Flaherty Cracks Down On Tax Evasion In New Budget
Monday, March 25, 2013
Canadian Finance Minister Jim Flaherty's 2013 Budget reaffirms his commitment
to not raise taxes, but does introduce new measures to close tax loopholes and
ensure that "everyone pays their fair share."
Unveiling his Economic Action Plan 2013, Flaherty said that the package
"builds on a legacy of success." He stressed that in spite of tough
economic conditions, the Government has done its best to keep taxes low, introducing
more than 150 tax relief measures since 2006. According to Flaherty, these initiatives
have resulted in the average family of four saving more than CAD3,200 (USD3,123)
a year in taxes, and a federal tax burden at its lowest level in 50 years.
When Flaherty launched consultations on this year's Budget, he made clear that
this burden would not be increased. His Budget speech accordingly reiterated
this message, instead focusing largely on the issue of tax fairness, which he
described as being "important to ordinary hard-working Canadians."
Flaherty announced that the Government is taking action to close a number of
tax loopholes which can result in the type of "complex structured transactions
that have allowed a select few to avoid paying their fair share of taxes."
In particular, the rules around tax planning are to be tightened. At present,
the tax rules permit businesses to use losses from previous years to offset
income from others. However, they are also intended to prevent one company from
purchasing an inactive business and using that company's loss pools to avoid
paying tax on its own income, a provision that the Government says is not always
The Budget closes a loophole that Flaherty says may allow the purchasing company to
simply sell income-producing assets to the inactive business, so that income
and losses can be offset in the same company. The Budget also establishes anti-loss
trading rules for trusts. These will be similar to those that apply for corporations,
and are intended to ensure that loss-trading restrictions cannot be avoided
through use of a different business structure. A separate loophole, which enables
companies to engage in "synthetic disposition" transactions to avoid
paying capital gains tax on share sales, will also be closed.
A harder line will be taken in instances of evasion and avoidance. New monetary
penalties and criminal offences will be introduced to deter the use, possession,
sale and development of electronic suppression of sales software that is designed
to falsify records for the purpose of tax evasion. The reassessment period will
be extended for reportable tax avoidance transactions and tax shelters when
information returns are not filed properly or on time. Fines of CAD1,000 will
be levied for each Scientific Research and Experimental Development (SR&ED)
claim where required information is missing, incomplete or inaccurate. The application
of the thin capitalization rules will be further extended to Canadian resident
trusts and non-resident entities, and unintended tax benefits relating to leveraged
insured annuities and leveraged life insurance arrangements will be eliminated.
The Canada Revenue Agency (CRA) will be permitted to collect up to 50% of amounts
in dispute in respect of tax shelter claims that involve a charitable donation.
The Revenue Minister will be given the authority to withhold the payment of
Goods and Services Tax/Harmonized Sales Tax (GST/HST) refunds claimed by a business,
where it has failed to provide all of the information required as part of the
GST/HST registration process. Measures will be taken to ensure that derivative
transactions cannot be used to convert fully taxable ordinary income into capital
gains that are taxed at a lower rate.
On the international front, the CRA will be able to make use of a new Stop
International Tax Evasion Program, giving it major new powers of oversight and
information collection. It will be enabled to pay individuals with knowledge
of major international tax non-compliance a percentage of tax collected as a
result of information provided. Certain financial intermediaries, including
banks, will be required to report their client's international electronic funds
transfers of CAD10,000 or more to the CRA. The CRA's process for obtaining information
concerning unnamed persons from third parties, such as banks, will also be streamlined.
In a more explicitly administrative vein, the Foreign Income Verification Statement
will be revised to require reporting of more detailed information, and the
reassessment period for taxpayers who have failed to report income from a specified
foreign property on their annual income tax return, and failed to properly file
their Statement, will be extended.
Away from the headline anti-avoidance measures, the Budget also included a
series of smaller modifications to the tax relief system, designed to help businesses.
It provides an additional CAD225m for a one-year extension of the temporary
Hiring Credit for Small Business. This credit will provide up to CAD1,000 against
a small firm's increase in its 2013 Employment Insurance (EI) premiums over
those paid in 2012 to employers with total EI premiums of CAD15,000 or less
in 2012. It will be made available to an estimated 560,000 employers. The Lifetime
Capital Gains Exemption will be increased to CAD800,000 in 2014 and indexed
to inflation. The temporary accelerated capital cost allowance for new investment
in machinery and equipment will continue for another two years, providing an
estimated CAD1.4bn in tax relief down to the 2017-18 tax period. The 15% Mineral
Exploration Tax Credit for flow-through share investors will be made available
for one more year, and the tax reliefs for clean energy generation will now
include a broader range of equipment. Finally, the CRA will be given CAD20m
over two years to improve the predictability and enhance enforcement of the
Scientific R&D program.
For families, the same approach of expanding the operation of existing initiatives
is taken by Flaherty. The Adoption Expense Tax Credit will be improved to better
recognize the costs of adopting a child, and CAD76m will be provided in annual
tariff relief on baby clothing and sports and athletic equipment, to reduce
the gap in retail prices that Canadian consumers pay compared to those in the
US. More generally, tax relief for home care services under the GST/HST will
be enhanced, and a new First-Time Donor's Super Credit will be introduced for
first-time claimants of the Charitable Donations Tax Credit.
With regard to the economy more broadly, the Action Plan is intended to aid
the Government in meeting its pledge to return to balanced budgets by 2015-16.
Flaherty estimates savings of CAD500 in 2013-14 and CAD2.3bn in 2017-18 as a
result of controls placed on direct program spending, and the anti-tax avoidance
measures introduced. The deficit is projected to decline every year until
a surplus of CAD0.8bn is reached in 2015–16. A surplus of CAD5.1bn is
outlined for 2017–18.
Concluding his speech, Flaherty said: "With this plan, our Government
renews our commitment to Canadians. Our commitment to jobs. Our commitment to
growth. Our commitment to long-term prosperity. For all Canadians."
Responding to the Budget, Dan Kelly, president of the Canadian Federation for
Independent Businesses, said: "Overall, this is a good budget for small
business. Minister Flaherty has done a solid job by remaining on course to eliminate
the deficit while announcing some important measures for Canada’s entrepreneurs."
Gregory Thomas, Federal Director of the Canadian Taxpayers Federation, said
of the anti-avoidance measures: "Flaherty should go further. He should
shut down all his boutique tax credits and cut tax rates across the board for
all Canadians. But this is a good start."