Top firms propose tax changes

PwC’s recent report, ‘Paying Taxes 2011’, explains that business tax rates in Canada hit a low of 29.2% last year, down from 49.1% in 2006. This helped our global total tax rate ranking leap from 103 in 2009 to 37 in 2010 (out of 183 countries). Canada ranks tenth in overall ease of paying taxes—based on number of tax payments, the time it takes to comply and total tax rate—making it the only G20 economy in the top 10.

PwC’s proposals also include a call to provide Canadian business with better access to foreign markets. Specifically, the government should increase its efforts to enter into trade agreements and tax treaties with emerging markets in Asia, South America and Africa.

“PwC is urging the Finance Minister to commence negotiations to sign a tax treaty with Hong Kong, the gateway to Asia and a hub for many Canadian businesses with interests in that part of the world,” says Nick Pantaleo, PwC’s Canadian national tax services leader. “Canadian companies should have the ability to keep pace with foreign competitors of countries that already have agreements with Hong Kong.”

PwC also recommends the federal government take a more proactive stance against currency value manipulation by joining other governments in their efforts to put pressure on countries artificially depressing the value of their currency to maintain growth.

“The manipulation of currency value is short-lived and disruptive to the international marketplace, making Canada’s exports more expensive,” says Pantaleo.

Among PwC’s other key recommendations is a call to reduce the red tape and costs associated with income tax reporting. Administration costs have spiked largely due to the widening of the range of financial and other information Canadian taxpayers are required to report for income tax purposes. But for most taxpayers, these changes have not borne fruit in the form of quality audit results and quicker reporting times.

“We recommend that there be a review of the existing information reporting requirements and if they can’t be traced to improved tax administration processes they should be eliminated and avoided in the future if real benefits cannot be established,” Pantaleo says.

Tax reforms needed to support family succession

Raymond Chabot Grant Thornton has sent the Ministry of Finance and Finances Québec its recent report titled, ‘Business Transfers: Problems and Suggested Solutions’, which proposes major reforms aimed at facilitating business transfers within families.

“If there is one necessary condition to Quebec and Canada’s economic success, it would be the competitiveness of our businesses. To support and encourage this competitiveness, we must ensure the prosperity of our business successors. This has, unfortunately, not been the case, because of tax provisions that do not favour business transfers to family members,” says RCGT president and CEO Jean Robillard.

“Our current tax system favours the transfer of a business to a third party over family members. Changes are needed,” Robillard adds.

The government needs to act more decisively in support of entrepreneurship, the report argues, as the entrepreneurial business rate has been decreasing for the past 20 years across Canada, and entrepreneurial businesses in Quebec will suffer a 13.9% decrease by 2018.

“If we consider Quebec government forecasts that the number of Quebec business owners will plummet by 25, 200 in the next 10 years (20,200 of which between 2013 and 2018), there is cause for concern,” says Jean Gauthier, tax partner at RCGT.

The report suggests significant changes to section 84.1 of Canada’s Income Tax Act would go a long way toward stimulating entrepreneurship.

According Gauthier, “This section of federal legislation and its Quebec equivalent consider capital gains as a deemed dividend when an individual disposes of the shares of a company resident in Canada, for a cash consideration, to another company that is not dealt with at arm’s length and when the company whose shares were sold is connected to the buyer after the transaction. This tax rule prevents the individual from benefiting from the capital gains deduction.”

The report suggests ten solutions for counteracting the tax disadvantage affecting family business transactions. Suzanne Landry, RCGT academic partner and HEC Montreal tax professor, says these solutions would resolve the disconnect between “the reality of the business world and the current tax system by proposing changes to tax laws that would encourage intergenerational business transfers that meet a criterion of economic reality.”

The recommendations include exemptions from section 84.1 of the Income Tax Act for: business transfers between brothers and sisters; the first $750,000 capital gain on the disposition of shares; and dispositions of shares for which a succession plan is recognized.

“At the dawn of a Quebec entrepreneurship strategy, changes to our tax legislation are indispensable to ensure the growth and competitiveness of our local businesses,” concludes Jean Robillard.