Federal Budget 2021 – Welcome Changes to the Taxation of Registered InvestmentsWednesday, July 7, 2021
The Government of Canada’s 2021 federal budget (“Budget 2021”) provided some welcome changes to the taxation of trusts and corporations that are registered investments pursuant to the Income Tax Act (Canada) (the “Tax Act”).
What is a Registered Investment?
A corporation or trust whose securities may not otherwise be eligible for certain registered plans, including a registered retirement savings plan (a “Registered Plan”), can apply to become a “registered investment” and therefore have its securities be eligible to be held by such Registered Plan.
Tax Imposed on Registered Investments
A corporation or trust that is a registered investment for a particular Registered Plan must limit its own investments to the types of property that are otherwise eligible to be held by such Registered Plan (“eligible property”). Where a registered investment holds a non-eligible property, the registered investment is subject to a special tax under Part X.2 of the Tax Act (the “Part X.2 Tax”) for each month that such property is held. The Part X.2 Tax is equal to 1% of the fair market value of the non-eligible property, determined at the time such property was acquired.
Budget 2021 – Registered Investment Tax Revised
The Government of Canada recognized that the Part X.2 Tax may apply disproportionally where the registered investment is held by investors other than Registered Plans (which are themselves subject to similar investment restrictions as registered investments). Budget 2021 proposes to change the calculation of the Part X.2 Tax and make it pro-rated based on the proportion of the shares or units of the registered investment that are held by a Registered Plan.
For example, if a registered investment is held by 100 investors, 20 of which are Registered Plans, the Part X.2 Tax would be equal to 0.20%, being 20% of 1% of the fair market value of the non-eligible property, determined at the time such property was acquired.
The proposed changes will apply to Part X.2 Tax imposed in respect of months after 2020. In addition, the proposed changes will also apply to Part X.2 Tax in respect of months before 2021 if, on or before April 19, 2021, no notice of assessment in respect of Part X.2 Tax has been sent to the taxpayer or, if such notice of assessment was sent, the taxpayer has the right to object or appeal the assessment.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.