Canadian Tax Journal Revue Fiscale Canadienne

2019 ■ VOLUME 67, No 1

CANADIAN TAX JOURNAL REVUE FISCALE CANADIENNE

PEER-REVIEWED ARTICLES Non-Residents and Capital Gains Tax in Australia Richard Krever and Kerrie Sadiq

POLICY FORUM Editor’s Introduction—Reform of Corporate Taxation Kevin Milligan International Effects of the 2017 US Tax Reform— A View from the Front Line Peter Harris, Michael Keen, and Li Liu Is Accelerated Tax Depreciation Good or Misguided Tax Policy? Philip Bazel and Jack Mintz Business Tax Reform in the United States and Canada Ken McKenzie and Michael Smart

AWARDS Douglas J. Sherbaniuk Distinguished Writing Award / Prix d’excellence en rédaction Douglas J. Sherbaniuk Canadian Tax Foundation Regional Student-Paper Awards / Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité Best Newsletter Article by a Young Practitioner Award / Prix pour le meilleur article de bulletin par un jeune fiscaliste Canadian Tax Foundation Lifetime Contribution Award / Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle

FEATURES Finances of the Nation: Survey of Provincial and Territorial Budgets, 2018-19 Vivien Morgan Current Cases: (FCA) Canada v. 594710 British Columbia Ltd.; (TCC) Cameco Corporation v. The Queen Ryan L. Morris, Adam Gotfried, and Yongchong Mao International Tax Planning: Transfer Pricing and Transactions Between Foreign Entities Byron Beswick Personal Tax Planning / Planification fiscale personnelle : Income-Splitting Update / L’évolution du fractionnement du revenu Sean Grant-Young and Katie Rogers Current Tax Reading Alan Macnaughton and Jinyan Li ■ CANADIAN TAX JOURNAL EDITORIAL BOARD/ COMITÉ DE RÉDACTION DE LA REVUE FISCALE CANADIENNE

■ Editors/Rédacteurs en chef Brian Carr Kevin Milligan Thorsteinssons LLP University of British Columbia Alan Macnaughton University of Waterloo

■ Practitioners/Fiscalistes ■ University Faculty/Universitaires Brian J. Arnold Reuven Avi-Yonah Tax Consultant, Toronto University of Michigan Thomas A. Bauer Richard M. Bird Bennett Jones llp, Toronto University of Toronto Stephen W. Bowman Robin W. Boadway Bennett Jones llp, Toronto Queen’s University C. Anne Calverley Neil Brooks Dentons Canada llp, Calgary York University R. Ian Crosbie Arthur Cockfield Davies Ward Phillips & Vineberg llp, Toronto Queen’s University Cy M. Fien Graeme Cooper Fillmore Riley llp, Winnipeg University of Sydney James P. Fuller Bev G. Dahlby Fenwick & West llp, Mountain View, ca University of Calgary Edwin C. Harris James B. Davies McInnes Cooper, Halifax University of Western Ontario William I. Innes David G. Duff Rueter Scargall Bennett llp , Toronto University of British Columbia Sandra Jack Judith Freedman Felesky Flynn llp, Calgary Oxford University Scott Jeffery Vijay Jog KPMG llp, Vancouver Carleton University Howard J. Kellough Jonathan R. Kesselman Davis llp, Vancouver Simon Fraser University Heather Kerr Ernst & Young llp/Couzin Taylor llp, Toronto Kenneth J. Klassen University of Waterloo Edwin G. Kroft Blake Cassels & Graydon llp, Vancouver Gilles N. Larin Elaine Marchand Université de Sherbrooke Banque Nationale du Canada, Montréal Amin Mawani Janice McCart York University Blake Cassels & Graydon llp, Toronto Jack Mintz Thomas E. McDonnell University of Calgary Toronto Martha O’Brien Matias Milet University of Victoria Osler Hoskin & Harcourt llp, Toronto Suzanne Paquette W. Jack Millar Université Laval Millar Kreklewetz llp, Toronto Abigail Payne Michael J. O’Connor McMaster University Sunlife Financial Inc., Toronto Michael R. Veall Daniel Sandler McMaster University EY Law llp, Toronto François Vincent KPMG Law llp, Chicago www.ctf.ca/www.fcf-ctf.ca ■ 2019 VOLUME 67, No 1

Canadian Tax Journal Revue fiscale canadienne

1 Non-Residents and Capital Gains Tax in Australia richard krever and kerrie sadiq 23 Policy Forum: Editor’s Introduction— Reform of Corporate Taxation kevin milligan 27 Policy Forum: International Effects of the 2017 US Tax Reform— A View from the Front Line peter harris, michael keen, and li liu 41 Policy Forum: Is Accelerated Tax Depreciation Good or Misguided Tax Policy? philip bazel and jack mintz 57 Policy Forum: Business Tax Reform in the United States and Canada ken mckenzie and michael smart 67 Douglas J. Sherbaniuk Distinguished Writing Award / Prix d’excellence en rédaction Douglas J. Sherbaniuk 69 Canadian Tax Foundation Regional Student-Paper Awards / Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité 75 Best Newsletter Article by a Young Practitioner Award / Prix pour le meilleur article de bulletin par un jeune fiscaliste 79 Canadian Tax Foundation Lifetime Contribution Award / Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle 81 Finances of the Nation: Survey of Provincial and Territorial Budgets, 2018-19 vivien morgan 161 Current Cases: (FCA) Canada v. 594710 British Columbia Ltd.; (TCC) Cameco Corporation v. The Queen ryan l. morris, adam gotfried, and yongchon mao 187 International Tax Planning: Transfer Pricing and Transactions Between Foreign Entities byron beswick 209 Personal Tax Planning: Income-Splitting Update sean grant-young and katie rogers 235 Planification fiscale personnelle : L’évolution du fractionnement du revenu sean grant-young et katie rogers 263 Current Tax Reading alan macnaughton and jinyan li

■ v ■ canadian tax journal / revue fiscale canadienne (2019) 67:1, 1 - 2 2 https://doi.org/10.32721/ctj.2019.67.1.krever

Non-Residents and Capital Gains Tax in Australia

Richard Krever and Kerrie Sadiq*

PRÉCIS À de nombreux égards, l’imposition des gains en capital a évolué de façon semblable en Australie et au Canada. Les deux pays ont adopté un impôt fédéral sur le revenu pendant la Première Guerre mondiale, et leurs tribunaux ont interprété le terme « revenu », l’objet de l’imposition, à l’aide des notions juridiques du Royaume-Uni qui excluaient les gains en capital de l’assiette fiscale. Dans le dernier quart du 20e siècle, les deux pays ont modifié leur loi de l’impôt sur le revenu pour y intégrer les gains en capital et les deux appliquent des taux de faveur. Initialement, le régime australien d’imposition des gains en capital comportait des règles semblables aux règles canadiennes sur l’imposition des gains en capital réalisés par des non-résidents, et la liste des biens pouvant donner lieu à l’assujettissement à l’impôt sur les gains en capital des non-résidents était similaire dans les deux pays. L’Australie a changé sa position il y a un peu plus d’une décennie en décidant de limiter l’imposition des gains en capital des non-résidents uniquement aux gains des sociétés foncières et des sociétés détenant une majorité de biens-fonds (land‑rich companies), mais en élargissant la définition de « bien-fonds » (land) pour y inclure directement les intérêts liés comme les droits d’exploration et les droits miniers. Par conséquent, avant cette décennie, la réforme du régime australien d’imposition des gains en capital des non-résidents était axée sur la notion de source comme principal facteur, et réduisait graduellement les catégories des biens imposables. Toutefois, après plus d’une décennie marquée par la hausse des prix immobiliers sans précédent en Australie, la réforme s’est déplacée de la question de la source à celle de l’intégrité. En Australie, comme au Canada, on a assisté au cours des dernières années à une forte hausse des investissements par des non-résidents dans des biens, en particulier des biens résidentiels, et le gouvernement a cherché des moyens d’améliorer l’application et l’intégrité des règles d’imposition des gains en capital s’appliquant aux non-résidents disposant de biens immobiliers australiens. Depuis 2013, l’Australie a proposé trois mesures distinctes pour assurer l’intégrité dans ce régime : le retrait d’un taux de faveur, l’instauration d’une retenue d’impôt à la source, et le retrait de l’exemption pour

* Richard Krever is of the Law School, University of Western Australia (e-mail: rkrever@gmail .com). Kerrie Sadiq is of the Business School, Queensland University of Technology, Australia (e-mail: [email protected]). We wish to thank this journal’s editors and reviewers for their useful feedback and comments on this article. We also gratefully acknowledge the research assistance of Peter Mellor.

1 2 n canadian tax journal / revue fiscale canadienne (2019) 67:1 résidence principale pour non-résidents. Cet article porte sur l’histoire et l’évolution du régime d’imposition des gains en capital en Australie, du point de vue de son application aux non-résidents, et il traite du changement d’orientation récent, de ce qui est touché par les règles sur la source des gains en capital aux dispositions relatives à l’intégrité qui ont été adoptées pour répondre tant à des objectifs de conformité qu’à des objectifs géopolitiques.

ABSTRACT The evolution of capital gains taxation in Australia parallels that in Canada in many respects. Federal income taxes were adopted in both countries during the First World War, and in both jurisdictions the courts interpreted the term “income,” the subject of taxation, using United Kingdom judicial concepts that excluded capital gains from the tax base. In the last quarter of the 20th century, both countries amended their income tax laws to capture capital gains, and in both countries concessional rates apply. Initially, the Australian capital gains tax regime had rules that paralleled those in Canada in respect of the application of capital gains tax measures to non-residents, and the list of assets that might generate a capital gains tax liability for non-residents was similar in both countries. Australia changed course just over a decade ago with a decision to limit the income tax liability of non-residents in respect of capital gains to gains on land and land-rich companies alone, albeit with an extended definition of land to capture directly related interests such as exploration and mining rights. Consequently, until this decade, reform of Australia’s regime imposing capital gains tax on non-residents focused on the concept of source as a primary driver, with the categories of taxable assets being gradually reduced. However, after more than a decade of unprecedented increases in housing prices in Australia, reform has moved away from addressing source to integrity matters. In Australia, as in Canada, there has been considerable investment in property, particularly residential property, by non-residents in recent years, and the government has sought ways to enhance the enforcement and integrity of the capital gains tax rules applying to non-residents disposing of Australian real property. Since 2013, Australia has proposed three separate measures to ensure integrity within this regime: removal of a concessional rate, introduction of a withholding tax, and removal of the principal residence exemption for non-residents. This article considers the history and development of Australia’s capital gains tax regime as it applies to non-residents and examines the recent shift in focus from what is captured in the capital gains source rules to integrity provisions adopted to achieve both compliance and geopolitical objectives. KEYWORDS: CAPITAL GAINS n NON-RESIDENTS n TAX REFORM n AUSTRALIA n WITHHOLDING TAXES n PRINCIPAL RESIDENCE

CONTENTS Introduction 3 Income Gains and Capital Gains in Australia: A Short History 3 Non-Residents, Australian-Source Income, and Capital Gains Tax 9 Non-Residents and Withholding Tax in Australia 15 A Contemporary Model for Imposing Capital Gains Tax on Non-Residents 18 Conclusion 22

non-residents and capital gains tax in australia n 3

INTRODUCTION Historically, the debate surrounding the taxation of non-resident capital gains on Australian-source assets has focused on what constitutes a gain that is taxable in Aus- tralia. However, after more than a decade of unprecedented growth in residential real estate prices, the focus has shifted from what is caught to the notion of how to capture the tax payable on capital gains realized by non-residents, while also reducing tax concessions that encourage housing purchases by non-residents, which are perceived as fuelling the rise in housing prices. Following this introduction, section two of this article provides a short history of the taxation of income gains and capital gains in the context of Australia as compared with the Canadian regime. It provides the foundation for the discussion in section three, which presents a critical analysis of Australia’s approach to the taxation of capital gains prior to 2013. During that period, little attention was paid to the challenges of collecting taxes from non-residents and maintaining integrity within a regime that was designed to include in the tax base gains not captured under the traditional concept of income. In 2013, the government of the day sought to address these challenges by removing a concessional rate of tax on net capital gains realized by non-residents, introducing a new collection model in the form of a withholding tax, and proposing that the principal residence exemption for non-residents be removed. Section four discusses the factors underlying the introduction of a withholding tax on capital gains. Section five provides details of the new measures applicable to non-residents.

INCOME GAINS AND CAPITAL GAINS IN AUSTRALIA: A SHORT HISTORY Federal income taxation was adopted in Australia in 1915, two years prior to its adoption in Canada.1 The colonies that joined together to create the Common- wealth of Australia in 1901 had imposed income taxation that remained in place after federation, and from 1915 until 1936, taxpayers faced two income tax liabilities based on tax laws that were often substantially different. Building on the recommendations of a royal commission on taxation,2 the disparate state and federal laws were replaced with uniform income tax laws in 1936. The state and federal laws operated in parallel until 1942 when, following the Japanese bombing of Darwin in the north of the country, the federal government “temporarily” appropriated state income tax powers, in a manner similar to that of the Canadian government in respect of

1 The impact of the Australian federal tax on the adoption of federal income taxation in Canada is reviewed in Richard Krever, “The Origin of Federal Income Taxation in Canada” (1981) 3:2 Canadian Taxation 170-88. 2 See Australia, Royal Commission on Taxation, Report[s] of the Royal Commission on Taxation, first to fourth reports, August 28, 1933 to October 19, 1934 (Canberra: Commonwealth Government Printer, 1933-34) (Justice D. Ferguson, chair). 4 n canadian tax journal / revue fiscale canadienne (2019) 67:1 provincial income taxation.3 In contrast to subsequent developments in Canada, Australia’s central government never returned income tax space to the lower-tier governments. Consequently, individuals and companies only face a single income tax in Australia. The income tax law adopted in the 1936 statute4 remained in place, albeit often amended, until 1997, when it was partially replaced with a “plain English” law.5 Remaining parts of the 1936 law have gradually been shifted to the 1997 statute in the years since, though the transfer is still not finished, as day-to-day changes continue to occupy the time of tax drafters. In the very early years of Australian income taxation, when the tax was first adopted in the colonies prior to federation, there remained a question as to how broad the judicial concept of “income” subject to the tax should be. Judges considering the scope of the early taxes had two common-law models to choose from: a United Kingdom judicial concept that excluded from the income tax base capital gains in the trust-law sense (gains that would accrue to the interest of a capital or remainder beneficiary), and a United States judicial concept that rejected the trust-law distinction between income gains and capital gains as being irrelevant for income tax purposes, and considered that all gains were “income” for the purposes of the income tax. After some initial flirtation with the broader income concept, colonial judges had largely settled on the narrow UK concept by the time that federal income taxation was enacted,6 and the die had been cast for the national income tax law. The judicial concept of capital gains outside the income concept was far broader than the common international understanding of gains realized on the disposition of investment assets. In effect, capital gains became the default characterization for gains unless they satisfied the judicial tests of a severable receipt derived from the use of property, business activities, or the provision of services,7 or they were perceived to embody inherent income characteristics—namely, they were periodic, anticipated, and applied for purposes for which ordinary income would be used.8 Applying these principles, capital gains may include, but are not limited to, some discounts on debt,9 foreign exchange gains,10 payments for negative covenants,11

3 Richard Krever and Peter Mellor, “The Development of Centralised Income Taxation in Australia, 1901-1942,” in Peter Harris and Dominic de Cogan, eds., Studies in the History of Tax Law, vol. 7 (Oxford: Hart, 2015), 363-92. 4 Income Tax Assessment Act 1936 (herein referred to as “ITAA 1936”). 5 Income Tax Assessment Act 1997 (herein referred to as “ITAA 1997”). 6 See Peter Mellor, “Origins of the Judicial Concept of Income in Australia” (2010) 25:3 Australian Tax Forum 339-60. 7 See Philip Burgess, Graeme S. Cooper, Miranda Stewart, and Richard J. Vann, Cooper, Krever & Vann’s Income Taxation: Commentary and Materials, 7th ed. (Sydney: Thomson Reuters, 2012), at 77. 8 Federal Commissioner of Taxation v. Dixon, [1952] HCA 65. 9 Lomax (HM Inspector of Taxes) v. Peter Dixon & Son, Ltd. (1943), 25 TC 353 (CA). 10 Armco (Aust.) Pty Ltd. v. Federal Commissioner of Taxation, [1948] HCA 49. 11 Dickenson v. Federal Commissioner of Taxation, [1958] HCA 62. non-residents and capital gains tax in australia n 5 payments for the cancellation of contracts,12 payments for rights to exploit income- producing assets,13 and undissected compensation for lost assets, including inventory and depreciable property.14 The boundary between income gains and capital gains was at best cloudy and was muddied further by the inclusion in the judicial concept of income of amounts classified as such by ill-defined UK income tests, including gains on the sale of assets acquired for the purpose of resale at a profit, gains from adventures in the nature of trade,15 and gains from “profit-making schemes.”16 The scope of the latter was further confused by the UK decision in Leeming v. Jones,17 which appeared to constrain the scope of income from profit-making schemes, prompting the Australian legislature to insert a statutory measure explicitly adding these gains to assessable income.18 Ironically, a subsequent UK decision appeared to suggest that Leeming v. Jones was an anomaly, confirming the earlier understanding that these gains were included in the judicial concept of income.19 However, in Australia the separate statutory measure led to a debate lasting half a century over whether the statutory rule merely codified the income nature of such gains or expanded the income tax base by including in it a subset of capital gains.20 The introduction of a separate capital gains tax in the United Kingdom in 196521 coincided with ongoing debate in Australia over the merits of expanding the income

12 Californian Oil Products Ltd. (in Liq.) v. Federal Commissioner of Taxation, [1934] HCA 35. 13 Stanton v. Federal Commissioner of Taxation, [1955] HCA 56. 14 McLaurin v. Federal Commissioner of Taxation, [1961] HCA 9. 15 See, for example, the UK Income Tax Act 1842, 5 & 6 Vict., c. 35, schedule D, case I. Stephen Dowell, The Acts Relating to the Income Tax, 5th ed. (London: Butterworth, 1902), at 133 (https://archive.org/stream/actsrelatingtoi00pipegoog#page/n14/mode/2up). 16 Californian Copper Syndicate (Limited and Reduced) v. Harris (1904), 5 TC 159 (Scot. Ex. Ct.). 17 Leeming v. Jones (HM Inspector of Taxes) (1930), 15 TC 333 (HL). 18 See Income Tax Assessment Act 1930 (Cth), section 2, amending the definition of “income” in the Income Tax Assessment Act 1922, enacted on August 18, 1930, exactly six months after the Leeming v. Jones decision. The provision became section 26(a) of the ITAA 1936, later shifted to section 25A of that act by the Income Tax Assessment Amendment Act (No. 3) 1984 (No. 47 of 1984), enacted on June 25, 1984, before being shifted to section 15-15 of the ITAA 1997. An exclusion was added to section 25A in 1986 and carried over to section 15-15 stating that these provisions do not apply to a sale of property acquired on or after September 20, 1985, since the main capital gains provisions will apply from that time. The addition of this exclusion suggests that, at the time of amendment at least, the legislators regarded these gains as capital gains and not income gains, though an equally likely explanation is that they wanted to avoid doubt by specifying one characterization for tax purposes. 19 Edwards (HM Inspector of Taxes) v. Bairstow & Harrison (1955), 36 TC 207 (HL). 20 See Ross Waite Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (Sydney: Law Book, 1985), at 186-87, discussing, for example, Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, [1971] HCA 35. 21 See Philip Baker and Mark Bowler-Smith, “The United Kingdom,” in Michael Littlewood and Craig Elliffe, eds., Capital Gains Taxation: A Comparative Analysis of Key Issues (Cheltenham, UK: Edward Elgar, 2017), 335-62. 6 n canadian tax journal / revue fiscale canadienne (2019) 67:1 tax base to include some capital gains,22 but the discussion prompted no legislative reform. The trigger for the first important expansion of the income tax base occurred in 1969-70 with the dramatic increase in the price on the Perth stock exchange of shares in a mining company based in Western Australia (Poseidon NL),23 and widespread publicity about the ability of short-term speculators to reap enormous untaxed profits. The newly elected Labor government responded to the outcry with a statutory measure in 1973 that included in assessable income short-term gains realized on the disposition of assets within the first year following acquisition.24 In the background, the Asprey committee, a tax review committee commissioned by the previous coalition government, was undertaking a comprehensive review of Australia’s tax system, with reform of capital gains taxation emerging as a central theme of the study. Seeking to capitalize on public sentiment for a broader and fairer tax base, the government pressed the committee to release a preliminary report. As the government had hoped would be the case, the report released in 1974 favoured expansion of the tax base to include capital gains,25 and the government moved quickly, albeit secretly, to prepare draft legislation modelled mostly on the Canadian precedent enacted two years earlier. Two events intervened before the government could move ahead formally with plans to expand the tax base. The first was the release in 1975 of the final version of the Asprey committee’s report, which retreated from its preliminary recommendation for capital gains taxation, reflecting growing concern in some quarters about the relationship between capital gains tax and the high rates of inflation that the country was then experiencing.26 The second, and far more decisive, event was the governor general’s dismissal of the Whitlam Labor government in November 1975 and the appointment of Malcolm Fraser, head of the Liberal Party, as interim prime minister. The following eight years witnessed an unequalled surge in tax avoidance as dividend-stripping schemes, built on the non-taxation of capital gains, morphed into “bottom-of-the-harbour” evasion schemes. Unwilling to contemplate the inclusion of capital gains in the tax base as a solution, the Liberal-led government adopted a host of alternative responses, including amendment of the Acts Interpretation

22 Australia, Report of the Commonwealth Committee on Taxation (Canberra: Commonwealth Government Printer, 1961) (G.C. Ligertwood, chair). 23 See John Simon, “Three Australian Asset-Price Bubbles,” in Tony Richards and Tim Robinson, eds., Asset Prices and Monetary Policy (Sydney: Reserve Bank of Australia, 2003), 8-41 (www.rba.gov.au/publications/confs/2003/pdf/simon.pdf ). 24 ITAA 1936, section 26AAA, introduced by the Income Tax Assessment Act (No. 5) 1973, section 6. 25 Australia, Taxation Review Committee, Preliminary Report (Canberra: Australian Government Publishing Service, 1974) (K.W. Asprey, chair). 26 Australia, Taxation Review Committee, Full Report (Canberra: Australian Government Publishing Service, 1975). non-residents and capital gains tax in australia n 7

Act27 and adoption of a measure that left shareholders and even tax advisers liable for unpaid company tax in some circumstances.28 By that point, however, the momen- tum for broader reform had snowballed, and less than two years after returning to power in 1983, the Labor government called an election making tax reform a central policy plank.29 Soon after its re-election, the government commissioned a “draft white paper” on tax reform from the Treasury30 and in September 1985 announced the inclusion of capital gains in the income tax base. The legislation was enacted in June 1986, effective from the announcement date.31 The new rules sought to bring into the income tax base the full array of gains excluded from the judicial concept of income as capital receipts. This presented the drafters of the legislation with unprecedented challenges as they strove to include transactions as diverse as the cancellation of contracts and the creation of rights through negative covenants in a conventional capital gains framework based on the acquisition and disposition of recognized assets. The somewhat convoluted deeming provisions used to achieve this end led to mixed outcomes in the courts,32 prompting legislative tweaking of the measures in the short term,33 and subsequently a broader rethink of the legislation in the context of a plain English rewrite of the income tax law in the second half of the 1990s.34

