Canada: The 2017 Tax Crystal Ball

Last Updated: December 28 2016
Article by Kim G.C. Moody

Well, it's that time of year when people start to wind down for the holidays and get ready to spend time with family. For me, I'm not immune to that. I'm very much looking forward to gathering my wife and kids around the fire and the Christmas tree to have a lively discussion about what 2017 might look like in the tax world. Accordingly, consider this short blog a preview of the riveting Moody family holiday discussions. And, yes, my family can't wait!

Earlier this month, the Standing Committee on Finance issued its report entitled Creating the Conditions For Economic Growth: Tools For People, Businesses and Communities. Wow, that's quite a title. The report documents the 2017 Budget consultations that the Committee carried out recently and sets forth its recommendations. It's a 212-page read and contains an ambitious grab bag of wishes and goodies. While the report is interesting and will likely be considered by the Government when developing 2017 Budget priorities, many of the recommendations are so broad and ambitious that it is doubtful many of them will result in any tangible changes. Notwithstanding, the report is a good barometer of the tax weather and an early forecast of what might be contained in the 2017 Federal Budget.

So, given the above, what will I be waxing on about around the Moody's Christmas tree? Here are my top six Canadian tax predictions – or what to watch for:

1. Increase in Capital Gains Inclusion Rate

In my 2016 Federal Budget prediction blog, I wrote the following:

With increased tax rates and a 50 per cent inclusion rate for capital gains, there is now a significant discrepancy between ordinary income rates and capital gains rates. The same can be said for dividend tax rates... they are much higher than capital gains rates. Given such a large discrepancy, it does not require a huge inferential leap to conclude that good tax advisors will look for opportunities to convert ordinary income to capital gain. Could such planning be minimized by the government increasing the capital gains inclusion rate from 50 per cent to, say, 66.67 per cent or 75 per cent? Certainly. And such increases are not without precedent before they were reduced again to 50 per cent in 2000. I really hope the government doesn't do this but the temptation to do so might be large given the current economic conditions and the disparity in tax rates.

I stand by the above comment. I really hope the government will not tinker with capital gains inclusion rates but I'm afraid they might.

2. A Review of the Taxation of Business Income Earned by Canadian-Controlled Private Corporations

One of the most controversial aspects of the 2016 Budget for private business owners was the changes to the small business deduction for Canadian-controlled private corporations (CCPC). As the tax community woke up to the breadth, depth, and complexity of the changes, one thing became clear: the taxation of business income earned by CCPCs needs to be re-thought. Given that access to the small business deduction is now significantly restricted and subject to a VERY complex set of entitlement rules, should the whole regime be scrapped in favor of something simpler? In my view, the time is ripe to take a fresh look at the taxation of business income earned by CCPCs and it wouldn't surprise me if the Department of Finance agrees.

3. Continued Elimination of Transactions that are Aggressive or Artificial

Over the last number of federal budgets, there have been a whole bunch of new rules introduced that attempt to shut down transactions or plans that were thought to be artificial and produce inappropriate tax results. The "synthetic disposition" rules, 10/8 life insurance rules, life insurance policy transfer rules, character conversion rules, back-to-back loan rules and a whole host of others have been recently introduced. My prediction is similar shutdowns will continue. There are a number of transactions that are still in existence are likely in the target sights of the Department of Finance. I'll decline to accept your invitation to specifically identify which ones, but suffice it to say, the smart people at the Department appear to be constantly scouring the marketplace for inappropriate or artificial types of transactions and I'm guessing we'll see some more enter the scrap heap.

4. Changes to Canada's Voluntary Disclosure Program

In April 2016, the government established The Offshore Compliance Advisory Committee. Its mandate was to provide advice to the Minister of National Revenue and to the Canada Revenue Agency on administrative strategies to deal with offshore compliance. Earlier this month, the Committee released its first report, which provides background and the Committee's recommendations in respect of Canada's Voluntary Disclosures Program (VDP). The report is an interesting read. One of the key sections of the report is the recommendation that full relief from penalties should not be available under certain circumstances. Below is an extract from the report that is, in my opinion, revealing:

The following is a partial list of circumstances that, in the Committee's view, should cause a taxpayer's relief from interest and penalties to be reduced:

  1. deliberate or wilful default or carelessness amounting to gross negligence,
  2. active efforts to avoid detection through the use of offshore vehicles or other means,
  3. large dollar amounts of tax avoided,
  4. multiple years of non-compliance,
  5. repeated use of the VDP by a taxpayer who meets clarified requirements for repeated use (see item 2 below),
  6. sophisticated taxpayer,
  7. taxpayer's disclosure motivated by CRA statements regarding its intended focus of compliance or by broad-based CRA correspondence or campaigns,
  8. avoidance transactions were undertaken or continued after implementation of the Common Reporting Standard, or
  9. any other circumstance in which a high degree of taxpayer culpability contributes to the failure to comply.

Relief could be reduced by increasing the period for which full interest must be paid or by denying relief from civil penalties.

Given the above, can we expect changes to Canada's VDP program? Short answer... yep. While these changes may simply be administrative changes that don't require any legislative amendment, my prediction is we'll see significant changes to Canada's VDP program. If you're one of Canada's taxpayers who can relate to the above list of circumstances outlined by the Committee, you might want to take action now.

5. Continued Changes to Personal Tax Credits

Regular readers of our tax blog will know that I am not a fan of the buffet of personal tax credits that have been introduced over the years and are often politically motivated. I was hopeful that the new federal Liberal government would stop the introduction of such nuisance credits. Unfortunately, that was not the case. While some were taken away, a new teacher school supply personal credit was introduced in 2016... sigh. I'm guessing that we'll see the introduction of more of these in the next budget. Which ones? Well, as I said in my 2016 Federal Budget prediction blog:

What are my guesses for such credits? Well, take your pick... it could really be anything. The "Those Affected by the Decline in Oil Prices" personal tax credit would be novel. In a recent silly New York Times article, apparently, Canadians are now hip after the election of the Liberal Government. In that vein, perhaps "hip" Canadians should be entitled to the new "hipster" personal tax credit. Maybe we could even get one of Canada's favorite rock bands, The Tragically Hip, to endorse such a new personal tax credit. I could go on... but comedy is best left to comedians and not (slightly) opinionated tax professionals.

Again, I stand by what I wrote.

6. Changes to US Taxation That Will Impact Cross-Border Planning

My colleague recently wrote the following with respect to pending US taxation changes as a result of the Trump presidency:

President-elect Trump's tax platform calls for significant changes to the US tax system for individuals such as reducing the number of tax brackets and repealing the estate tax. On the business tax side, his plan includes reducing the US corporate tax rate from 35 per cent to 15 per cent, providing a current deduction for capital investments and eliminating many current corporate tax deductions including interest.

If the new US regime is successful in implementing some or all of the proposals, then US citizens residing in Canada, Canadian businesses wishing to expand to the US, American businesses wishing to expand into Canada, and many estate plans for Canadians who have US interests and Americans who hold Canadian interests will need to be significantly rethought. My prediction: there will be significant US taxation changes that will force many Canadians to react. Whether the Canadian government is also forced to react will be fun to watch. If some of the US tax changes are as dramatic as proposed, Canada would be foolish to not react in some way.

Well, there you go. I can't wait to discuss the above with my family... if you're chatting with them before me, don't ruin the surprise!

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kim G.C. Moody
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