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 effective.
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."