Chapter 8 – Tax Fairness and a Strong Financial Sector
The Government is committed to preventing underground economic activity, tax evasion and aggressive tax planning. Budget 2016 provides increased resources to ensure more effective administration and enforcement of tax laws, and proposes actions to improve the integrity of Canada’s tax system. Budget 2016 also sets out certain other tax measures that affect businesses and individuals.
The financial sector plays a vital role in Canada’s economy. Budget 2016 proposes measures to reinforce its soundness, enhance competition and better serve users’ needs.
Making the Tax System More Fair
As a matter of fairness for all taxpayers, it is important to prevent underground economic activity, tax evasion and aggressive tax planning. This involves providing the Canada Revenue Agency (CRA) with sufficient resources to administer and enforce tax laws effectively. This effort also requires legislative and other actions to improve the integrity of Canada’s tax system—on both the international and domestic fronts—to ensure that the system is functioning as intended. Budget 2016 proposes several actions that improve the fairness and integrity of the tax system. These actions will help support the objective of an economy that works for everyone.
Improving Tax Compliance
To help ensure that all taxpayers pay their fair share of taxes, Budget 2016 proposes a number of measures to prevent evasion and improve tax compliance.
Cracking Down on Tax Evasion and Combatting Tax Avoidance
Tax evasion and aggressive tax avoidance by individuals and businesses entail a fiscal cost to governments and taxpayers, and reduce the fairness and integrity of the tax system. Budget 2016 proposes to invest $444.4 million over five years for the CRA to enhance its efforts to crack down on tax evasion and combat tax avoidance by: hiring additional auditors and specialists; developing robust business intelligence infrastructure; increasing verification activities; and improving the quality of investigative work that targets criminal tax evaders.
As the CRA has a proven track record of meeting expectations from targeted compliance interventions, Budget 2016 accounts for the expected revenue impact of $2.6 billion over five years from these measures. These amounts do not reflect the gain that will be realized by provinces and territories, whose tax revenues will increase as a result of these initiatives.
Enhancing Tax Collections
The success of the CRA’s work in combatting aggressive tax planning, the underground economy and tax evasion is diminished when assessed revenues are not collected by the CRA. Budget 2016 proposes to provide $351.6 million over five years for the CRA to improve its ability to collect outstanding tax debts. It is anticipated that this proposal will lead to the collection of an additional $7.4 billion in tax debt over five years. This strategy will complement existing efforts to encourage earlier payment of outstanding tax liabilities and work with those who cannot pay the full amount when due.
As a matter of fairness for all taxpayers, it is important to prevent underground economic activity, tax evasion and aggressive tax planning. A key part of this effort is ensuring that the CRA has sufficient resources to administer and enforce tax laws effectively.
In recent years, the CRA has taken significant action to detect, correct and deter non-compliance. This has included increasing the focus on high-risk segments of the population, reinforcing strategic partnerships with key countries and organizations, developing business intelligence tools to maximize the use of all available tax data, and enhancing risk assessment capacity.
Further investments to crack down on tax evasion and combat tax avoidance will increase the CRA’s ability to find those who aggressively evade or avoid taxes, making the tax system fairer for everyone.
- To do this, the CRA will hire additional auditors and tax specialists, develop a more robust business intelligence infrastructure, increase verification activities, and improve the quality of investigative work that targets criminal tax evaders.
- The CRA will also continue ramping up its outreach efforts to ensure that taxpayers understand and meet their tax obligations. These efforts improve tax compliance through a “get it right from the start” approach to educate, inform and support taxpayers by improving service and encouraging voluntary compliance.
Enhancing Tax Integrity
Canada’s tax system needs ongoing adjustment to ensure that it is functioning as intended and contributing to the objective of an economy that works for everyone. Regular adjustments to address tax planning are consistent with the principles of fairness, economic efficiency and responsible fiscal management.
Internationally, Canada is actively engaged in coordinated multilateral efforts to address base erosion and profit shifting (BEPS) and to increase transparency through the automatic exchange of financial account information between tax authorities. Domestically, a key challenge is to prevent unintended tax advantages that businesses and high-net-worth individuals may be able to obtain through sophisticated tax planning techniques involving private corporations and other mechanisms.
Budget 2016 proposes actions to improve the integrity of Canada’s tax system, on both the international and domestic fronts, to protect the revenue base and give Canadians greater confidence that the system is fair to everyone. These actions also help protect provincial revenues on our shared tax bases.
Strengthening International Tax Integrity
Canada and other members of the G20 and the Organisation for Economic
Co-operation and Development (OECD) have worked together to develop recommendations aimed at addressing BEPS. This refers to international tax planning arrangements undertaken by multinational enterprises to inappropriately minimize their taxes, for example by shifting taxable profits away from the jurisdiction where the underlying economic activity has taken place.
