On March 21, 2013, the Canadian Finance Minister, Jim Flaherty, tabled the Canadian federal Government’s budget for 2013 (the “Budget 2013”). The speculation leading up to the Budget was that the Minister’s principal focus would be eliminating a federal deficit estimated to be as high as $26 billion, which could be achieved, in part, through an increase in tax revenue without the political fallout associated with increasing rates by instead introducing rules under the Government’s continuing “tax fairness” program designed to curtail the erosion of Canada’s corporate tax base and protect the integrity of Canada’s tax system. Budget 2013 does not disappoint in this regard.
Several domestic and international measures announced in Budget 2013 exemplify decisive action taken by the Government to prevent the erosion of or broaden Canada’s corporate tax base and reduce tax distortions and protect the integrity of Canada’s tax system. Some of these measures (discussed in greater detail below) include:
- The extension of Canada’s thin-capitalization rules to Canadian resident trusts and non-resident corporations and trusts that operate in Canada
- New anti-avoidance rules aimed at corporate loss trading that do not technically result in acquisitions of control that would otherwise trigger the loss-streaming rules
- The extension and adaptation of the corporate loss-streaming rules to trusts
- New anti-avoidance rules aimed at accelerating the tax consequences associated with “synthetic dispositions” of property
- New anti-avoidance rules designed to tax gains realized in derivative transactions referenced to underlying income properties as ordinary income (such as forward sale transactions, now referred to as “character conversion” transactions)
- An intention to launch a consultative process in respect of “treaty shopping”.
Further measures designed to protect the integrity of Canada’s tax system are comprised primarily of extending the circumstances in which the Canada Revenue Agency may issue an assessment beyond the normal reassessment period (such as in the context of late reporting of tax shelters and reportable transactions and improperly reported foreign property holdings), providing the Canada Revenue Agency with new collection powers in respect of amounts in dispute that relate to charitable donation tax shelters, rules denying benefits associated with certain leveraged life insurance arrangements, requiring more detailed reporting of a taxpayer’s foreign holdings, and introducing a new program that rewards individuals with knowledge of international tax non-compliance for providing information that leads to the collection of taxes.
Finally, certain measures contained in Budget 2013 reflect the Government’s continuing commitment to supporting Canadian small business (including a proposal to increase the lifetime capital gains exemption by $50,000 and indexing the limit to inflation going forward), Canada’s manufacturing and processing sector and the development of clean energy.