Corporate tax cuts may not be as sweet as initially thought
Fine print contains tax measures that would save the feds about $600 million.
OTTAWA—Proposed corporate tax cuts announced by the Conservative government may not, in fact, be saving Canadian businesses $6 billion in tax revenues this year.
But one would only know by looking through the fine print of a new partnership tax deferral proposal so complicated it was ignored during budget coverage.
New tax deferral rules will apply to corporate partners that are entitled to more than a 10 per cent income allocation from a partnership per year.
And although the opposition parties have dissolved government and are headed to a May election, this won’t be the last time we’ll see the proposed tax deferral conditions, says Fred O’Riordan, national tax advisor at Ernst & Young.
“It doesn’t matter who wins the election in May, these conditions will be in the next budget,” he says.
Simply speaking, in Canada, partnerships aren’t taxable. The income or loss of a partnership is allocated to its partners who have to include the amount in calculating their own taxable income.
These new measures (on page 292 of the budget) will apply to corporate partners for a tax year only if the partner is a member of a partnership at the end of a taxation year. Corporations who have different fiscal year-ends will have a one-year tax deferral period to straighten out the books and pay taxes for income earned through corporate partnerships.
“The government suspected there’s an abuse in that structure,” says David Steignberg, CEO and tax partner at RSM Richter. “There was a tax structure in place, but it’s been taken advantage of as a tax deferral strategy. This new proposal is expected to eliminate those kinds of deferral strategies.”
The government has had these measures in place for individuals since 1995. The U.S. and U.K. adopted these kinds of deferrals years ago.
This year’s federal budget supposedly sought to continue a seemingly consistent federal regime of continued investment into small and medium-sized businesses and tax incentives for corporations. But these new partnership rules don’t fit that strategy.
By 2016, the proposal would save the feds $2.8 billion.
That represents about $600 million in tax revenues a year until 2016, or 10 per cent of the $6 billion the feds said they would lose this year by cutting corporate taxes.
But, not only did $600 million get hidden amongst the fine print, that $2.8 billion over five years also represents the biggest tax savings in this year’s budget.
O’Riordan says the proposal is actually cutting businesses some slack by spreading partnership tax payments over five years, increasing the percentage annually until a maximum of 25 per cent in 2015-2016.
“This proposal will show corporate partners that taxes aren’t to be avoided, they’re due, but the government is spreading the payments out so there isn’t a massive hit on companies required to pay,” he says.