Federal Tax Measures – Items to Watch
Let’s look at the Liberal party promises that could affect taxpayers. The Liberal party platform does not propose any general corporate or personal income tax or GST/HST rate changes. Key tax initiatives in the Liberal party platform would:
• introduce a 3% digital services tax on large multinational corporations with an on-line presence in Canada
• limit the amount of interest that certain corporations can deduct
• reduce the corporate tax rate by 50% for companies that develop and manufacture zeroemission technology and products
• limit tax benefits from hybrid debt mismatch arrangements
• increase the basic personal amount gradually to $15,000 by 2023
• introduce a federal speculation and vacancy property tax
However, given that it is a minority government, the Liberals will require the support of another federal party to enact their proposals. As a result, it is unclear whether all of their proposals will be implemented, and to what extent compromises or modifications must be made to the proposals and other policies to gain the support of another party in the House of Commons.
In detail: Business tax measures
1. Digital services tax:
To ensure that international digital corporations, whose products are consumed in Canada, pay their fair share of tax in Canada, the Liberals plan to introduce a 3% tax, effective April 1, 2020, on the Canadian revenues from: targeted advertising services, digital intermediation services, for businesses with worldwide revenues of at least $1 billion and Canadian revenues of more than $40 million. PWC observes: This 3% tax is modelled after the digital services tax recently enacted by the French government. It is expected to apply only to a limited number of multinational technology companies.
2. Interest deduction limitations:
The Liberals plan to limit the amount of interest that a corporation can deduct for a year to no more than 30% of its income for the year before interest, taxes, depreciation and amortization (EBITDA); interest above the 30% threshold may be allowed as a deduction if the corporation is part of a corporate group and the worldwide ratio of total net third party interest expense to EBITDA exceeds the 30% threshold. The proposal allows for denied interest deductions to be carried back three years or forward twenty. PWC observes:
This represents a significant change to the Canadian interest deductibility rules. For many taxpayers, particularly Canadian multinationals, this will result in denied interest deductions.
3. Corporate tax rates for clean technology companies:
The Liberals propose to reduce the corporate income tax rate on eligible activities for clean technology companies by 50% over three years (i.e. from 9% to 4.5% [small business rate] and from 15% to 7.5% [general corporate rate]).
4. Hybrid debt mismatch arrangements:
The Liberal party platform states that it will “modernize antiavoidance rules to stop large multinational companies from being able to shop for lower tax rates by constructing complex schemes between countries.” The main proposal of the Liberals in this respect is to limit hybrid debt mismatch arrangements, which are cross-border transactions that exploit differences in tax laws in two or more jurisdictions, to bring Canada fully in line with the OECD’S recommendations on hybrid debt mismatch arrangements. PWC observes: An introduction of anti-hybrid rules will necessitate a review of payments made by Canadian taxpayers to non-residents or received by Canadian taxpayers from non-residents. For example, when a Canadian taxpayer makes interest payments to a non-resident, it will be necessary to understand the tax treatment of that payment in the foreign jurisdiction. The rules could add significant complexity as it may be necessary to also have an understanding of payments between foreign persons that could be directly or indirectly linked to the payment made by the Canadian taxpayer.
MORE INFORMATION: pwc.com/ca/en/services/tax/publications.html