of the disposition at any time of a share of a corporation resident in Canada that is taxable Canadian property and that is not a property any profit or gain of the taxpayer from the disposition of which at that time could, under an agreement between Canada and another country, be exempt from tax under Part I of the Act.

Foreign tax credit: short-term

securities acquisitions

(46) That the foreign tax credit be amended to provide that, subject to paragraph (47), the amount included in computing a taxpayer's business-income tax or non-business-income tax for a particular taxation year on account of foreign withholding tax imposed in respect of dividends or interest included in computing the taxpayer's income for any taxation year, from a property (other than a capital property) that is a share or debt obligation acquired by the taxpayer after February 23, 1998 and disposed of within one year after it was acquired, be limited to 40 per cent (where the tax would otherwise be included in the taxpayer's business-income tax) or 30 per cent (where the tax would otherwise be included in the taxpayer's non-business-income tax) of that proportion of

(a) the amount, if any, by which

(i) the total of the taxpayer's proceeds from the disposition of the property and the amount of all dividends or interest included in computing the taxpayer's income for any taxation year from the property

exceeds

(ii) the total of the taxpayer's cost of the property and all costs of the disposition

that

(b) the amount of foreign withholding tax in respect of the property that would otherwise be included in computing the taxpayer's business-income tax or non-business-income tax for the particular year

is of

(c) the total amount of foreign withholding tax in respect of the property that would otherwise be included in computing the taxpayer's business-income tax or non-business-income tax for any taxation year.

Foreign tax credit: where profit not material

(47) That, where a taxpayer acquires a property after February 23, 1998 in respect of which it is reasonable to expect that any profit, after

(a) deducting therefrom any amount expected to be incurred for the purpose of acquiring, holding and disposing of the property,

(b) deducting therefrom any foreign income or profits tax expected to be payable in respect of income from the property, and

(c) taking into account the taxpayer's profit or loss in respect of any other transactions entered into by the taxpayer as part of the arrangement in which the property was acquired,

will not be material in relation to the total amount of such tax that would otherwise be included in computing the taxpayer's business-income tax or non-business-income tax for any taxation year, the amount of any foreign income or profits tax paid in respect of the property not be included in computing the taxpayer's business-income tax or non-business-income tax for any taxation year, but be deductible to the extent of the taxpayer's income in respect of the property.

Non-residents' certificates of exemption

(48) That a certificate of exemption not be issued pursuant to subparagraph 212(14)(c)(ii) of the Act after February 23, 1998 to a non-resident corporation or trust unless it has as its principal activity the administration of, or the provision of benefits under, one or more superannuation, pension or retirement funds or plans or any funds or plans established to provide employee benefits.

Amounts owing by non-residents

(49) That the provisions in section 17 of the Act that apply to include interest at a prescribed rate in the income of a corporation resident in Canada for a taxation year in respect of a loan owing at any time during the year by a non-resident that has been outstanding for one year or longer be modified, for taxation years and fiscal periods that begin after February 23, 1998, to extend its application

(a) to a trust or partnership of which a corporation resident in Canada is a beneficiary or member, and

(b) to all amounts owing in a year or period by non-residents directly or indirectly to a corporation resident in Canada or a trust or partnership of which such a corporation is a beneficiary or member that have been outstanding for one year or longer and in respect of which interest at a reasonable rate has not been included in computing the income of the corporation, trust or partnership for the year or period (other than amounts owing to a corporation resident in Canada by a subsidiary controlled corporation to the extent that the amount owing arose in the course of the carrying on of an active business by the subsidiary, or amounts owing by a non-resident in respect of which tax has been paid under Part XIII of the Act).

