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March 1, 2012

No. 2012-10

 

 

2012 Federal Budget — Does Majority Mean Major Tax Changes?

Finance Minister Jim Flaherty will deliver the Conservative government’s 2012 federal budget on March 29, 2012. With a majority government in power and the next election years away, this year’s budget may be an important one that could include significant changes to the tax system.

We’ve already heard speculation in the media about potential cuts to government programs, including a review of the retirement income system and Old Age Security, and possible changes to the R&D tax incentives program.

R&D tax credits

In a speech given at the end of January in Davos, Switzerland, Prime Minister Stephen Harper said Canada will continue to invest in science and technology but he believes Canada has obtained less than optimal results for the investments it has made. He said, “we have recently received a report on this — the Jenkins report — and we will soon act on the problems the report identifies”.

The Jenkins report was released in October 2011 by an expert panel established to review the federal government’s support of research and development (R&D) in Canada. The report recommends changing the balance of R&D spending to provide more direct funding through targeted grants and incentives and less in the form of indirect spending through tax incentives.

Specifically, the report recommends simplifying the Scientific Research and Experimental Development (SR&ED) tax credit program by restricting the base for the tax credit for small and medium-sized businesses to labour-related costs and raising the tax credit rate. For details, see KPMG’s TaxNewsFlash-Canada 2011-30, “Expert Panel Recommends Changes to Federal R&D Funding Programs” and 2012-09, “R&D Tax Incentives — Big Changes Afoot?”.

It’s possible that this year’s budget could include some of these recommendations or other changes to the SR&ED tax credit program.

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

What else to expect

The Department of Finance has indicated that we can expect a focus on so-called “tax integrity” items in the 2012 budget. For example, the 2011 federal budget included new rules that limit the tax deferral opportunities for corporate partnerships and new anti-avoidance rules for RRSPs. A senior Finance official indicated at the Canadian Tax Foundation conference in November 2011 that we can likely expect to see more of these types of measures to broaden the tax base.

For more indications of specific corporate or personal tax changes the government may make in the 2012 budget, we consulted the House of Commons Finance Committee’s pre-2012 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.

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. These recommendations may carry even more weight this year because most of the Finance Committee members are also members of the majority Conservative government.

This year’s report, titled Staying Focussed on Canadian Jobs and Growth, runs more than 135 pages and offers 18 recommendations related to possible tax changes. Highlights of these possible tax changes that may be included in the 2012 federal budget are as follows.

Business tax changes

International competitiveness
To enhance the international competitiveness of Canada's business tax structure, the Committee recommends that the government:

·      Continue to consult on potential new rules for the taxation of corporate groups (for details, see KPMG’s TaxNewsFlash-Canada 2011-15, “Reforming Canada’s Taxation of Corporate Groups — A Step in the Right Direction”)

·      Examine the impact of sections 105 and 102 of the Income Tax Regulations on access to skilled service in Canada by non-residents

·      Continue implementing the recommendations of the Advisory Panel on Canada's System of International Taxation (for details, see KPMG’s TaxNewsFlash-Canada 2008-33, “Advisory Panel Issues Final Report on International Tax Reform”).

Resource and M&P industries
The Committee recommends that the government maintain tax incentives for Canada's traditional industries like mining, forestry and manufacturing.

Other business tax measures
To support Canadian businesses, the Committee also recommends:

·      Implementing all planned corporate tax rate reductions as scheduled to 2012

·      Continuing to use tax incentives to promote the development and use of renewable energy

·      Studying the issue of intergenerational transfers of family businesses, including farms, to ensure tax fairness.

Personal tax changes

Charitable giving
To encourage greater charitable giving, the Committee recommends that the government support initiatives such as the Committee's study on tax incentives for charitable donations.

Some witnesses before the Committee advocated a "stretch" tax credit that would apply to amounts that exceed a donor's previous highest level of giving. This measure could provide an extra 10% credit for donations exceeding the previous highest level up to an annual donation limit of $10,000.

Personal tax reductions when budget is balanced
Contingent on a return to balanced budgets, the Committee recommends reducing personal taxes through measures like income splitting and doubling the contribution limits for Tax-Free Savings Accounts.

Other personal tax and retirement savings measures
On the personal tax front, the Committee also recommends:

·      Reducing the tax compliance burden for individuals, including reviewing the tax filing due date for certain individuals

·      Helping skilled workers move between provinces more easily with tax incentives

·      Continuing to work with the provinces to implement Pooled Retirement Pension Plans

·      Reviewing the rules surrounding Registered Retirement Savings Plans and Registered Retirement Income Funds to better support retirement savings

·      Continuing to review the rules for Registered Disability Savings Plans to ensure these plans meet the needs of disabled Canadians

·      Studying the issue of intergenerational transfers of family business, including farms, to ensure tax fairness.

Expert panels to review personal and corporate tax systems

The Committee recommends that the government convene expert panels to review, modernize and simplify the federal corporate tax and personal tax systems.

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 February 29, 2012. 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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