Advisers expect the government to continue its strong focus on transfer pricing so it hits its projected budget surplus goals, of C$4.2 billion ($4.2 billion) by fiscal year 2015 to 2016.
“Transfer pricing is a huge focus for the government, budget or no budget,” Robert Davis, tax partner at KPMG in Toronto said.
The government has put low taxes at the centre of its economic policy. Canada’s corporate rate was reduced again this January from 18% to 16.5% and will be taken to the next and final phase on January 1 2012 when it drops to 15%.
At 15%, Canada will be able to pride itself on having one of the lowest corporate tax rates among the G7 countries and one that makes the US 35% rate even more unattractive.
“A reduced combined provincial and federal rate, from a transfer pricing perspective, might encourage multinationals with operations in Canada to examine and perform a functional analysis of their investments in Canada,” said Fred O’Riordan of Ernst & Young.
Such analyses would likely lead multinationals to “perhaps consider allocating them [investments] to the Canadian side” O’Riordan said.
Increased activity across borders will ultimately pave the way for increased transfer pricing.
To Canada’s advantage, foreign investors will see even more of a difference between the effective income tax rates in Canada and the US.
Still, O’Riordan said the two countries are intertwined: “Progression [since the financial crisis] in the US has been slower and Canada depends greatly on that.”
Brief attention was given to extending the 15% mineral exploration tax credit for flow-through share investors for an additional year to “help companies raise capital for mineral exploration”.
If manufacturing, forestry and mineral companies receives preferential tax treatment, the flip-side to this is increased scrutiny by the authorities, of the transfer pricing practices of these industries.
What the budget didn’t say
Still, past budgets have repeatedly emphasised the need to strengthen international tax enforcement.
“They [the Department of Finance] usually say they will step up enforcement to keep tax dollars in Canada, but apparently they didn’t feel a need to reiterate that,” Davis said. “Overall it’s a pretty safe budget given the political situation. They couldn’t do anything too radical.”
“The budget was a stay-the-course, steady-as-you-go type of budget,” O’Riordan commented.
Vote danger
If the government had a majority in parliament, the budget provisions would be expected to pass swiftly into law.
With a minority government in power, the budget’s future is more uncertain.
“Due to the political situation at play, the budget is more tenuous than usual since someone from the opposition party will need to approve it first,” Davis said.
Murray said the future of the budget is questionable because “there is some Canadian opposition to lower corporate tax rates and this may become an election issue”.
The budget still needs to be passed through parliament and its dismissal could happen as early as Friday. If the budget fails to garner support from one opposition party, a general federal election will take place.
“[Passage] won’t happen because all three opposition leaders have already said they will vote down the budget,” O’Riordan commented.
Michael Ignatieff, leader of the federal Liberal Party in Canada, has already stated his party will be “forced to reject” the budget. Jack Layton of the New Democratic Party of Canada and Gilles Duceppe, leader of the Quebec-based Bloc Quebecois party, are likely to follow his example.
Taxpayers are gearing up for this likely outcome in the wake of good news that Canada is more than ready to market its best tax assets beyond its own borders.
