“We know what this budget is intended to do,” said Vern Krishna, a tax law professor at the University of Ottawa Faculty of Law - Common Law Section. “It’s the budget that’s the union of two parties; and it’s intended to safeguard the minority government.”
Application of General Anti-Avoidance Rule to tax attributes
The issue of corporations paying lower taxes by becoming non-Canadian-controlled private corporations “has been around for at least a decade,” said Krishna.
The Canada Revenue Agency (CRA) taxes Canadian-controlled private corporations (CCPCs) at a higher rate, on both investment income and capital gains, than it does foreign-controlled entities, Krishna explained. For this reason, some corporations have tried to convert to non-CCPCs in order to enjoy preferential tax rates.
The CRA has now launched an audit project to effectively stop this practice, and now “the government wants to invoke GAAR … to deny the tax benefit,” Krishna told The Lawyer’s Daily.
The General anti-Avoidance Rule, or GAAR, is intended to prevent abusive tax avoidance transactions. Budget 2022 “proposes to amend the Income Tax Act to provide that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes,” the budget reads.
This leaves “considerable doubt and uncertainty” regarding the type of transaction that could be affected, and the scope and reach of GAAR itself, said Krishna, who estimates the matter could be litigated for 10 to 15 years, from the date of release of the CRA’s audit to challenges in the Tax Court, and possibly proceeding to the Federal Court of Appeal and up to the Supreme Court of Canada, with leave. In the meantime, the consequences will be that taxpayers — corporations — that are assessed as CCPCs will have to pay the higher tax rates, or pay substantial interest charges.
“It’s easy to announce these measures with great gusto,” Krishna said, adding he fears government doesn’t “truly understand the implication of that which they’ve announced in general terms.”
Canada Recovery Dividend and corporate tax
Two significant budget proposals target large banks and insurance companies; the first, the temporary Canada Recovery Dividend, would be a one-time tax of 15 per cent on taxable income above $1 billion for the 2021 tax year. The second measure would permanently increase financial institutions’ corporate income tax rate from 15 per cent to 16.5 per cent.
However, “it’s not only banks and life insurance companies that made over a billion dollars last year,” said David Macdonald, senior economist for the Canadian Centre for Policy Alternatives. “They make up 10 of the 51 publicly listed companies in Canada that made over $1 billion last year, and so only 20 per cent of companies that made over $1 billion last year will be part of this one-time tax.”
The biggest group of companies that made over $1 billion last year were oil and gas companies, Macdonald said, which profited from record-high gasoline prices. Rising food prices are another big driver of inflation, he added, which grocery retailers are also profiting from.
Oil and gas companies also pay provincial royalties, in addition to income tax and levies, noted Mark Agnew, senior vice-president of Policy and Government Relations at the Canadian Chamber of Commerce in Ottawa.
Investment tax credit for carbon capture, utilization, and storage
This tax credit available to businesses for carbon capture, utilization and storage (CCUS) is “the biggest single line item in the environment section,” says Macdonald. However, he adds, “carbon capture storage is the least efficient way to reduce carbon emissions. It’s very expensive per tonne of CO2” emitted.
Krishna is also skeptical. “We have a long history of giving tax credits that do not produce the desired result,” he said, citing a long-ago credit of $1.04 for every dollar spent drilling a hole to produce oil, whether it produced oil or not. “That was a time when we liked to have [fossil] energy produced; it was a different era.”
Agnew is more sanguine. "A lot of the 2030 climate plan relies on reductions in emissions from the oil and gas sector, and therefore CCUS is a critical tool."
Phaseout of small business tax
Budget 2022 proposes to phase out access to the small business tax rate gradually, with access to be fully phased out when taxable capital reaches $50 million, rather than at $15 million.
“That was one of the ones unexpected in a good way in the budget,” said Agnew; “we’re happy to see that included.”
Competition Act
As anticipated, Budget 2022 announced legislative amendments to the Competition Act as “a preliminary step” in modernizing Canada’s competition regime.
“What you're seeing in Europe and the United States is an increasing push [toward] bringing in stricter competition rules for the kind of digital economy” we now have, Agnew said, and hence the government’s broad review of the Competition Act. In addition to looking at competition in relation to the digital economy, the government evidently anticipates making “a number of … tweaks around the penalties” for price fixing, drip pricing and wage fixing issues as part of the Budget Implementation Act, part one, he added.
Government House Leader Mark Holland has said debate on the budget will continue on April 25- 27, after which the budget implementation bill will be up for a debate of its own.
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