11/04/22

CANADA: Federal budget proposes new anti-avoidance measure to deter offshoring of private corporations.

As published on step.org/industry-news, Monday 11 April, 2022.

Canada's 2022 federal budget proposes to deter the shifting of Canadian-controlled private corporations (CCPCs) to foreign jurisdictions to avoid tax on investment income.

Department of Finance Canada says that some business owners are manipulating their CCPC status to avoid paying the additional refundable corporate income tax that they would otherwise pay on investment income earned in the businesses. This is done either by moving a corporation into a foreign low-tax jurisdiction, by using foreign shell companies or by moving passive portfolios to an offshore corporation.

Budget 2022 therefore includes a measure to impose the ordinary CPCC tax regime on investment income earned and distributed by private corporations that have used these stratagems, thereby nullifying the tax advantage of offshoring. The clause will take effect for tax years ending on or after 7 April 2022 and is expected to generate extra tax revenues of CAD4.2 billion over five years.

The budget also proposes to extend the general anti-avoidance rule (GAAR) to transactions that ‘affect tax attributes that have not yet been used to reduce taxes’. The GAAR system works by classifying certain transactions as 'abusive tax avoidance', in which case the unfairly created tax benefit is refused. In the meantime, the government is preparing a broader consultation paper on reforming the GAAR. A consultation will be held in the coming months and legislative proposals will be tabled by the end of 2022.

The government has also proposed to introduce further measures to deter 'property flipping', through which investors buy and sell a property within a short period to make a profit. In future, a person who sells a property they have held for less than 12 months would be subject to full taxation on their profits as business income. This would apply to residential properties sold on or after 1 January 2023. Exemptions would apply for Canadians who sell their home due to death, disability, divorce, the birth of a child or a new job.

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