27 Statute Law Revision Act 1981 (Cth), schedule 1, introducing section 15AA of the Acts Interpretation Act 1901 (purposive interpretation), subsequently followed by a Labor government interpretation initiative, Acts Interpretation Amendment Act 1984 (Cth), section 7, introducing section 15AB (use of extrinsic materials). 28 Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth), enacted on December 13, 1982. 29 The background to the tax reform is set out in Richard Krever, “Tax Reform in Australia: Base-Broadening Down Under” (1986) 34:2 Canadian Tax Journal 346-94. 30 Australian Treasury, Reform of the Australian Taxation System (Draft White Paper) (Canberra: Australian Government Publishing Service, June 1985). 31 Income Tax Assessment Amendment (Capital Gains) Act 1986, enacted on June 24, 1986. 32 An almost infamous decision was that of the High Court in Hepples v. Federal Commissioner of Taxation (No. 2), [1992] HCA 3. The taxpayer in that case had been assessed in respect of a payment for a restraint-of-trade agreement alternatively on the basis of two deemed disposal provisions, sections 160M(6) and 160M(7) of the ITAA 1936. In each case, three of the seven judges found that one deeming measure applied and the other did not. A majority of the judges found that at least one provision applied, but there was no majority in favour of one particular provision. In the end, the court held that the application of each provision should be treated as a separate question, with the result that the assessment could not stand and the court found in favour of the taxpayer. 33 Section 160M(6) of the ITAA 1936 was replaced and section 160M(7) amended, and new provisions were added, in 1992 to overcome the drafting problems highlighted by the Hepples decision: Taxation Laws Amendment Act (No. 4) 1992. 34 Following the recommendations of the Parliament of the Commonwealth of Australia, Joint Committee of Public Accounts, An Assessment of Tax: A Report on an Inquiry into the Australian Taxation Office, report no. 326 (Canberra: Australian Government Publishing Service, November 1993), the Tax Law Improvement Project task force commenced drafting a plain English version of the law, the first tranche of which was enacted in 1997. 8 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Initially, the 1973 measure including short-term capital gains in the income tax base was retained alongside the full capital gains regime. However, a technical anomaly allowed taxpayers to exploit an inconsistency between the two inclusion rules in some circumstances,35 leading to the repeal of the separate short-term capital gains provision in 1988. More than a decade after the inclusion of capital gains in the income tax base, the legacy of UK judicial concepts, particularly the idea that capital gains were wholly distinguishable from the natural base for an income tax law (the judicial concept of income), was undiminished. Somewhat surprisingly, some of the strong- est views of capital gains as being foreign to the natural income tax base were found in the Australian Taxation Office, home to tax experts with great practical experience but often relatively little theoretical exposure. In the course of the income tax rewrite, this group managed to reverse the 1985 structure that had treated capital gains as an integral element of the income tax base and in its stead enact a capital gains tax scheme situated in the income tax law but operating, and labelled, as a separate system, the “CGT” regime. Importantly, the designers sought to replace the central pillar of the original capital gains measure, a structure that brought all judicial concept capital gains into a single inclusion formula, with a series of rules described as “CGT events” that were devised for each type of capital gain. Not surprisingly, the replacement of a conceptual regime with a black-letter-law list of inclusion rules proved problematic, and the original set of 33 CGT events enacted in 199836 has grown to 54 events today. By the time the conservative coalition returned to power in 1996, capital gains had been well integrated into the income tax. The coalition’s antipathy to taxing capital gains remained, however, and in 1998 the government commissioned a review of business taxation chaired by a private-sector business leader with terms of reference that explicitly included reduction of the tax on capital gains.37 The report of the review issued in the following year recommended a halving of the tax imposed on realized capital gains and called for a significant widening of rollovers and other capital gains concessions.38 It also called for a statutory definition of capital gains to provide a focus for the concessional treatment. The recommendations, apart from the call for a definition, were adopted in 1999, and since that time 50 percent of capital gains realized by individuals have been exempt from taxation, with exceptions for short-term capital gains and some other types of gains clearly substituted for ordinary income, which are included in assessable income in full. Since 1999,

35 See P.K. Searle, “Some Section 160ZZN Roll-Over Anomalies” (1987) 16:4 Australian Tax Review 220-25, at 222. 36 Tax Law Improvement Act (No. 1) 1998 (Cth), enacted on June 22, 1998, schedule 1, setting out new division 104 of the ITAA 1997. 37 Terms of reference for the Review of Business Taxation, paragraph 3(c), set out in Australia, Review of Business Taxation, A Tax System Redesigned—More Certain, Equitable and Durable (Canberra: Review of Business Taxation, July 1999), at v-viii. 38 A Tax System Redesigned, ibid., at recommendation 18.2. non-residents and capital gains tax in australia n 9 complying retirement savings funds are also provided with a concessionary rate that reduces their taxable gain by one-third, resulting in a tax rate of 10 percent. Com- panies are not able to access the same concessions; instead, they are taxed on their total net capital gains. However, the legislation does provide a different dynamic for companies as a result of the inclusion of capital loss quarantining rules. These rules allow companies to offset any capital losses realized in an income year as well as any capital losses carried forward to be offset against capital gains. Consequently, where companies have capital losses, there is an incentive to characterize gains as capital gains in order to absorb those losses.

NON-RESIDENTS, AUSTRALIAN-SOURCE INCOME, AND CAPITAL GAINS TAX Both the 1936 and the current 1997 versions of the Australian income tax law assess residents on worldwide income and non-residents on Australian-source income, and capital gains are no exception. Both statutes contain only a small number of source rules, such as provisions that stipulate an Australian source for interest income payable on a loan secured by a mortgage on property situated in Australia39 and provisions that set out an Australian source for royalties paid on an agreement entered into abroad.40 With no statutory guidelines, it has been left to the courts to develop common-law source rules applying what have become known as “facts and circumstances” tests.41 The result of this approach, as demonstrated below, is a con- fusing mix of statutory and common-law rules that has resulted in a long history of litigation concerning the taxation of capital gains by non-residents both before and after the adoption of a capital gains tax regime. The 1936 legislation suffered from a substantial technical flaw in terms of estab- lishing a consistent distinction between the tax liability of residents on worldwide income and the liability of non-residents in respect of Australian-source income only. Tax was payable on taxable income,42 which was defined as assessable income less allowable deductions.43 The principal inclusion section was relatively clear, including in the assessable income of resident taxpayers “the gross income derived directly or indirectly from all sources whether in or out of Australia,” and in the assessable income of non-resident taxpayers “gross income derived directly or indirectly from all sources in Australia.”44 However, gross income in this provision

39 See, for example, ITAA 1936, section 25(2). 40 See, for example, ITAA 1936, section 6C, introduced in 1968 by the Income Tax Assessment Act 1968, section 4. 41 See Robert Deutsch and Róisín Arkwright, “Taxation of Non-Residents,” in Chris Evans and Richard Krever, eds., Australian Business Tax Reform in Retrospect and Prospect (Sydney: Thomson Reuters, 2009), 417-30, at 424-27. 42 ITAA 1936, section 17. 43 ITAA 1936, section 6. 44 ITAA 1936, section 25(1). 10 n canadian tax journal / revue fiscale canadienne (2019) 67:1 had been interpreted to mean only the narrow judicial notion of income or, as the courts called it, “ordinary income.”45 Apart from the capital gains provisions, all sections that included gains, or what is now referred to as “statutory income,” in assessable income were silent on the distinction between the liability of residents and that of non-residents in respect of the particular types of gain. Two approaches were adopted by tax administrators and courts to fill in the gap. The first approach was to assume that, notwithstanding the deliberate words of the primary inclusion measure, all gains brought into statutory income were somehow funnelled through the ordinary income inclusion section, and the distinction between residents’ and non-residents’ liability could consequently be extended to all other types of income.46 The second approach was to assume that in the absence of clear signposts in either direction, the distinction between residents’ and non- residents’ liability set out in the ordinary income inclusion section was intended to apply to all statutory income inclusion measures in a manner parallel to that explicitly set out for gross income.47 It would be an understatement to suggest that the Australian Taxation Office faces obstacles in applying the broad principles of income tax law to non-residents; apart from the confused legislation, there are obvious logistical challenges in tracking income derived by non-residents, assessing those who are liable to tax, and collecting the tax. Despite the constraints, the Australian Taxation Office had some notable successes over the years,48 aided by two factors. The first factor was the use of withholding taxes to collect final taxes on passive income (interest, dividends, and royalties).49 Using resident taxpayers as collection agents greatly simplified the task.

45 “Ordinary income” became the phrase commonly used by the courts to describe income according to judicial concepts following the lead of Jordan CJ in Scott v. Commissioner of Taxation (1935), 35 SR (NSW) 215, at 219. 46 See Parsons, supra note 20, at paragraphs 1.8 and 1.31-1.40. 47 See, for example, Thiel v. Commissioner of Taxation, [1990] HCA 37. 48 One of the most notable was its victory in Parke Davis & Co. v. Federal Commissioner of Taxation, [1959] HCA 15. The case concerned a US company that had received proceeds from winding up a US subsidiary that in turn had operated a branch in Australia. When the assets of the subsidiary were distributed to the parent company on the windup of the subsidiary, the parent company was assessed in respect of deemed dividends paid out of the retained earnings of its subsidiary attributable to profits that were derived from that company’s Australian operations. Significantly, those profits had already been taxed to the subsidiary when derived in Australia. The second level of tax on distribution as a dividend was consistent with the classical company and shareholder tax system in effect at the time, but it was a very unusual assessment in that the dividend was paid by a non-resident and the payment was taxed as a dividend only because of a deeming provision that applied to windup proceeds. 49 The withholding tax on interest, dividends, and royalties is a final tax (that is, the recipient is not subject to any further assessment): ITAA 1936, division 11A, section 128D. The withholding tax on film royalties was made a final tax in 1977 (Income Tax Assessment Amendment Act (No. 2) 1977), and the withholding tax on other royalties in 1992. Unlike Canada, Australia does not impose a withholding tax on rental income paid to non-residents. A withholding tax does apply non-residents and capital gains tax in australia n 11

The second factor was the fact that (as explained further in the next section), particularly in the period after 1971—the year in which Australia joined the Organ- isation for Economic Co-operation and Development—Australia regularly signed treaties in which it agreed to relinquish its right to tax almost all Australian-source business income derived by non-residents. The abandonment of taxing rights was subject to two exceptions: Australia retained the right to tax business profits derived by a non-resident through a permanent establishment in Australia and the right to tax gains on the sale of land, to the extent that these were assessable in Australia under the short-term capital gains measure50 or the indistinct quasi-income/quasi- capital gains measure applying to gains from profit-making schemes and sales of property acquired for the purpose of resale at a profit.51 The treaties provided an absolute shield for all other capital gains taxed under these two provisions where the non-resident had no permanent establishment in Australia.52 While this obstacle was somewhat addressed in renegotiated treaties such as the UK and US agreements concluded in 2003, which preserved Australia’s claim to tax capital gains derived by non-residents, the domestic amendments to the capital gains tax regime in 2006 have meant that there is very little point in such an approach. An exception to the general rule in the ITAA 1936 that the statutory provisions that included amounts other than ordinary income in the tax base omitted any distinction between the tax liability of residents and that of non-residents came with the addition of capital gains to the income tax base effective from September 1985. The inclusion section added “net capital gains” to assessable income,53 which were calculated as capital gains less capital losses.54 A capital gain was defined as the gain realized on the disposition of a capital asset.55 Source rules were achieved by limiting the capital gains of non-residents that were included in the net capital gain calculation to gains realized on the disposition of a “taxable Australian asset.”56 A taxable Australian asset was in turn defined as land or a building in Australia, a share in a resident private company, a share in a resident public company in which the taxpayer and associates had a 10 percent or greater interest, an interest in a resident partnership,

to payments made by managed investment trusts, which are a vehicle commonly used by foreign investors to enter the Australian property market, and as a consequence rental income is subject to a de facto withholding tax when paid via a managed investment trust. 50 ITAA 1936, section 26AAA. 51 ITAA 1936, section 26(a). 52 Thiel, supra note 47 (the Swiss investor’s short-term capital gain assessable under section 26AAA of the ITAA 1936 was business profit but was shielded from Australian taxation under article 7 of the Agreement Between Australia and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income, signed at Canberra on February 28, 1980, since the investor had no permanent establishment in Australia). 53 ITAA 1936, section 160ZO. 54 ITAA 1936, section 160ZC. 55 ITAA 1936, section 160Z. 56 ITAA 1936, section 160L. 12 n canadian tax journal / revue fiscale canadienne (2019) 67:1 and an interest in a resident trust estate.57 Land was defined to include a share in a company directly owning land,58 but the definition did not extend to other interests in land such as mining or exploration rights, assets that were included in the definition of real property, or immovable property under a number of Australia’s tax treaties. A very different approach to taxing the capital gains of non-residents was adopted in 1998 when the capital gains provisions were shifted from the ITAA 1936 to the plain English successor, the ITAA 1997.59 Like its predecessor, the ITAA 1997 assessed residents on worldwide income60 and non-residents on income from an Australian source.61 Income from an Australian source was defined as income that would have been considered to have been derived from a source in Australia under the ITAA 1936,62 in effect picking up the judicial facts and circumstances tests developed for the earlier statute. The charging provisions solved a serious problem with the early law, however, by extending the distinction between the liability of residents and that of non-residents to both ordinary income (gains that fell within the narrower judicial concept of income) and all statutory income (gains that became assessable only because of explicit separate inclusion provisions). In contrast to the ITAA 1936, the 1997 statute includes no source rules in the primary capital gains rules. The basic charging rules are similar to their 1936 pre- decessors: a taxpayer’s “net capital gain” is included in assessable income, and this is calculated as the excess of a taxpayer’s capital gains over capital losses.63 Capital gains are determined by the rules in a set of CGT events (currently 54, as noted earlier). None of those rules contain source rules or distinguish between the liabilities of residents and those of non-residents. In the amending legislation, the CGT events were subject to a separate division, however, that modified the general rules

57 ITAA 1936, section 160T. Resident trusts and partnerships were defined in section 160H of the ITAA 1936. Interests in resident partnerships were removed from the definition in 1991 pursuant to the Taxation Laws Amendment Act 1991, enacted on April 24, 1991. This amendment provided statutory recognition of the commissioner’s approach adopted in June 1989 (Australian Taxation Office,Taxation Ruling IT 2540, “Capital Gains: Application to Disposals of Partnership Assets and Partnership Interests,” June 22, 1989, at paragraph 18), according to which disposal of partnership assets involved disposal of the fractional interest in the underlying assets: see David J. Garde, “Capital Gains Tax and Everett Assignments” (1993) 22:1 Australian Tax Review 28-41, at 29. 58 ITAA 1936, section 160K. 59 The Income Tax Assessment Act 1997 was adopted in 1997. The capital gains provisions were added in the Tax Law Improvement Act (No. 1) 1998; some residual provisions of part IIIA (the capital gains provisions in the ITAA 1936) were repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006, enacted on September 14, 2006, schedule 1. 60 ITAA 1997, section 6-5(2) for ordinary income and section 6-10(4) for statutory income. 61 ITAA 1997, section 6-5(3) for ordinary income and section 6-10(5) for statutory income. 62 ITAA 1997, section 995-1. 63 ITAA 1997, section 102-5. non-residents and capital gains tax in australia n 13 as they applied to non-residents so that the CGT events applied in respect of transactions by non-residents only if the assets or property described in the events had a “necessary connection with Australia”64 or amounts described in the events derived “from an Australian source.”65 The list of assets having a necessary connection with Australia largely mirrored the list of taxable Australian assets in the 1936 law,66 while the definition of amounts derived from an Australian source, as noted, implicitly referred to the judicial facts and circumstances tests used to apply the 1936 statute. The wide scope of the capital gains rules in the original and redrafted capital gains provisions had little practical impact. Most investment in the assets listed in the legislation came from countries with which Australia had tax treaties that protected the investors from tax on gains realized on the disposition of assets other than land. For a brief period, the Australian Taxation Office attempted to argue that the treaties signed prior to the addition of capital gains measures to the Australian law did not apply to gains assessed under the subsequently legislated measure. Although each treaty applied to income tax in effect at the date of signature of the treaty and any subsequently enacted “identical or substantially similar” taxes, the Australian Taxation Office argued that the capital gains measures in the income tax statute constituted an entirely separate tax and this capital gains tax was not similar to an income tax. Not surprisingly, the argument was consistently rejected by the courts,67 and the Australian Taxation Office eventually conceded that there was little tax revenue that could be collected from the measures if the taxpayer was resident in a treaty country.68 The capital gains provisions thus raised little revenue from non-residents investing in taxable Australian assets apart from land. Parliament finally conceded the practical limitations of the broad capital gains tax base in 2006, redrafting the capital gains rules for non-residents to exclude gains on all assets apart from land and land- rich companies.69 At the same time, the structure of the law was modified to restore the “taxable Australian asset” nexus, but in a very truncated form in its second itera- tion, now labelled “taxable Australian property” and limited to an interest in real property, an indirect interest in real property, and an asset used by a permanent establishment.70 Taxable Australian real property is defined to include mining,

64 ITAA 1997, section 136-10. 65 ITAA 1997, section 136-15. 66 ITAA 1997, section 136-25. 67 Virgin Holdings SA v. Commissioner of Taxation, [2008] FCA 1503, and Undershaft (No. 1) Limited v. Commissioner of Taxation, [2009] FCA 41. 68 Australian Taxation Office,Decision Impact Statement, “Virgin Holdings SA v. Commissioner of Taxation; Undershaft (No. 1) Limited and Undershaft (No. 2) BV v. Commissioner of Taxation,” July 29, 2009. 69 Tax Laws Amendment (2006 Measures No. 4) Act 2006. 70 ITAA 1997, section 855-15. 14 n canadian tax journal / revue fiscale canadienne (2019) 67:1 quarrying, and prospecting rights,71 and an indirect interest in real property is defined as a non-portfolio interest in an entity if the entity’s underlying value is principally derived from Australian real property.72 An unusual structure was used to establish the capital gains base for non-residents. The capital gains tax rules were left intact, but their application to non-residents was shifted from the divisions of the legislation setting out those rules to the international tax divisions.73 The rules currently adopt an unusual positive-negative structure, assuming that the capital gains tax rules apply to non-residents in the same way as they apply to residents, but stating that non-residents can disregard capital gains and losses attributable to a capital gains event if the event happens in relation to an asset that is not taxable Australian property.74 The official explanation for the retreat to taxing non-residents on capital gains attributable to dispositions of direct and indirect interests in real property and assets associated with a permanent establishment, set out in an “objects” provision in the law, makes no mention of the fact that these are the only capital gains derived by a non-resident that Australia can tax under most of its double tax treaties. However, the explanatory memorandum released by the government to accompany the bill narrowing the capital gains tax base noted that the impact of treaties was a factor behind the change. The document suggested that removal of the need for broader treaty rules in this area would “relieve the pressure to compromise other aspects of Australia’s preferred tax treaty practice.”75 This statement has been understood to mean that the contraction of the definition of taxable Australian property to exclude assets other than real property was prompted in part by the realization that retention of the provision would require broader capital gains articles in tax treaties and that insistence on greater source-country rights over other capital gains attributable to other assets would create pressure in treaty negotiations to grant concessions on other matters such as withholding rates.76 The legislation itself declares that the rules are intended to improve Australia’s status as an attractive place for business

71 ITAA 1997, section 855-20. 72 The non-portfolio interest threshold is set out in section 855-25 of the ITAA 1997, and the principal underlying value attributable to Australian real property threshold is set out in section 855-30 of the ITAA 1997. 73 The general capital gains rules are found in chapter 3, “Specialist Liability Rules” of the ITAA 1997, while the application to non-residents is now set out in chapter 4, “International Aspects of Income Tax.” 74 ITAA 1997, section 855-10. 75 Australia, House of Representatives, Tax Laws Amendment (2006 Measures No. 4) Bill 2006: Explanatory Memorandum (Canberra: Parliament of the Commonwealth of Australia, 2006), at paragraph 4.7. 76 Michael Rigby, “What Is Taxable Australian Real Property?” (2016) 45:3 Australian Tax Review 161-208, at 162-63, citing Australia, Board of Taxation, Post Implementation Review into Certain Aspects of the Consolidation Regime: A Report to the Assistant Treasurer (Canberra: Board of Taxation, June 2012), at paragraphs 5.37-5.38. non-residents and capital gains tax in australia n 15 and investment, and the integrity of its capital gains tax base, by aligning Australia’s tax laws with “international practice.”77 Throughout the introduction and reform of Australia’s capital gains tax regime, relatively little attention was paid to the collection of tax from non-residents. The government’s eventual response to the challenge of collecting tax on capital gains from non-residents is reviewed in the next section.

