Canada Softens Tax Restrictions on Private Corporations

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By Peter Menyasz

Canada continued its tough talk on offshore tax evasion and abusive tax planning in its latest federal budget, but took little new action, and mostly walked back previously announced measures to restrict tax breaks for private corporations.

The tax measures in the government’s budget for fiscal 2018-19 would do little new to address offshore evasion but represent a more reasonable approach to taxation of private corporations, tax professionals told Bloomberg Tax.

The government is acting to make the tax system fairer for all Canadians, building on the C$1 billion ($780 million) invested in the past two years to crack down on “tax cheats and offshore tax havens,” Finance Minister Bill Morneau said Feb. 27 in his budget speech to the House of Commons.

“We can’t have an economy that works for everyone if everyone doesn’t pay their fair share,” he said. “With every dollar we invest, we expect to get five dollars in recovered revenue.”

The Canada Revenue Agency will receive an additional C$90.6 million over the next five years to tackle more tax abuse cases, domestically and internationally, and that is expected to generate about C$354 million in additional tax revenues over the five-year period, the government said in the detailed Budget Plan document.

The budget does little new to address international tax planning, mostly just reminding taxpayers that Canada is participating fully in the Organization for Economic Cooperation and Development’s base erosion and profit-shifting initiative, John Wonfor, a spokesman for Chartered Professional Accountants Canada, said Feb. 27.

“It was a repeat of existing news,” Wonfor, a partner with BDO Canada LLP, told Bloomberg Tax.

Minor changes proposed in the budget on offshore tax evasion, however, will “go a long way” toward making offshore transactions more transparent, Kenneth Keung, a director with Calgary-based Moodys Gartner Tax Law LLP, said Feb. 27.

Those include new reporting requirements for trusts, a three-year extension of the reassessment of income from foreign affiliates, and shortening of the filing requirement for foreign affiliate reporting, Keung told Bloomberg Tax.

Private Corporation Rules Eased

The budget proposes overhauling the tax measures announced in July 2017—and amended in October—to address tax planning strategies by private corporations.

The measures were intended to keep private corporations from excessively benefiting from access to the 15 percent small business income tax rate, which applies to the first C$500,000 of business income, compared to 25 percent for public corporations and up to 50 percent for individuals.

The government estimates private corporations hold C$300 billion in “passive” investments, like stocks, bonds, or real estate, taking advantage of a small business tax break aimed at promoting reinvestment and job creation.

The budget would limit the ability of private corporations with more than C$50,000 in passive investment income in a tax year, equivalent to C$1 million in passive investment assets, to claim the small business tax rate.

It would also include in the calculation of passive investment income, under certain circumstances, capital gains from the sale of assets used in the business or the sale of shares of connected corporations.

The new approach avoids much of the “collateral damage” of the original measures, which were “horribly complicated” and heavily criticized by businesses and tax professionals, Wonfor said. “It’s a lot simpler than what they were originally proposing,” he said.

Elimination of the “punitive” original proposals is a “welcome” change, Kim Moody, a director of Canadian tax advisory with Moodys Gartner, told Bloomberg Tax Feb. 27.

No Response to U.S. Tax Cuts

Finance Minister Morneau said in his speech that Canadian businesses are worried about the potential impacts on the domestic economy of recent tax cuts in the U.S., but didn’t announce measures to offset their potential impact on Canada.

The budget plan includes only a brief reference, saying the government will conduct a detailed analysis “over the coming months” to assess the U.S. changes.

The lack of reaction to U.S. tax reform, which will surely challenge Canada’s economy in attracting new investment, is “disappointing,” Moody said.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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