Mergers of foreign corporations

(50) That the provisions of the Act relating to foreign mergers be modified, applicable to dispositions of shares that occur after February 24, 1998 and to other dispositions of shares in a taxation year for which the normal reassessment period does not expire before 1999, to provide a tax-deferred rollover in respect of a disposition of shares of a foreign corporation by a taxpayer on the merger of that corporation and one or more other foreign corporations where, on the merger, the taxpayer disposed of those shares in exchange for shares of the capital stock of another foreign corporation that, immediately after the merger, controlled the new foreign corporation formed on the merger.

Taxpayer information

(51) That the provisions with respect to communication of taxpayer information be expanded to permit certain taxpayer information to be provided by Revenue Canada to persons administering social assistance programs in a province for the purposes of adjusting, as part of the National Child Benefit System, the amount of social assistance or child benefit payable to a person.

Notice of Ways and Means Motion to Amend the Income Tax Conventions Interpretation Act

That it is expedient to amend the Income Tax Conventions Interpretation Act to provide among other things:

(1) That, with respect to amounts paid after 1996,

(a) an "annuity" be defined in section 5 of the Act not to include any pension payment,

(b) a "periodic pension payment" be defined in section 5 of the Act to mean a pension payment arising in Canada other than a payment described in any of paragraphs (a) to (d) of the definition of that term in the current Act, and

(c) the definition of "pension" in section 5.1 of the Act be repealed, and that that term be defined in section 5 to mean, in respect of the application of an agreement between Canada and another country to payments that arise in Canada,

(i) where the agreement does not include a definition of "pension", a payment under any plan, arrangement or contract that is described in any of paragraphs (a) to (i) of section 5.1 of the current Act, and

(ii) where the agreement includes a definition of "pension", a payment that is a pension for the purposes of the agreement or a payment (other than a payment of social security benefits) that would be a periodic pension payment under the Act if the agreement did not include a definition of "pension".

(2) That in respect of the disposition after February 23, 1998 of taxable Canadian property, for the purpose of applying an agreement between Canada and another country, for greater certainty, any income, gain or loss in respect of the disposition be deemed to arise in Canada.

Notice of Ways and Means Motion

to Amend the Excise Tax Act

That it is expedient to amend the Excise Tax Act to provide among other things:

Direct sellers

(1) That the definition of a "sales aid" of a direct seller or an independent sales contractor of a direct seller be amended to include the service of shipping or handling, or processing an order for, property that is either defined under the existing definition to be a sales aid or that is an exclusive product of the direct seller, applicable to supplies of services for which no consideration becomes due, or is paid, on or before February 24, 1998.

(2) That where

(a) a direct seller has made a supply of an exclusive product of the direct seller in circumstances in which an amount was required to be added in determining the net tax of the direct seller,

(b) a particular supply of the product has (without reference to the deeming provision under paragraph 178.3(2)(e) of the Act) been made by a particular independent sales contractor of the direct seller to a person (other than the direct seller and another independent sales contractor of the direct seller) with whom the particular contractor was dealing at arm's length,

(c) the direct seller has obtained evidence satisfactory to the Minister of National Revenue that the consideration and the tax payable in respect of the particular supply have become in whole or in part a bad debt and that the bad debt has, at a particular time, been written off in the particular contractor's books of account, and

(d) the direct seller pays to, or credits in favour of, the particular contractor an amount in respect of the product equal to the amount determined by the formula

A x B/C

where

A	is the tax payable in respect of the particular supply,

B	is the total of the consideration, tax, and any amount that can reasonably be attributable to a tax, duty or fee (in this paragraph referred to as "applicable provincial tax") imposed under an Act of the legislature of a province and prescribed for the purposes of section 154 of the Excise Tax Act, in respect of the particular supply remaining unpaid and written off at the particular time as a bad debt, and

C	is the total of the consideration, tax, and applicable provincial tax, payable in respect of the particular supply,

the direct seller may deduct the amount paid or credited, in determining the net tax for the particular reporting period of the direct seller in which the payment or credit is given or for a subsequent reporting period, in a return filed within four years after the day on or before which the return for the particular reporting period is required to be filed.

