March 15, 2013
Finance Minister Jim Flaherty is expected to deliver the Conservative government’s 2013 federal budget on March 21, 2013. Since the Minister has stated that the government wants to balance the budget by 2015, it seems unlikely that this year’s budget will include any broad-based tax cuts or spending increases. We expect tax measures in the budget to be specifically targeted but these measures could still affect a wide range of individual and corporate taxpayers.
Department of Finance officials have publicly stated that the government intends to introduce more measures to close “tax loopholes” in the 2013 budget, as it has done in the previous two years’ budgets. For example, the 2012 budget included new rules to restrict foreign affiliate dumping and tighten the thin capitalization rules, and the 2011 budget included new rules that limit the tax deferral opportunities for corporate partnerships and new anti-avoidance rules for RRSPs. Since these changes can cover such a wide range of measures, it’s difficult to predict what areas might be affected by new “tax integrity” provisions in this year’s budget.
Though we expect to see tax integrity measures in this year’s budget, Minister Flaherty stated in a recent speech that the government does not intend to introduce any new taxes. The Minister also said the government intends to stick to its plan for “balanced budgets and low taxes”, though of course this comment does not guarantee that the budget will not include any changes that could increase the tax burden for corporations or individuals.
Catch KPMG’s same-day budget coverage
Whatever kind of tax changes are announced in this year’s budget, your KPMG adviser can help you understand their effect on your personal finances or business affairs, and point out ways to ease their impact or take advantage of new opportunities.
Registration is now open for our budget highlights webcast planned for late afternoon on budget day. You can also get highlights from our special budget edition of TaxNewsFlash-Canada — expected to be available late in the afternoon on budget day from your KPMG adviser and on our website at www.kpmg.ca/tax.
What else to expect
We’re hearing about other possible announcements in this year’s budget from the House of Commons Standing Committee on Finance (also known as “the Finance Committee”) and other sources. The Finance Committee traditionally tables a pre-budget report with recommendations for budget changes developed through public consultations. Based on past years’ experiences, these recommendations often form the basis for the government’s budget proposals, if not in the next budget, then in a later year.
This year’s report, titled Jobs, Growth, Productivity and Demographic Change: Challenges and Opportunities for Canada, runs more than 65 pages and offers 18 recommendations related to possible tax changes. Highlights of these recommendations and other possible tax changes that may be included in the 2013 federal budget are as follows.
Corporate and personal tax rates
The Finance Committee recommends that the government not impose any new taxes, especially any form of carbon tax. The Committee also recommends that the government maintain "a continued commitment to the recently implemented corporate tax rate reductions and ensuring competitive personal income tax rates."
Charities and NPOs
CRA review of NPOs
The CRA has almost finished a three-year audit project focusing on non-profit organizations (NPOs). This project is meant to give the CRA and the Department of Finance a better understanding of the issues NPOs face and evaluate their compliance with the rules that allow them a tax exemption. For details, see KPMG’s Canadian Tax Adviser (August 14, 2012), “NPO Audit Project — CRA Stops Issuing ‘Education Letters’”.
If the government has determined that the tax rules for NPOs need to be modernized, the budget could include these changes, with a transition period to allow these organizations time to comply with new requirements.
Finance Committee proposes new charitable tax incentives
The budget may also include changes to the tax credit for individuals’ charitable donations. The Finance Committee’s pre-budget report, released in December 2012, suggests that to facilitate greater charitable giving, the government should examine the forthcoming recommendations of the Committee's study on tax incentives for charitable donations.
The Committee’s report on this study was released on February 11, 2013. The 40-page report makes 12 recommendations for the government to consider in the budget, recognizing that the timing for introducing these measures may vary given the government’s current focus on balancing the budget.
Stretch tax credit for individuals
The study’s recommendations include a "stretch" tax credit for charitable giving, which the Finance Committee also suggested in a previous year’s pre-budget report. This credit could provide an additional 10% tax credit if the donor’s total donations claimed for the current taxation year are greater than his or her total contributions for the previous taxation year. The year-over-year incrementally increased donations to which the additional credit would apply would be no more than $10,000 over the donor’s lifetime, providing a maximum lifetime benefit of $1,000 from the stretch tax credit.
The pooling of donations by spouses, which the CRA administratively allows under the current system, would not be allowed with this proposal.
Donations of real property and private company shares
The study also suggests the government consider eliminating or lowering the capital gains tax on charitable donations of real or immovable property and on the shares of private corporations. Among other recommendations, the study further suggests that the government:
- Extend the carryforward period for claiming a charitable donation including gifts of ecologically sensitive lands or gifts of certified cultural property
- Explore ways to increase charitable giving in the corporate sector
- Explore ways to facilitate bequests to charitable organizations and transfers of property to a charity as a result of a will.
Scientific Research and Experimental Development
The Finance Committee recommends that the government continue its efforts to streamline and improve the SR&ED tax incentive program, including implementing its commitment to direct savings generated by these actions to more direct support for innovative private-sector businesses.
