The federal budget aims to tighten up corporate tax laws rather than reform them, applying rules more strictly and closing loopholes instead of making wider changes to the tax burden on companies.
In several instances, the budget released on Monday takes aim at businesses – most notably multinational corporations – that exploit weaknesses in existing laws to avoid paying taxes. But the government made no broader move to raise or cut core taxes for companies in Canada, even as U.S. President Joe Biden looks to raise rates for American companies and his administration has endorsed a global minimum corporate rate.
“You don’t see any major tax cuts or any major tax increases there in terms of the broadened base for general corporate tax, or even for small business tax,” Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce, said in an interview. “I think there’s some hesitation on the part of governments to do anything major and dramatic ... until we see how long it takes for the recovery to fully kick in.”
Instead, new measures are designed to keep Canada aligned with other countries on common issues of concern. Only on one especially hot-button matter – the taxation of digital giants like Google, Facebook and Amazon – has Canada diverged from the pack by introducing an interim 3-per-cent tax while waiting for a consensus approach to coalesce internationally.
One of the most significant proposals released on Monday would raise an estimated $5.3-billion in tax revenue over five years by limiting the extent to which businesses can deduct the interest they pay when borrowing to fund their operations. The government claims some companies “use excessive deductions of interest” and that Canada is the only G7 country that has yet to take action to address the problem.
Starting in 2023, the amount of interest some businesses can deduct would be capped at 40 per cent of profits in the first year, and 30 per cent in subsequent years, with some relief provided for small businesses. The government expects to release draft legislation this summer.
Another measure targets companies that exploit differences between Canadian and foreign laws to avoid paying taxes on some income. The government is proposing changes to the Income Tax Act, made in stages, to eliminate benefits from what are called “hybrid mismatch arrangements,” boosting tax revenues by an estimated $775-million over four years.
“It’s more a question of tightening up the rules and looking specifically at international tax and protecting the tax base,” Fred O’Riordan, National tax policy leader at Ernst & Young LLP, said in an interview.
Starting next January, the government plans to impose a 3-per-cent tax on some revenue collected by the largest digital services giants, such as Google and Facebook. The proposal fleshes out a promise made in the government’s fall economic statement, and is estimated to raise $3.4-billion over five years.
The tax would apply to any revenue on digital services that rely on data and content from Canadian users – such as social media, online marketplaces and advertising, as well as the sale of user data – and apply only to companies with gross revenue of at least €750-million, or about $1.5-billion.
In total, the government estimates its new corporate tax measures would generate nearly $16-billion in revenue over five years. The budget also allocates new spending to the Canada Revenue Agency, including $304-million over five years to combat tax evasion and avoidance, and $230-million over five years to more rigorously collect outstanding taxes.
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