Finance Minister Jim Flaherty has announced that he will deliver the Conservative government’s 2014 federal budget on February 11, 2014. This budget comes earlier in the year than the Conservatives’ last few budgets, most of which have been delivered in March. According to media reports, the government plans to deliver a “bare-bones” budget as a low-key event, with a more significant budget and possibly tax breaks coming in 2015, the next election year. Nevertheless, we’re still expecting a range of tax measures in this year’s budget, with the government maintaining its focus on tax fairness measures and tightening the tax system by closing “tax loopholes”.
In the 2011 federal election campaign, the government promised to introduce tax incentives such as family income splitting, increasing the limits on tax free savings accounts (TFSA) and enhancing fitness tax credits, but only after the budget is balanced. Based on the fall economic update in November 2013, the government projected that it is on track to balance the budget in 2015.
The government is also expected to comment on the OECD’s push for greater tax transparency and its ambitious Action Plan on Base Erosion and Profit Shifting (BEPS) that Canada and other G20 leaders signed in July 2013. The action plan includes recommendations for establishing international coherence of corporate income taxation, greater transparency through the disclosure by multinational enterprises of tax planning arrangements and updates for OECD transfer pricing guidelines. For details, see KPMG’s TaxNewsFlash-Canada 2013-27, “OECD Action Plan Could Signal a Shift in the Global Tax Landscape” and TaxNewsFlash-Canada 2013-43, “New Treaty Shopping Rules — Should Canada ‘Wait and See’? [PDF 52 KB]”. The government may use the budget to signal more precisely how Canada will respond to the BEPS action plan and the OECD’s aggressive timelines to implement the various international initiatives.
Canadian financial institutions and certain other non-U.S. entities must comply with new withholding rules and information gathering requirements that take effect July 1, 2014 under the U.S. Foreign Account Tax Compliance Act (FATCA). These rules include registering as participating foreign financial institutions, among other things. Canada has been in talks with the U.S. government to enter into an inter-governmental agreement (IGA) to streamline FATCA compliance for Canadians, and the budget may include details of the IGA to simplify practical implementation and reduce costs. For more, see TaxNewsFlash-Canada 2013-32, “FATCA Registration — Canadian FIs Should Stand Pat”.
Catch KPMG’s same-day budget coverage
Whatever 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
For more indications of specific corporate or personal tax changes the government may make in the 2014 budget, we consulted the House of Commons Finance Committee’s pre-2014 budget report.
The House of Commons Standing Committee on Finance (also known as “the Finance Committee”) traditionally tables a pre-budget report with recommendations for budget changes developed through public pre-budget consultations. This year, the Committee also released a special report on income equality in Canada. 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 “The Future We Want: Recommendations for the 2014 Budget”, offers 48 recommendations, 15 of which relate to possible tax changes. These recommendations include several measures affecting the resources and energy industry, a proposal to review tax provisions for real estate and continuing to close tax loopholes in general. Highlights of these possible tax changes that may be included in the 2014 federal budget are as follows.
The Committee recommends that the government reaffirm its commitment to keep taxes low and not to impose new taxes, especially any form of carbon tax. At the same time, the Committee calls on the government to continue to ensure a competitive tax system, including a continued commitment to small businesses and ensuring competitive personal tax rates. Recently, the CRA announced it would take a new approach to improving tax compliance among small- and medium-sized businesses (see KPMG’s TaxNewsFlash-Canada 2014-01, “CRA’s New Approach to Small Business Tax Compliance [PDF 42 KB]”).
The Committee further recommends that the government should undertake a comprehensive review of the tax system to ensure its fairness and neutrality by continuing to close what it refers to as “tax loopholes”. As well, it says the government should examine additional ways to better equip the CRA to combat tax evasion while working collaboratively with law enforcement agencies to prosecute tax evaders.
Resources and energy
Oil and gas
According to the Committee, the federal government should investigate 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.
Further, the federal government should explore the cost and feasibility of tax incentives, such as the accelerated capital cost allowance or other support programs, to improve the affordability of commercial natural gas vehicles and the use of natural gas as transportation fuel to reduce air pollutants.
The Committee recommends that the federal government consider making permanent the temporary 15% Mineral Exploration Tax Credit for flow-through share investors, to support junior mineral exploration.
Another recommendation is that the federal government amend Classes 43.1 and 43.2 of the Income Tax Act to specify that capital cost allowances for those classes apply to expenditures on tangible stand-alone energy storage assets.
Further, the Committee urges the federal government to continue to promote tax incentives to encourage the development and use of clean energy generation.
The Committee states that the federal 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.
Also, the Committee recommends that the federal government continue to pursue its aggressive trade agenda, including through continued pursuit of free trade agreements like the Canada–European Union Comprehensive Economic and Trade Agreement and the conclusion of tax treaties with foreign governments.
As part of its housing and homelessness review, the Committee recommends that the federal government examine tax provisions in relation to real estate, such as the deferral of previously claimed depreciation on income properties. This recommendation appears to be based on a change proposed by the Canadian Real Estate Association, which asks the government to allow small investors to defer tax on income from the sale of real property in which depreciation was previously claimed when that investor sells an investment property and reinvests the proceeds from the sale in a similar property within one year.
Another recommendation is that the federal government continue its support and promotion of the skilled trades, such as exploring the feasibility and cost of tax incentives to help skilled workers enhance their mobility and to benefit employers of skilled workers.
Fossil fuel subsidies
The Committee recommends that the federal government further enhance the neutrality of the tax system by eliminating unnecessary fossil fuel subsidies, in line with Canada’s commitment to the G-20 nations.
Simplify the Act
The Committee states that the government should explore ways to simplify the Income Tax Act to reduce complexity and inefficiency of its administration. The government should also ensure the timely assessment of income tax returns and explore the possibility of permitting consolidated reporting.
The 2013 federal budget announced that the government’s examination of the taxation of corporate groups was complete and that it had determined that moving to a formal system of corporate group taxation was not a priority at that time. The government said that it would continue to work with the provinces and territories regarding the current approach to loss utilization.
Charitable tax credits
According to the Committee, the federal government should explore innovative ideas for greater charitable giving by Canadians such as a stretch tax credit, building on initiatives like the First-Time Donor's Super Credit.
Pooled Registered Pension Plans
Further, the Committee recommends that the federal government should continue to work with the provinces to implement Pooled Registered Pension Plans.
Finance Committee's Report on Income Inequality
The Finance Committee also released a December 2013 report titled "Income Inequality in Canada — An Overview". This report includes several recommendations to address income inequality that relate to the tax system. Specifically, the Committee recommends that the federal government should:
- Reaffirm its commitment to keeping taxes low and to not impose higher personal or business tax rates
- Continue to close tax loopholes and develop tax legislation to curb "egregious" forms of tax avoidance
- Formally review the Working Income Tax Benefit to determine how it could be expanded or modified to further benefit Canadians and further incent workforce attachment, subject to the government’s stated intention to balance the budget in the medium term
- Continue to ensure that Canada maintains its reputation as an attractive investment environment, and continue to work toward eliminating barriers to international trade through signing trade agreements.
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.
We Can Help
Your KPMG adviser can help you assess the effect of the tax changes in this year’s federal budget on your personal finances or business affairs, and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of proposals as they make their way into law and help you bring any concerns you may have to the attention of the Ministry of Finance.
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Information is current to January 27, 2014. 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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