Measures to stop schemers
Hidden offshore money, tax loopholes, targeted in bid to boost revenue
OTTAWA— The federal government is taking aim at tax loopholes and Canadians who hide money offshore as part of a bid to boost its revenue base.
The new budget measures include big rewards for snitching on Canadians who hide money offshore to ending tax schemes that companies and high-net worth individuals use to reduce their tax bill to eliminating the deduction for safety deposit boxes.
“Tax fairness is important to ordinary hard-working Canadians. To that end, we are taking additional actions today to close tax loopholes,” federal Finance Minister Jim Flaherty said in his speech on Thursday.
“Loopholes with strange names such as ‘synthetic dispositions’ and ‘character conversion transactions.’ Those are complex structured transactions that have allowed a select few to avoid paying their fair share of taxes.”
These changes will provide an estimated $315 million in tax savings this year, rising to over $1.2 billion in 2017, for a total of $4.4 billion over the next five years.
Making the tax system fairer for everybody is a good strategy, said Richard Monk, Canada advisor for the Society of Management Accountants of Canada.
“Closing these loopholes or balancing the base of taxation is a positive thing for the government to consider,” he said.
The government’s new Stop International Tax Evasion Program will enable the Canada Revenue Agency to pay individuals with knowledge of any major international tax evasion. (If CRA collects more than $100,000 in federal tax, it will share up to 15 per cent of the total with the informant.)
Financial institutions would also be obligated to report to CRA any international electronic fund transfers of $10,000 or more.
“This is a very important tool to the agency in tracking people that would avoid paying their fair share of Canadian taxes,” Flaherty said. The government will also crack down on arrangements that allow individuals to reduce their tax bills by borrowing from their life insurance policies. On the small business side, Budget 2013 proposes to reduce what’s known as the gross-up factor on dividends to 18 per cent from the current 25 per cent. The dividend tax credit would also be reduced. This would affect small business owners — not investors who receive dividends from large corporations. “It’s not really a loophole. It’s more of an inconsistency of the tax regulations,” said Bruce Ball, spokesperson for the Canadian Institute of Chartered Accountants. “It could affect a lot of companies. Anyone who’s operating a small business as a corporation and has paid dividends to family members, the tax rate will be higher.” The government lowered small business tax rates years go, but didn’t change the dividend tax credit, said Dan Kelly, president of the Canadian Federation for Independent Business. As a result, small business owners that use dividends — rather than a salary or bonus — to take money out of their company pay less tax. “It’s a technical tax change, however, it will have an impact on small firms. It will mean that dividends are higher taxed in 2014,” Kelly said. He added that businesses are pleased with other measures, such as the EI hiring credit and the increase to the lifetime capital gains exemption. “There’s enough good small business measures in the budget that we think will help compensate for the change he’s made to the dividend tax credit.” The budget also takes aim at other, more exotic, tactics known as losstrading and synthetic dispositions that allow companies to reduce their revenues and capital gains, and thereby pay less tax. The government also proposes to end the existing tax deduction for safety deposit boxes. “The importance of retaining paper copies of documents — either for income-earning or personal purposes — is declining as electronic records become the norm,” the budget document said.