NON-RESIDENTS AND WITHHOLDING TAX IN AUSTRALIA In 2013, the government announced as part of the annual federal budget that a comprehensive withholding tax regime would be introduced to apply to foreign residents78 who realize capital gains from transactions involving taxable Australian property subject to capital gains tax. The genesis of this new capital gains withholding is found in both legal and geopolitical factors. The legal factor was the difficulty that tax authorities faced in collecting tax from non-resident investors. The limits of tax office power were brought into sharp national focus in 2009 when Texas Pacific Group (“TPG”), a private equity firm that had acquired Australia’s largest, but ailing, department store chain, Myer Ltd., three years earlier, floated its Myer shares on the Australian Stock Exchange, realizing a gain in the vicinity of A $1.5 billion. TPG had structured the acquisition via a chain of ownership with a Cayman Islands company at the top, an intermediary Luxem- bourg company, and finally a Netherlands company that could access the Australia-Netherlands tax treaty as the immediate owner of Myer Ltd. The Australian Taxation Office’s attempt to protect the tax base until litigation over assessments ran its course failed when a court order prohibiting the transfer of proceeds from the float abroad was lifted after officials discovered that the funds had already left the country.79 The experience helped to focus the attention of officials on the role of withholding taxes as a practical way of enforcing the tax liability of non-residents. Withholding tax rules have long been an integral part of Australia’s income tax regime. A non-final withholding tax on interest paid by companies was included in the income tax law in the early decades of the tax,80 and a withholding tax on dividends, copied from colonial income tax laws, was included in very early federal

77 ITAA 1997, section 855-5. 78 Current legislation uses the term “foreign resident” rather than “non-resident.” However, the two terms are defined as being the same: ITAA 1997, section 995-1. 79 For details of the issue, see Robin Cao, Larelle June Chapple, and Kerrie Sadiq, “Taxation Determinations as De Facto Regulation: Private Equity Exits in Australia” (2014) 43:2 Australian Tax Review 118-41. 80 See Australia, Third Report of the Royal Commission on Taxation (Canberra: Commonwealth Government Printer, 1934), at 137-41. The measures were incorporated into the Income Tax Assessment Act 1936, where they currently sit, as originally enacted (division 11, sections 125 through 128), following on from rules under prior legislation. 16 n canadian tax journal / revue fiscale canadienne (2019) 67:1 income tax laws, repealed in 1923, and then adopted as a final tax in 1959.81 The withholding tax on interest was converted to a final tax by inclusion in these final tax provisions in 1967.82 A non-final withholding tax first imposed on royalty payments in 193683 was converted to a final withholding tax on film royalties in 197784 and on all other royalties in 1992.85 From July 1, 2007, withholding measures have applied to managed investment trust distributions paid to non-residents. Currently, this is a final withholding tax on Australian-source net income paid by the trust, excluding dividends, interest, and royalties subject to withholding tax under other provisions, and, when amendments currently before Parliament are enacted, will include capital gains arising from assets that are taxable Australian property. Separately, from 1936, the current law (using provisions modelled on pre-existing federal and state income tax provisions) has required an agent receiving income on behalf of a non-resident86 or a person holding money that belongs to a non-resident who has derived income from a source in Australia87 to retain an amount sufficient to pay the non-resident’s income tax liability in respect of that income. When originally enacted, both provisions spoke of withholding requirements in respect of a tax liability of a non-resident following derivation of “income” with a source in Australia, and the application of the provisions to short-term capital gains (derived from dispositions within a year of acquisition) following their inclusion in the income tax base in 1973 remained unclear,88 although the Australian Taxation Office assumed that the sections would apply to assessable capital gains. When all capital gains were brought into the income tax base in 1986, the sections were amended to add to “income” the words “profits or gains of a capital nature.”89 A separate question crucial to the operation of the withholding measure was how the agent or holder could know whether tax was payable on a capital gain and, if so, how much must be withheld so that the withholding would, in the words of the

81 Income Tax and Social Security Contribution Assessment Act (No. 3) 1959, section 18, enacting division 11A of the ITAA 1936, sections 128A through 128E. The history of Australia’s taxation of company distributions, including withholding taxes, is set out in C. John Taylor, “Development of and Prospects for Corporate-Shareholder Taxation in Australia” (2003) 57:8 Bulletin for International Taxation 346-57. Dividend imputation in its current form was reintroduced in 1987. 82 Income Tax Assessment Act (No. 4) 1967. 83 ITAA 1936, division 14 (“Film Business Controlled Abroad”), providing for a 30 percent tax on defined gross income derived by non-residents, along with an agent withholding rule (section 139). 84 Income Tax Assessment Amendment Act (No. 2) 1977, enacting division 13A of ITAA 1936 and the Income Tax (Film Royalties) Act 1977. 85 Taxation Laws Amendment Act (No. 5) 1992. 86 ITAA 1936, section 254. 87 ITAA 1936, section 255. 88 See, for example, “Confusion over New Gains Tax,” Canberra Times, January 3, 1974. 89 Income Tax Assessment Amendment (Capital Gains) Act 1986 (Cth), sections 33 and 34. non-residents and capital gains tax in australia n 17 provisions, “be sufficient to pay tax which is or will become due.” Following the 1973 amendment to bring short-term capital gains into the income tax base, the Austral- ian Taxation Office adopted the sensible view that the withholding requirement applied only where the office had notified the agent or holder that withholding was required.90 A widely held view that the sections required an actual assessment to be issued by the Australian Taxation Office before the withholding obligation could be triggered was confirmed by the High Court, Australia’s final court of appeal, in 2007 in respect of the holder provision91 and in 2015 in respect of the agent provision.92 The developments were seen by many as the legal prompts for reform of the withholding tax rules. The immediate cause for reform, however, was likely not legal but geopolitical. In the decade that followed the contraction of the capital gains base for non-residents to direct and indirect interests in real property and assets of permanent establishments, Australia enjoyed a surge in direct foreign investment in Australian real estate, particularly housing.93 Paralleling the situation in Canada, Australia experienced a period of unprecedented rise in house prices in its two major urban centres, and particularly in Sydney.94 In some quarters, the rise was attributed to demand by non-resident investors—primarily buyers from China, often euphemistically referred to as “international” buyers in Australian discussions. Sydney house prices more than doubled in value in real terms between 2009 and 2017, while Melbourne was not far behind at 189 percent.95 Chinese buyers accounted for 77 percent of all

90 Australian Taxation Office,Ruling IT 354, “Sharedealing Transactions by Overseas Investors: Application of Sections 254 and 255,” April 5, 1974, at 13; see further D.C. Orrock, “Australia,” in The Assessment and Collection of Tax from Non-Residents, Cahiers de droit fiscal international vol. 70a (Deventer, the Netherlands: Kluwer, 1985), 233-43, at 236. IT 354 was withdrawn and replaced by IT 2544 on June 29, 1989 (to similar effect), following an auditor general report in 1987 and a House of Representatives committee investigation in 1989 on international profit shifting. IT 2544 was itself withdrawn on June 23, 2010 following the High Court decision in Bluebottle UK Limited v. Deputy Commissioner of Taxation, [2007] HCA 54, in which the court held that the section 255 obligation in respect of retaining funds on behalf of non-residents applied only where an assessment had been made, but also left open the question of whether the general obligation on agents under section 254 was also so limited. That issue was decided by the High Court eight years later in Commissioner of Taxation v. Australian Building Systems Pty Ltd. (in Liquidation), [2015] HCA 48. 91 Bluebottle UK Limited, supra note 90. 92 Australian Building Systems Pty Ltd., supra note 90. 93 Australia, House of Representatives, Standing Committee on Economics, Report on Foreign Investment in Residential Real Estate (Canberra: Parliament of Australia, November 2014); and ACIL Allen Consulting, Benefits of Foreign Investment in Real Estate: Report to the Property Council of Australia (Sydney: ACIL Allen Consulting, May 22, 2017). 94 Nicole Gurran and Peter Phibbs, “ ‘Boulevard of Broken Dreams’: Planning, Housing Supply and Affordability in Urban Australia” (2016) 42:1 Built Environment 55-71, at 59. 95 Stephen Letts, “Why Chinese Investors Keep Buying Australian Property: It’s Cheap,” ABC News, March 24, 2017 (www.abc.net.au/news/2017-03-24/why-chinese-investors-keep-buying -australian-property/8385174). 18 n canadian tax journal / revue fiscale canadienne (2019) 67:1 foreign property buyers in New South Wales during this time.96 While official sources97 supported by private-sector analysis98 suggested that only a portion of the price increases was attributable to foreign buyers, popular perception linked the foreign buyers with escalating housing prices,99 creating political pressure to ensure the integrity of existing rules and assurances that the rules could be applied to non- resident investors. The three key income tax measures adopted are the removal of the 50 percent capital gains discount for non-residents from 2012,100 the introduction of a capital gains withholding tax in 2016,101 and amendments in 2018 currently before Parliament to ensure that the principal residence exemption does not extend to capital gains on residential properties owned by non-residents.102

A CONTEMPORARY MODEL FOR IMPOSING CAPITAL GAINS TAX ON NON-RESIDENTS The past five years have seen three key changes in the application of the capital gains tax regime to non-residents, with a shift from a regime that encouraged foreign investment to one with far greater enforcement features and almost no incentives for investment in Australian residential real estate. The first change was the removal of a general concessional rate for capital gains when realized by non-residents. When a capital gains tax was first introduced in Australia in 1985, the law provided for indexation of the cost base of assets held for more than 12 months. In 1999, following the recommendations of a government- appointed but private-sector-run review of business taxation103 whose terms of reference included the introduction of a capital gains concession, the conservative coalition government of the day replaced cost base indexation with a 50 percent discount for net capital gains for individual taxpayers. The review said that the concession was needed to “enliven and invigorate Australia’s equities markets, to stimulate greater participation by individuals, and to achieve a better allocation of

96 Ibid. 97 Chris Wokker and John Swieringa, Foreign Investment and Residential Property Price Growth, Treasury Working Paper 2016-03 (Canberra: Australian Treasury, December 2016). 98 Cross Border Management, Land Dragons: The Impact of Chinese Buyers on Australian Property Prices (Sydney: Cross Border Management, October 2017). 99 Dallas Rogers, Chyi Lin Lee, and Ding Yan, “The Politics of Foreign Investment in Australian Housing: Chinese Investors, Translocal Sales Agents and Local Resistance” (2015) 30:5 Housing Studies 730-48 (https://doi.org/10.1080/02673037.2015.1006185). 100 Tax Laws Amendment (2013 Measures 3 No. 2) Bill 2013, amending the ITAA 1997 to remove the capital gains tax discount for foreign individuals. 101 Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016, introducing the Taxation Administration Act 1953, schedule 1, subdivision 14-D. 102 Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018. 103 A Tax System Redesigned, supra note 37. non-residents and capital gains tax in australia n 19 the nation’s capital resources.”104 As part of a tradeoff for a 6 percent reduction in the company tax rate, indexation was also removed for companies without the substitution of a concession. The 50 percent discount was removed for non-residents in 2012, with the explanation that the concession was not necessary to attract foreign investment in immobile property such as real estate and mining assets.105 Unexpectedly, the amending legislation went beyond the announced target of foreign investors and also removed the concession for temporary residents and Australian residents who become non-residents and later resume Australian residence. The change may have been a factor contributing to a small dip in foreign investment in real estate in the year in which the new rules came into effect, but within two years, foreign investment in the sector had increased by more than 25 percent over the level immediately before the change.106 The second change affecting non-residents specifically was the adoption of a withholding regime to collect tax on capital gains realized by non-residents. Since property titles are registered with state government agencies and Australian states levy no income tax, there is no link between state records of sale and the federal income tax authority. The difficulty of collecting capital gains tax from foreign property owners starts with the problem of knowing that a potential liability has arisen in the first place. Shifting the information collection and tax collection to the buyer, with appropriate sanctions to prompt compliance, seemed a logical response. The government first announced its intention to adopt a non-final capital gains withholding tax in its May 2013 budget. A discussion paper with more details was released in October 2014,107 and legislation implementing the measure was introduced in Parliament in late 2015, with final passage in early 2016, effective from July 1, 2016.108 The legislative amendments did not affect the income tax legislation but instead modified a tax administration act.109

104 Ibid., at 598. 105 Australian Treasury, “2012-13 Budget Builds on Growing Record of Tax Reform,” Media Release no. 026, July 8, 2012. 106 Data compiled from Foreign Investment Review Board annual reports located on the website of the Foreign Investment Review Board (http://firb.gov.au/). 107 Australian Treasury, Non-Final Withholding Tax on Transactions Involving Taxable Australian Property, Discussion Paper (Canberra: Australian Treasury, October 2014). 108 Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015. For further discussion of the measures, see Anton Joseph, “Capital Gains Tax for Non-Residents Comes Under Significant Review” (2015) 69:2Bulletin for International Taxation 124-27; Michael Butler, Alicia Jennison, and Ria Neilson, “Important International Tax Developments— Foreign Capital Gains Withholding Tax, and Anti-Google, Netflix and Amazon Taxes” (2016) 22:2 Asia-Pacific Tax Bulletin 1-18; Dung Lam and Alex Whitney, “Taxation and Property: Practical Aspects of the New Foreign Resident CGT Withholding Tax” [2016] no. 21 LSJ: Law Society of New South Wales Journal 84-85; Jeffrey Chang, “Foreign Resident CGT Withholding” (2016) 50:11 Taxation in Australia 664-69; Rigby, supra note 76; Richard Harvey, (Notes 108 and 109 are continued on the next page.) 20 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The drafters had two important precedents to consider, the rules in Canada and the United States. Canada had adopted a capital gains tax withholding regime as part of the reforms that brought capital gains into the income tax base in 1972.110 The withholding tax was set at 25 percent of the sale price, subject to a clearance mechanism that allowed a non-resident vendor to provide details of the actual net capital gain. The United States first imposed tax on real property capital gains realized by non-resident vendors in 1980111 and added a 10 percent withholding tax in 1984.112 The withholding rate was increased to 15 percent in 2016 for properties sold for more than US $1 million.113 New Zealand, which has no general capital gains tax regime, introduced a short-term capital gains measure applying to gains on residential property sold within two years of acquisition beginning in October 2015,114 and a 10 percent withholding tax imposed on the gross payment effective from July 2016, subject to alternative calculations if the seller’s or buyer’s convey- ancer is the withholder.115 Alternatively, if the buyer knows the net capital gain, New Zealand’s withholding tax is 28 percent of the net gain if the vendor is a company and 33 percent if the vendor is an individual. As originally enacted, the Australian rule imposed a requirement on vendors of taxable Australian property to withhold and remit to the Australian Taxation Office 10 percent of the sale proceeds on sales made under contracts entered into on or after July 1, 2016. The requirement applied to all four types of taxable Australian property (real property, leasehold interests, non-portfolio interests in land-rich companies, and various mining rights, as well as rights or options to acquire these assets), with an exclusion for sales of less than A $2 million. The threshold was subsequently lowered, effective from July 1, 2017, to A $750,000 and the withholding rate increased to 12.5 percent.116 The threshold amount is calculated in respect of the total property, so if there are multiple purchasers, the interests of all buyers are consolidated to determine whether the threshold has been reached. Unlike the

“Foreign Resident Capital Gains Withholding Regime Changes Set To Have Massive Effect” [2017] no. 35 LSJ: Law Society of New South Wales Journal 77; and Anton Joseph, “The Taxation of Resource Companies in Australia” (2018) 72:2 Bulletin for International Taxation 99-105. 109 Taxation Administration Act 1953, schedule 1, subdivision 14-D (sections 14-200 to 14-235). 110 The current rules are found in section 116 of the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. 111 Foreign Investment in Real Property Tax Act of 1980, subtitle C of the Omnibus Budget Reconciliation Act of 1980, Pub. L. no. 96-499 (herein referred to as “FIRPTA”). 112 Deficit Reduction Act of 1984, Pub. L. no. 98-369. 113 Protecting Americans from Tax Hikes Act of 2015, Pub. L. no. 114-113. 114 Taxation (Bright-Line Test for Residential Land) Act 2015, Public Act 2015 no. 111. 115 Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Act 2016, Public Act 2016 no. 21. 116 Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017. non-residents and capital gains tax in australia n 21

Canadian regime, and similar to the US FIRPTA withholding rules,117 the Australian rules provide no option to calculate withholding tax on the basis of a net capital gain. The withheld amount must be remitted to the Australian Taxation Office on or before the day on which the buyer becomes the owner of the asset. Failure by the buyer to comply with the obligation causes the buyer to become liable for the amount and brings the buyer within the existing penalties regime relating to other withholding tax obligations. Collection of these amounts by the Australian Taxation Office could be enforced against any assets of the buyer in the normal way applicable to any debts payable to the tax authority, but the legislation does not provide for a specific charge to arise against the property that is the subject of the sale for any unpaid withholding amount. In the case of other transactions, the buyer’s obligation to withhold is triggered if (1) the buyer knows that the seller (or any one of several sellers) is a foreign resident; (2) the buyer reasonably believes that the seller is a foreign resident; (3) the seller has given the buyer an address outside Australia; or (4) the seller has authorized the buyer to pay an amount to a place outside Australia. In some cases, the buyer will be able to rely on an exception to withhold—for example, where the sale price is less than the withholding threshold, where the sale takes place on a public stock exchange, or where another withholding obligation applies.118 In addition, clearance certifi- cates will be provided to applicants who demonstrate that they are not a “relevant foreign resident.” The clearance certificate specifies that withholding is not required on the acquisition of property and is presented to the purchaser prior to settlement. A purchaser in receipt of a clearance certificate is relieved of the obligation to withhold and remit tax, even if the seller’s circumstances change during the settlement period. The certificate itself is issued in respect of the seller, not a particular transaction, and with a validity of 12 months from the issuance date, it can be used for multiple dispositions during this period. The third reform measure, which is yet to pass into law, is the removal of the principal residence exemption for non-residents, with effect from May 2017. A grandfathering provision will retain the concession until June 30, 2019 for property acquired prior to May 9, 2017. Somewhat controversially, the change will apply to gains on properties owned by Australian expatriates who are not resident in Australia at the time of disposition. A consultation process in relation to the proposed legislation resulted in numerous submissions suggesting that the reforms would penalize Australian citizens who were not the target of what were considered integrity measures. A Senate committee reviewing the legislation “acknowledged” the concerns but recommended that the amending legislation be passed without amendment.119 The legislation was not considered by the Senate in the final session of 2018, and in

117 Supra note 111. 118 There are seven limited exceptions in total. See Taxation Administration Act 1953, schedule 1, section 14-215. 119 Australia, Senate, Economics Legislation Committee, Report: Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures (No. 2)) Bill 2018 [Provisions] and Foreign 22 n canadian tax journal / revue fiscale canadienne (2019) 67:1 light of an impending election, there is some doubt now as to whether the amendments will pass.

CONCLUSION The application of Australia’s capital gains tax regime to non-residents was relatively stable for the first two decades of its operation, apart from the replacement of cost base indexation with a 50 percent capital gains discount for individual investors 15 years into this period. On paper, the base was dramatically narrowed in 2006 when it was limited to direct and indirect gains on real property. To some extent, the legislative change may actually have codified the practical challenge of collecting tax from non-residents after they have disposed of assets other than real property. Following the change, it became apparent that the challenge of collection applied equally to dispositions of real property. The belated adoption of a capital gains withholding regime long after one had been in place in many jurisdictions was an acknowledgment of the difficulty of assessing non-residents in a largely self- assessment tax system. The impetus for the most recent changes has been the popular perception that there is a link between foreign buyers and escalating housing prices. The government’s response to political pressures built on this perception has included removal of the 50 percent capital gains discount and the principal residence exemption for non-residents. This tranche of reform is in its infancy, making it is difficult to know whether it has altered non-resident investor decision making or residential housing prices in Australia. Paralleling the capital gains changes have been a host of other factors that could affect house prices, including new application fees for compul- sory foreign investment approval for foreign purchasers of real property, additional state taxes in the form of stamp duties, a new tax (a “vacancy fee”) on residential property that is left uninhabited for more than half a year, and capital outflow controls in China, the source of most foreign buyers.120 Segregating the impact of capital gains tax changes from all the other considerations that may affect housing prices may be impossible. Whether or not the changes affect the price of housing, their impact on the structure of the capital gains tax is striking, leaving Australia with what are in effect two capital gains tax systems, one for residents and a very different one for non-residents.

Acquisitions and Takeovers Fees Imposition Amendment (Near-New Dwelling Interests) Bill 2018 [Provisions] (Canberra: Parliament of Australia, March 2018). 120 Foreign real estate approvals in the July 1, 2016 – June 30, 2017 fiscal year fell by almost two-thirds from the previous fiscal year; see Foreign Investment Review Board,Annual Report 2016-17 (Canberra: Foreign Investment Review Board, May 2018), at vii. However, approvals do not equate to actual acquisitions, and the biggest factor explaining the drop may be the introduction of not insignificant foreign investment approval application fees, starting at $5,000, effective from July 1, 2016. Previously, it was common for potential buyers to seek multiple approvals that would allow them to bid for a large number of properties while intending to buy only one; see Report on Foreign Investment in Residential Real Estate, supra note 93, at 44. canadian tax journal / revue fiscale canadienne (2019) 67:1, 23 -25 https://doi.org/10.32721/ctj.2019.67.1.pf.editor

Policy Forum: Editor’s Introduction— Reform of Corporate Taxation

Corporate taxation influences investment decisions as well as government revenues. The nature and extent of that influence reflect both purely domestic considerations and international capital flows. Domestically, firms are continually measuring after-tax returns against costs to determine whether to make new investments. The resulting scale of corporate activity then has a direct impact on corporate tax revenues. So, independent of what is going on elsewhere, there is always a case for examining whether Canada’s corporate tax system is delivering the appropriate levels of investment and tax revenue. The international context also affects investment decisions and tax revenues. Firms may compare the Canadian investment climate, including Canadian tax rates and tax policy, with that in other countries when making capital allocation decisions. Moreover, firms can take advantage of opportunities to shift, and potentially reduce, their corporate tax burden through the use of a variety of cross-border arrangements, such as related-entity structures, transfer pricing, intercompany loans, and other transactions between members of a multinational group. These international considerations became more pressing for Canada in 2017 with the passage of the Tax Cuts and Jobs Act in the United States.1 The headline measure of cutting the US statutory federal corporate tax rate from 35 percent to 21 percent, in combination with structural changes such as immediate expensing for some asset classes, led to much debate about how Canada should respond to the US reforms. In the fall economic statement of November 21, 2018,2 the Canadian government responded to the US challenge. Rather than cutting Canada’s statutory corporate tax rate, the government focused on depreciation measures for investments in new assets. All classes of assets are immediately eligible for triple the usual rate of depreciation in the first year, while investments in machinery and equipment for manufacturing along with some clean-energy assets are eligible for full expensing in the first year. These measures will be phased out starting in 2024, matching the timing of the temporary US depreciation measures.

1 Pub. L. no. 115-97, enacted on December 22, 2017. 2 Canada, Department of Finance, Investing in Middle Class Jobs: Fall Economic Statement 2018 (Ottawa: Department of Finance, 2018).

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The purpose of this Policy Forum is to analyze Canada’s response to the US corporate tax reform and provide direction for future reform of Canadian tax law and policy. The first article provides an assessment of Canadian corporate taxes within the international context. Peter Harris, Michael Keen, and Li Liu begin by laying out how the US corporate tax changes may affect investment and government revenues in Canada—in particular, by providing estimates of the potential impact on revenues from base shifting. They go on to highlight several novel international aspects of the US tax reform that may have a substantial impact on Canada. As one example, the global intangible low-taxed income (GILTI) provisions impose a surtax on accruing income when the foreign tax rate is too low. Harris, Keen, and Li recognize that the full effects of the GILTI provisions cannot yet be determined, but they suggest that these measures could provide an incentive to locate tangible assets outside the United States. In the second article, Philip Bazel and Jack Mintz provide an analysis and new simulations of the impact of the Canadian tax changes. They argue against narrowing the tax base through larger depreciation allowances, in part because this increases distortions for firms that do not pay tax. Moreover, without a change in Canada’s statutory rates, there is the risk of additional revenue losses, to the benefit of the US Treasury, since tax-base shifting out of Canada may accelerate. In the simulations, Bazel and Mintz find that the Canadian reforms lead to large improvements, on average, in the marginal effective tax rates on new investment in Canada, but an increase in the disparity across industries. This non-neutrality in incentives to invest across industries, they argue, is a serious shortcoming of the Canadian government’s approach. They close by pointing out the merits of a cut to corporate tax rates: a more even impact on investment incentives across industries, and a stronger defence against tax-base shifting. In the third and last article, Ken McKenzie and Michael Smart deliver an alternative analysis of the Canadian tax reforms. They begin by noting some challenges for proposals to cut Canada’s statutory tax rate. Not only are the fiscal costs heavy, but the GILTI provisions may limit the effectiveness of tax rate cuts in improving investment in Canada. McKenzie and Smart then move on to a more fundamental question: What should be the base of corporate taxation? Rather than broad corporate income, they argue for a switch to taxing above-normal returns and leaving the normal return to investment untaxed. This approach to taxing economic rent, they argue, can deliver marginal effective tax rates that are very close to zero across all industries, and still raise substantial revenue if tax rates on the remaining base are kept relatively high. The introduction of accelerated depreciation is seen as a step in this direction, but it is regarded as a partial and incomplete response to the US tax reform. Looking at this collection of articles in total, it is clear that the main source of dispute about policy direction is a fundamental difference of opinion on the question of what should be taxed. The nature of the appropriate tax base is not a matter to be determined by reference to technical tax legislation, or ad hoc changes to tax policy forum: editor’s introduction—reform of corporate taxation n 25 parameters; instead, it is a question that should be addressed first, providing a framework that can then be used to build tax legislation and define tax policy. An obvious way to clarify the fundamental question of what should be taxed is to undertake a thorough study of the tax system. A previous Policy Forum in this journal addressed different approaches to the conduct of such a study.3 While a timely response to the pressures of the US tax reform likely called for action in advance of the advice of a comprehensive tax commission, it is clear that deeper reflection on the goals of our tax system could provide a robust and consistent framework within which future incremental tax reforms could be constructed. Kevin Milligan Editor

3 Policy Forum (2018) 66:2 Canadian Tax Journal 349-99. canadian tax journal / revue fiscale canadienne (2019) 67:1, 2 7 - 3 9 https://doi.org/10.32721/ctj.2019.67.1.pf.harris

Policy Forum: International Effects of the 2017 US Tax Reform—A View from the Front Line

Peter Harris, Michael Keen, and Li Liu*

PRÉCIS Sa proximité et ses liens économiques étroits avec les États-Unis obligent le Canada à examiner en détail les effets de la Tax Cuts and Jobs Act (TCJA) des États-Unis. Cet article traite des principales voies par lesquelles les dispositions de la TCJA sur l’imposition des entreprises pourraient toucher le Canada, et comment le Canada pourrait y réagir.

