Canada has introduced new tax breaks that enable businesses to immediately expense the full cost of machinery and equipment used in manufacturing or the processing of goods.
The tax concession, announced in Canada's 2019 Budget, is effective from 21 November 2018. It is the cornerstone measure in Canada's response to the release of the United States' tax reform law at the tail end of 2017, the Tax Cuts and Jobs Act.
Notable measures enacted in the US included a reduction in the headline rate of corporate tax from 35% to 21% and the introduction also of immediate expensing.
Rather than also slash its corporate income tax rate, the Canadian Government instead opted for a fiscally prudent approach. In delivering the Fall Economic Statement, Morneau noted that the US had moved forward with an "aggressive package of tax cuts for corporations" and that it had been urged to match those measures. Morneau said that tax cuts on such a scale would add considerably to Canada's debt. The Government has said the improved write-off and depreciation rules were preferable to a corporate tax rate cut as they will influence new investment decisions rather than provide tax relief for past ones.
In addition to the immediate expensing provisions, the Government announced that it would introduce an Accelerated Investment Incentive to support investment by businesses of all sizes and across all sectors. Under this provision, capital investments are generally eligible for a first-year deduction for the depreciation equal to up to three times the amount that would otherwise apply in the year an asset is put in use. It applies to all tangible capital assets and to intangible capital assets, such as patents and other intellectual property.
Other initiatives announced in the 19 March Budget included a focus on tackling tax non-compliance in the real estate sector. The Government has committed CAD50m (USD37.5m) over five years to the Canadian Revenue Authority to create four new dedicated residential and commercial real estate audit teams in high-risk regions, focusing in particular on British Columbia and Ontario.
These teams will focus on ensuring that:
• taxpayers report all sales of their principal residence on their tax returns;
• any capital gain derived from a real estate sale, where the principal residence tax exemption does not apply, is identified as taxable;
• money made on real estate flipping is reported as income;
• commissions earned are reported as taxable income; and
• for goods and services tax/harmonised sales tax purposes, builders of new residential properties remit the appropriate amount of tax to the CRA.
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Alongside these enforcement measures, the Government has announced support for taxpayers with saving for a deposit for a first house and for the costs associated with the purchase. The Government will increase the amount first-time buyers can withdraw tax-free from their Registered Retirement Savings Plan, from CAD25,000 to CAD35,000.
The other proposals in the Budget will reform Canada's international tax rules.
The Government Proposed to:
• Extend the foreign affiliate dumping rules in the Income Tax Act to prevent a corporation resident in Canada that is controlled by a non-resident individual or trust from reducing its tax payable by investing in a foreign affiliate;
• Introduce an ordering rule to ensure that the transfer pricing rules in the Income Tax Act apply before other provisions of the Act;
• Ensure that the term "transaction" has the same meaning in both the transfer pricing rules and the assessment rules in the Income Tax Act; and
• Prevent non-resident taxpayers from avoiding Canadian dividend withholding tax on compensation payments made under cross-border share lending arrangements with respect to Canadian shares.
The Budget includes meaningful improvements to tax conditions for businesses in Canada, which should sharpen the country's appeal. Announced in an election year, businesses and individuals alike will have to see what further tax promises emerge ahead of Canadian federal elections, to be scheduled for no later than 21 October 2019.