In the 2012 federal budget, the government acted on recommendations of a report submitted by the Jenkins panel and announced changes to the SR&ED program that included more direct funding to support research and development and changes to the SR&ED tax credit program. For details, see KPMG’s TaxNewsFlash-Canada 2012-15, “2012 Federal Budget Highlights”.
The government may choose to implement more of the Jenkins panel’s recommendations in the 2013 federal budget. As such, further changes to the SR&ED program could be coming. For more on the Jenkins report, see KPMG’s TaxNewsFlash-Canada 2011-30, “Expert Panel Recommends Changes to Federal R&D Funding Programs”.
The 2013 federal budget may also address the way companies claiming SR&ED tax credits can choose to pay consultants they hire to help them prepare their claims. The CRA recently recently completed consultations to better understand why many companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims.
This consultation was announced in the 2012 federal budget with the comment that the result of this study would determine whether any action was required. It’s possible that the government could announce the results of this review in the 2013 federal budget.
For more on the consultations and recent changes to the SR&ED program, see KPMG’s TaxNewsFlash-Canada 2012-33, “Are You Ready for the New R&D Regime?”
Personal tax changes
The government is still facing a deficit and does not expect to balance the budget this year, according to a recent press release from the Department of Finance. The press release said the government’s goal is to balance the budget by the end of this Parliament (i.e., before the next federal election). As a result, it seems unlikely that we will see any major personal tax cuts in the 2013 budget.
Though significant personal tax cuts will probably not happen this year, the Conservative party’s platform for the 2011 federal election indicates where the government may focus personal tax changes in the future. The election platform said that when the budget was balanced, the government would:
- Increase the annual contribution limit for Tax-Free Savings Accounts to $10,000 (from $5,000)
- Allow up to $50,000 of income splitting for couples with dependent children under 18
- Increase the amount eligible for the Children’s Fitness Tax Credit to $1,000 (from $500) and make it refundable
- Introduce an Adult Fitness Tax Credit for eligible expenses up to $500.
It will be interesting to see whether the government confirms in the 2013 budget that it still intends to introduce these measures when the budget is balanced.
Other personal tax measures
The Finance Committee report mentioned the following measures affecting individuals:
Pooled retirement pension plans — The Committee recommends that the government continue to implement pooled retirement pension plans, including working cooperatively with the provinces and territories to introduce these plans.
Transfer of family-owned businesses — The government should examine tax provisions in relation to estate and succession planning and their impact on the transfer of family-owned businesses.
Skilled trades — To support and promote the skilled trades, the government should explore the feasibility of tax incentives "to help skilled workers and their mobility."
According to the Finance Committee, the government should remain vigilant in examining ways to improve Canada's international tax competitiveness, including through the continued implementation of the recommendations of the Advisory Panel on Canada's System of International Taxation.
The report also recommends that the government continue to pursue its aggressive trade agenda, including pursuing free trade agreements and concluding tax treaties with foreign governments.
Energy and resource industries
The Finance Committee recommends that the government explore the cost and feasibility of expanding the accelerated capital cost allowance to encourage the construction of domestic infrastructure in relation to downstream activities in the oil and gas sector, such as transportation, refining and upgrading.
The Committee also recommends that the government explore the cost and feasibility of tax incentives such as accelerated capital cost allowance (CCA) or other support programs to improve the affordability of commercial natural gas vehicles and the use of natural gas as transportation fuel.
To further enhance the neutrality of the tax system, the Committee recommends the government eliminate fossil fuel subsidies, in line with Canada's recent Group of Twenty commitment. Further, the government should continue to promote tax incentives to encourage the development and use of clean energy generation.
The Committee also recommended that the government consider extending the temporary 15% Mineral Exploration Tax Credit for flow-though share investors for an additional year to support junior mining exploration.
The Committee recommends that the government explore ways to simplify the Income Tax Act "to reduce the complexity and inefficiency of its administration", including establishing a royal commission to undertake a comprehensive review. The government should also ensure the timely assessment of income tax returns and explore the possibility of permitting consolidated reporting.
According to the Committee, a comprehensive review of the tax system should also "ensure its fairness as well as neutrality by continuing to close tax loopholes that allow select taxpayers to avoid paying their fair share of tax."
Further, the government should examine ways to better equip the CRA to combat tax evasion while working collaboratively with law enforcement agencies to prosecute tax evaders.
Trade and customs
According to the Committee, the government should continue to pursue free trade agreements with foreign governments and also review the relevance of the current tariff regime on consumer goods, especially those not produced domestically, and examine the impact of their removal on household costs and government revenue.
Complete tax-sensitive transactions before budget day
As with any budget, there’s no telling what type of changes the government may have in store this year. Since federal budgets often propose measures that take effect on budget day, your best defence against adverse tax changes is to complete or close all tax-sensitive transactions before 12:01 a.m. on budget day.
Information is current to March 15, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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