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No New Taxes For Canada, Says Flaherty

Thursday, February 13, 2014

Jim Flaherty's 2014 Budget introduces no new taxes on families or businesses, but does crack down on aggressive tax avoidance and overhauls a number of tax credits.

The Canadian Finance Minister has described his latest Budget as both a "low-tax plan to promote jobs and economic growth and support Canadian families," and a "common sense plan that will see Canada return to a balanced budget in 2015."

According to Flaherty, the federal tax burden is the lowest it has been in 50 years, with the average family of four paying CAD3,400 (USD3,075) less in tax a year. Flaherty is convinced that "by keeping taxes low we have created the best environment for business investment in the G7."

His Economic Action Plan 2014 does nevertheless contain a series of reforms designed to address international tax avoidance by multinationals. The Budget document itself states that "by protecting the tax base, these measures help keep Canadian tax rates low and competitive, thereby improving incentives to work, save and invest in Canada."

Steps will be taken to ensure that financial institutions are unable to avoid paying Canadian tax on income associated with the insurance of Canadian risks through the use of derivative "insurance swap" arrangements between foreign affiliates of Canadian taxpayers and third parties. Loopholes will be closed that allow offshore regulated bank provisions to be used inappropriately to circumvent the foreign accrual property income rules, while non-residents will be prevented from escaping withholding tax or the thin capitalization rules by entering into back-to-back loan arrangements with third-party financial intermediaries.

The Government will also seek input from stakeholders on a proposed rule to prevent treaty shopping and on issues more generally related to international tax planning by multinationals and other cross-border integrity issues.

Tax fairness will be improved by the elimination of tax benefits that arise from taxing certain trusts and estates at graduated rates and the removal of exemptions from the non-resident trust rules that currently benefit a small number of individuals during their first five years of Canadian residence.

Businesses will be further affected by changes intended to reduce the compliance burden. At present, they are required to withhold from employee wages amounts in respect of personal income tax, Canada Pension Plan contributions and Employment Insurance premiums, all of which must be remitted to the Government. As a result of the Budget, the threshold level of average monthly withholdings at which employers are required to remit up to two times a month will rise from CAD15,000 to CAD25,000. The threshold level for up to four monthly remittances will increase from CAD50,000 to CAD100,000.

Around 50,000 small- and medium-sized employers can expect to benefit from these administrative amendments, which will enter into force for amounts withheld after December 31, 2014. They will not impact on the overall amount of tax revenues collected, but the change in timing will increase public debt charges by CAD20m over the 2014-16 period.

The remaining tax-related changes unveiled by Flaherty are as follows:

  • The Revenue Minister will be given extra powers to prevent the potential abuse of registered charities by state supporters of terrorism. The Minister will also have the discretionary authority to register and assign a Goods and Services Tax (GST) or Harmonized Sales Tax (HST) registration number where a person fails to comply with the requirement to register;
  • The tax on split income will be extended to income from a business or rental property that is paid or allocated to a minor child from certain partnerships and trusts;
  • The gift value of certified cultural property will be capped no higher than the donor's cost of the property, if it was acquired under a gifting arrangement that is considered a tax shelter;
  • A new administrative monetary penalty and an amended offence will be implemented in cases where false statements or omissions are made in excise tax returns;
  • A public consultation will be held on the income tax framework for non-profit organizations, to ensure that their tax exemptions are appropriately targeted and not subject to abuse by organizations that claim an exemption but are not operating in the manner intended;
  • The Government will consult on replacing the eligible capital property rules;
  • Individuals will no longer be expected to apply for the GST/HST credit, with the Canada Revenue Agency (CRA) automatically determining eligibility;
  • Compliance requirements will be simplified for the accounting and reporting of GST/HST for transfers of business assets by one member of a closely related group of corporations and/or partnerships to a new member of that group;
  • The Government will simplify the tax rules relating to the Lifetime Capital Gains Exemption and the intergenerational rollover for taxpayers who carry on farming and fishing businesses in combination;
  • Legislation will be introduced to require the Finance Minister to table to parliament annually a list of the government's outstanding tax measures;
  • The list of eligible expenses under the Medical Expense Tax Credit will be expanded to include costs associated with service animals specially trained to assist individuals with severe diabetes;
  • Amounts paid for the design of an individualized therapy plan will be included as an eligible expense for income tax purposes under the Medical Expense Tax Credit
  • The GST/HST exemption for training will be improved, to help individuals cope with a disorder or disability to exempt services of designing such training;
  • Acupuncturists' and naturopathic doctors' professional services will be exempted from the GST/HST;
  • The maximum amount on which the Adoption Tax Credit can be applied will increase from CAD11,774 per child to CAD15,000 per child; and
  • The excise duty on cigarettes will rise, to account for inflation since 2002. It will go up from CAD0.425 per five cigarettes or fraction thereof to CAD0.52575 per five cigarettes or fraction thereof.

The Economic Action Plan projects that the deficit will decline to CAD2.9bn in 2014-15. A surplus of CAD6.4bn is expected in 2015-16.

Concluding his Budget speech to parliament, Flaherty said that he was proud of the Government's "record of fiscal restraint and good management," adding that it had been "the envy of the world."