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Canadian federal budget could hike CGT rates, but offer R&D reliefs

17 March 2017

Anjana Haines

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Canada’s 2017 federal budget will be unveiled on March 22 and it is very likely to contain tax changes affecting businesses as the government looks to address economic challenges and maintain the country’s competitive edge.

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 said.

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 being stolen.

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 worth individuals.

"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."






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