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Canadian Budget Focuses On 'Tax Fairness'

Thursday, March 23, 2017

The tax measures contained in Canadian Finance Minister Bill Morneau's second Budget are focused on closing loopholes, cracking down on tax evasion and improving tax reliefs for the "middle class."

Morneau delivered the Budget on March 22. In his Budget speech, he said: "Going forward, we will close loopholes that result in unfair tax advantages for some at the expense of others. We will eliminate inefficient tax measures, especially those that disproportionately benefit the wealthy. And we will work with the provinces and territories to crack down on those who hide their identity to avoid paying taxes."

According to Budget documents, the Government intends to take the following actions to close loopholes in the tax system:

  • Prevent the avoidance or deferral of income tax through the use of offsetting derivative positions in straddle transactions;
  • Clarify the intended meaning of "factual control" under the Income Tax Act for the purpose of determining who has control of a corporation, in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable Scientific Research and Experimental Development Tax Credit for small businesses;
  • Prevent the avoidance of tax on income from the insurance of Canadian risks, by extending the foreign-affiliate base erosion rules to foreign branches of Canadian life insurers; and
  • Extend to the Registered Education Savings Plans and Registered Disability Savings Plans anti-avoidance rules similar to those currently applicable in connection with Tax-Free Savings Accounts and Registered Retirement Savings Plans.

The Government will also further review the use of tax planning strategies involving private corporations that inappropriately reduce the personal taxes of high-income earners. The Government will at the same time consider whether there are features of the current income tax system that have an inappropriate, adverse impact on genuine business transactions involving family members.

The Government will release a paper in the coming months that will set out the nature of these issues in more detail, along with a range of proposed policy responses.

In addition, the Budget will invest an extra CAD523.9m (USD393m) over five years in activities designed to prevent tax evasion and improve tax compliance. The funding will enable the Canada Revenue Agency to: increase its verification activities; hire additional auditors and specialists with a focus on the underground economy; develop robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases; and improve the quality of investigative work that targets criminal tax evaders.

The Government expects to raise CAD2.5bn from the anti-evasion measures outlined in the Budget.

The federal Government will collaborate with the provinces and territories on a national strategy "to strengthen the transparency of legal persons and legal arrangements and improve the availability of beneficial ownership information." It is also currently examining how the tax reporting requirements for trusts can be enhanced, to improve the collection of beneficial ownership information.

Another key tax-related focus of the Budget is the elimination of tax measures that have a limited impact, have had low take-up, or duplicate other forms of federal support. The Budget proposes to:

  • Eliminate the Public Transit Tax Credit, effective in respect of transit use occurring after June 30, 2017;
  • Repeal the Good and Services Tax (GST)/Harmonized Sales Tax (HST) rebate payable to non-resident tourists and non-resident tour operators in respect of the accommodation portion of tour packages;
  • Eliminate the surtax on domestic tobacco manufacturers;
  • Repeal the 25 percent Investment Tax Credit for Child Care Spaces;
  • Repeal the additional deduction available to corporations that donate medicine to eligible registered charities; and
  • Allow the First-Time Donor's Super Credit to expire in 2017, as planned.

To improve consistency across the tax system, the Budget also proposes to eliminate the deduction in respect of employee home relocation loans, and remove the tax exemptions for non-accountable expense allowances paid to members of provincial and territorial legislative assemblies and to certain municipal office-holders.

With a view to updating the tax system to reflect the changing nature of the economy, the Budget will:

  • Amend the definition of a taxi business under the Excise Tax Act, with a view to levelling the playing field and ensuring that ride-sharing businesses are subject to the same GST/HST rules as taxis;
  • Eliminate the use of billed-basis accounting for income tax purposes by a limited group of professionals, to avoid giving these professionals a deferral of tax that is not available to other taxpayers; and
  • Eliminate the income tax exemption for insurers of farming and fishing property, which was introduced in 1954 to encourage the provision of insurance in rural districts.

On the personal tax front, the Budget proposes the following changes to the tax credit system:

  • The range of courses eligible for the Tuition Tax Credit will be expanded to include occupational skills courses that are undertaken at a post-secondary institution in Canada;
  • Individuals who require medical intervention in order to conceive a child will be eligible to claim the same expenses under the Medical Expense Tax Credit that would generally be eligible for individuals on account of medical infertility;
  • The Government will introduce a new, non-refundable Canada Caregiver Credit, which will replace the existing Caregiver Credit, Infirm Dependant Credit, and Family Caregiver Tax Credit; and
  • Nurse practitioners will be added to the list of medical practitioners that can certify the impacts of impairments for Disability Tax Credit applicants.