As part of its commitment to protect the integrity of the Canadian tax base, the Government of Canada is acting on certain recommendations of the BEPS project:
- Budget 2016 proposes new legislation to strengthen transfer pricing documentation by introducing country-by-country reporting for large multinational enterprises;
- The Canada Revenue Agency is applying revised international guidance on transfer pricing by multinational enterprises, which provides an improved interpretation of the arm’s-length principle; and
- Canada is participating in international work to develop a multilateral instrument to streamline the implementation of treaty-related BEPS recommendations, including addressing treaty abuse.
The Canada Revenue Agency will also undertake the spontaneous exchange with other tax administrations of tax rulings that could potentially give rise to BEPS concerns.
The Government is also protecting the integrity of Canada’s international tax system by taking action in other areas. Specifically, Budget 2016 proposes to:
- Extend the application of the income tax back-to-back loan rules to royalty arrangements, and introduce a similar set of rules in the shareholder loan rules; and
- Prevent unintended, tax-free cross-border distributions of capital to non-residents by narrowing the application of an existing exception to the cross-border anti-surplus-stripping rule.
The Government is committed to strengthening efforts to combat international tax evasion and avoidance. The exchange of information between tax authorities is an important tool to promote compliance, combat international tax evasion and ensure public confidence in the fairness of the tax system. In November 2015, G20 Leaders reaffirmed their commitment to undertake the automatic exchange of information with respect to financial accounts held by non-residents, under the framework of the Common Reporting Standard developed by the OECD. More than 90 jurisdictions have committed to implement the new standard. Canada intends to implement the standard starting on July 1, 2017, allowing for first exchanges of information with other countries in 2018. The Government will issue legislative proposals for public comment in the near future.
Enhancing Domestic Tax Integrity
A concern on the domestic front is the ability of high-net-worth individuals to use private corporations to inappropriately reduce or defer tax. To help address this, and as early action in the context of the review of the tax system to be completed in the coming year, Budget 2016 proposes measures to:
- Prevent business owners from multiplying access to the $500,000 small business deduction using complex partnership and corporate structures;
- Ensure that investment income derived from an associated corporation’s active business is ineligible for the small business deduction (and taxed at the general corporate income tax rate) in certain circumstances;
- Ensure that associated corporations cannot avoid the $15-million taxable capital limit in certain circumstances; and
- Close loopholes that allow private corporations to use a life insurance policy to distribute amounts tax-free that would otherwise be taxable.
Budget 2016 also proposes measures to:
- Preserve the integrity of the foreign exchange computational rules in transactions typically referred to as debt-parking transactions;
- Prevent the asymmetrical recognition of gains and losses on derivatives for tax purposes;
- Prevent the deferral of capital gains tax by investors in mutual fund corporations structured as switch funds;
- Introduce a new rule that would effectively treat the portion of any gain realized on the sale of a linked note that is attributable to the variable return on the note as accrued interest on the note; and
- Ensure that excise tax relief for diesel fuel used as heating oil or to generate electricity is targeted to specific instances.
Integrity measures proposed in this budget are expected to increase tax revenues by more than $1.2 billion over five years starting in 2016–17.
Following consultations in 2015, Budget 2016 also confirms the Government’s intent to maintain a rule that allows income earned from property to qualify as active business income where a business has more than five full-time employees.
Going forward, the Government will continue to identify and address tax planning schemes to ensure that the tax system operates as fairly and effectively as possible.
Other Tax Measures
Certain other tax measures affecting businesses and individuals are set out below. All new tax measures proposed in Budget 2016 are described in detail in the accompanying document Tax Measures: Supplementary Information.
Small Business Income Tax Rate
Small businesses—from health care professionals to small manufacturers—provide important goods and services, create opportunities and strengthen communities across Canada. They also benefit from a supportive tax environment, including a reduced income tax rate of 10.5 per cent on their first $500,000 of active business income. This reduced rate allows them to retain more earnings that can be reinvested to support growth and job creation.
Budget 2016 proposes that further reductions in the small business income tax rate be deferred.
Eligible Capital Property
Eligible capital property for income tax purposes includes intangible property such as goodwill and licences, franchises and quotas of indeterminate duration, as well as certain other rights. Budget 2016 proposes to simplify the income tax system by repealing the eligible capital property regime and replacing it with a new capital cost allowance (CCA) class. As part of this change, Budget 2016 also proposes to allow small balances of eligible capital property carried over to the new CCA class to be deducted more quickly, and to allow up to $3,000 in incorporation costs to be deducted as a current expense. The latter measure will allow approximately 80 per cent of newly incorporated businesses to deduct the full amount of the incorporation expenses in their initial year.