(3) That where all or part of a bad debt in respect of which a direct seller has made a deduction under any enactment founded on paragraph (2) is recovered, the direct seller shall, in determining the net tax for the reporting period of the direct seller in which the bad debt or part thereof is recovered, add the amount determined by the formula

A x B/C

where

A	is the amount of the bad debt recovered;

B	is the tax payable in respect of the supply to which the bad debt relates; and

C	is the total of the consideration, tax, and any amount that can reasonably be attributable to a tax, duty or fee imposed under an Act of the legislature of a province and prescribed for the purposes of section 154 of the Excise Tax Act, payable in respect of that supply.

(4) That where

(a) a distributor of a direct seller has made a supply of an exclusive product of the direct seller in circumstances in which an amount was required under subsection 178.4(1) of the Act to be added in determining the net tax of the distributor,

(b) a particular supply of the product has (without reference to the deeming provision under paragraph 178.4(2)(d) of the Act) been made by a particular independent sales contractor of the direct seller (other than the distributor) to a person (other than the direct seller, distributor and another independent sales contractor of the direct seller) with whom the particular contractor was dealing at arm's length,

(c) the distributor has obtained evidence satisfactory to the Minister of National Revenue that the consideration and the tax payable in respect of the particular supply have become in whole or in part a bad debt and that the bad debt has, at a particular time, been written off in the particular contractor's books of account, and

(d) the distributor pays to, or credits in favour of, the particular contractor an amount in respect of the product equal to the amount determined by the formula

A x B/C

where

A	is the tax payable in respect of the particular supply,

B	is the total of the consideration, tax, and any amount that can reasonably be attributable to a tax, duty or fee (in this paragraph referred to as "applicable provincial tax") imposed under an Act of the legislature of a province and prescribed for the purposes of section 154 of the Excise Tax Act, in respect of the particular supply remaining unpaid and written off at the particular time as a bad debt, and

C	is the total of the consideration, tax, and applicable provincial tax, payable in respect of the particular supply,

the distributor may deduct the amount paid or credited, in determining the net tax for the particular reporting period of the distributor in which the payment or credit is given or for a subsequent reporting period, in a return filed within four years after the day on or before which the return for the particular reporting period is required to be filed.

(5) That where all or part of a bad debt in respect of which a distributor of a direct seller has made a deduction under any enactment founded on paragraph (4) is recovered, the distributor shall, in determining the net tax for the reporting period of the distributor in which the bad debt or part thereof is recovered, add the amount determined by the formula

A x B/C

where

A	is the amount of the bad debt recovered;

B	is the tax payable in respect of the supply to which the bad debt relates; and

C	is the total of the consideration, tax, and any amount that can reasonably be attributable to a tax, duty or fee imposed under an Act of the legislature of a province and prescribed for the purposes of section 154 of the Excise Tax Act, payable in respect of that supply.

(6) That any enactment founded on any of paragraphs (2) to (5) apply to bad debts relating to supplies made after February 24, 1998.

Services supplied by certain

charities to registrants

(7) That a charity whose main purposes include the provision of employment, training for employment or employment placement services for individuals with disabilities, or the provision of instructional services to assist such individuals in securing employment, be entitled to apply to the Minister of National Revenue to be designated for the purpose of having its supplies of specified services made to registrants excluded from the general exemption for supplies by charities under section 1 of Part V.1 of Schedule V to the Act, provided the charity supplies, on a regular basis, specified services that are, in whole or in part, performed by individuals with disabilities.

(8) That, for the purposes of any enactment founded on paragraph (7), a "specified service" be defined as any service, other than a service

(a) that is

(i) the care, employment, or training for employment, of individuals with disabilities,

(ii) an employment placement service for the benefit of such individuals, or

(iii) the provision of instruction to assist such individuals in securing employment; and

(b) the recipient of which is a public sector body or a board, commission or other body established by a government or municipality.