ABSTRACT Proximity and close economic links put Canada on the front line in thinking through the effects of the US Tax Cuts and Jobs Act (TCJA). This article reviews the main channels by which the business tax provisions of the TCJA might affect Canada, and possible responses. KEYWORDS: TAX REFORM n CORPORATE TAXES n INTERNATIONAL TAXATION n CROSS-BORDER n INVESTMENT n PROFIT SHIFTING

CONTENTS Introduction 28 How Might the TCJA Affect Canada? 29 Effects Through Statutory and Effective Rates Within the United States 29 Effects Through International Provisions: FDII, GILTI, and All That 33 What Options Are Available? 36 Conclusion 38

* Peter Harris is of the Faculty of Law, University of Cambridge (e-mail: [email protected]). Michael Keen and Li Liu are of the Fiscal Affairs Department, International Monetary Fund (IMF), Washington, DC (e-mail: [email protected]; [email protected]). This article draws on the analysis in Michael Keen, Li Liu, and Peter Harris, “Canada: Taxing Business in a Changing World,” in Canada: Selected Issues, IMF Country Report no. 18/222 (Washington, DC: International Monetary Fund, July 2018), 4-31 (www.imf.org/~/media/Files/Publications/ CR/2018/cr18222.ashx). We thank the editors of this journal, along with Robin Boadway, Wei Cui, Beverly Dahlby, Kenneth McKenzie, Jack Mintz, and Michael Smart for helpful comments and discussions. The views expressed here are our own and do not necessarily represent the views of the IMF, or its executive board or management.

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INTRODUCTION The US tax reform of 2017, enacted as the Tax Cuts and Jobs Act (TCJA),1 may well prove a landmark event for the international tax system. Beyond the attention- grabbing reduction in the statutory federal corporate income tax (CIT) rate, from 35 percent to 21 percent, and a move toward full expensing of domestic investments, the TCJA introduced structural innovations that mark quite a new way of taxing corporate income in an international setting. There has been much discussion of the likely impact of the TCJA, and its corporate tax provisions in particular,2 on the United States itself, and also some analysis of the likely spillover effects for other countries.3 Such is the novelty of the US reform, however, and so deep and pressing are other issues in international taxation—not least those associated with digitization—that many countries still appear to be wrestling with the question of how, if at all, they should react to the changed environment created by the TCJA. Both literally and figuratively, in proximity and economic interdependence (for instance, more than half of all foreign direct investment in Canada is US-owned), Canada is on the front line in dealing with the TCJA. How it does so matters not only for Canada, but, given Canada’s position as an active and respected participant in international tax forums, also as a possible sign of how the international tax system will be affected more generally. This article aims to take stock of the ways in which the corporate tax aspects of the TCJA might affect Canada, and of how Canada might choose—and to some extent has now chosen—to respond.

1 Pub. L. no. 115-97, enacted on December 22, 2017. 2 Important contributions to a now vast literature include Alan J. Auerbach, “Measuring the Effects of Corporate Tax Cuts” (2018) 32:4 Journal of Economic Perspectives 97-120; Joel Slemrod, “Is This Tax Reform, or Just Confusion?” (2018) 32:4 Journal of Economic Perspectives 73-96; William Gale, Hilary Gelfond, Aaron Krupkin, Mark J. Mazur, and Eric Toder, “A Preliminary Assessment of the Tax Cuts and Jobs Act of 2017” (2018) 71:4 National Tax Journal 589-612; Dhammika Dharmapala, “The Consequences of the Tax Cut and Jobs Act’s International Provisions: Lessons from Existing Research” (2018) 71:4 National Tax Journal 707-28; David Kamin, David Gamage, Ari Glogower, Rebecca Kysar, Darien Shanske, Reuven Avi-Yonah, Lily Batchelder, J. Clifton Fleming, Daniel Hemel, Mitchell Kane, David Miller, Daniel Shaviro, and Manoj Viswanathan, “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the 2017 Legislation” (2018) 103 Minnesota Law Review (forthcoming) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089423); and Samuel A. Donaldson, Understanding the Tax Cuts and Jobs Act, Georgia State University College of Law, Legal Studies Research Paper no. 2018-07 (Atlanta: Georgia State University College of Law, 2018) (http://dx.doi.org/10.2139/ssrn.3096078). 3 Sebastian Beer, Alexander Klemm, and Thornton Matheson, Tax Spillovers from U.S. Corporate Income Tax Reform, IMF Working Paper WP/18/166 (Washington, DC: International Monetary Fund, July 2018); Nigel Chalk, Michael Keen, and Victoria Perry, The Tax Cuts and Jobs Act: An Appraisal, IMF Working Paper WP/18/185 (Washington, DC: International Monetary Fund, August 2018); and Désirée I. Christofzik and Steffen Elstner, International Spillover Effects of U.S. Tax Reforms: Evidence from Germany, German Council of Economic Experts Working Paper 08/2018 (Wiesbaden: German Council of Economic Experts, November 2018). policy forum: international effects of the 2017 us tax reform n 29

HOW MIGHT THE TCJA AFFECT CANADA? To navigate the complexities of the TCJA, it helps to consider first its more conventional domestic components—the change in headline and effective corporate tax rates—before turning to the novel international provisions.

Effects Through Statutory and Effective Rates Within the United States The sharp reduction in the statutory federal CIT rate in the United States means that the combined federal and average state statutory rate, which was around 41 percent prior to reform, falls to 27.1 percent—about the same as the comparable (federal plus average provincial) rate in Canada (figure 1).4 What was a substantial advantage for Canada, as a result of the difference in statutory CIT rates, has now turned into broad equality.5 This matters for two main reasons.6 First, there is the potential impact on profit shifting. Before the TCJA, the difference in statutory rates generally pointed to shifting profits out of the United States and into Canada—to the benefit of Canadian tax revenues. Now that incentive is weakened, and may be reversed. Provincial and state taxes begin to matter, in a way that simple averages may conceal. For instance, the gap in statutory rates between British Columbia and neighbouring Washington state is 4 percentage points, and that between Manitoba and North Dakota is about 6 points.7 Some sense of the magnitude of profit shifting associated with CIT rates can be gained by examining how—conditional on levels of real assets and other controls—reported profits by multinationals in Canada have varied over time with differences between the statutory rate in Canada and the rates abroad. Estimates of this kind, reported in our 2018 study for the International Monetary Fund, suggest that profit shifting into Canada

4 “Reform” in the figures refers to the TCJA for the United States and the 2018 fall economic statement for Canada: Canada, Department of Finance, Investing in Middle Class Jobs: Fall Economic Statement 2018 (Ottawa: Department of Finance, 2018) (herein referred to as “the 2018 fall economic statement”). The distribution of tax rates in Canada remains as before reform. 5 For Canadian-controlled private corporations (CCPCs), the lower rate of CIT in Canada continues to confer a significant advantage. (See, however, Nathan Boidman, “The Tax Cuts and Jobs Act: Canada-U.S. Comparisons for Private Business and Individuals” (2018) 90:7 Tax Notes International 741-49, on the complexities that arise in comparing the treatment of reinvested business profits in the United States and for CCPCs.) 6 There is, of course, also a substantial benefit to Canadian owners of US corporations. 7 Like British Columbia and Manitoba, Washington state, Nevada, Ohio, and Texas have no CIT, but they do have state taxes on gross receipts (ranging up to top rates of 1.5, 0.33, 0.26, and 2 percent, respectively). It would, of course, be even more advantageous for US firms to shift profits to jurisdictions with lower tax rates than Canada, but there is evidence that physical presence in a country facilitates the shifting of profits to that country. 30 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 1 Statutory CIT Rates 50

35 30 25 Percent 20

15 10

0 United States, United States, Canada Group of pre-reform post-reform Seven

Notes: Box height represents interquartile (25th to 75th percentile); the bars indicate minimum and maximum, and the dot represents outlier(s).

by US multinationals may fall by around 15 percent following the rate reduction under the TCJA.8 Second, the change in the CIT rate could have an impact on real investment. Most obviously, when companies choose whether to locate some discrete investment in Canada or in the United States, the reduction in the US statutory rate, implying a lower average effective tax rate (AETR)9 on the associated profits, increases the attractiveness of the US option relative to the pre-TCJA situation.

8 The main data set used for analysis in the IMF study is an unbalanced panel of foreign- majority-owned affiliates (FMOAs) in Canada, from a total of 34 countries, and includes the assets, revenues, profits, and corporate tax rates of these affiliates in their home countries. Estimation of profit shifting relates the profits reported in Canada by FMOAs in each originating country to the difference between the CIT rate in that country and the rate in Canada, allowing for asymmetries in respect of inward and outward shifting, and threshold effects by which profit shifting is concentrated in countries with particularly large tax differentials relative to Canada. For a more detailed discussion of the data and empirical analysis, see Michael Keen, Li Liu, and Peter Harris, “Canada: Taxing Business in a Changing World,” in Canada: Selected Issues, IMF Country Report no. 18/222 (Washington, DC: International Monetary Fund, July 2018), 4-31, at appendix 1 (www.imf.org/~/media/Files/ Publications/CR/2018/cr18222.ashx). 9 As defined, for instance, in Michael P. Devereux and Rachel Griffith, “Evaluating Tax Policy for Location Decisions” (2003) 10:2 International Tax and Public Finance 107-26. policy forum: international effects of the 2017 us tax reform n 31

Much of the debate in Canada, perhaps more than in other countries, revolves around impacts on, not the average, but the marginal effective tax rate (METR)—the amount by which taxation raises the pre-tax return required on an investment to yield the minimum post-tax return required by the investor. Precise figures for calculated METRs are quite sensitive to underlying assumptions.10 It seems clear, however, that the combined effect of the reduced statutory rate and the move to immediate expensing under the TCJA11 was to substantially erode the gap in METRs between the United States and Canada (figure 2).12 It is important to ask, however, why the METR on an investment in the United States should matter for Canada. The world in which the METR completely summarizes how taxation affects investment is one of a perfectly competitive firm that can invest however much it wants at the going rate of return. But in that case there is no direct mechanism by which changes in the METR in one country might affect investment in another.13 Such effects—together with effects from the statutory rate reflected in theAETR —can arise, however, in the plausible case of a firm with market power that chooses how much to invest in differing locations in order to serve a single, integrated market.14 Estimation of a model of this kind, reported in our earlier work,15 suggests that real assets held in Canada by US multinationals might fall, in the long run, by 6 percent. Our estimates imply that, taken together, the reductions in profit shifting into Canada from the United States and in real investment by US firms in Canada may reduce corporate tax revenue paid in Canada by US multinationals (which currently accounts for about 15 percent of Canada’s total CIT revenue) by around 25 percent. However, these results need to be interpreted with great caution. Among the many caveats, it is important to note that the sample does not contain any change in the US rate.16 Moreover, the study focuses only on the response of US multinationals.

10 The methodology for calculating METRs used here is that of Robert E. Hall and Dale W. Jorgenson, “Tax Policy and Investment Behavior” (1967) 57:3 American Economic Review 391-414, with updated data on corporate income tax systems provided by the Oxford Centre of Business Taxation, “CBT Tax Database” (http://eureka.sbs.ox.ac.uk/4635/). 11 The TCJA also includes restrictions on interest deductibility, which considered alone would raise the METR on debt-financed investment. Overall, however, it is generally reckoned that the dominant tendency of the TCJA has been to reduce METRs. 12 A similar message is borne by METR estimates included in the Canadian government’s 2018 fall economic statement, supra note 4, at 59, chart 3.3. 13 Other, perhaps, than through consequent change in the levels of aggregate demand, an effect that drives much of the cross-country spillover found in macro simulation of the TCJA, as for example reported in Chalk et al., supra note 3. 14 Similar effects can also arise if the firm is constrained in the total amount that it can invest. 15 Keen et al., supra note 8. 16 The results are not out of line, however, with those in Beer et al., supra note 3: using firm-level data covering many other countries (but not Canada), Beer et al. suggest a loss of foreign direct investment attributable to the TCJA of up to 4 percent in the long run, with total losses of tax bases (including through profit shifting) averaging 0.07 percent of gross domestic product. 32 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 2 Marginal Effective Tax Rates 35

20 Percent 15

0 United States, United States, Canada, Canada, pre-reform post-reform pre-reform post-reform

Notes: Box height represents interquartile (25th to 75th percentile); the bars indicate minimum and maximum, and the dot represents outlier(s). Source: Calculation by staff of the International Monetary Fund.

Investment and profit-shifting responses can also be expected, however, from non- US businesses. Canadian companies exporting to the United States, for instance, may now find it advantageous to produce there, and perhaps even to produce there for sale into Canada, especially given the new foreign-derived intangible income (FDII) provision discussed below. The lower statutory rate in the United States may also encourage more equity financing and less debt financing of Canadian-owned US subsidiaries, shifting tax revenue from Canada to the United States. These potential effects have been highlighted by business17 and some other commentators.18 They remain unquantified, but are evidently cause for concern. Perhaps an even more fundamental limitation of our results, however, is that they take no account of the major changes in international aspects of the US tax system brought about by the TCJA.

17 Ernst and Young report that more than half of 165 surveyed executives thought it likely that they would shift revenue or risk functions to the United States following the enactment of the TCJA, and nearly one-third expected to reduce investment in Canada: Ernst and Young, “Capital Allocation and Competitiveness Survey: How Government Policy Shifts Are Affecting Canadian Business,” 2018 (www.ey.com/ca/en/services/tax/ey-canada-capital-allocation-survey -economy-impact). 18 See, for example, Jack Mintz, “Global Implications of U.S. Tax Reform” (2018) 90:11 Tax Notes International 1183-93 (also published by the European Network of Economic and Fiscal Policy Research as EconPol Working Paper 2018-08, March 2018). policy forum: international effects of the 2017 us tax reform n 33

Effects Through International Provisions: FDII, GILTI, and All That The international tax provisions, especially some of the more novel ones summar- ized below, may also come to have a substantial impact on Canada. One element is a movement toward territoriality, in the sense that the active business income of US multinationals earned abroad will no longer be subject to US tax, so long as it represents a return of no more than 10 percent on tangible assets— an important qualification taken up later. The implication is that, to the extent that earnings by US multinationals in Canada were previously being repatriated (or were expected to be, with additional tax due at the pre-reform rate), there is a clear reduction in the effective tax rate on, and so possible encouragement of, such investments. Tending in the opposite direction, however, the movement to territoriality also suggests the removal of a lock-in effect. Pre-reform, there was an incentive to keep profits in Canada. Now it is easier to withdraw profits from Canada, so reinvest- ment may be less. Experience with the movement to territoriality in the United Kingdom and Japan shows an increase in outward investment in lower-tax countries;19 but the effects at work in the present context seem likely to be relatively muted, given the ease with which repatriation could be, and in many cases was, deferred pre-reform. The transition provisions of the TCJA that bring unrepatriated earnings into the tax net (at reduced rates) in the United States over the next eight years is a one-off that seems unlikely to have a significant impact, even in the short term.20 Further and potentially more powerful effects arise, however, from the following more novel features of the TCJA:21

n Foreign-derived intangible income. Domestic corporations receive a 37.5 percent deduction from the corporate tax base for FDII, which is calculated as the income of the corporation in excess of 10 percent of qualified business asset investment multiplied by the share of foreign-derived income

19 For example, investment in Europe by UK multinational corporations is estimated to have increased by 15.7 percent in countries with lower statutory CIT rates than the United Kingdom. See Li Liu, “Where Does MNC Investment Go with Territorial Taxation? Evidence from the UK,” American Economic Review (forthcoming). Smart finds a significant increase in outward foreign direct investment from Canada associated with the expansion of the treaty/tax information exchange agreement network and hence of exempt surplus treatment: Michael Smart, “Repatriation Taxes and Foreign Direct Investment: Evidence from Tax Treaties,” June 28, 2010 (www.researchgate.net/publication/228594352_Repatriation_taxes_and_foreign _direct_investment_Evidence_from_tax_treaties). 20 Other than reducing (perhaps substantially) the cost of repatriation of existing profits from Canada: Canadian dividend withholding tax will now be the only barrier for repatriation of existing retained profits. 21 The descriptions set out below are much simplified; for instance, the allocation of domestic expenses to foreign earnings can mean that US tax is payable under the GILTI provision even when the foreign tax rate exceeds 13.125 percent. 34 n canadian tax journal / revue fiscale canadienne (2019) 67:1

to total income (all calculated on a consolidated group basis). This effectively reduces the CIT rate for such income from 21 percent to 13.125 percent. Questions have been raised about the consistency of this provision with World Trade Organization (WTO) rules and with measures adopted by the Organisation for Economic Co-operation and Development (OECD) to eliminate harmful tax practices.22 n Global intangible low-taxed income (GILTI). As an important qualification of the move to territoriality, the TCJA imposes a minimum tax on overseas income that is in excess of 10 percent of the return on tangible assets. Specif- ically, it taxes at the standard US CIT rate, and on accrual, the income of US controlled foreign corporations (CFCs) earned in all foreign jurisdictions that exceeds 10 percent of qualified business asset investment (that is, the depreciated value of tangible fixed assets of thoseCFC s)—but with a deduction for 50 percent of that income. Credit is also given for 80 percent of the foreign tax paid on such income. The effect is to impose a minimum tax rate of 10.5 percent on GILTI income (when no tax is paid abroad) with the US liability being wholly eliminated if the average foreign tax rate paid is at least 13.125 percent. n Base erosion anti-abuse tax (BEAT). The TCJA applies a base erosion provision to large multinational companies23 (those with annual gross receipts of more than US $500 million in the preceding three years) that make certain cross-border payments to affiliates if those payments exceed 3 percent of the multinational’s total deductible expenses. The payments targeted are those that are commonly associated with profit shifting (for example, interest, royalties, and management fees), but the provision does not apply to items characterized as cost of goods sold. Specifically, theBEAT imposes a minimum tax that is a fixed percentage24 of a concept of “modified” taxable income that adds back into income the deductions claimed for these categories of cross- border payments to affiliates. Questions have been raised as to the consistency of this provision with tax treaties.

22 Academic views on this question are divided. For example, Kamin et al., supra note 2, at 49, argue that the FDII regime “is likely an illegal export subsidy in violation of WTO agreements”; Sanchirico concludes that the regime is not clearly in breach: Chris William Sanchirico, The New US Tax Preference for “Foreign-Derived Intangible Income,” Institute for Law and Economics Research Paper 18-8 (Philadelphia: University of Pennsylvania, Institute for Law and Economics, April 30, 2018) (http://dx.doi.org/10.2139/ssrn.3171091). 23 This includes both US companies and foreign companies with income effectively connected with a US trade or business but does not cover individuals, S corporations, regulated investment companies, or real estate investment trusts: section 59A(e) of the Internal Revenue Code of 1986, as amended (herein referred to as “IRC”). 24 The rate is set at 5 percent for 2018, 10 percent for 2019-2025, and 12.5 percent thereafter. policy forum: international effects of the 2017 us tax reform n 35

Consider how these measures might affect the calculus of, for instance, a US firm choosing between exporting to Canada from the United States (and so, if the return on the tangible assets involved is high enough, benefiting from the reduced FDII rate) or alternatively serving the same market by locating a subsidiary in Canada (thus escaping US tax unless that return is sufficiently high that theGILTI provision applies). To simplify, suppose that the statutory tax rates in the two countries are exactly the same, and, abstracting from the complexity of investment allowances, that the tax in each case bears only on rents. The firm’s tax-efficient choice then turns on the rate of return on tangible assets that this investment earns. If the rate of return is less than 10 percent, neither FDII nor GILTI will apply, and the investor will be indifferent as to the choice between locating in the United States or in Canada. If, however, the return on tangible assets is greater than 10 percent, then location in the United States will be preferred: the tax payable in Canada wipes out what would otherwise be a benefit from the reducedUS rate on GILTI income, so that the reduced FDII rate on a return above the 10 percent threshold means that such income is taxed less in the United States. Transaction costs are likely to limit the shifting of tangible assets back to the United States in order to take advantage of this opportunity. But for companies already producing for export in the United States, the implied tax advantage of producing there for export to Canada may already be at work. And the effect could be significant: one estimate is that, hadFDII been in effect in 2014, around 9 percent of all US companies and 13 percent of multinationals would have been eligible for the reduced rate, with a particularly heavy concentra- tion in manufacturing.25 At the same time, however, the GILTI and FDII provisions both create an incentive for US companies to locate tangible assets outside the United States.26 For GILTI, this incentive arises because reducing the return on tangible assets outside the United States reduces the amount of foreign income subject to any tax in the United States; for FDII, the incentive arises because increasing the return on tangible assets located in the United States increases the amount of income subject to the reduced FDII rate. How significant any such effects will prove to be, however, remains very uncertain. One possible indirect benefit from theGILTI provision to some outside the United States is also worth noting. To the extent that the provision induces changes in the business models of some low-tax jurisdictions (since those low rates may no longer be so effective in attracting highly mobile income), a consequent reduced

25 Tim Dowd and Paul Landefeld, “The Business Cycle and the Deduction for Derived Foreign Intangible Income: A Historical Perspective” (2018) 71:4 National Tax Journal 729-50. 26 Hence the international provisions of the TCJA are sometimes caricatured as encouraging the location of intangible assets in the United States and the location of tangible assets in other jurisdictions. The impact of the GILTI and FDII provisions on METRs associated with tangible investments are analyzed in Chalk et al., supra note 3, and Beer et al., supra note 3. 36 n canadian tax journal / revue fiscale canadienne (2019) 67:1 exposure to profit shifting toward such jurisdictions will serve to also protect the tax bases of Canada and other relatively high-tax countries. The impact on Canada of the BEAT seems likely to be limited. The measure may have little bite, since the reversal of the differential in statutory rates for larger companies largely eliminates any incentive to shift profits directly from the United States to Canada. Small businesses in Canada, it should be stressed, may be less affected by the TCJA as a consequence of the relatively generous tax treatment that they now enjoy. Even with the rate reduction and FDII for C corporations, and the top US federal marginal rate of 29.6 percent for eligible passthroughs,27 Canada’s low CIT rates for small corporations, combined with the dividend tax credit and 50 percent exclusion of capital gains, will often preserve more favourable treatment in Canada.28

WHAT OPTIONS ARE AVAILABLE? Even aside from the TCJA—with its novelty and complexity, and with important details left open for several months after adoption—now is a time of considerable uncertainty in international tax matters. Perhaps most notably, there is uncertainty as to the outcome of the heated debate over how, or whether, some of the core building blocks of the current system need to be reformulated to deal with the implications of digitization—an issue now being addressed within the OECD framework. While there is an evident need for caution in navigating that uncertainty, there are clearly some potential pressure points created by the TCJA, and some ways in which they might be eased. Firms are likely to respond more quickly to changed incentives in relation to profit shifting—perhaps by adjusting their intragroup borrowing or royalty payments—than to those affecting real investments. Since the most immediate risk is thus enhanced profit shifting out of Canada, the adequacy of protections against base erosion requires close attention. Possibilities for strengthening these include the following:

n Extending thin capitalization rules to borrowing from unrelated parties, and perhaps also to domestic transactions. Policing a distinction between related and third parties is inherently problematic, and deduction of internally generated group debt that is not reflected in group third-party debt is a continuing problem. Moreover, substantive problems of such debt shifting can arise domestically between the provinces. Thin capitalization rules are, however, an inherently

27 This is achieved by granting businesses a deduction equal to 20 percent of their income, capped by reference to the greater of 50 percent of certain wages paid and 25 percent of those wages plus 2.5 percent of certain depreciable tangible property held by the business: IRC section 199A. The tax rate will, of course, be increased by applicable state taxes. 28 Except perhaps in the case of dividends paid to high-income CCPC owners. policy forum: international effects of the 2017 us tax reform n 37

blunt instrument and do not address the underlying problem of a fundamental tax distortion toward debt finance.29 n Adopting wider anti-base-erosion measures for other deductible payments that are subject to minimal or limited withholding tax. Rents and royalties are leading candidates, and service fees are also potentially problematic. A general approach would be to limit deductions of payments that are prone to contribute to base erosion (or to charge a minimum tax on a base from which such deductions are excluded) in cases where these payments are not subject to some minimal level of taxation in the hands of the recipient. n Addressing the risk of inappropriate allocation of expenses to Canada. The deduction of expenses related to foreign-source income against domestic income is potentially a significant form of base erosion, especially for interest expense incurred in deriving exempt foreign dividends. Dealing with the risk that foreign subsidiaries in low-tax jurisdictions may be stuffed with profits and their Canadian parents loaded with expenses may require more prescriptive rules for allocating expenses between domestic and foreign activities. In relation to foreign branches of Canadian companies, allowing the deduction of foreign losses effectively allows foreign expenses to reduce domestic-source income; this merits reconsideration.