Donations of Real Estate and Shares of Private Corporations
Budget 2015 included a proposal to provide, beginning in 2017, an income tax exemption in respect of capital gains on certain dispositions of private corporation shares or real estate, where cash proceeds from the disposition are donated to a registered charity or other qualified donee within 30 days. Budget 2016 confirms that the Government does not intend to proceed with this measure.
Accelerated Capital Cost Allowance for Liquefied Natural Gas Facilities
An accelerated capital cost allowance (CCA) is currently available for certain liquefied natural gas (LNG) facilities. For assets acquired before 2025, an effective CCA rate of 30 per cent is available for eligible liquefaction equipment and 10 per cent for related buildings. This treatment serves as an incentive to invest in new facilities that supply LNG to new markets. Consistent with Canada’s G20 commitment to eliminate fossil fuel subsidies over the medium term, the Government intends to maintain this tax preference as currently legislated and allow it to expire as scheduled.
Restoring the Labour-sponsored Venture Capital Corporations Tax Credit
To facilitate access to venture capital for small and medium-sized businesses and support saving by the middle class, Budget 2016 proposes to restore the Labour-Sponsored Venture Capital Corporations (LSVCC) tax credit to 15 per cent for share purchases of provincially registered LSVCCs for 2016 and subsequent tax years. The measure will provide federal tax relief of about $815 million over the 2015–16 to 2020–21 period.
Strengthening the Financial Sector to Support Economic Growth
Canada’s financial sector framework balances the objectives of stability, competition, and meeting the evolving needs of consumers and businesses. The financial sector plays a vital role in allocating capital efficiently to businesses and households across the economy. It must continue to do so effectively to ensure that Canada’s economic growth will be long-lasting and inclusive.
Canada’s financial sector is world-renowned and has remained resilient and stable through the darkest days of the financial crisis and its aftermath. However, the strength of the Canadian financial sector should not be taken for granted or stand in the way of measures to reinforce its soundness, enhance competition and better serve users’ needs.
This is all the more important at a time when new market forces and risks, including financial technology, changing global regulation, and an uncertain global economic and market environment are presenting challenges to Canada’s economy and financial system.
The Government is committed to advancing measures that will foster conditions that allow federally regulated financial institutions and pension funds to build on their current strengths and adapt to a changing world, while ensuring risks and vulnerabilities are monitored closely and addressed effectively.
Enhancing Consumer Protection
Canadians deserve financial consumer protection that keeps pace in meeting their needs. In addition, the financial consumer protection framework must provide clarity to guide the operations of federally regulated banks.
Amendments to the Bank Act will be proposed to modernize the financial consumer protection framework by clarifying and enhancing consumer protection through a new chapter in the Act. They will reaffirm the Government’s intent to have a system of exclusive rules to ensure an efficient national banking system from coast to coast to coast. The Government will collaborate with provinces, territories, and stakeholders to support the implementation of the framework, as well as to enhance consumer education and financial literacy.
The current financial consumer protection framework for banking is designed to give consumers the tools they need to make appropriate financial decisions. Existing provisions are dispersed throughout the Bank Act and related regulations. The new consumer chapter of the Act will bring together these disparate provisions to create a comprehensive, consolidated framework and include targeted and more flexible consumer protection rules to better respond to Canadians’ changing needs. It will also provide a set of guiding principles, reflecting that banks should act fairly and responsibly and that consumers should be able to make informed financial decisions for themselves. The Financial Consumer Agency of Canada will continue to oversee compliance with the regulatory framework and work with stakeholders to enhance consumer education and financial literacy initiatives with a focus on managing household finances and debt.
Renewing Financial Sector Legislation
The federal financial institutions statutes contain sunset provisions mandating renewal of banking and insurance legislation by Parliament every five years, providing an opportunity to examine the legislative and regulatory framework in light of emerging trends and developments, to ensure it remains robust and technically sound.
The Department of Finance will undertake a financial sector legislative review and begin consulting stakeholders in the coming months. To support the review, Budget 2016 proposes to provide the Department of Finance with $4.2 million over five years, starting in 2016–17, and to extend the current statutory sunset date by two years to March 29, 2019.
Introducing a Bank Recapitalization “Bail-in” Regime
To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.
The Government is proposing to introduce framework legislation for the regime along with accompanying enhancements to Canada’s bank resolution toolkit. Regulations and guidelines setting out further features of the regime will follow. This will provide stakeholders with an additional opportunity to comment on elements of the proposed regime.
Canada’s financial system performed well during the 2008 global financial crisis. Since that time, Canada has been an active participant in the G20’s financial sector reform agenda aimed at addressing the factors that contributed to the crisis. This includes international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”. Implementation of a bail-in regime for Canada’s domestic systemically important banks would strengthen our bank resolution toolkit so that it remains consistent with best practices of peer jurisdictions and international standards endorsed by the G20.
