The first Budget tabled by Canada's new Liberal Government provides for a major crackdown on tax evasion and avoidance, and streamlines the domestic tax credits system.
The Budget was delivered by Finance Minister Bill Morneau on March 22, 2016. He told Parliament: "Today, we begin to restore hope for the middle class. Today, we begin to revitalize the economy. Today, we begin a long-term plan that will use smart investments and an unwavering belief that progress is possible to ensure that Canada's best days lie ahead."
The tax measures announced by Morneau focus overwhelmingly on improving compliance. The Government will invest CAD444.4m (USD339.6m) over the next five years in the Canada Revenue Agency's (CRA) efforts to tackle tax evasion and avoidance. The money will be used to hire additional auditors and specialists, develop a robust business intelligence infrastructure, increase verification activities, and improve the quality of investigative work that targets criminal tax evaders. The Government expects these activities will generate CAD2.6bn in additional revenue over five years.
A further CAD351.6m will be invested in helping the CRA improve its ability to collect outstanding tax debts. This is expected to lead to the collection of an additional CAD7.4bn in tax debt over five years.
The Government will implement a number of recommendations made by the Organisation for Economic Cooperation and Development (OECD) as part of its base erosion and profit sharing (BEPS) project. It will introduce new legislation to strengthen transfer pricing documentation, by requiring country-by-country reporting by large multinationals. The CRA will apply revised international guidance on transfer pricing by multinationals, which will provide an improved interpretation of the arm's length principle.
The Budget also includes a provision to extend the application of the income tax back-to-back loans rules to royalty arrangements, and introduce a similar set of rules for shareholder loans. In addition, it will narrow the application of an existing exemption to the cross-border anti-surplus-stripping rule to prevent unintended, tax-free cross-border distributions of capital to non-residents. The Government will implement the Common Reporting Standard (CRS) developed by the OECD from July 1, 2017. The first exchanges of information will take place from 2018.
Morneau likewise announced a number of initiatives to enhance the integrity of the domestic tax system, and in particular to limit the ability of high net worth individuals to use private corporations to inappropriately reduce or defer tax. The Government will prevent business owners from multiplying access to the CAD500,000 small business deduction by using complex partnership and corporate structures. It will ensure that investment income derived from an associated corporation's active business is ineligible for the small business deduction and make sure that associated corporations cannot avoid the CAD15m taxable capital limit. Lastly, it will close loopholes that enable private corporations to use a life insurance policy to distribute amounts tax-free that would otherwise be taxable.
The Budget also proposes measures to:
- Preserve the integrity of the foreign exchange computational rules in debt-parking transactions;
- Prevent the asymmetrical recognition of gains and losses on derivatives for tax purposes;
- Prevent the deferral of capital gains tax (CGT) by investors in mutual fund corporations structured as switch funds;
- Introduce a new rule to effectively treat the portion of any gain realized on the sale of a linked note that is attributable to the variable return on the note as accrued interest on the note; and
- Ensure that excise tax relief for diesel fuel used as heating oil or to generate electricity is targeted to specific instances.
- Commit the Government to undertaking a review of the tax system within the coming year with a view to eliminating poorly targeted and inefficient tax measures;
- Defer any further reductions in the small business income tax rate;
- Replace the eligible capital property regime with a new capital cost allowance (CCA) class, and allow small balances of eligible capital property carried over to the new CCA class to be deducted more quickly and allow up to CAD3,000 in incorporation costs to be deducted as a current expense;
- Introduce an income tax exemption in respect of capital gains on certain dispositions of private corporation shares or real estate, where cash proceeds from the disposition are donated to a registered charity or other qualified donee within 30 days;
- Restore the Labour-Sponsored Venture Capital Corporations (LSVCC) tax credit to 15 percent for share purchases of provincially-registered LSVCCs for 2016 and subsequent tax years;
- Introduce a tax-free Canada Child Benefit targeted at low- and medium-income families;
- Halve the maximum eligible expenses for the Children's Fitness and Art Tax Credits for 2016, and eliminate both credits as of 2017;
- Abolish the Education and Textbook Tax Credits, effective January 1, 2017;
- Introduce a 15 percent refundable income tax credit, applicable on up to CAD1,000 of eligible supplies purchased by teachers;
- Extend the 15 percent Mineral Exploration Tax Credit for an additional year, to March 31, 2017;
- Expand eligibility for the accelerated capital CCA to include electric car charging stations and a wider range of stationary electrical energy storage equipment; and
- Clarify the income tax treatment of emission allowances.