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KPMG Canada delivered highlights from the 2014 Federal Budget minutes after the budget was released on February 11, 2014. kpmg.ca/budget2014
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2014 Federal Budget Highlights
February 11, 2014
kpmg.ca/budget2014
1 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Tax Highlights
Tax changes once again focused on “closing loopholes” Trusts and estates Insurance companies and financial institutions operating offshore Back-to-back loan arrangements with non-residents
No tax rate changes, no broad-based personal tax changes
Canada’s response to OECD’s 15-point action plan on base erosion and profit shifting highlighted
2 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Trust and Estate Tax Changes
Elimination of graduated tax rates for testamentary trusts
More flexibility provided for donation tax credits for gifts made under a will
Immigration trusts eliminated
3 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Personal Tax Changes
Targeted personal tax amendments
Tax on split income (“kiddie tax”)
Minimal tax credit enhancements
4 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
New Consultation Proposals
NPOs
Review of whether income tax exemption properly targeted
Sufficiency of reporting also to be reviewed
Eligible capital property (ECP)
Review of ECP regime and potential repeal in place of CCA proposals
5 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
OECD Base Erosion & Profit Shifting (BEPS) Initiative
July 19, 2013 – OECD presents BEPS 15-point Action Plan to G20 finance ministers
Action Plan encompasses 4 categories of focus
Structural rule changes Aggressive tax planning and abuse of system Transfer pricing Methodology
September 2014 – first major deadline for expected outputs
6 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Canada’s BEPS Action Plan
Budget proposes 120-day consultation period on issues relating to international tax planning by multinational enterprises
Specific questions posed by Finance
Impact of such planning on other taxpayers
Prioritization of15 OECD recommendations
Determination of approach to respond to issues
7 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Treaty Shopping Proposals
Finance’s commentary period on treaty shopping consultation paper ended December 2013
In response, budget outlines proposed domestic rule to address treaty shopping
Main purpose test
Conduit presumption
Safe harbours
Rule to be included in Income Tax Conventions Interpretation Act
60-day consultation period
8 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Examples – Domestic Treaty Shopping Rule
Non-Treaty Parent
Canco Canco
Royalty income subject to 25% w/h tax
Non-Treaty Parent
Treaty Sub Royalty income subject to 0% w/h tax
Assignment of royalty license
Facts supporting conduit presumption: Treaty Sub remits 80% of royalties to Non-Treaty Parent within 30 days of receipt
9 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Examples – Domestic Treaty Shopping Rule
Treaty Sub
Canco
Dividend income subject to low w/h tax rate
Facts supporting conduit presumption: Treaty Sub required to distribute entire dividend to Non-Treaty Parents immediately after receipt
Non-Treaty Parent
Non-Treaty Parent
10 © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Other International Tax Measures
Captive insurance companies
FAPI rules to be extended to include insurance of foreign risks swapped for Canadian risks
Regulated banks
FAPI rules to be extended to entities that are not true financial institutions
Thin cap back-to-back rules
New anti-abuse measures aimed at loans made through an arm’s length intermediary to avoid thin capitalization rules
Thin cap rules and withholding tax to apply to interest as if loan made by related non-resident
KPMG CONFIDENTIAL
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
For more information, please visit: kpmg.ca/budget2014
Marlene Cepparo Partner-in-Charge, National Tax KPMG LLP E. [email protected] T. 416.777.8250 Heather O’Hagan Partner, International Tax KPMG LLP E. [email protected] T. 416.777.8095 Greg Bell Partner, KPMG Enterprise and M&A Tax KPMG LLP E. [email protected] T. 613.212.2800
