Some of the headline changes anticipated by tax analysts are
a potential rise in the capital gains tax (CGT) rate, new
measures in line with the BEPS Project, as well as
environmental tax measures in line with the Paris Agreement
commitments, tax avoidance measures and some incentives to
support research and development (R&D).
Drew Morier, international tax lawyer and partner at Osler
in Toronto and Calgary, said there have been numerous
predictions that the government will increase the CGT rate from
50% inclusion to something higher. "If this occurs it will
clearly have an impact on capital investment decisions," Morier
told International Tax Review.
However, Laura Gheorghiu, partner at Gowling, is skeptical
that there will be any increase in the CGT rate. The 50%
inclusion rate, meaning that tax is only paid on half the gain,
has been a "great incentive" for start-ups and mid-size
companies and increasing this could discourage innovation and
entrepreneurship in Canada. "We have great innovation in
Canada. I think with what’s happening in the US,
and the great talent that is being stopped at the border,
people are travelling to Canada a lot now and to change a
system that has worked so well and to increase the inclusion
rate to 75%, meaning you are taxed on three-fourths of the
gain, would be a step back," Gheorghiu said. "I’m
surprised this is being talked about so much, but maybe
everyone else is right and I’m wrong."
To Gheorghiu’s surprise, she noted that because
of the conversations around an anticipated CGT hike, many are
already preparing for the change. "I have seen so much push
behind the CGT that some people are planning for it already,
which is very interesting because the whole point of a budget
is to make as not be known before the budget so that people
don’t have time to plan around the rules and
that’s why we have lock-ups where the police and
everybody has got to give up their phones. We will see. It is
very interesting and it will be a big deal if it happens."
Reacting to the US
Other than potential changes to the CGT rate,
Osler’s Morier does not expect any significant
changes to corporate tax rates.
"The federal government – like all of us –
is carefully monitoring possible tax reform in the US and we
would expect that any significant changes to the corporate tax
system would be in reaction to changes in the US," Morier
However, he believes that if any reactionary measures are
undertaken, they are unlikely to be announced on March 22 and
will instead occur in an Economic Statement in autumn 2017.
R&D incentives possible
To maintain the competitiveness of Canadian businesses, KPMG
believes that R&D incentives may become available.
"The government’s budget may focus on
supporting innovation and R&D," it said in a tax alert. "We
could see the creation of a patent box programme to subsidise
the expenses incurred by small and medium-sized businesses
obtaining a first patent – similar to a recent
programme launched in Quebec."
Gheorghiu believes a patent box regime could also be on the
cards. "Another thing that has been proposed a lot, and Quebec
has an example already, is a patent box regime –
similar to that in the UK and Ireland, where
you’re trying to financially support SMEs with the
expenses of getting their first patents."
She noted that trying to keep IP in Canada is an issue and a
patent box regime could go some way to prevent innovations
Moreover, as the US appears to close its doors to
immigrants, Gheorghiu said that the government would try to
introduce some incentives that will show an openness to
immigration and attract "high-skilled workers that normally go
to Silicon Valley, but now feel that’s not safe or
that they’re not welcome". "We need them
– especially in IT and technology," she said. "We have
a huge deficit of skilled workers, so that could be an
opportunity for them."
BEPS and anti-avoidance
The Canadian government has been an active participant in
the OECD BEPS Project and will want to stay on par with other
implementing countries to ensure it meets its commitments.
"We expect the budget to provide further guidance to
taxpayers about how Canada intends to implement its BEPS
commitments," Morier said. "Any measures to implement changes
to the international tax rules based on BEPS commitment will
have to be carefully considered by multinationals in relation
to their investments into and out of Canada."
KPMG Canada believes the government may
also adopt a Multilateral Instrument (MLI) to facilitate the
updating of its international tax treaties. "In
2016’s budget, the government pledged its
commitment to address treaty abuse in accordance to BEPS
minimum standard and some related measures may be included in
the 2017 budget," it said in a tax alert.
On tax avoidance measures, the budget may include some
proposals to address recent media reports about international
tax avoidance schemes, particularly those involving high-net
"The 2016 Federal Budget saw funding increases to the Canada
Revenue Agency, intended, in part, to fund expanded audit
activity in this area," Morier noted. "It is possible that the
2017 budget could contain additional targeted measures, or at
the very least a reaffirmation of the government’s
commitment to combat tax avoidance transactions that are
perceived as illegitimate."