On 19 March 2019, Finance Minister Bill Morneau tabled in the House of Commons the Liberal Government’s Budget 2019.

This budget focuses on continued economic growth, job creation, support for first-time home buyers, investments in cleaning up the environment, improving relations with Canada’s Indigenous Peoples, and a new national pharmacare initiative — all with the aim of supporting and building Canada’s middle class.

Update on the Base Erosion and Profit Shifting Project

The Canadian Government is committed to safeguarding tax system and to that end continues to be an active participant in the Organisation for Economic Cooperation and Development/Group of Twenty (OECD/G20) project known as the Base Erosion and Profit Shifting (BEPS) initiative.

Country-by-Country Reporting

Large multinational enterprises in Canada and elsewhere are now required to file country-by-country (CbC) reports that include information on their global allocation of income and taxes, as well as the nature of their global business activities. These reports are exchanged between the Canada Revenue Agency (CRA) and other tax authorities with whom Canada has the required exchange agreements in place.

Country-by-country reports are an important tool in combating Base Erosion and Profit Shifting (BEPS) by providing the CRA and other tax authorities with new information to better assess transfer pricing risks. The first exchanges of these reports took place in 2018. Canada is now participating in an OECD review of the standard for these reports to ensure that they provide tax administrations with better information that allows for proper assessment of transfer pricing and other BEPS risks. This review is scheduled to be completed in 2020.

Multilateral Instrument

The multilateral convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (known as the Multilateral Instrument or MLI) is an important tool in facilitating a number of the measures developed under the OECD/G20 BEPS project, and in combating international tax avoidance. The MLI is intended to allow participating jurisdictions to modify their existing tax treaties without having to individually renegotiate those treaties. Canada, along with another 86 jurisdictions to date, is a signatory to the MLI. The Canadian Government is taking the necessary steps to enact the MLI into Canadian law and to ratify the MLI as needed to bring it into force.

Strengthening Canada’s International Tax Rules

The Government is also taking action to protect the integrity and improve the fairness of Canada’s international tax system. This system includes rules to prevent taxpayers from avoiding Canadian income tax by shifting property income into foreign resident corporations. It also includes rules aimed at ensuring that non-residents pay their fair share of tax on income derived from Canadian sources.

To further strengthen Canada’s international tax rules, the Government proposes 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 (i.e., rules that apply to certain international transactions) 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.
• 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.

Order of application of the transfer pricing rules

Budget 2019 proposes a new measure relating to the relationship between the transfer pricing rules in section 247 with other provisions in the Act. Where both the transfer pricing rules and another provision of the Act may apply to the same amount that is relevant to the computation of tax, questions have arisen as to whether adjustments under the transfer pricing rules are made in priority to the application of other provisions. This may have various implications, including with respect to the applicability of penalties under 247(3).

Budget 2019 proposes to add a new provision intended to clarify that section 247 transfer pricing rules in Part XVI.1 apply in priority to the application of the provisions in other parts of the Act, including the provisions relating to income computation in Part I. The current exceptions to the application of the transfer pricing rules that pertain to situations in which a Canadian resident corporation has an amount owing from, or extends a guarantee in respect of an amount owing by, a controlled foreign affiliate will continue to apply. This measure will apply to taxation years that begin on or after 19 March 2019.

Small Business Deduction—Farmers and Fishers

Currently, certain relief is given to Canadian-controlled private corporations carrying on farming or fishing business from the tax rules designed to prevent the multiplication of the small business deduction. Budget 2019 proposes to extend that relief to sales of farming products and fishing catches to any arm’s length corporation. This measure applies to taxation years that begin after March 21, 2016.

Closing Tax Loopholes

In each of its previous three budgets, the Government has taken action to ensure that Canada’s tax rules function as intended and that they do not result in unfair tax advantages for some at the expense of others. Budget 2019 continues this approach by proposing measures to close tax loopholes that can result in some people paying less than their fair share. Ongoing legislative adjustments help ensure the integrity of Canada’s tax system and give Canadians greater confidence that the system is fair for everyone.

To make Canada’s tax system more fair, Budget 2019 proposes to:

• Prevent the use by mutual fund trusts of a method of allocating capital gains or income to their redeeming unit holders where the use of that method inappropriately defers tax or converts fully taxable ordinary income into capital gains taxed at a lower rate.
• Improve existing rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains taxed at a lower rate.
• Stop the use of individual pension plans to avoid the prescribed transfer limits. These limits are meant to prevent inappropriate tax deferrals when individuals transfer assets out of certain types of pension plans.