Turning to measures by which investment in Canada might be encouraged and profit shifting more systematically discouraged, the most prominent possible instruments are the statutory CIT rate and/or the treatment of investment. Reductions in the statutory rate are best targeted to discouraging profit shifting. There may be further pressures in Canada to reduce the rate for large businesses: one estimate is that the rate reduction in the United States may eventually spur reductions elsewhere in the order of 4 percentage points (though this again ignores the impact of the changed international provisions).30 As discussed above, there is likely to be less pressure on the small business rate; indeed, there remains a strong case for moderately increasing it.31 It will be important, too, to preserve effective taxation of location-specific rents, most obviously in the natural resource sector. Reducing the statutory rate can be expensive, however, because it confers a windfall benefit on past investments. This concern can be mitigated to some degree

29 More complete potential solutions include, for instance, movement toward an allowance for corporate equity (ACE) form of corporate tax, advocated for Canada by Boadway and Tremblay: Robin Boadway and Jean-François Tremblay, Corporate Tax Reform: Issues and Prospects for Canada, Mowat Research no. 88 (Toronto: University of Toronto, School of Public Policy and Governance, Mowat Centre, April 2014); and Robin Boadway and Jean-François Tremblay, Modernizing Business Taxation, C.D. Howe Institute Commentary no. 452 (Toronto: C.D. Howe Institute, June 2016). 30 See supra note 16. 31 As argued, for instance, by Keen et al., supra note 8. 38 n canadian tax journal / revue fiscale canadienne (2019) 67:1 by phasing in any reduction in the rate, as has been the case in the past. A phased-in reduction, though, brings its own distortions, creating incentives to bring investment and other expenses forward and shift profits into the future. It may also add complexity to the dividend tax credit during the transition period, although experience elsewhere has proved that these difficulties are manageable. Close coordination between federal and provincial governments, which has been well established in Canada, would be needed to consider how best to share any reduction in the combined rates between the two levels of government. A more closely targeted way to encourage real investment is by increasing the generosity of investment allowances. Moving toward immediate expensing of a wide class of assets can be expensive, though the issue here, while significant, is essentially one of timing: compared to depreciation, immediate expensing implies a narrower tax base when the investment is undertaken, but—since in either case the asset is fully written off over time—a broader one later. Such a move was in any event announced in Canada’s 2018 fall economic statement, which introduced new measures for accelerated depreciation, along the lines of developments in the United States. The combined effect of immediate expensing for equipment and machinery, and accelerated depreciation for buildings, is estimated to reduce the average METR in Canada by 5 percentage points (from 17 percent to 12 percent).32 Applying the estimates used above, this would in itself, in the long run, increase investment in Canada by US multinational corporations by 0.5 percent and increase the Canadian CIT that they pay by around 1 percent. This is far from negating the effects of the TCJA set out above. There is a case for more generous treatment of investment accompanied by tighter limits on interest deductibility in order to avoid exacerbating a marginal corporate tax subsidy to investment.33 Such restrictions would need to apply to all interest, not just borrowing from related parties, and would recoup some of the revenue loss from enhanced investment allowances.

CONCLUSION The view from the front line is often unsettling. The TCJA—with its complexity and the novelty of its cross-border provisions—changes aspects of the international tax environment that have been fixed for more than a generation. It will affect many countries, some more so than Canada, but few are more closely linked to the United States and in few is the reform itself more visible. This article has considered what seem likely to be the main channels through which Canada might be affected

32 This is broadly in line with the estimates in the article that follows, by Philip Bazel and Jack Mintz, “Is Accelerated Depreciation Good or Misguided Tax Policy?”, which uses a somewhat different methodology. Similarly, the 2018 fall economic statement estimates that these measures will cause the average METR to fall from 17 percent to 13.8 percent: supra note 4, at 59, chart 3.3. 33 As, indeed, the TCJA did. policy forum: international effects of the 2017 us tax reform n 39 by the business tax provisions of the TCJA, and some of the ways in which it might respond—and now, to some degree, has responded. How the international tax system will evolve in the coming years, including in response to developments other than the TCJA, is far from clear. There is little sign, however, that pressures on the CIT and the revenue it yields will ease. Any changes will need to be seen, ultimately, within the context and the desired future direction of the tax system as a whole.34

34 Among those arguing that the time is right for a broad review of the Canadian tax system are Keen et al., supra note 8; Chartered Professional Accountants of Canada, International Trends in Tax Reform: Canada Is Losing Ground (Toronto: CPA Canada, 2018) (www.cpacanada.ca/en/ the-cpa-profession/about-cpa-canada/key-activities/public-policy-government-relations / policy-advocacy/cpa-canada-tax-review-initiative/international-trends-in-tax-reform); Ernst and Young, supra note 17; and Alan Macnaughton and Kevin Milligan, “Policy Forum: Editors’ Introduction—Should Canada Have a Tax Commission?” (2018) 66:2 Canadian Tax Journal 349-50. canadian tax journal / revue fiscale canadienne (2019) 67:1, 4 1 - 5 5 https://doi.org/10.32721/ctj.2019.67.1.pf.bazel

Policy Forum: Is Accelerated Depreciation Good or Misguided Tax Policy?

Philip Bazel and Jack Mintz*

PRÉCIS Les auteurs examinent les implications de la réaction du Canada à la réforme fiscale américaine de 2017. L’accent mis par le Canada sur l’amortissement fiscal accéléré occasionnera des taux effectifs marginaux d’imposition sur le capital moins élevés pour les entreprises contribuables, et ces taux seront bien inférieurs aux taux américains obtenus avec l’entrée en vigueur de la Tax Cuts and Jobs Act le 1er janvier 2018. En ne tenant pas compte de la neutralité, le gouvernement annule une partie des gains qui pourraient être réalisés en diminuant le fardeau fiscal sur le capital, et perd ainsi l’occasion de maximiser les économies d’efficience pouvant être tirées d’un meilleur régime fiscal des sociétés. En outre, par son approche, le Canada néglige de réagir aux effets de compétitivité des réformes américaines sur l’érosion de l’assiette fiscale des sociétés au Canada par suite du déplacement par les entreprises de leurs profits vers les États-Unis. Le faible taux d’imposition américain sur le revenu tiré de biens incorporels attirera certaines fonctions aux États-Unis. Il aurait été préférable que le gouvernement adopte une approche plus globale à la réforme fiscale visant les sociétés, y compris en réduisant les taux d’imposition des sociétés.

ABSTRACT The authors examine the implications of Canada’s response to the 2017 US tax reform. Canada’s focus on accelerated tax depreciation will achieve lower marginal effective tax rates on capital for taxpaying companies, well below the US levels achieved with the Tax Cuts and Jobs Act that came into effect on January 1, 2018. By ignoring neutrality, the government offsets some of the potential gains by reducing the tax burden on capital, thereby failing to maximize efficiency gains from a better corporate tax system. Further, Canada’s approach fails to respond to competitiveness effects of US reforms on corporate tax base erosion in Canada as companies shift profits to the United States. The lowUS tax rate on intangible income will draw certain functions to the United States. A more comprehensive approach to corporate tax reform, including some reduction in corporate income tax rates, would have been a preferable response. KEYWORDS: CORPORATE INCOME TAXES n CAPITAL COST ALLOWANCE n EFFECTIVE RATES n EFFICIENCY n TAX REFORM

* Of the School of Public Policy, University of Calgary (e-mail: [email protected]; [email protected]). We wish to thank editors Kevin Milligan and Alan Macnaughton for helpful comments that improved the article.

41 42 n canadian tax journal / revue fiscale canadienne (2019) 67:1

CONTENTS Introduction 42 US Tax Reform and Canada’s Accelerated Tax Depreciation 44 Was Accelerated Depreciation the Right Response to US Tax Reform? 49 Conclusion—Is There a Better Approach? 53 Appendix 54

INTRODUCTION In the fall economic statement issued on November 21, 2018,1 Canada’s minister of finance introduced temporary accelerated tax depreciation for qualifying assets as a response to the 2017 US tax reform. The stated intent of the policy was to

[i]mprove competitiveness by allowing the full cost of machinery and equipment used in the manufacturing and processing of goods to be written off immediately for tax purposes, and by introducing the Accelerated Investment Incentive to support investment by businesses of all sizes and across all sectors of the economy. These changes will make it more attractive to invest in assets that will help drive business growth and secure jobs for middle class Canadians.2

Despite the “temporary” nature of the measure (which is to be fully phased out by 2028), we argue that accelerated tax deprecation is a significant departure from the principles of corporate tax reform adopted over the last three decades. In the May 1985 federal budget, the corporate tax was first “restructured” to lower the corporate income tax rate and broaden the tax base in pursuit of market efficiency, certainty, simplicity, and stability of corporate tax revenues.3 This restructuring followed a decade and a half of tax policies that had led to a narrowing of the corporate tax base, with accelerated depreciation, preferential tax rates, and investment tax credits creating a large overhang of tax losses.4 Competitiveness was also a theme for the 1998 report of the Technical Committee on Business Taxation, which argued for “neutrality with internationally competitive [corporate] tax rates.”5 In the words of the committee,

1 Canada, Department of Finance, Investing in Middle Class Jobs: Fall Economic Statement 2018 (Ottawa: Department of Finance, 2018) (herein referred to as “the 2018 fall economic statement”). 2 Canada, Department of Finance, “2018 Fall Economic Statement: Investing in Middle Class Jobs,” News Release, November 21, 2018. 3 Canada, Department of Finance, The Corporate Income Tax System: A Direction for Change (Ottawa: Department of Finance, May 1985), at 2-3 (released with the May 23, 1985 budget). 4 So many companies had unused deductions (totalling $14 billion by 1981) that by the mid-1980s only 30 percent of corporate investment was undertaken by firms that were taxpaying over a long period of time. Ibid., at 18. 5 Canada, Report of the Technical Committee on Business Taxation (Ottawa: Department of Finance, April 1998), at 1.5. policy forum: is accelerated depreciation good or misguided tax policy? n 43

Neutrality encourages businesses and entrepreneurs to pursue profitable opportunities that will make Canada prosper, rather than to waste resources in an effort to reduce taxes. Moreover, with lower and more competitive tax rates, Canada would be a more attractive location for business, thereby creating employment and growth.6

To put this another way, tax competitiveness is best achieved by having the least economically harmful corporate tax, not by matching tax burdens by industry with those in competing jurisdictions. Hence, if the United States chooses a highly distortionary corporate tax structure, Canada should not mimic it. As we show in this article, accelerated tax depreciation will achieve lower marginal effective tax rates (METRs) on capital for taxpaying companies in Canada, and those rates will be well below the US levels achieved with the Tax Cuts and Jobs Act (TCJA) that came into effect on January 1, 2018.7 However, accelerated depreciation will more than double distortions in the corporate tax system, leading to a less neutral corporate income tax and impairing efficiency and productivity in the allocation of capital among competing uses. The potential impact of the new measure on the value of unused deductions is unclear at this time, but we note that 56 percent of corporations were not paying corporate income taxes in 2015.8 This number will likely grow, with more companies being unable to fully use accelerated depreciation deductions. By ignoring neutrality, the government offsets some of the potential gains from reducing the tax burden on capital, thereby failing to maximize efficiency gains from a better corporate tax system. Further, if accelerated depreciation, investment tax credits, and other prefer- ences become an enduring component of the tax system, the corporate tax will become increasingly complex, inefficient, and unstable. Instead of relying on such incentives, the federal and provincial governments should be pursuing a more comprehensive approach to tax reform in order to improve efficiency, fairness, simplicity, and competitiveness. In the remainder of this article, we review the major elements of the US tax reform measures affecting Canadian competitiveness, and the Canadian response. In the next section, we provide an analysis of the potential impact of Canada’s tax package on investment and neutrality. We then turn to the benefits and costs of accelerated depreciation as a tax policy and conclude with an argument for a more comprehensive approach to tax reform in Canada.

6 Ibid. 7 Tax Cuts and Jobs Act, Pub. L. no. 115-97, enacted on December 22, 2017. 8 Canada Revenue Agency, “T2 Corporate Income Tax Statistics, 2018,” at table 9, “Number and Percentage of Taxable Versus Non-Taxable Corporations, 2011 to 2015” (www.canada.ca/ content/dam/cra-arc/prog-policy/stats/t2-corp-stats/2011-2015/tbl09-en.pdf ). 44 n canadian tax journal / revue fiscale canadienne (2019) 67:1

US TAX REFORM AND CANADA’S ACCELERATED TAX DEPRECIATION The most significant part of theUS tax reform is a restructuring of the corporate income tax to reduce the federal corporate income tax rate, broaden the corporate tax base, and attract profits to the United States, including the adoption of a dividend exemption system for US multinationals. The competitive impact results not just from the attraction of investment and other corporate activities to the United States, but also from the mitigation of US base erosion through the repatriation of profits to the United States and the shifting of costs to other jurisdictions, including Canada.9 The TCJA contains a large number of provisions aimed at increasing US tax competitiveness through business tax reforms. Key measures include the following:

n A reduction in the federal corporate income tax rate from 35 percent to 21 percent. n Immediate (100 percent) expensing of investment in assets with a recovery of less than 20 years (primarily machinery and equipment). This is a temporary measure: the writeoff rate is reduced by 20 percentage points per year beginning in 2023 until eliminated by 2027. The preferential rate is not available to companies that are not subject to the interest limitation rule (construction and real estate businesses, and certain public utilities). n A general limitation on the deductibility of interest expense, initially set at a maximum of 30 percent of earnings before the deduction of interest, taxes, depreciation, and amortization (EBITDA) (reduced to 30 percent of earnings before the deduction of interest and taxes after 2021), and a limitation on the use of deductions for non-operating losses, with the maximum being 80 percent of profits. n A minimum tax of 10 percent on foreign-controlled affiliates operating in the United States, applied to profits excluding deductions for interest, royalties, payments for services, and other payments to related foreign parties (the base erosion anti-avoidance tax, or BEAT). n A new federal tax rate of 10.5 percent on global intangible low-taxed income (GILTI) earned abroad by US companies and a 13.125 percent tax rate on income from foreign-derived earnings from domestic intangible activities (FDII). Rates are to be adjusted upward in later years but remain favourable relative to the US federal corporate income tax rate.

9 See Jack Mintz, “Global Implications of U.S. Tax Reform” (2018) 90:11 Tax Notes International 1183-93 (also published by the European Network of Economic and Fiscal Policy Research as EconPol Working Paper 2018-08, March 2018). See also the preceding article by Peter Harris, Michael Keen, and Li Liu, “International Effects of the 2017 US Tax Reform—A View from the Front Line”; and Philip Bazel, Jack Mintz, and Austin Thompson, “The 2017 Tax Competitiveness Report: Calm Before the Storm” (2018) 11:7 SPP Research Papers [University of Calgary, School of Public Policy] 1-40. policy forum: is accelerated depreciation good or misguided tax policy? n 45

n A 20 percent reduction in personal income taxes on qualifying business income earned by passthrough entities, including sole proprietorships, partnerships, and S corporations.10 These businesses do not pay corporate income taxes since their income is flowed through to owners of equity and taxed at the personal level.

As described above, in the 2018 fall economic statement, the Canadian government provided a response to the US tax reform. Beginning November 21, 2018, a company will be able to claim the “accelerated investment incentive” in the first year equal to 1.5 times the normal capital cost allowance rate for depreciable assets. (The half-year convention providing a 25 percent deduction in the first year is also suspended.) Goodwill and other intangible assets (such as resource development expenditures, and oil and gas property expenditures) will be allowed faster writeoffs, to a maximum of 1.5 times the normal allowance in the first year. In addition, a richer incentive is provided for investment in manufacturing and processing machinery and equipment, and investment in clean energy that would be fully expensed in the first year.11 The allowance for accelerated depreciation will be phased out gradually, beginning in 2024, with a return to the pre-November 21, 2018 capital cost allowance system by 2028. Both the temporary expensing provisions in the United States and the temporary accelerated depreciation incentive in Canada will have a roller- coaster impact on METRs, with initial reductions being followed by increases at a later time.12 While accelerated depreciation in Canada is a reaction to the immediate expensing of machinery expenditures in the US reform, it is not uncommon for such temporary measures to become like a narcotic, difficult to take away from companies relying on the incentive. For example, in 2002 the United States introduced bonus depreciation at 30 percent for investments in capital assets with recovery rates of less than 20 years. Although the measure was cancelled from 2004 to 2007, it was reinstated at a 50 percent rate in 2008, followed by varying rates ranging between 30 percent and 100 percent applicable over the next 13 years. Bonus depreciation was to be phased

10 For high-income taxpayers, the deduction is limited to one of two options, whichever produces the greater number: (1) 50 percent of wages with respect to the qualified trade or business, or (2) the sum of 25 percent of wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property. The deduction is phased out for incomes in excess of US$315,000 (married, filing jointly) or US$157,500 (other filers), and eliminated when taxable income exceeds US$415,000 (married, filing jointly) or US$207,500 (other filers). Qualified business income does not include capital gains and /or losses, dividend income, interest income (unless it is part of the business’s usual operations), gains from currency transactions, or any other type of investment income. 11 For a full description of the new measures, see the 2018 fall economic statement, supra note 1, at 57-58. 12 See Bazel et al., supra note 9, for a discussion of the US roller-coaster effect. 46 n canadian tax journal / revue fiscale canadienne (2019) 67:1 out by 2020, but as described above, US reform reintroduced a 100 percent writeoff for five years, followed by a phase-out period for another five years. In 1972, Canada introduced a temporary two-year writeoff for expenditures on manufacturing and processing equipment used for sale or lease, in response to a US incentive for domestic exported production by a domestic international sales corporation. The Canadian incentive was phased out after the 1987 tax reform and returned in 2007, initially on a temporary basis but in the end extending to 2016. The capital cost allowance rate after 2015 for manufacturing and processing equipment has been 50 percent on a declining balance basis (and subject to the half-year convention providing a 25 percent deduction in the first year). After November 21, 2018, manufacturing and processing capital expenditures are fully expensed for the next five years, followed by a 75 percent writeoff in 2024 and 2025, and 55 percent in 2026 and 2027. To measure the impact of Canada’s accelerated depreciation provisions in comparison with the US reform, we estimate the corporate METR before and after the introduction of these changes.13 The METR is the annualized value of corporate taxes paid as a percentage of the pre-tax profitability of marginal investments. Marginal investments are those that are incremental to the economy: they earn sufficient profit to be taxable, and to attract financing from international investors. At the margin, businesses invest in capital until the rate of return, net of taxes and risk, is equal to the cost of financing (the interest rate on bonds and the imputed cost of equity financing). If the rate of return is more (less) than financing costs, firms will invest more (less) in capital. Thus, if a government increases the tax rate, this will result in businesses rejecting marginal projects that would otherwise be profitable if the tax burden were smaller. In our calculations, we include corporate income taxes, sales taxes on capital purchases, franchise fees, capital taxes, and land transfer taxes. It is assumed that companies are taxpaying and use all deductions. For the United States, the interest limitations are not binding, given our assumption that assets are 40 percent financed by debt. We assume that all provinces, including Quebec and Alberta, adopt the federal provisions. (Quebec has already announced, on December 3, 2018, its adoption of the federal measures and a reduction in its additional capital cost allowance. Alberta had not made any announcement at the time this article was written, but we assume that it will adopt the federal measures, as has been its practice in the past.)

13 See ibid. for a fuller explanation of the methodology used for the calculations that follow. The results shown in figure 1 below include oil and gas when averaging METRs for the Canadian and US economies, unlike our estimates of industry-wide averages in earlier years. (See the appendix to this article for provincial results excluding oil and gas.) Oil and gas investments include exploration and development as well as post-development expenditures on depreciable capital, inventories, and land. For a theoretical treatment of oil and gas, see J. Mintz, “Taxes, Royalties and Cross-Border Investments,” in Philip Daniel, Michael Keen, Artur Świstak, and Victor Thuronyi, eds., International Taxation and the Extractive Industries (Washington, DC and New York: International Monetary Fund and Routledge, 2017), 306-31. policy forum: is accelerated depreciation good or misguided tax policy? n 47

The METR calculations provided below have several important limitations. The first is that some industries are excluded, particularly mining, finance, insurance, and real estate. Mining in Canada tends to be less highly taxed than most sectors, and also less highly taxed than US mining, even when royalties and mining profit taxes are taken into account.14 On the other hand, investment in tangible capital by finance and insurance is much more heavily taxed in Canada than in the United States, owing to capital taxes and value-added taxes with non-refundable taxes on intermediate goods and capital.15 Further, the calculations ignore investments in intangible capital (such as research and development, and marketing) since we do not have access to data on the extent to which such activities are supported by government grants in the United States and Canada. (Tax support is easier to model, but the United States relies more on grants.)16 As shown in figure 1, Canada’s METR drops on average from 23.5 percent pre- November 21, 2018 to 19.1 percent after the introduction of accelerated depreciation.17 The US METR after the US tax reform is 24.2 percent. Industries that benefit most from accelerated depreciation in Canada include communications (a 6.2 percentage point decline), manufacturing (6.0 percentage points), forestry (5.9 percentage points), and oil and gas (5.2 percentage points, assuming that Alberta adopts the same measures). Sectors benefiting least are construction, wholesale trade, and retail trade.

14 We have not yet been able to aggregate US results taking into account products and states. For coal and iron, see Jack Mintz, Philip Bazel, Duanjie Chen, and Daria Crisan, With Global Company Tax Reform in the Air, Will Australia Finally Respond? (Melbourne: Minerals Council of Australia, March 2017). 15 See Jack M. Mintz and Angelo Nikolakakis, “Tax Policy Options for Promoting Economic Growth and Job Creation by Leveraging a Strong Financial Services Sector,” paper prepared for the Toronto Financial Services Alliance, January 2016 (http://tfsa.ca/storage/reports/ TFSA%20-%20Tax%20Policy%20Options%20-%20January%202016.pdf). 16 See Jack M. Mintz, Most Favored Nation: Building a Framework for Smart Economic Policy, Policy Study no. 36 (Toronto: C.D. Howe Institute, 2002). 17 Our estimates of aggregate METRs for 2018 differ from earlier estimates: Canada’s METR has previously been calculated as 18.9 percent instead of 22.9 percent in figure 1, and the US METR as 21.8 percent instead of 24.2 percent in figure 1. (Bazel et al., supra note 9.) The increase in the rate for Canada, and part of the increase in the US rate, is due to the inclusion of the oil and gas sector in the more recent calculations. A portion of the increase in the US METR is also due to updated data for a key non-tax variable that drives the model, namely, capital weights. Capital weights represent the distribution of investment across assets and industries, and are a primary driver of the model results. Notably, our updated data showed a sizable shift in key areas from lower- to higher-taxed industries; most important among them was a shift of capital into electrical power generation, an industry that does not benefit from the new expensing regime in the United States. This compounds the effect of the data update, and creates a larger change than would have occurred if electrical power equipment had been granted expensing. Quebec’s (now temporary) additional capital cost allowance provided a short-lived reduction in the Canadian METR of 1.5 points (from 20.4 percent to 18.9 percent) between March and December 2018. 48 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 1 Corporate Marginal Effective Tax Rates (METRs) by Industry, Canada and the United States, as at December 2018 35

30 30.1 28.5 25.4 25.0 24.9 24.9 24.9 24.2 23.9 23.8 25 23.7 23.5 23.2 22.4 21.6 21.6 21.0 20.8 20.5 20.2 19.2 20 19.1 18.5 18.2 17.9 16.2 15.5 15 15.1 13.5 13.2 13.0 METR (percent) 10 7.5 7.1 5

Forestry storage All sectors Retail trade Oil and gas and waterConstruction Manufacturing Other services Wholesale trade Communications Transportation and Electrical power, gas,

Canada, 2018 Canada, pre-November 21, 2018 United States, 2018

Source: Authors’ calculations.