(9) That the Minister of National Revenue may, by notice in writing, designate a charity applying therefor under any enactment founded on paragraph (7), effective on the first day of a reporting period specified in the notice, where the Minister is satisfied that the conditions set out in that enactment are satisfied and the effective date is not earlier than one year after the effective date of a revocation of a designation of the charity pursuant to a request made by the charity.

(10) That the Minister of National Revenue may, by notice in writing, revoke a designation of a charity made under any enactment founded on paragraph (9), effective on the first day of a reporting period specified in the notice, where

(a) the Minister is satisfied that the charity no longer meets the conditions for designation; or

(b) the charity makes a request in writing to the Minister that the designation be revoked and the designation had been in effect for at least one year.

(11) That any enactment founded on any of paragraphs (7) to (10) be deemed to have come into force on February 24, 1998 and apply to reporting periods beginning after that day.

(12) That, for the purpose of determining the net tax of a charity for reporting periods beginning after February 24, 1998, the streamlined accounting method applicable to charities under section 225.1 of the Act not apply to the charity if, in that reporting period, a designation of the charity under any enactment founded on paragraph (9) is in effect.

(13) That a charity designated under any enactment founded on paragraph (9) be permitted to elect under section 227 of the Act to determine the net tax of the charity in the manner prescribed thereunder for qualifying non-profit organizations for any reporting period beginning after February 24, 1998 during which the designation of the charity is in effect.

(14) That the supplies by a charity that are exempt supplies under section 1 of Part V.1 of Schedule V to the Act exclude a supply of a specified service (within the meaning assigned by any enactment founded on paragraph (8)) where the supply is made to a registrant at a time when a designation of the charity, under any enactment founded on paragraph (9), is in effect.

(15) That any enactment founded on paragraph (14) apply to supplies made by a charity in reporting periods of the charity beginning after February 24, 1998.

Charities operating bottle return depots

(16) That where, in the course of a business, a charity (whether or not a registrant) collects used, empty returnable containers (within the meaning of section 226 of the Act) in a province for the purpose of supplying the containers when empty, or the by-products of a process of recycling the containers, and the charity is not entitled to claim input tax credits in respect of the containers, the charity be entitled to claim a deduction in determining its net tax for the reporting period in which it collects the containers, provided that, in respect of each container for which the deduction is claimed,

(a) the charity did not acquire the container in circumstances in which tax under Part IX of the Act did not apply because of an election under section 156 (with a closely-related person) or section 167 (upon the sale of a business);

(b) if the charity makes a supply of the container in respect of which tax is or would, but for section 156 or 167 of the Act, be collectible, the charity is not relieved, under subsection 226(3) of the Act, from having to include that tax collectible in determining its net tax; and

(c) the charity pays to the person from whom the container is collected the total of

(i) the portion (in this paragraph referred to as the "refundable deposit") of all taxes or fees that are imposed in respect of the container under an Act of the legislature of the province respecting the regulation, control or prevention of waste and that, pursuant to that Act or any agreement entered into thereunder, is refundable to the person, and

(ii) an amount that is

(A) if tax is payable by the charity in respect of the supply to it of the container, the amount of the tax calculated on the refundable deposit, or

(B) in any other case, equal to tax under Part IX of the Excise Tax Act, calculated on the refundable deposit, that would be payable by the charity in respect of the supply to it of the container if that supply were a taxable supply by a registrant.

(17) That the deduction to which a charity is entitled under any enactment founded on paragraph (16) in respect of the supply to the charity of a returnable container in a province be determined by multiplying the amount referred to in that enactment as the "refundable deposit" by

(a) the total of 7 per cent and the tax rate for the participating province, in the case of a participating province, or

(b) 7 per cent, in any other case.

(18) That a charity not be entitled to make a deduction under any enactment founded on paragraph (16) in respect of a supply of a returnable container made to the charity unless the deduction is claimed in a return under Division V of Part IX of the Act filed not later than the day on or before which the return under that Division is required to be filed for the last reporting period of the charity ending within four years after the end of the reporting period in which the charity collects the container.

