The Canada Revenue Agency rolled out a list of changes for its 2017 budget. Many of these changes have been pushed through by a liberal administration, although others are a clear nod to efforts by federal and provincial governments attempting to crack down on tax shelters and tax avoidance.
Notable CRA Changes
Small businesses receive a small boost beginning on Jan. 1, 2018, when their business deduction is set to increase to 18 percent. The rate will climb to 19 percent effective Jan. 1, 2019.
The Income Tax Act was amended to cut down on deductions related to Canadian exploration expenses (CEE). Traditionally, CEE were 100 percent deductible for all oil and gas exploration in the year in which expenses were incurred. These deductions have been a major source of tax relief for energy corporations. As proposed in 2015 in the liberal party’s election platform, starting in 2017, only those oil and gas expenses related to unsuccessful drilling qualify for a CEE deduction.
Renewable energy expenses (CRCE) related to drilling geothermal resources will be eligible for a 100 percent deduction as long as the expenses are incurred after March 21, 2017, and at least 50 percent of the depreciable property is used in the geothermal project. Along similar lines, adjustments have been made to capital cost allowances (CCA) for equipment used for electricity generation. Any such equipment acquired after March 21, 2017, is eligible for an accelerated CCA as long as it is used for generating heat or a combination of heat and electricity.
In June 2017, the CRA floated significant changes to the Voluntary Disclosure Program (VDP). The proposal included a limitation on eligibility under the VDP and decreasing potential relief. The Agency adopted these changes the following month, although they will not become effective until Jan. 1, 2018. A release stated that “the Government of Canada is cracking down on tax cheats and those who avoid their obligations.”
Changes to the VDP echo the conclusions resulting from the 2015 Guindon v. Canada decision, namely that significant tax penalties will be more difficult to avoid in the future for those who skirt the edges of CRA rules.
Starting with the tax year beginning March 21, 2017, Canadian corporations may use the mark-to-market method for valuing derivative assets. This means unrealized gains and losses will accrue at the end of the tax year.
The CRA offers informational videos about key changes in its programs and initiatives. If you’re interested, check out the CRA website and click on the video and webinar section.
Advice to Affected Clients
Prior to 2017, oil and gas clients were able to redesignate a significant amount of expenses as CEE, away from Canadian development expenses, or CDE, which only receive a 30 percent deduction. The serious squeeze placed on CEE makes planning for exploration more difficult, since the CDE/CEE designation very much depends on the outcome of the exploration. Client companies might be advised to accelerate their drilling projects to before 2019, when the historical CEE definition goes away.
Changes to the VDP must be communicated to any client who may have omitted key data to the CRA. The mood among Canada’s tax authorities appears to be more strict than in past years, so it’s important for accountants and advisors to tread carefully around aggressive tax planning strategies that might be misconstrued as tax avoidance. This is clearly a priority for Minister of National Revenue Diane Lebouthillier.