In table 1, we provide a summary of METRs on capital by province pre- and post- November 21, 2018. (A more detailed breakdown of METRs by sector is provided in the appendix to this article.) The Atlantic provinces tend to have the lowest METRs, largely as a result of the federal Atlantic investment tax credit available for the resource (excluding mining, and oil and gas) and manufacturing sectors. Mani- toba, Saskatchewan, and British Columbia have relatively high METRs owing to provincial sales taxes on capital purchases. On December 3, 2018, Quebec announced the end of a short-lived but extremely generous uncapped18 60 percent bonus to depreciation for manufacturing and processing equipment and general-purpose electronic data processing and systems software, enacted earlier in the year. Instead, the province chose to adopt the federal government’s new depreciation measures and introduce a new capital cost allowance of 30 percent. As a result, the Quebec METR does not drop as much, since the adopted federal measures were partially offset by the scaling down of the bonus capital cost allowance. As a result of the federal government’s accelerated depreciation measure, corporate taxes in Canada have become more distorted. We estimate the dispersion index

18 “Uncapped” refers to the fact that the measure allowed for depreciation in excess of 100 percent. policy forum: is accelerated depreciation good or misguided tax policy? n 49

TABLE 1 Corporate Marginal Effective Tax Rates (METRs) by Province, Pre- and Post-November 21, 2018

Pre-November Post-November Reduction in 21, 2018 21, 2018 METR

percent Canada ...... 19.2 15.3 −4.0 Newfoundland and Labrador . . . . . 12.8 7.4 −5.5 Prince Edward Island ...... 15.4 10.3 −5.1 Nova Scotia ...... 17.8 12.7 −5.1 New Brunswick ...... 14.8 9.8 −5.0 Quebec ...... 14.3 10.6 −3.6 Ontario ...... 18.3 13.9 −4.4 Manitoba ...... 27.0 23.7 −3.3 Saskatchewan ...... 23.9 20.5 −3.4 Alberta ...... 18.5 14.5 −4.0 British Columbia ...... 27.6 24.3 −3.3

Note: See the appendix to this article for notes on the calculations. Source: Authors’ calculations. as a measurement of the variation of METRs across assets and industries (the variance in METRs divided by the average METR for Canada). As shown in figure 2, before November 21, 2018, the dispersion index19 was 2.9 percent; after that date, it increased by almost two-and-half times, to 7.9 percent. Canada’s corporate tax is now almost as distorted as the US corporate tax structure (with expensing for industries except utilities). While the Canadian government provided accelerated depreciation for a broad class of capital expenditures, accelerated depreciation tends to provide stronger support to short-lived assets that turn over more quickly (allowing for more frequent claims of accelerated depreciation). Further, manufacturing machinery and clean energy investments were expensed unlike other assets. Across industries (excluding oil and gas), the METR on machinery investments plummets from 19.7 percent to 10.3 percent and for structures from 23.1 percent to 21.2 percent. (The METR on inventories at 24.8 percent and on land at 10.9 percent remains unchanged.) Thus, industries with machinery-intensive investments benefit most, similar to the impact of the US expensing provisions.

WAS ACCELERATED DEPRECIATION THE RIGHT RESPONSE TO US TAX REFORM? Despite the exclusion of some sectors in METR calculations, as discussed above in our analysis, it might be questionable whether Canada needed to do anything at all

19 This dispersion index is a version of the coefficient of variation—the weighted variance of METRs across industries and asset classes divided by the average METR. The dispersion index for Canada and the United States excludes oil and gas. 50 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 2 Dispersion Index Measure for Canada and the United States, Pre- and Post-November 21, 2018 9 8.4 8 7.9 7 6 5

Percent 4 3 2.9 2 1 0 Canada, 2018 Canada, pre-November 21, 2018 United States, 2018 Index of dispersion Notes: The dispersion index is calculated as the variance in marginal effective tax rates (METRs) by asset and industry over the average economy-wide asset by industry METR. Oil and gas are excluded.

in response to the US tax reform. Prior to the passage of the TCJA, Canada had a 14-point advantage as measured by its METR, relative to the United States,20 but it still maintained a 3-point advantage, on average, after the US reform—so why introduce a new distortion into the tax system? Canada had significantly improved its tax competitiveness for large company investments since 2005, especially compared to the United States. Given that Canada’s advantages, such as a well-educated workforce and health-care subsidies, are partly offset by certain disadvantages (a small market, low adoption rates for technological innovations, and higher taxes on energy and labour costs), a corporate tax system that encourages business investment is helpful to Canada’s competitiveness. When the combined federal-provincial corporate income tax rate was well below (by as much as 12 points) the US federal rate, many companies with cross- border investments shifted profits and intangible functions from the United States to Canada.21 With the US tax reform, the corporate tax advantage was largely eliminated, resulting in concerns about Canada’s competitiveness.

20 See Bazel et al., supra note 9, for rankings of Canada’s METR relative to 92 countries. Canada’s METR fell from one of the highest in 2005 to the middle of the pack by 2012. After 2012, Canada’s corporate tax advantage was weakening, but its METR remained significantly lower than the US METR until 2018. 21 See Bazel et al., supra note 9. policy forum: is accelerated depreciation good or misguided tax policy? n 51

An argument in favour of accelerated depreciation is that it provides a faster recovery of capital costs for tax purposes, compared to the economic cost of depreciation. It is similar to an interest-free loan through the tax system, whereby a company is able to use upfront tax savings to reduce the amount of financing needed for capital expansion. The impact of accelerated depreciation is to reduce the tax burden on qualifying capital expenditures, thus improving the return on business investment and labour productivity.22 Business investment also enables companies to adopt innovations more quickly, since more recent capital inflows are embedded with new technologies. Further, the tax benefits of accelerated depreciation flow only to companies that make new investments; thus, new capital expenditures are rewarded with tax savings while the relative value of prior capital investment declines. Also, the impact of a favourable treatment of machinery investments is to increase the premium for skilled labour over unskilled labour, thereby increasing economic inequality, as one recent study suggests.23 For this reason, accelerated depreciation can create an advantage for the adoption of new technologies. While these arguments for accelerated depreciation make some sense, we argue that it was an insufficient response to theUS tax reform. First, as discussed above, accelerated depreciation creates new distortions in the corporate tax system, primarily benefiting machinery-intensive businesses. Further, accelerated depreciation will be of little or no value if companies are unable to use the deduction owing to insufficient profitability. The tax loss overhang will be increased, and a greater incidence of non-taxpaying companies will be experienced over time. These impacts will further undermine the efficiency and stability of the corporate tax system since companies will look for opportunities to “sell” their losses to other companies, putting pressure on existing anti-loss-trading rules. Second, the US treatment of intangible income (intellectual property, services, and marketing) results in a much lower METR calculation than what is captured in figure 1. As noted above, the new US federal tax rate on foreign-derived intangible income (FDII) is 13.125 percent. This encourages US and foreign multinationals to shift several functions to the United States, since Canada’s combined corporate income tax rate, at roughly 27 percent, is considerably higher. Accelerated depreciation in Canada responds to US expensing provisions for investment but will have little effect in avoiding the loss of intangible-related activities to the United States. Third, looking only at averages fails to take account of regional differences in METRs across provinces and states. While most provincial corporate income tax rates are close to 12 percent, US state income tax rates differ sharply, ranging from zero (in Texas, Ohio, and Washington state) to 12 percent (in Iowa). (The current

22 A 10 percent reduction in the METR has been found to increase investment by 7 percent to 10 percent in many studies. See Bazel et al., supra note 9. 23 C. Slavík and H. Yazici, “On the Consequences of Eliminating Capital Tax Differentials” (2019) 52:1 Canadian Journal of Economics 225-52 (https://doi.org/10.1111/caje.12370). 52 n canadian tax journal / revue fiscale canadienne (2019) 67:1

US federal-state corporate income tax rate varies between 21 percent and 30.48 percent, while the combined Canadian federal-provincial general rate varies between 26.5 percent and 29 percent.) While it is common to apply a gross domestic product (GDP)-weighted average of state corporate income tax rates in the United States, this is not equivalent to a taxable-income or trade-weighted average, which may be more relevant to Canada. For Ontario, we calculate the trade-weighted average as about 1.5 points lower than the GDP-weighted average. For Alberta, the federal- provincial corporate income tax rate is 27 percent; in Texas—which accounts for nearly 80 percent of US oil production and 27 percent of US gas production—the corporate income tax rate is 21 percent. These state-provincial differences in corporate income tax rates suggest that competitiveness issues for investment and the corporate tax base are to be found at the regional or industry level, rather than in a comparison of averages. Fourth, accelerated depreciation does not deal with the potential base-erosion impact of the US reform. The problem for Canada is not only that the US corporate income tax rate is somewhat below the Canadian rate; in addition, the many provisions of the TCJA, including the interest deduction limitation and loss restriction provisions, the concessionary US tax rate on FDII, and the base-erosion tax (BEAT), encourage US companies and foreign companies with US operations to shift profits to the United States. There is now a considerable incentive for US multinationals and Canadian companies with US operations to shift costs to Canada and put profits in low-tax US states, in order to avoid limitations on debt and other deductions in the United States.24 Accelerated depreciation will do little to deal with the erosion of Canada’s tax base that will occur over time. Fifth, Canada’s federal-provincial corporate income tax rate is no longer competitive internationally. Currently, Canada’s average corporate income tax rate is close to 27 percent, the 8th highest of 33 countries in the Organisation for Economic Co-operation and Development.25 (Portugal has the highest rate, at 31.5 percent; France and Belgium are reducing their corporate rates to 25 percent by 2020, and Greece is reducing its corporate rate to 25 percent by 2022.) While the United States and many European countries are adopting rules to limit interest deductions and protect their corporate tax base, Canada is more exposed to base erosion in the future and the loss of corporate revenues. Base broadening and corporate rate reductions would make sense. Sixth, the US tax reform leads to a much lower tax on small and medium-sized businesses compared to the tax burden in Canada, despite the small business deduction that results in lower corporate taxes on active business income for Canadian- controlled private corporations. As discussed above, most US small and medium-sized

24 See Harris et al., supra note 9, for an estimate of base erosion for US multinationals. Their analysis of base erosion does not extend to foreign companies with US operations. 25 Organisation for Economic Co-operation and Development, “OECD Tax Database” (www.oecd.org/tax/tax-policy/tax-database.htm). policy forum: is accelerated depreciation good or misguided tax policy? n 53 businesses have been organized as passthroughs and pay no federal corporate income tax, since the income from these businesses is attributed to the owners /investors. The US tax reform provides a 20 percent deduction from qualifying business profits for those taxpayers. Prior to November 21, 2018, entrepreneurial companies with a maximum of $10 million in assets (qualifying for Canada’s small business deduction) would have a 10-point advantage in locating in the United States compared to Canada (42.5 percent in Canada versus 32.5 percent in the United States) owing to much lower corporate and personal income taxes paid in the United States.26 For businesses with $20 million in assets (not qualifying for the small business deduction in Canada), the tax advantage in the United States remains about the same (48.1 percent in Canada versus 37.8 percent in the United States), primarily owing to personal tax advantages in the United States. Accelerated depreciation offsets only some of the tax advantages to startups in the United States. Overall, a much deeper corporate and personal tax reform was needed to deal with the many competitiveness issues raised by the US tax reform for Canada. Accelerated depreciation focused only on a narrow set of issues, and not necessarily the right ones.

CONCLUSION—IS THERE A BETTER APPROACH? We argue that a comprehensive approach would have been a better response to the US tax reform, one that would not only deal with competitiveness but also make Canada’s tax system more efficient and fair. A comprehensive approach would require a review of corporate and personal income taxation and the tax mix, including sales and excise taxes. (The latter are expected to grow in the next several years as a result of new taxes on carbon and cannabis.) A comprehensive tax reform would include a reduction in corporate tax rates, which would help to address some of the competitiveness effects of the US tax reform, especially with respect to income from intangibles and base erosion. It might well also include lower personal taxes to attract talent and entrepreneurial companies. In addition, it would include base-broadening provisions, such as limitations on interest deductions, that would achieve neutrality and fairness in the tax system. What would likely not be included is temporary accelerated depreciation, which is the main response to the US tax reform that Canada has chosen instead.

26 For an early assessment of the impact of corporate and personal taxes on small and medium- sized businesses, see Jack Mintz and V. Balaji Venkatachalam, “Small Business Tax Cut Not Enough—U.S. Tax Reforms Will Make U.S. More Attractive for Start-Ups,” Tax Policy Trends, October 24, 2017 (University of Calgary, School of Public Policy). We have updated the numbers reported above with a state-by-state analysis, but the results are not yet published. 54 n canadian tax journal / revue fiscale canadienne (2019) 67:1 19.2 12.8 15.4 17.8 14.8 14.3 18.3 27.0 23.9 18.5 27.6 All sectors 23.7 23.5 26.0 24.7 22.7 20.4 21.3 34.9 30.8 21.4 32.6 Other services 21.9 21.3 21.5 22.1 20.5 16.5 18.5 34.1 31.9 18.9 34.1 cations Communi - - 17.7 17.2 21.5 18.1 18.0 14.8 15.9 25.2 20.9 15.0 23.1 storage Transpor tation and 24.1 25.6 26.6 26.5 24.7 22.0 22.4 29.4 27.6 22.9 28.6 trade Retail 23.4 25.4 26.4 26.3 24.5 21.9 22.0 28.6 27.9 22.7 27.9 trade percent Wholesale Industrial sector 2.9 8.5 13.2 17.2 17.6 19.9 22.5 − 5.0 − 6.7 − 4.4 turing − 36.5 Manufac - tion 23.7 24.9 25.8 25.8 24.0 21.4 21.7 30.6 27.8 22.2 29.7 Construc - 17.8 15.0 18.8 18.5 19.3 19.3 15.9 29.5 25.8 16.3 28.1 (The appendix is concluded on the next page.) Electrical and water power, gas, power, 2.8 12.8 15.6 12.5 16.3 17.3 22.8 − 6.7 − 6.2 − 4.5 − 24.3 Forestry 3.1 4.8 17.9 12.2 11.1 16.8 16.7 23.6 21.9 17.2 22.0 Agriculture ...... Labrador . Canada Newfoundland and Prince Edward Island Nova Scotia . New Brunswick . Quebec Ontario Manitoba . Saskatchewan Alberta . British Columbia APPENDIX 21, 2018 and Post-November Pre- and Industry, on Capital by Province Rates Tax Effective Marginal Pre-November 21, 2018 policy forum: is accelerated depreciation good or misguided tax policy? n 55 9.8 7.4 10.3 12.7 10.6 13.9 23.7 20.5 14.5 24.3 15.3 All sectors 21.6 19.3 17.8 16.6 16.1 31.7 27.4 16.5 29.3 19.3 18.5 Other services 14.5 13.2 10.3 11.7 29.2 26.9 11.9 29.4 13.5 15.6 13.7 cations Communi - - 14.0 14.9 11.5 12.6 22.6 18.3 11.7 20.4 18.5 14.6 12.8 storage Concluded Transpor tation and 24.5 22.7 20.3 20.5 27.7 25.9 21.0 26.9 24.5 22.3 23.6 trade Retail 23.9 22.2 19.9 19.8 26.6 25.9 20.5 25.9 24.0 21.3 23.0 trade percent Wholesale Industrial sector 0.3 7.1 10.8 12.1 14.4 17.2 − 1.9 turing − 20.3 − 14.5 − 56.1 − 14.5 Manufac - tion 23.3 21.6 19.3 19.4 28.6 25.7 19.9 27.6 23.3 21.4 22.4 Construc - 11.4 11.9 26.5 14.8 13.6 22.5 12.3 25.0 14.8 15.2 14.2 Electrical and water power, gas, power, 9.6 5.7 6.9 10.6 11.2 17.6 − 2.2 − 16.2 − 17.6 − 40.1 − 17.3 Forestry 8.0 0.7 9.5 13.2 12.8 19.9 17.5 13.1 18.7 14.0 − 2.2 Agriculture ...... Labrador . Quebec Nova Scotia . New Brunswick . Ontario Manitoba . Saskatchewan Alberta . British Columbia March 2018 budget and thus include the uncapped 60 percent Results do not include real estate transfer taxes. The pre-update numbers reflect Quebec’s Source: Authors’ calculations. Prince Edward Island Canada Newfoundland and Notes: For technical reasons, the oil and gas sector is excluded from calculations in this table since our source of data differs that used for other industries. Using Statistics Canada data, we could aggregate the total capital stock by industry including oil and gas for but not province. Further data are necessary to provide aggregate measures by province. December 3, 2018 rescinding of the original bonus depreciation scheme in favour bonus depreciation measure. Post-budget numbers reflect Quebec’s expensing. Marginal Effective Tax Rates on Capital by Province and Industry, Pre- and Post-November 21, 2018 and Post-November Pre- and Industry, on Capital by Province Rates Tax Effective Marginal Post-November 21, 2018 canadian tax journal / revue fiscale canadienne (2019) 67:1, 5 7 - 6 6 https://doi.org/10.32721/ctj.2019.67.1.pf.mckenzie

Policy Forum: Business Tax Reform in the United States and Canada

Ken McKenzie and Michael Smart*

PRÉCIS Les auteurs examinent certains des aspects clés de la Tax Cuts and Jobs Act (TCJA) des États-Unis, et discutent de leurs effets sur les revenus des sociétés et des gouvernements canadiens. Ils montrent que l’avantage fiscal dont jouissait le Canada avant la TCJA a grandement diminué, tant en ce qui a trait aux taux d’imposition (marginaux et moyens) prévus par la loi qu’aux taux d’imposition réels. Ils examinent les effets économiques que pourront avoir les réactions possibles des gouvernements canadiens à la TCJA, y compris la réduction des taux prévus par la loi et l’accélération des déductions pour amortissement fiscal. En ce qui concerne l’avenir, les auteurs soutiennent qu’il serait préférable de se concentrer sur une réforme fiscale plus fondamentale reposant sur l’imposition des rentes économiques.

ABSTRACT The authors examine some of the key features of the US Tax Cuts and Jobs Act (TCJA) and discuss the implications for Canadian corporations and government revenues. They show that the tax advantage that Canada enjoyed prior to the TCJA has declined significantly, in terms of both statutory and effective (marginal and average) tax rates. They discuss the economic effects of possible responses to the TCJA by Canadian governments, including cutting statutory rates and accelerating tax depreciation deductions. Looking ahead, the authors argue that it would be preferable to focus on a more fundamental tax reform based on the taxation of economic rents. KEYWORDS: TAX REFORM n CORPORATE TAXES n INVESTMENT n TAX RATES

CONTENTS Introduction 58 Impacts of the TCJA 58 International Tax Provisions of the TCJA 62 Canada’s Reform Options 64 Concluding Remarks 66

* Ken McKenzie is of the School of Public Policy and the Department of Economics, University of Calgary (e-mail: [email protected]); Michael Smart is of the Department of Economics, University of Toronto (e-mail: [email protected]).

57 58 n canadian tax journal / revue fiscale canadienne (2019) 67:1

INTRODUCTION In 2018, following the passage of the Tax Cuts and Jobs Act (TCJA),1 the United States embarked on a major tax reform. Since embarking on its own corporate tax reforms in 2000, Canada has long imposed lower corporate tax rates than the United States, whether measured on the basis of statutory rates or marginal effective tax rates (METRs) on new investment. While there is considerable uncertainty regarding the impact of the TCJA, it is clear that those tax differentials have now disappeared. In this short article, we summarize the key corporate tax provisions of the TCJA. According to our calculations, it is likely that, absent a Canadian response, both business investment and corporate tax revenues in Canada would fall. The federal government announced its initial response to the TCJA in November 2018,2 choosing to adopt some of the investment incentives of the TCJA but eschewing changes to the statutory corporate tax rate. Given the magnitude of the changes in the TCJA, however, some further response is likely required in the future. But what should it be? Some commentators have called for a significant statutory tax rate cut to restore Canada’s “tax advantage” in terms of the rate differential with the United States. We argue that such a response would be a mistake. The revenue cost of a comparable rate cut is simply too large relative to the anticipated economic benefits. As we discuss below, this reflects the windfall gain that a tax cut would imply for existing capital owners, as well as certain international provisions of the TCJA, which make rate cuts an especially ineffective tool for reducing the effective tax rate on Canad- ian investment by US-owned multinational corporations (MNCs). The call for rate reductions in this case reflects the “low rates, broad base” dictum that is commonly heard from tax economists. In most instances, this is a sensible guide to effective and efficient tax policy, but corporate taxation—and taxes on business investment in particular—are one area where the standard advice may fail. Instead, in our view, an optimal business tax system should use investment deductions that narrow the tax base in order to reduce the effective tax rate on new investment, while preserving relatively high average taxation of corporate profits overall, most particularly on “above-normal” profits (so-called economic rents). In some respects, the changes announced in the November 2018 economic statement can be viewed as a move in this direction, although we think that more could be done.

IMPACTS OF THE TCJA The TCJA is a complex tax reform, and many aspects of the Act await clarification. Nevertheless, some key changes can be highlighted and their implications for US

1 Pub. L. no. 115-97, enacted on December 22, 2017. 2 Canada, Department of Finance, Investing in Middle Class Jobs: Fall Economic Statement 2018 (Ottawa: Department of Finance, 2018) (herein referred to as “the 2018 fall economic statement”). policy forum: business tax reform in the united states and canada n 59 and cross-border corporate decision making can be sketched. In particular, statutory tax rates have fallen substantially: with the TCJA, the federal statutory corporate income tax rate has dropped from 35 percent to 21 percent. While the total statutory rate depends on the location (the US state) of business operations and other factors, headline rates in the United States are for the first time in two decades about as low as they are in Canada. Moreover, writeoffs for new investments in machinery and equipment have increased: there is immediate (100 percent) expensing of investment in equipment.3 As well, there are new restrictions on interest deductions, which are now limited to 30 percent of adjusted taxable income.4 To capture how the TCJA affects business choices, we focus on changes in the METR and the average effective tax rate (AETR). The METR measures how taxes increase the required minimum rate of return on a marginal investment—the so- called hurdle rate of return. It is a summary measure of how tax rates, tax deductions and credits, and other taxes on capital affect the level of corporate investment. The AETR is a summary measure of the extent to which the tax system affects the economic income, or economic rent, generated by a discrete investment project. It measures the present value of the taxes associated with an investment project relative to the present value of the pre-tax revenue stream from the project. Since investment location decisions are discrete by nature, the AETR is often viewed as being a key determinant of the location of investments across various jurisdictions. Prior to the TCJA, Canada enjoyed a substantial METR advantage over the United States (see figure 1). By our calculations, the aggregate METR in Canada was 19.9 percent in 2018, before November 21, substantially lower than the 33.2 percent rate for the United States prior to the TCJA, and 15.7 percent in manufacturing, compared to 30.7 percent for the United States pre-reform. These rates fall dramatically with the TCJA, but the precise details depend on specific features of the reform. Where the interest limitation is not binding, and assuming that bonus depreciation remains in place for equipment, the METR in the United States falls to 17.0 percent in aggregate and 13.1 percent in manufacturing, just lower than the corresponding rates for Canada.5 Other aspects of the TCJA push against this development. For firms for which the interest limitation is binding,6 the US METR is 24.2 percent in aggregate and

3 Bonus depreciation drops to 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. 4 Adjusted taxable income is similar to earnings before interest, taxes, depreciation, and amortization (EBITDA) through 2021 and earnings before interest and taxes (EBIT) thereafter. Beginning in 2022, the rules therefore become tighter, so that that many more US corporations will subject to the limits. 5 Our METR calculations will no doubt differ somewhat from those reported by others because of differences in the underlying parameters employed in the model, but they are of the same order of magnitude. 6 Here we focus on the EBIT rule for interest limitations, which is to become effective after 2021, and which are likely to apply to a much higher proportion of firms than the current EBITDA rule. 60 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 1 Marginal Effective Tax Rates, Canada and the United States 40 35 30 25 20 15 10 5 METR (percent) 0 −5 −10 CAN 2018 CAN post- CAN 10 CAN CFT US 2017 US TCJA 1 US TCJA 2 November point cut 2018

Aggregate Manufacturing

Notes: CAN 2018: Canada before the November 21, 2018 economic statement. CAN post-November 2018: Canada after the November 21, 2018 economic statement. CAN 10 point cut: Canada with a 10 percentage point statutory rate cut. CAN CFT: Canada with a cash flow tax. US TCJA 1: US TCJA interest limitation not binding, bonus depreciation. US TCJA 2: US TCJA earnings before interest and taxes (EBIT) interest limitation binding, bonus depreciation. Source: Authors’ calculations.