Studying Housing and Household Indebtedness
Households rely on housing market data to make informed decisions in buying and selling their homes, while governments depend on data to design effective housing policies. Currently it is not possible to fully understand the role of foreign homebuyers in Canada’s housing market since a comprehensive and reliable data set on the number of homes sold to foreign homebuyers does not exist.
Budget 2016 proposes to address this data gap by allocating $500,000 to Statistics Canada in 2016–17 to develop methods for gathering data on purchases of Canadian housing by foreign homebuyers. This initiative could involve collaboration with the provinces, such as British Columbia, which recently announced its intention to have homebuyers disclose whether they are citizens or permanent residents of Canada or another country.
Stable and secure housing markets protect the greatest investment of many middle class Canadian families. On December 11, 2015, the Government announced coordinated actions to strengthen the resiliency of Canada’s housing finance system, increase market discipline in residential lending, and promote long-term stability and balanced economic growth.1 The Government will continue to closely monitor vulnerabilities related to housing and consumer debt and is prepared to implement further measures, should they be needed.
Monitoring Systemic Risks to the Financial System
The ability to monitor and respond to emerging systemic risks and vulnerabilities in Canada’s financial system is critical to promoting financial stability and economic growth.
In December 2011, the Supreme Court of Canada found that Parliament has a role in the management of systemic risks in Canada’s capital markets and Canada-wide data collection. The Government intends to fulfil these responsibilities in a manner that is collaborative and respectful of provincial and territorial jurisdiction. A consultation draft of the proposed federal Capital Markets Stability Act was released for public comment in September 2014. Based on the findings of this consultation, the Government will release a revised draft of the proposed federal Capital Markets Stability Act by the summer.
The Government will also invest to enhance the quality and timeliness of economic and financial data to support domestic and international financial stability. Budget 2016 proposes $13.5 million over five years, starting in 2016–17, to allow Statistics Canada to produce four new data products and fill existing data gaps to meet the International Monetary Fund’s Special Data Dissemination Standard Plus.
Supporting a Robust Credit Union System Across Canada
The federal credit union legislative framework provides an option for credit unions that seek to grow regionally or nationally. Recognizing that credit unions considering the federal framework may face transition challenges, the Government will propose legislative measures to provide targeted protection against transitional risks and facilitate a smooth entry process.
Enhancing the Strong Regulatory and Supervisory Framework for Federally Regulated Pension Plans
Budget 2016 proposes changes to the agreement powers of the Pension Benefits Standards Act (PBSA) and announces a consultative process on a pension plan investment rule.
The Government proposes to broaden the scope of its ability to enter into bilateral agreements with provinces under the PBSA, which will better allow the federal and provincial governments to work together to oversee certain pension plans.
The Government aims to set out an efficient legislative and regulatory framework that provides flexibility to pension plans to seek out the best investment opportunities, while protecting the retirement savings of Canadians. To this end, the Government will shortly launch a public consultation on the usefulness of the investment rule that restricts pension plans from holding more than 30 per cent of the voting shares of a company.
Ensuring the Ongoing Effective Management of Canada’s Finances
Statutes supporting the management of Canada’s finances and financial sector governance are reviewed periodically to ensure they remain effective and up to date.
The Government will review and may subsequently propose amendments to Part IV of the Financial Administration Act and related statutes to ensure that they continue to support efficient management of federal funds, as well as statutes relating to federal financial sector oversight and certain Crown corporations to ensure effective governance and operations.
|Making the Tax System More Fair|
|Cracking Down on Tax Evasion and Combatting Tax Avoidance||-154||-312||-466|
|Enhancing Tax Collections||32||56||88|
|Enhancing Tax Integrity||-124||-205||-329|
|Subtotal—Making the Tax System More Fair||-246||-461||-707|
|Other Tax Measures||25||130||-230||-75|
|Strengthening the Financial Sector to Support Economic Growth|
|Renewing Financial Sector Legislation||1||1||1|
|Studying Housing and Household Indebtedness||1||1|
|Monitoring Systemic Risks to the Financial System||2||3||5|
|Subtotal—Strengthening the Financial Sector to Support Economic Growth||4||4||7|
|Net Fiscal Cost||25||-113||-688||-775|
1 The Minister of Finance announced an increase to the minimum down payment from 5 per cent to 10 per cent for the portion of the property price above $500,000 for government-backed insured mortgages effective February 15, 2016; Canada Mortgage and Housing Corporation (CMHC) announced an increase to guarantee fees for CMHC-sponsored securitization programs effective July 1, 2016; and the Office of the Superintendent of Financial Institutions announced plans to update regulatory capital requirements for residential mortgages.
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