Budget 2017: No game-changers in holding-pattern budget – Gowling
Press Release
Despite rising deficits, Budget 2017 does not propose any general tax increases or other game-changing measures that were the subject of much speculation in recent weeks. This is arguably a “holding-pattern” budget, giving the Government of Canada time to gauge external developments prior to deciding whether to implement more significant tax changes at a later time.
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- Overview
- More Tax Auditors and Enforcement
- Private Company Planning Scrutinized
- Straddle Transactions Curtailed
- Combating International Tax Avoidance
- Flow-through Tax Deductions Limited
- Investment Fund Mergers
- Mark-to-market Election for Derivatives
- Overriding the Case Law on Factual Control
- Federal Carbon Pricing Backstop
- GST/HST and Excise Tax Measures
Learn more about Gowling WLG’s Tax Group
From a business perspective, perhaps most newsworthy is what is not in Budget 2017. The Budget did not increase the capital gains inclusion rate. This had been widely speculated and was the impetus for many pre-Budget capital gain realization transactions. Budget 2017 also did not propose changes to the stock option regime, another favorite topic for pre-Budget speculation. The income tax changes with the most significant financial impact on business focused on very specific groups of taxpayers: professionals will be taxed on their work in progress; an anti-avoidance rule will prevent the deferral of income using “straddle transactions”; and deductions will be limited for oil and gas discovery wells.
For individuals, Budget 2017 proposes only minor tweaks to certain tax credit programs and the elimination or reduction of certain tax preferences on the basis of inefficiency or to close perceived tax loopholes. However, in keeping with Budget 2017’s theme of “Building a Strong Middle Class,” the Minister of Finance stated very clearly that the Government of Canada remains concerned with income inequality, perceived tax loopholes, and the steps taken by some taxpayers to reduce their taxes.
In particular, tax planning strategies by wealthy individuals using private corporations will be scrutinized and policy responses will be developed. The issues have been known for years and addressed in various ways in prior budgets, but the government is signaling once more that the rules may be further tightened to limit “sprinkling income” and the use of private corporations to accumulate passive investment portfolios. Budget 2017 strongly suggests that additional measures to address these issues are being considered and could be introduced in the near-term. Buckle up!
More Tax Auditors and Enforcement
Budget 2017 enhances measures from Budget 2016, deploying additional and substantial resources to crack down on tax evasion and avoidance. The Budget 2017 document conflates evasion and avoidance, reminiscent of the October 2016 Report of the Standing Committee on Finance and the February 23, 2017 Government of Canada response. A preferred view may have been to seek to address “abusive” tax avoidance.
In any case, over the next five years, the Canada Revenue Agency (“CRA”) will receive $523.9 million to fund increasing verification activities, hire more auditors and specialists focusing on the underground economy, develop robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases and improve the quality of investigative work targeting criminal tax evaders. Touting a proven track record of meeting expectations from targeted compliance interventions, the expected five year revenue impact of $2.5 billion results in a five to one “return on investment.”
We have already observed the consequences of this enhanced focus on tax enforcement, by more aggressive CRA audits and collection actions. This is bound to increase.
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