20.6 percent for manufacturing, both remaining higher than current Canadian rates. This shows how the interest limitation lowers the effective rate at which capital expenses may be deducted against income, raising the portion of marginal investment returns that are subject to taxation, even under bonus depreciation. This brief summary masks the sharp differences in US METRs across assets and industries, and over time as the parameters of the TCJA change in future years. Bonus expensing of expenditures on equipment is temporary. Moreover, since bonus depreciation applies only to equipment, it lowers the METR for equipment relative to buildings and other assets such as inventories and land. Thus, inter-asset distortions increase significantly under theTCJA when bonus depreciation is in place. This is then reflected in differences in sectoralMETR s because of differences in asset shares. The interest limitation will be binding for some firms and not others, depending on their reliance on debt financing as it relates to adjusted taxable income. This introduces further distortions and variation in the METR across firms and sectors, depending on their underlying circumstances. The AETR in the United States declines from 34.7 percent to 22.1 percent in aggregate under the TCJA, roughly equivalent to the Canadian average of 22.5 percent. In contrast to the METRs, there is little variation across sectors and scenarios. policy forum: business tax reform in the united states and canada n 61

This reflects the fact that the AETR is in fact a weighted average of the statutory tax rate and the METR—with the weight on the former rising in the assumed rate of return to the investment project.7 For this reason, the AETR is relatively unaffected by the base-specific features of theTCJA reform, such as whether bonus depreciation is paid or whether the interest limitation is binding. It is an open question how much these changes are likely to affect business investment in the United States. A study of earlier episodes of bonus depreciation in the United States found that expenditures on eligible capital assets fell by 10 percent to 17 percent, relative to contemporaneous changes for ineligible assets.8 This suggests a rather large elasticity of investment with respect to METRs. However, previous episodes occurred in periods of weak economic performance (2001-2004 and 2008- 2011), when more firms faced cash flow and other pressures that would increase the importance of tax incentives. The impact of bonus depreciation might well be smaller in the current period of strong economic growth in the United States. Whatever its implications for business investment, the TCJA will affect tax revenues in Canada. MNCs use a variety of tax-planning strategies to exploit tax rate differences between countries, shifting profits from high-tax to low-tax jurisdictions. Corporations may, for example, manipulate transfer prices for cross-border trade between affiliates; they may lend to affiliates in high-tax countries to generate tax- deductible interest payments; and they may locate intellectual property and other intangible assets in low-tax countries to reduce worldwide total tax payments. Thus, the statutory rate reduction under the TCJA is likely to affect profit shifting and tax revenues in Canada.9 Majority-owned US affiliates in Canada paid Cdn $8.9 billion in federal and provincial income taxes on average during 2014- 2016.10 A recent survey of empirical research concludes that a 1 percentage point increase in a country’s statutory corporate tax rate relative to the rates of its trading

7 We assume a rate of return in the AETR calculations of 20 percent, which is approximately four times the hurdle rate of return. Results are fairly robust to this assumption. With an assumed return of 10 percent, the average AETR falls by approximately 2 percentage points, and it remains quite uniform across sectors. 8 Eric Zwick and James Mahon, “Tax Policy and Heterogeneous Investment Behavior” (2017) 107:1 American Economic Review 217-48. 9 Our calculations in this section focus on profit-shifting responses by US affiliates in Canada and ignore possible profit shifting by Canadian-resident MNCs with affiliates in the United States. While there might be some increase in profit shifting to the United States through transfer pricing and other tax-planning strategies, there are reasons to expect the response of Canadian MNCs to be more muted than for inbound investment by US MNCs. 10 The data are from United States, Bureau of Economic Analysis, “Comprehensive Data on Activities of Foreign Affiliates” (www.bea.gov/international/di1usdop). We exclude corporations in the mining and the oil and gas sectors, where different tax rules and far lower effective tax rates apply, and where taxable income is highly variable from year to year. The data are converted to 2016 real Canadian dollars at annual average exchange rates, deflated by the consumer price index. 62 n canadian tax journal / revue fiscale canadienne (2019) 67:1 partners decreases reported taxable income by 1.5 percent owing to profit shifting.11 But this survey includes multinational foreign affiliates in tax havens, where income is typically more sensitive to tax differentials; another recent study of US foreign affiliates found that responsiveness to tax differentials with high-tax countries was only half as large.12 Taking these results as our range of estimates for the semi- elasticity, this would imply that the 12 percentage point tax rate reduction under the TCJA would cause annual revenue losses to Canadian governments of Cdn $800 million-$1.6 billion. This analysis considers the effects of US rate reductions alone. But other features of the TCJA will exert an influence too. The new and tighter earnings-stripping rules (interest limitations) will be binding for some US MNCs, reducing leverage of US parents and, absent any policy response in Canada, possibly leading to some additional shifting of debt to Canadian affiliates. Some perspective on these issues can be gleaned from examining the experience of Germany, which introduced a similar earnings-stripping rule in 2008. A recent study found that this measure led German MNCs to substitute toward other, unregulated forms of debt, leaving group-total leverage largely unchanged.13 In particular, borrowing by foreign affiliates unaffected by the rules may rise. A response to the TCJA by Canadian affiliates of US MNCs of a similar magnitude to that suggested by these studies would result in tax revenue losses of several hundred million dollars annually, in the absence of any change in tax rules in Canada.

INTERNATIONAL TAX PROVISIONS OF THE TCJA The TCJA also incorporates fundamental reforms to the system of international taxation. The traditional US system of “worldwide” income taxation, levied on repatriated dividends of foreign subsidiaries with credits of foreign taxes paid, has been abandoned. In this sense, the United States has joined Canada and most other high-income countries in adopting territorial taxation, excluding from the tax base most active business income that is earned abroad. But other aspects of the TCJA are far from territorial, and could have significant implications for investment in Canada. Most notably, the TCJA applies a new minimum tax rate on offshore income of US MNCs through the global intangible low-taxed income (GILTI) provisions. (Despite its name, GILTI has nothing to do with intangible assets per se.) Because

11 Sebastian Beer, Ruud de Mooij, and Li Liu, International Corporate Tax Avoidance: A Review of the Channels, Effect Sizes, and Blind Spots, IMF Working Paper WP/18/169 (Washington, DC: International Monetary Fund, July 2018). 12 Tim Dowd, Paul Landefeld, and Anne Moore, “Profit Shifting of U.S. Multinationals” (2017) 148:1 Journal of Public Economics 1-13. 13 Thiess Büettner, Michael Overesch, Ulrich Schreiber, and Georg Wamser, “The Impact of Thin-Capitalization Rules on the Capital Structure of Multinational Firms” (2012) 96:11-12 Journal of Public Economics 930-38. policy forum: business tax reform in the united states and canada n 63 the new tax on GILTI is applied to subsidiary income as it accrues, and not merely on repatriation, US taxation of foreign subsidiaries is arguably even more important than before. GILTI tax applies at a rate of 10.5 percent of the grossed-up net tested income (NTI) of controlled foreign corporations in excess of 10 percent of qualified business assets (QBAs).14 A credit is then given for 80 percent of foreign taxes paid by affiliates. The upshot is that GILTI taxes will be paid when the average foreign tax rate on US MNCs is less than 13.125 percent (10.5 percent divided by the 80 percent credit rate).15 For the purposes of the GILTI calculation, NTI, foreign taxes paid, QBAs, etc., are pooled on a worldwide basis. This means that the relevant foreign tax rate is the average across all countries in which the US parent has subsidiaries. While Canada may not appear, at first glance, to be a low-tax jurisdiction in the sense ofGILTI , because of worldwide pooling it is quite possible that many or even most US MNCs operating in Canada will pay tax on GILTI, even in respect of Canadian-source income. Even absent pooling, the average tax rate facing businesses in Canada can be quite low in some circumstances. The average tax rate for US-controlled affiliates in Canada reported in official US government statistics is about 15 percent, far below the average statutory tax rate on taxable income of about 26.5 percent. This reflects the various deductions and credits available under Canadian tax rules, such as accelerated capital cost allowances; tax credits for research and development, and other tax-favoured expenditures; the exemption of corporate dividends received, and so on. So even a US MNC without tax-haven affiliates might be subject to theGILTI tax on its Canadian operations. Recent research, while admittedly speculative at this stage, suggests that one-half or more of US MNCs are likely to be subject to GILTI taxes.16 All this suggests that GILTI has become an important part of tax-planning decisions for US MNCs, and it presents new challenges for Canadian policy makers. US tax policy has become extraterritorial in ways that the previous system was not, particularly because GILTI taxes are due on accrual of foreign income rather than on repatriation of foreign dividends—which were frequently long deferred or “permanently reinvested” under the old system. However, even when a Canadian affiliate becomes subject toGILTI , the direction of distortions to investment decisions is ambiguous. First, because GILTI is com- puted on a worldwide basis, taxes paid in Canada contribute to foreign tax credits

14 NTI is essentially EBITDA, and QBAs are essentially book value of tangible capital assets based on the alternate depreciation system (ADS), generally depreciated at slower than the standard rates in the US tax system. 15 The GILTI tax rate is scheduled to rise to 13.125 percent in 2026, so that GILTI taxes will apply where the effective foreign tax rate is less than 16.4 percent. 16 Kimberly A. Clausing, “Profit Shifting Before and After the Tax Cuts and Jobs Act,” October 29, 2018 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3274827). 64 n canadian tax journal / revue fiscale canadienne (2019) 67:1 that offset (80 percent of ) GILTI taxes that would otherwise be due on tax-haven income of US MNCs. In this sense, the GILTI provisions create an incentive to shift business activity and profits to Canada that is at least as strong as the intended effect of substitution toward US operations. Second, the deduction for 10 percent of QBAs creates a new tax shield that may induce US MNCs to acquire (relatively low-return) tangible assets abroad as a means of reducing GILTI tax liabilities.

CANADA’S REFORM OPTIONS As a part of the fall economic statement released on November 21, 2018 the federal government indicated that in response to the TCJA, it is introducing accelerated tax depreciation for capital expenditures.17 By our calculations, this will lower the aggregate METR in Canada by about 4 percentage points, from 19.9 percent to 15.8 percent, which is slightly lower than the 17.0 percent US METR with the TCJA under one scenario (figure 1). The effect is uneven across sectors, with manufacturing and forestry enjoying a substantially greater reduction than the other sectors. While accelerated depreciation strikes us as a relatively measured initial response to the TCJA, we think that further reforms are needed in the future. Next we consider two alternative and more far-reaching reforms that Canada might adopt in response to the US tax reform. First, consider the impact of a 10 percentage point statutory tax cut, lowering the combined federal-provincial average statutory corporate income tax rate from about 27 percent to 17 percent. This would nearly match the magnitude of the US rate reduction and keep the rate differential almost unchanged.18 Our calculations show that the aggregate METR in this case would fall to 12.7 percent (figure 1). Moreover, the reduction is more uniform across sectors than in the post-November 2018 scenario, because the reduction in the statutory tax rate benefits all types of capital relatively equally. The aggregate AETR falls substantially, to 14 percent. A statutory rate cut of this magnitude could be achieved only at very substantial revenue cost. Using 2016 data on federal corporate income tax revenue, a mechanical calculation of the immediate impact of a 10 percentage point reduction in the federal statutory rate, with no associated change in the tax base,19 suggests a reduction in revenue of about $22 billion per year.20 The disproportionately high fiscal cost of

17 2018 fall economic statement, supra note 2, at 57-58. 18 This was proposed by P. Bazel and J. Mintz, “Canadian Policy Makers Consider Response to US Tax Overhaul,” Tax Policy Trends, October 18, 2018 (University of Calgary, School of Public Policy). 19 This is a “static” cost estimate, with no adjustment for the possible effects of rate reductions on the tax base. However, as discussed above, there is reason to expect firms to respond by altering profit-shifting strategies. A rate cut in Canada may therefore be expected to moderate the reduction in tax revenues owing to profit shifting under the US cut that we calculated above. 20 Taxable income of non-Canadian-controlled private corporations was approximately $258 billion in 2016, which is assumed to receive the full 10 percentage point reduction. Our policy forum: business tax reform in the united states and canada n 65 achieving METR reductions in this way reflects the fact that statutory tax rate reductions result in windfall capital gains for owners of existing assets, as well as tax reductions for future investments. Only the latter affects business decisions or productivity in the long run, but both cost the government revenues. Revenues forgone do not represent a social cost per se, since they might be replaced by other taxes with a lower social cost. Economic studies have shown that as much as one-third to one-half of the burden of corporate taxes is ultimately borne by workers in the form of lower wages, presumably owing to the effects of the tax on business investment and labour productivity, which would lower the social cost of corporate tax cuts. But there are reasons to believe that the effects on labour income in Canada are smaller than these estimates would suggest. In particular, many recent estimates are derived from studying corporate income taxes that are levied at the local or regional level,21 which are apt to have stronger effects on flows of capital and labour than a Canada-wide tax change would have. Another approach would be to abandon the corporate income tax structure alto- gether and replace it with a tax on “economic rents,” which is corporate income generated in excess of that suggested by the hurdle rate of return on capital. In a forthcoming paper, we examine this alternative in more detail, focusing on a simple variant of the approach, a cash flow tax.22 Our calculations show that the aggregate METR under this scenario declines substantially, to just under 2 percent, with very little variation across assets and sectors; however, the METR on manufacturing is actually negative at −6.2 percent because of some tax credits, which we assume would be maintained (figure 1). The AETR falls only slightly because it depends largely on the statutory tax rate, which does not change in our simulations. This approach results in a tax system that is virtually “neutral” or non-distortionary. While a rent-based tax on corporations would result in some revenue losses over time, the losses would be lower than those associated with a statutory rate cut, because the tax would apply to new investment only and would not result in a windfall gain to past investments.23

calculation may be somewhat excessive, however, because of the effect of tax losses carried forward and other ways in which the statutory tax rate does not apply to all taxable income. We assume commensurate reductions to the dividend tax credit, which we estimate would reduce its revenue cost by approximately $3 billion annually. 21 See, for example, Clemens Fuest, Andreas Peichl, and Sebastian Siegloch, “Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany” (2018) 108:2 American Economic Review 393-418. 22 Ken McKenzie and Michael Smart, Tax Policy Next to the Elephant: Business Tax Reform in the Wake of the Tax Cuts and Jobs Act (Toronto: C.D. Howe Institute, forthcoming). A cash flow tax involves the immediate expensing of all capital expenditures coupled with the complete elimination of interest deductibility. Other approaches to rent taxation include the capital allowance account (CAA) approach and the allowance for corporate equity (ACE) approach; see Robin Boadway and Jean-François Tremblay, Modernizing Business Taxation, C.D. Howe Institute Commentary no. 452 (Toronto: C.D. Howe Institute, June 2016). 23 McKenzie and Smart, supra note 22. 66 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The new global minimum tax imposed on US-resident MNCs under the GILTI provisions of the TCJA also changes the calculus of rate cuts in Canada. Because of the worldwide pooling approach of GILTI, reductions in Canadian taxes would lower foreign tax credits of a US MNC that is subject to the GILTI tax. In such circumstances, 80 percent of any reduction in Canadian taxes could be offset by increased taxes on GILTI. This is a variation of the so-called treasury transfer effect that existed under the previous US worldwide approach to international taxation. But previously the offsetting effects applied only on repatriation of dividends to the US parent, and were absent entirely in the case of permanently reinvested dividends. Under the new accrual-based approach to worldwide taxation, the logic of the treasury transfer effect assumes greater importance for host-country governments like Canada’s. Both METRs and AETRs decline under all three of the reform scenarios. Thus there might be additional behavioural responses on the part of firms that would lead to an increase in real domestic investment and in the corporate tax base in the long run, moderating the projected revenue losses to some extent.

CONCLUDING REMARKS We have argued that the TCJA is likely to have significant impacts on business investment and corporate tax revenues in Canada. Given the close integration of the Canadian and US economies, commensurate responses in Canadian tax policy are required. The federal government has thus far adopted a measured approach, but we think that more is required. On balance, taking account of the potential effects on real investment, profit shifting, and revenues, we come down on the side of a fundamental tax reform in the nature of a rent-based tax, such as a cash flow tax. A fundamental tax reform of this nature would require more analysis, and would no doubt give rise to legal and administrative challenges associated with any major reform.24 However, the US move to bonus expensing and the elimination of interest deductibility in certain circumstances, which is consistent with the cash flow approach, does provide some precedent. While the TCJA poses significant challenges for Canada, it also provides an opportunity to make a bold move toward a corporate tax system that is grounded in sound tax-policy principles, is less distortionary, promotes economic growth and prosperity, and restores Canada’s tax competitiveness on a worldwide basis.

24 It should be noted that since a cash flow tax involves a change in the tax base, it would directly affect provincial revenues from corporate taxation. canadian tax journal / revue fiscale canadienne (2019) 67:1, 67 https://doi.org/10.32721/ctj.2019.67.1.awards

Douglas J. Sherbaniuk Distinguished Writing Award

JOEL NITIKMAN Joel Nitikman is the 2018 recipient of the Canadian Tax Foundation’s Douglas J. Sherbaniuk Distinguished Writing Award. His article, “Life Is Change: Using Powers of Amendment in a Non-Charitable Trust—Rules and Tax Implications,” was published in (2017) 65:3 Canadian Tax Journal 559-632. The article was selected by a committee of experienced tax professionals as the best writing published by the Foundation in 2017-18. The award, which is conferred annually, is named for the Foundation’s late director emeritus. Joel Nitikman is a partner in the Tax group at Dentons Canada LLP, Vancouver. For almost 30 years, Joel’s practice has focused on resolving tax disputes between taxpayers and federal and provincial tax authorities. Joel earned a BSc from the University of British Columbia, an LLB from the University of Manitoba, and an LLM from New York University School of Law. He is a writer and speaker on international, federal, and provincial income tax, GST, and retail sales tax issues. This is Joel’s second Douglas J. Sherbaniuk Distinguished Writing Award; he won previously in 2006. He is a former governor of the Canadian Tax Foundation and a member of the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada.

67 canadian tax journal / revue fiscale canadienne (2019) 67:1, 68

Prix d’excellence en rédaction Douglas J. Sherbaniuk

JOEL NITIKMAN Joel Nitikman est le récipiendaire 2018 du Prix d’excellence en rédaction Douglas J. Sherbaniuk de la Fondation canadienne de fiscalité. Son article intitulé « Life Is Change: Using Powers of Amendment in a Non-Charitable Trust— Rules and Tax Implications » a été publié dans (2017) 65:3 Revue fiscale canadienne 559-632. Son article a été retenu par un comité composé de professionnels en fiscalité à titre de meilleur article publié par la Fondation en 2017-2018. Ce prix, décernée annuellement, est nommé à la mémoire du défunt directeur emeritus de la Fondation. Joel Nitikman est associé chez Dentons Canada LLP à Vancouver dans le département de fiscalité. Depuis plus de trente ans, la pratique de Joel est axée sur la résolution de conflits en matière fiscale entre les contribuables et les autorités fiscales fédérale et des provinces. Joel est détenteur d’un baccalauréat en science de l’Université de la Colombie-Britannique, d’une LL.B. de l’Université du Manitoba, et d’une LL.M. de New York University School of Law. Il est auteur et conférencier sur de nombreux sujets touchant la fiscalité internationale, l’impôt fédéral et provincial, la TPS et les taxes à la consommation. En 2006, Joel a aussi remporté le Prix d’excellence en rédaction Douglas J. Sherbaniuk. Il est un ancien gouverneur de la Fondation canadienne de fiscalité et est membre du Comité mixte sur la fiscalité de l’Association du Barreau canadien et deCPA Canada.

68 canadian tax journal / revue fiscale canadienne (2019) 67:1, 6 9 - 7 1

Canadian Tax Foundation Regional Student-Paper Awards

Each year, the Canadian Tax Foundation awards up to four regional student-paper prizes. Depending on the merit of the papers received, one prize may be awarded for each of four regions of the country: Atlantic Canada (the Canadian Tax Foundation- McInnes Cooper Award); Quebec (the Canadian Tax Foundation-Osler Hoskin Harcourt Award); Ontario (the Canadian Tax Foundation-Fasken Martineau Du- Moulin Award); and western Canada (the Canadian Tax Foundation-Bert Wolfe Nitikman Foundation Award). Papers must be written as a requirement of a tax- related course, including directed research courses, and can address any aspect of the Canadian tax system, including comparative analyses, tax policy, tax compliance, tax planning, and tax system design. Papers may be written in either English or French and must be recommended for award consideration by the professor or instructor of the course. Papers will be reviewed by three independent reviewers, and abstracts (of 400 words or less) of the award-winning papers will be published in the Canadian Tax Journal. The authors of the winning papers will also receive a cash prize from the firms or institutions sponsoring the awards and a one-year membership in the Foundation, entitling them to receive complimentary copies of many of the currently issued Foundation publications, including the Canadian Tax Journal, Canadian Tax Focus, Canadian Tax Highlights, Tax for the Owner-Manager, and the annual tax conference report, along with one year of complimentary access to TaxFind, the Foundation’s online research database. As members of the Foundation, winners can also take advantage of generous discounts on other publications as well as discounted registration fees for Foundation conferences and courses. Submissions to the student-paper competition should be addressed to the Can- adian Tax Foundation, Student-Paper Competition, 145 Wellington Street West, Suite 1400, Toronto, ON M5J 1H8, or e-mailed to [email protected]. Entries must be accompanied by a letter of recommendation from the professor or instructor of the tax course for which the paper was written and must include the student’s name and e-mail address if known. The submission deadline for the 2018-19 academic year is June 30, 2019.

