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 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."