(19) That any enactment founded on any of paragraphs (16) to (18) apply to supplies of containers made to charities after March 1998.

Visitors' Rebate Program

(20) That the definition "related convention supplies" in subsection 123(1) of the Act be amended to repeal the exclusion for food and beverages and for property or services that are supplied under a contract for catering.

(21) That section 252.3 of the Act be amended so that the rebate under that section in respect of related convention supplies for non-resident exhibitors at a convention who are not registered under Part IX of the Act be maintained for "related convention supplies" as defined in existing subsection 123(1) of the Act.

(22) That the rebate under subsection 252.4(1) of the Act to a sponsor of a foreign convention in respect of a supply of property or services relating to the convention made by a registrant who is the organizer of the convention be calculated as the total of

(a) the tax paid by the sponsor calculated on that part of the consideration for the supply that is reasonably attributable to the convention facility or related convention supplies other than food and beverages and property or services supplied under a contract for catering; and

(b) 50 per cent of the tax paid by the sponsor calculated on that part of the consideration for the supply that is reasonably attributable to related convention supplies that are food or beverages or property or services supplied under a contract for catering.

(23) That the rebate under subsection 252.4(1) of the Act to a sponsor of a foreign convention in respect of related convention supplies (other than those acquired from the organizer of the convention) be calculated as the total of

(a) 50 per cent of the tax paid by the sponsor in respect of the related convention supplies that are food or beverages or property or services supplied under a contract for catering; and

(b) all tax paid by the sponsor in respect of the remaining related convention supplies.

(24) That the rebate under subsection 252.4(3) of the Act to the organizer of a foreign convention in respect of related convention supplies be calculated as the total of

(a) 50 per cent of the tax paid by the organizer in respect of the related convention supplies that are food or beverages or property or services supplied under a contract for catering; and

(b) all tax paid by the organizer in respect of the remaining related convention supplies.

(25) That any enactment founded on any of paragraphs (20) to (24) apply for the purpose of determining a rebate under section 252.3 or 252.4 of the Act in respect of any property or service acquired, imported or brought into a participating province for consumption, use or supply in connection with a convention all the supplies of admissions to which are made after February 24, 1998.

(26) That the existing provision under subsection 252.4(4) of the Act that enables a supplier, in specified circumstances, to pay or credit to a convention sponsor or unregistered organizer the amount of a rebate under section 252.4 to which the sponsor or organizer would be entitled in respect of certain short-term accommodation be amended to apply in the same circumstances to a supply of "camping accommodation", where the convention begins after June 1998 and all the supplies of admissions to the convention are made after February 24, 1998.

(27) That, for the purposes of any enactment founded on any of paragraphs (26) to (32), "camping accommodation" be defined, as of February 24, 1998, as a campsite at a recreational trailer park or campground (other than a campsite included in the definition "short-term accommodation" in subsection 123(1) of the Act) that is supplied by way of lease, licence or similar arrangement for the purpose of its occupancy by an individual as a place of residence or lodging where the period throughout which the individual is given continuous occupancy of the campsite is less than one month, and includes water, electricity and waste disposal services, or the right to the use thereof, accessed by way of an outlet or hook-up at the campsite, when supplied with the campsite.

(28) That the provisions of the Act under which a rebate in respect of short-term accommodation or a tour package that includes short-term accommodation is, in specified circumstances, provided be amended to apply in the same circumstances to supplies of camping accommodation and tour packages that include camping accommodation.

(29) That the provisions of the Act that, in specified circumstances, provide for the calculation of a rebate in respect of a supply of short-term accommodation or a tour package that includes short-term accommodation on the basis of $5 for each night that the accommodation is made available under the agreement for the supply be amended to also provide for a rebate in the case of a supply of camping accommodation to be calculated, in the same circumstances, as $1 for each night camping accommodation is made available under the agreement for the supply.

