5th April 2017
In stark contrast to the deregulatory flavor of the Trump administration, Canada has introduced a 2017 budget that features a strong government presence to keep watch over the economy. Put forth by Finance Minister Bill Morneau, the new budget gives accountants plenty to think about – as it attempts to tighten or close off several avenues commonly used to lower tax obligations.
Among the programs introduced or strengthened by the new budget are an ambitious 10-year, $11.2 billion affordable housing plan, expanded daycare services, job training and support, additional funding for education to prepare workers for high-tech industry developments, a national housing database, a “venture capital catalyst initiative”, and several projects to facilitate student loans.
Part of the cost of these programs will be met through raised employment insurance premiums as well as higher taxes on tobacco and alcohol, but a multi-front set of countermeasures against tax loopholes will also play a large part in ensuring a sustainable tax base moving forward.
Perhaps most notable among these is a new $523.9 million investment over the next 5 years to increase the number of government auditors and ensure compliance with financial reporting regulations moving forward. This announcement portends a new wave of tax avoidance investigation cases nationwide, and crackdowns on individuals and organizations whose tax returns are incomplete or contain errors.
The Canada Revenue Agency clearly anticipates that this proactive stance on tax evasion will reap significant additional income, estimating that the government will receive an extra $2.5 billion as a result of the CRA’s enhanced investigatory powers. The message for accountants in this new environment is surely to be as meticulous as possible, and also responsive to the new set of reporting rules summarized briefly below.
Most tax rates will remain the same over the coming year, but work-in-progress exemptions for billed-basis accounting in several professions will be disallowed. Home relocation loans and gifts of medicine will no longer be eligible for tax deductions; insurers for farmers and fishing properties will no longer enjoy tax exemption; education and disability savings plans will be subject to tax-avoidance rules; and the Public Transit Tax Credit will be discontinued. In addition, straddle transactions will no longer provide the benefit of allowing realization of a loss while an offsetting gain goes unreported.
Other common practices will be monitored for potential future action, including the shifting of funds to capital gains or portfolio investments, as well as to other family members, for the purpose of securing lower tax rates.
The government has also modified its rules on the recording of gains and losses on derivatives, proposing an elective mark-to-market regime that will clarify reporting standards for these financial instruments. Switch mutual fund corporations will be eligible for re-structuring into multiple mutual fund trusts, though restrictions do apply.
The budget contains several adjustments in other areas, and as with all accounting-related matters, close attention to detail is essential. Moreover, modifications may be made as the year progresses, although the budget’s theme of closer supervision of accounting practices is unlikely to change.