[February 12, 2014]

Grant Thornton: 2014 Federal budget sets the stage for next year's election

Today Finance Minister Jim Flaherty presented a budget that can best be described as low-key, as the Conservative government opted to stay the course towards a balanced budget in 2015 during the lead-up to a federal election. With many of the budget's key deliverables leaked in advance, no surprises were revealed and what was tabled followed Grant Thornton's (News - Alert) assertion that the government would focus on "closing loopholes" instead of conferring significant tax breaks or committing to new spending.

"Today's budget is in line with our expectations", said Keith MacIntyre, National Leader, Tax, Grant Thornton LLP in Canada. "The government is banking on employment to spur economic growth, there are no new taxes on families and businesses, and balancing the 2014 budget will largely rely on freezing departmental budgets. This is a bit of a non-budget in terms of impacts on Canadian businesses and business owners."

More forceful measures to support the competitiveness of Canada and Canadian businesses will likely be announced next year as the Conservatives gear up for an election and seek to shore up voter support.

"The most significant personal tax measure in the federal budget is the eventual elimination of the graduated rate taxation of trusts and estates," commented Paul Coleman, National Leader, Succession and Estate Planning, Grant Thornton LLP. "The government announced that it plans to proceed with most of the measures introduced in the June 3, 2013 consultation paper - this is a major change in the taxation of testamentary trusts and estates and it will have a significant impact on current and future tax planning using trusts."

Grant Thornton has released a detailed summary of the tax measures that were announced in this budget:

Personal measures

The budget proposes to:

• Expand the "tax on split income" to situations where a minor is allocated income from a partnership or trust that is derived from business or rental activities conducted with third parties; and
• Eliminate the 60-month exemption rule for non-resdent trusts.

The budget proposes to:

• Change the rules for charitable donations made in a person's will; and
• Deny registration to a charity or revoke a charity's status if it accepts a donation from a foreign state known to sponsor terrorism.

International tax measures

The budget proposes to:

• Amend the rules for certain captive insurance arrangements;
• Add new conditions that a business must satisfy to qualify for the regulated foreign financial institution exception under the Foreign Accrual Property Income (FAPI) rules;
• Task the government with conducting a consultation on tax planning by multi-national enterprises and on a proposed rule to prevent treaty shopping; and
• Implement a new reporting regime whereby the government will proceed with the automatic exchange of information for tax purposes under Foreign Account Tax Compliance Act (FATCA) (Canada-US agreement was signed on February 5, 2014).

Business measures

The budget proposes to:

• Reduce remittance frequency for source deductions for certain businesses;
• Implement tax incentives for clean energy generation; and
• Introduce a consultation process to repeal the eligible capital expenditure rules and replace it with a new Capital Cost Allowance (depreciation for tax purposes) class

There are some noteworthy spending announcements to create long-term economic advantages for Canada. The budget revealed that the government will provide an additional $500 million over the next two years to top up Canada's Automotive Investment Fund, as well as $1.5 billion over the next decade for the new Canada First Research Excellence Fund to help post-secondary institutions excel globally in research areas. Also included was $40 million for the Canadian Accelerator and Incubator Program to assist entrepreneurs to create new companies.

"Overall, the government's 2014 budget is more interesting for what's not included," said Mr. MacIntyre. "We think the bigger story is what's on the horizon - specifically base erosion and profit shifting (BEPS) and treaty shopping. At Grant Thornton we believe that these issues will receive more attention as the year goes on. A key question that will be asked is - are companies paying their fair share?"

Note to editors

Grant Thornton released a post-budget summary on February 11. More detailed commentary will follow in the days ahead, including a free budget webinar at 12 pm ET on February 12.

About the Grant Thornton tax practice

Whether it's domestic, cross border or international tax issues, or understanding changes to the domestic and international legislation and regulatory environment, Grant Thornton LLP tax experts have experience working with clients across all sectors. And with offices located from coast-to-coast and as a member firm of Grant Thornton International Ltd, our team can help you almost anywhere you're located.

About Grant Thornton in Canada

Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. We help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member and correspondent firms operate in over 100 countries worldwide.

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