(30) That the provision of the Act that, in specified circumstances, provides for the calculation of a rebate in respect of a supply of a tour package that includes short-term accommodation to be based on a formula that employs a factor of 50 per cent of the tax paid on the supply be amended to also apply to tour packages that include camping accommodation (including those that include a combination of short-term accommodation and camping accommodation) and that the amount of tax deemed, for the purposes of the rebate, to be paid in those circumstances in respect of all the accommodation included in the tour package be determined by the formula.

A/B x C/2

where

A	is the total number of nights for which either short-term accommodation or camping accommodation included in the tour package is made available under the agreement for the supply of the tour package;

B	is the number of nights the non-resident individual to whom the accommodation is made available spends in Canada during the period commencing on the earlier of the first day on which either overnight lodging or camping accommodation included in the tour package is made available to the individual and the first day any overnight transportation service included in the tour package is rendered to the individual and ending on the later of the last day any overnight lodging or camping accommodation is made available to the individual and the last day any such transportation service is rendered to the individual; and

C	is the tax paid in respect of the supply of the tour package.

(31) That the rules under subsections 252.1(6) and (7) of the Act dealing with multiple supplies by the same supplier of short-term accommodation for the same night be amended to apply to camping accommodation as well.

(32) That the rules under subsection 252.1(8) of the Act that permit, in specified circumstances, a registrant to pay or credit to a non-resident person the amount of a rebate under section 252.1 to which the person would be entitled in respect of a supply of short-term accommodation, or a tour package that includes short-term accommodation, be amended to apply, in the same circumstances, to a supply of camping accommodation or a supply of a tour package that includes camping accommodation, including tour packages that include a combination of short-term accommodation and camping accommodation.

(33) That any enactment founded on any of paragraphs (28) to (32) apply to

(a) a supply of camping accommodation not included in a tour package where the camping accommodation is, under the agreement for the supply, first made available after June 1998, and

(b) a supply of a tour package that includes camping accommodation where no short-term accommodation and no camping accommodation included in the tour package is, under the agreement for the supply, made available in Canada before July 1998.

(34) That the limitations under paragraphs 252.2(b) and (c) of the Act on the number of applications that a non-resident person is entitled to make in a calendar month or quarter for rebates in respect of exported goods or accommodation be repealed, effective for applications received by the Minister of National Revenue after February 24, 1998 (without regard to the day on which the applications are deemed under subsection 334(1) of the Act to have been received).

(35) That the provision setting out the maximum total amount of rebates in respect of short-term accommodation that may be claimed in a single application on the basis of the formula that employs a factor of $5 per night be amended so that the same maximum applies to applications that include rebates calculated on the basis of a flat amount per night in respect of any accommodation, whether short-term accommodation, camping accommodation or both.

(36) That any enactment founded on paragraph (35) apply to applications received by the Minister of National Revenue after June 1998 (without regard to the day on which the applications are deemed under subsection 334(1) of the Act to have been received).

Respite care for individuals

with an infirmity or disability

(37) That Part IV of Schedule V to the Act be amended to add an exemption for the supply of a service of providing care and supervision to an individual with limited physical or mental capacity for self-supervision and self-care due to an infirmity or disability, where the service is rendered principally at an establishment of the supplier.

(38) That any enactment founded on paragraph (37) apply to services performed after February 24, 1998 and, where a supply to which that enactment applies includes services provided during a period that includes, but ends after, that day, the provision of the services for the part of the period that is before February 25, 1998 and the provision of the remaining services each be deemed to be a separate supply and the total consideration for all the services be prorated accordingly such that the consideration reasonably attributable to the services performed after February 24, 1998 be treated as consideration for an exempt supply.

(39) That there not be any increase in a registrant's net tax for the reporting period that includes February 25, 1998 in respect of any decrease or cessation of use, in commercial activities, of capital property of the registrant to the extent that the change in use results from the application of any enactment founded on paragraph (37).