69 70 n canadian tax journal / revue fiscale canadienne (2019) 67:1

THE CANADIAN TAX FOUNDATION-FASKEN MARTINEAU DUMOULIN AWARD FOR ONTARIO Darren Joblonkay (2017-18 recipient) The Canadian Tax Foundation is pleased to announce that Darren Joblonkay is the winner of the Canadian Tax Foundation-Fasken Martineau DuMoulin Award for the best Ontario paper of 2017-18 dealing with an aspect of Canadian taxation. Mr. Joblonkay’s paper, “To Tax or Not To Tax Non-Resident Digital Supplies— An Assessment of Quebec’s Proposed ‘Netflix Tax,’ ” was written for Professor Jinyan Li’s Tax as Social and Economic Policy class at Osgoode Hall Law School. Mr. Joblonkay holds a BSc from the University of Lethbridge and an MA from the University of Toronto. He is completing his PhD at the University of Toronto while also currently enrolled in the second year of the JD program at Osgoode Hall.

ABSTRACT At present, non-resident suppliers of digital products and services (NRSs) are not obligated by law to collect and remit sales taxes on behalf of their customers in Canada. Current Canadian legislation, which was designed to tax the consumption of physical goods and locally available services, has simply not adjusted to the realities of a globalized economy where goods and services are often digitalized and made universally available for consumption through the World Wide Web. As a result, a significant amount of tax revenue from the sale of digital products and services is not collected. Furthermore, domestic businesses are at a competitive disadvantage in relation to their foreign counterparts, who are not required to incorporate a consumption tax into the final price of their products. To rectify this issue, the government of Quebec has proposed various amendments to its tax legislation that would require NRSs to collect and remit Quebec Sales Tax on behalf of their customers in Quebec. While it remains to be seen whether Quebec will effectively and efficiently enforce such obligations onNRS s, the author is optimistic that if a simplified registration framework is adopted, such as the one promoted by theOECD , it is likely that the big players in the digital service industry, such as Netflix and Spotify, will comply. Despite the apparent obstacles, Quebec is revolutionizing its legislation to successfully adapt to the economic realities of the 21st century. This paper calls on the federal finance minister to adopt a similar taxation framework for Canada as a whole. The adoption of a successful framework for the taxation of remote digital supplies will ensure that Canada protects its current tax base and bolsters competitive neutrality between domestic and foreign businesses that operate within the contemporary realities of the global economy. canadian tax foundation regional student-paper awards n 71

THE CANADIAN TAX FOUNDATION-OSLER HOSKIN HARCOURT AWARD FOR QUEBEC Katherine Borsellino (2017-18 recipient) The Canadian Tax Foundation is pleased to announce that Katherine Borsellino is the winner of the Canadian Tax Foundation-Osler Hoskin Harcourt Award for the best Quebec paper of 2017-18 dealing with an aspect of Canadian taxation. Ms. Borsellino’s paper, “Preserving the Canadian Dream: Amendments to the Rules Governing the Principal Residence Exemption, the Reporting of Real Estate Transactions and Land Transfer Tax,” was written for the MTax program at HEC Montreal. Ms. Borsellino holds a bachelor’s degree in Civil Law, a JD (North American common law) from the University of Montreal, and an MTax from HEC Montreal. She has been a member of the Quebec bar since 2012. She is a senior manager at Richter LLP, a business advisory firm in Montreal, where she consults with businesses and their owners and families on a variety of issues surrounding Canadian taxation, particularly in the context of corporate reorganizations as well as personal and estate- planning matters.

ABSTRACT Over the last several years, Canadian housing prices have escalated to a point where affordability, economic stability, and tax fairness have become a concern for many Canadians. Low interest rates, increased foreign investment, and speculative activity are among the factors that have contributed to these concerns. When observed in isolation, these factors do not seem problematic; to the contrary, they seem to be indicators of a healthy economy. However, they have triggered concern and have influenced the Canadian housing market. This has resulted in collective action by the federal and provincial governments. The measures brought forth by the federal government include amendments to the rules governing financing, mortgages, and mortgage insurance as well as interest rate increases. The federal measures also include amendments to the Income Tax Act’s longstanding rules governing the capital gains tax exemption on the sale of a principal residence as well as revised tax compliance and reporting measures related to residential and non-residential real estate transactions. The measures introduced by certain provincial governments (namely, British Columbia and Ontario) include, among other things, amendments to the rules governing duties collectable on the disposition of real property and an additional 15 percent tax on non-resident purchasers of Canadian residential real estate. Such measures form part of collective and ongoing initiatives at both levels of government aimed at encouraging affordability, economic stability, and tax fairness in the Canadian housing market. The author provides a comprehensive outline of the federal and provincial measures and their consequences. canadian tax journal / revue fiscale canadienne (2019) 67:1, 7 2 - 7 4

Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité

Chaque année, la Fondation canadienne de fiscalité FCF( ) décerne jusqu’à quatre prix régionaux pour des articles rédigés par des étudiants. Selon la qualité des articles qui ont été soumis, un prix peut être décerné pour chacune des quatre régions du pays : le Canada atlantique (le Prix FCF-McInnes Cooper); le Québec (le Prix FCF-Osler Hoskin Harcourt); l’Ontario (le Prix FCF-Fasken Martineau DuMoulin); et l’Ouest canadien (le Prix FCF-Bert Wolfe Nitikman Foundation). Les articles doivent avoir été rédigés dans le cadre d’un cours lié à la fiscalité, comprenant les cours de travaux dirigés, et ils peuvent porter sur tout aspect du régime fiscal canadien, y compris les analyses comparatives, la politique fiscale, l’observation des règles fiscales, la planification fiscale et la conception du régime fiscal. Les articles peuvent être rédigés en anglais ou en français et une lettre de recommandation du professeur ou du chargé d’enseignement du cours doit être au dossier. Les articles sont évalués par trois examinateurs indépendants, et des précis (de 400 mots ou moins) des articles primés seront publiés dans la Revue fiscale canadienne. Les auteurs des articles primés recevront aussi une récompense en argent des organismes ou des sociétés qui commanditent le prix ainsi qu’une adhésion d’une année à la FCF, leur donnant le droit de recevoir des exemplaires gratuits d’un grand nombre d’ouvrages publiés par la FCF, dont Revue fiscale canadienne, Canadian Tax Focus, Faits saillants en fiscalité canadienne, Actualités fiscales pour les propriétaires exploitants ainsi que le rapport de la conférence annuelle en fiscalité, avec un accès d’un an à TaxFind en ligne, l’outil de recherche électronique de données de la FCF. À titre de membre de la FCF, les lauréats bénéficient également de réductions appréciables sur le prix d’autres publications ainsi que sur les frais d’inscription aux conférences et aux cours offerts par la FCF. Les dossiers de participation au concours du meilleur article rédigé par un étudiant doivent être transmis par la poste à la FCF, Concours du meilleur article rédigé par un étudiant, 145 Wellington Street West, bureau 1400, Toronto, ON M5J 1H8, ou par courriel à [email protected]. Les dossiers doivent être accompagnés d’une lettre de recommandation du professeur ou du chargé d’enseignement du cours en fiscalité dans le cadre duquel l’article a été rédigé ainsi que des nom et adresse courriel de l’étudiant si connue. La date d’échéance de présentation des dossiers pour l’année universitaire 2018-2019 est le 30 juin 2019.

72 prix régionaux du meilleur article par un étudiant n 73

PRIX DE LA FONDATION CANADIENNE DE FISCALITÉ-FASKEN MARTINEAU DUMOULIN POUR L’ONTARIO Darren Joblonkay (récipiendaire 2017-2018) La Fondation canadienne de fiscalité a le plaisir d’annoncer que Darren Joblonkay est le lauréat du Prix Fondation canadienne de fiscalité-Fasken Martineau DuMoulin pour le meilleur article 2017-2018 qui traite d’un aspect de la fiscalité canadienne. L’article de M. Joblonkay intitulé « To Tax or Not To Tax Non-Resident Digital Supplies—An Assessment of Quebec’s Proposed “Netflix Tax” » a été rédigé dans le cadre du cours Tax as Social and Economic Policy de Osgoode Hall Law School donné par la professeure Jinyan Li. M. Joblonkay détient un B.Sc. de l’Université de Lethbridge et une M.A. de l’Université de Toronto. Il est en voie de compléter un Ph.D. à l’Université de Toronto tout en poursuivant la deuxième année du programme J.D. à Osgoode Hall.

PRÉCIS Présentement, les non-résidents fournisseurs de produits et services numériques (FNR) ne sont pas obligé, en vertu de la loi, de percevoir et de remettre les taxes de vente pour le compte de leurs clients au Canada. La législation actuelle, laquelle a été adoptée dans le but de taxer la consommation des biens physiques et des services disponibles localement, ne s’est pas ajustée aux réalités d’une économie globale où les biens et les services sont souvent numérisés et disponibles pour consommation partout dans le monde via le Web. Ainsi donc, une somme importante de revenus fiscaux provenant de la vente de produits et de services numériques n’est pas perçue. De plus, comparativement aux entreprises étrangères qui ne doivent pas incorporer une taxe à la consommation au prix final de leurs produits, les entreprises locales sont économiquement désavantagées. Afin de corriger cette situation, le gouvernement du Québec a proposé divers amendements à sa législation fiscale qui auront pour effet d’obliger unFNR de percevoir et de remettre la TVQ au nom de leurs clients au Québec. Bien qu’il soit trop tôt pour savoir si Québec pourra effectivement et efficacement contraindre lesFNR s à de telles obligations, l’auteur est d’avis qu’en adoptant une structure simplifiée d’inscription, telle que celle préconisée par l’OCDE, il est vraisemblable de croire que les grands joueurs du service numérique — tels que Netflix et Spotify — vont s’y conformer. Malgré les obstacles apparents, Québec révolutionne sa législation en l’adaptant aux réalités économiques du 21e siècle. Cet article interpelle le ministre fédéral des Finances à adopter une structure fiscale similaire pour le Canada dans son ensemble. L’adoption d’une structure efficace pour taxer les fournitures numériques étrangères permettra au Canada de protéger sa base fiscale actuelle et d’assurer une neutralité compétitive entre les entreprises domestiques et les entreprises étrangères en tenant compte des réalités actuelles de l’économie globale. 74 n canadian tax journal / revue fiscale canadienne (2019) 67:1

PRIX DE LA FONDATION CANADIAN DE FISCALITÉ-OSLER HOSKIN HARCOURT POUR LE QUÉBEC Katherine Borsellino (récipiendaire 2017-2018) La Fondation canadienne de fiscalité a le plaisir d’annoncer que Katherine Borsellino est la lauréate du Prix Fondation canadienne de fiscalité-Osler Hoskin Harcourt pour le meilleur article de 2017-2018 de la province de Québec qui traite d’un aspect de la fiscalité canadienne. L’article de Mme Borsellino intitulé « Preserving the Canadian Dream: Amendments to the Rules Governing the Principal Residence Exemption, the Reporting of Real Estate Transactions and Land Transfer Tax » a été rédigé dans le cadre du programme de MFisc de HEC Montréal. Mme Borsellino détient un baccalauréat en droit civil et un J.D. (common law nord-américaine) de l’Université de Montréal ainsi qu’une MFisc de HEC Montréal. Elle est membre du Barreau du Québec depuis 2012. Mme Borsellino est directrice principale chez Richter, une firme de conseillers d’affaires à Montréal, où elle conseille les entreprises et leurs propriétaires et familles sur une variété de sujets en lien avec la fiscalité canadienne, plus particulièrement dans les domaines de la réorganisation corporative de même que l’impôt des particuliers et la planification successorale.

PRÉCIS Au cours des dernières années, le Canada a connu une croissance importante de son marché immobilier, particulièrement dans le secteur résidentiel. De nombreux facteurs ont contribué à ce phénomène tel que les faibles taux d’intérêt, l’augmentation d’investissement étranger et l’accroissement de la spéculation immobilière. Tous seuls, ces facteurs ne semblent pas problématiques; au contraire, ils semblent être une indication d’une économie stable. Cependant, collectivement, ces facteurs ont déclenché une préoccupation importante à l’égard de l’abordabilité, de la stabilité économique et de l’équité fiscale. Le gouvernement fédéral a annoncé des modifications aux règles hypothécaires ainsi que des augmentations de taux d’intérêt. Les mesures fédérales incluent aussi des modifications à certaines règles fiscales régissant l’exonération de l’impôt sur le revenu des gains en capital lors de la disposition d’une résidence principale. Ces mesures prévoient aussi des modifications aux règles régissant l’administration du régime fiscal, particulièrement en ce qui concerne la disposition de biens immobiliers (résidentiels et non résidentiels). Pour leur part, les gouvernements de la Colombie-Britannique et de l’Ontario ont proposé, entre d’autres, des modifications aux règles visant les droits sur les mutations immobilières lors de la disposition d’un immeuble et un impôt additionnel de 15 pour cent qui s’applique aux acheteurs étrangers. Globalement, ces mesures font partie des efforts déployés par les gouvernements pour promouvoir un marché du logement stable et concurrentiel à travers le Canada et pour préserver l’équité dans le régime fiscal. Dans son texte, l’auteure fait un survol de ces mesures et analyse leurs conséquences. canadian tax journal / revue fiscale canadienne (2019) 67:1, 7 5 - 7 6

Best Newsletter Article by a Young Practitioner Award

For a fourth year, the Canadian Tax Foundation (CTF) has presented the “Best Newsletter Article Written by a Young Practitioner Award.” The winners were announced at the CTF’s annual conference in Vancouver in November 2018. News- letter articles, in addition to being a valuable service to the profession in their own right, are often a stepping stone to lengthier pieces of writing, such as contributions to Canadian Tax Foundation conferences and articles in the Canadian Tax Journal. Early success in writing newsletter articles as a young practitioner (YP) may lead to a career in tax in which writing is a regular and ongoing part of one’s contribution to the profession. The CTF defines aYP as an individual who has 10 years or less of experience working in the taxation field after becoming fully qualified (for example, receiving their professional designation). The award is given for the best newsletter article that (1) was written solely by one or more authors who was a YP at the time of publication, and (2) appeared in any of the three CTF newsletters in a calendar year: Canadian Tax Focus, Canadian Tax Highlights, or Tax for the Owner-Manager. The vast majority of the eligible articles appeared in Canadian Tax Focus, which generally publishes only articles for which the author (or one of the co-authors) is a YP. In all, 65 articles were eligible for the award. A total of 12 of these articles were reviewed by an eight-member committee consisting of YPs who have been extensively involved with CTF newsletters. The criteria applied by the committee were essentially the same as those used for the CTF’s Douglas J. Sherbaniuk Distinguished Writing Award. The members of the committee were:

n Tanya Budd, Buckberger Baerg & Partners LLP, Saskatoon n Aron Grusko, Fillmore Riley LLP, Winnipeg n Kenneth Keung, Moodys Gartner Tax Law, Calgary n Melanie Kneis, Royal Bank of Canada, Toronto n Ilia Korkh, EY Law LLP, Vancouver n Colleen Ma, Miller Thomson LLP, Calgary n Victor Perrault, KPMG LLP, Montreal n Karina Shahani, Deloitte LLP, Ottawa

The committee gave the 2017 awards to five authors in respect of the following articles:

75 76 n canadian tax journal / revue fiscale canadienne (2019) 67:1

n Amanda S.A. Doucette and Britney Wangler (Stevenson Hood Thornton Beaubier LLP, Saskatoon: [email protected], [email protected]), “Normal Borrowing by CCPC Owners Can Create an Income Inclusion” (2017) 7:1 Canadian Tax Focus 1-2. n Bud Goff (Deloitte LLP, Winnipeg: [email protected]) and Michaella DePalo (Deloitte LLP, Ottawa: [email protected]), “US State-Tax Strategies To Reduce Double Taxation” (2017) 7:4 Canadian Tax Focus 1-2. n Lauchlin MacEachern (with Moodys Gartner Tax Law LLP, Calgary at the time of writing), “The Small Business Deduction: Is Its Complexity Justified?” (2017) 17:3 Tax for the Owner-Manager 2-3.

Lauchlin MacEachern is now a two-time winner, having won previously in 2014: Lauchlin H. MacEachern, “Ten-Year Limitation Period for Tax Debts Arising Prior to 2004” (2014) 14:3 Tax for the Owner-Manager 8-9. Young practitioners (and anyone else) interested in writing for the CTF newsletters are invited to contact the newsletter editors: Alan Macnaughton (amacnaughton @uwaterloo.ca) for Canadian Tax Focus, Vivien Morgan ([email protected]) for Canadian Tax Highlights, and Thomas McDonnell ([email protected]) for Tax for the Owner-Manager. In Quebec, they are invited to contact Sonia Gobeil ([email protected]) of the Quebec office. Individuals interested in participating in any of the events and activities of the Young Practitioners chapters of the CTF across Canada are invited to contact the chair of the steering committee of their local chapter or Robyn Corrigan (rcorrigan @ctf.ca) of the CTF national office. In Quebec, they are invited to contact Sonia Gobeil ([email protected]) of the CTF Quebec office. Young Practitioners chapters now exist in Calgary, Edmonton, Halifax, Kelowna, Kitchener-Waterloo, Mississauga, Montreal, Ottawa, Quebec City, Saskatoon, Toronto, Vancouver, and Winnipeg. canadian tax journal / revue fiscale canadienne (2019) 67:1, 7 7 - 7 8

Prix pour le meilleur article de bulletin par un jeune fiscaliste

Pour une quatrième année, la Fondation canadienne de fiscalité FCF( ) a présenté le « Prix pour le meilleur article de bulletin par un jeune fiscaliste ». Les gagnants ont été annoncés à la Conférence annuelle de la FCF en novembre 2018 à Vancouver. Les articles de bulletin, en plus de constituer un service précieux à la profession, servent souvent de fondements à des textes plus long, tels que des contributions aux conférences de la FCF et des articles dans la Revue fiscale canadienne. Obtenir du succès dans la rédaction d’articles de bulletin tôt dans la carrière d’un jeune fiscaliste peut mener à une carrière en fiscalité dans laquelle la rédaction constitue une part régulière et continue de sa contribution à la profession. La FCF définit « jeune fiscaliste » comme étant une personne qui travaille dans le domaine de la fiscalité depuis 10 ans ou moins. Le prix est décerné pour le meilleur article de bulletin qui 1) a été rédigé exclusivement par un ou plusieurs auteurs qui étaient de jeunes fiscalistes au moment de la publication et 2) a été publié dans l’un des trois bulletins de la FCF dans une année civile : Canadian Tax Focus, Faits saillants en fiscalité canadienne ou Actualités fiscales pour les propriétaires dirigeants. La grande majorité des articles éligibles ont été publiés dans Canadian Tax Focus, lequel contient que des articles rédigés par des jeunes fiscalistes (ou en sont les co-auteurs). En tout, 65 articles étaient éligibles à ce prix. Un total de 12 articles éligibles à ce prix ont été examinés par un comité de huit jeunes fiscalistes, lesquels ont participé de près aux bulletins de laFCF au cours des dernières années. Les critères appliqués par le comité étaient essentiellement les mêmes que ceux utilisés pour le Prix d’excellence en rédaction Douglas J. Sherbaniuk de la FCF. Les membres du comité étaient :

n Tanya Budd, Buckberger Baerg & Partners LLP, Saskatoon n Aron Grusko, Fillmore Riley LLP, Winnipeg n Kenneth Keung, Moodys Gartner Tax Law, Calgary n Melanie Kneis, Royal Bank of Canada, Toronto n Ilia Korkh, EY Law LLP, Vancouver n Colleen Ma, Miller Thomson LLP, Calgary n Victor Perreault, KPMG LLP, Montréal n Karina Shahanni, Deloitte LLP, Ottawa

Le comité a remis le prix de 2017 à cinq auteurs pour les articles suivants :

77 78 n canadian tax journal / revue fiscale canadienne (2019) 67:1

n Amanda S.A. Doucette et Britney Wangler (Stevenson Hood Thornton Beaubier LLP, Saskatoon: [email protected], [email protected]), « Normal Borrowing by CCPC Owners Can Create an Income Inclusion » (2017) 7:1 Canadian Tax Focus 1-2. n Bud Goff (Deloitte LLP, Winnipeg: [email protected]) et Michaella DePalo (Deloitte LLP, Ottawa: [email protected]), « US State-Tax Strategies To Reduce Double Taxation » (2017) 7:4 Canadian Tax Focus 1-2. n Lauchlin MacEachern (avec Moodys Gartner Tax Law LLP, Calgary au moment de la rédaction), « The Small Business Deduction: Is Its Complexity Justified? » (2017) 17:3 Tax for the Owner-Manager 2-3.

Lauchlin MacEachern reçoit le prix pour une seconde fois. Il a été recipiendaire du prix en 2014 : Lauchlin H. MacEachern, « Ten-Year Limitation Period for Tax Debts Arising Prior to 2004 » (2014) 14:3 Tax for the Owner- Manager 8-9. Les jeunes fiscalistes (ou toute personne) intéressés par la rédaction d’articles dans l’un des bulletins de la Fondation sont invités à s’adresser aux rédacteurs en chef des bulletins : Alan Macnaughton ([email protected]) pour Canadian Tax Focus, Vivien Morgan ([email protected]) pour Faits saillants en fiscalité canadienne et Thomas McDonnell ([email protected]) pour Actualités fiscales pour les propriétaires exploitants. Au Québec, elles sont invitées à contacter Sonia Gobeil ([email protected]) du bureau de la Fondation au Québec. Les personnes intéressées à participer aux événements et aux activités de l’une des sections des jeunes fiscalistes de la FCF au Canada sont invités à communiquer avec le ou la président(e) du comité de ladite division ou avec Robyn Corrigan ([email protected]) du bureau de la FCF à Toronto. Au Québec, elles sont invitées à communiquer avec Sonia Gobeil ([email protected]). Les sections des jeunes fiscalistes existent maintenant à Calgary, Edmonton, Halifax, Kelowna, Kitchener- Waterloo, Mississauga, Montréal, Ottawa, Québec, Saskatoon, Toronto, Vancouver et Winnipeg. canadian tax journal / revue fiscale canadienne (2019) 67:1, 79

Canadian Tax Foundation Lifetime Contribution Award

As of 2016, the Canadian Tax Foundation honours each year individuals who, through their volunteer efforts and body of work, have made substantial and out- standing contributions to the Foundation during their careers. The Lifetime Contribution Award is the most prestigious award conferred by the Foundation. The selection committee takes into account the individual’s contributions to Foun- dation publications and conferences, service on the board of governors and other committees, and participation in other organizations and activities that further the Foundation’s purposes. The 2018 recipients were Neil Brooks and Perry Truster. For further information about the nomination and selection process for this award, see the Foundation website.

79 canadian tax journal / revue fiscale canadienne (2019) 67:1, 80

Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle

Depuis 2016, la Fondation canadienne de fiscalité rend hommage chaque année à des personnes qui, par leur travail bénévole et leurs réalisations, ont contribué de façon importante et exceptionnelle à la Fondation au cours de leur carrière. Le Prix pour une contribution exceptionnelle est le prix le plus prestigieux décerné par la Fondation. Le comité de sélection prend en compte la contribution de la personne aux publications et aux conférences de la Fondation, son travail au sein du conseil des gouverneurs et d’autres comités, ainsi que sa participation à d’autres organisations et activités qui contribuent à la réalisation des objectifs de la Fondation. Les lauréats de 2018 étaient Neil Brooks et Perry Truster. Pour obtenir de plus amples renseignements sur le processus de nomination et de sélection pour ce prix, consultez le site Web de la Fondation.

80 canadian tax journal / revue fiscale canadienne (2019) 67:1, 81 - 160 https://doi.org/10.32721/ctj.2019.67.1.fon

Finances of the Nation Vivien Morgan*

SURVEY OF PROVINCIAL AND TERRITORIAL BUDGETS, 2018-19 For almost 60 years, the Canadian Tax Foundation published an annual monograph, Finances of the Nation, and its predecessor, The National Finances. In a change of format, the 2014 Canadian Tax Journal introduced a new “Finances of the Nation” feature, which presents annual surveys of provincial and territorial budgets and topical articles on taxation and public expenditures in Canada. This article surveys the 2018-19 provincial and territorial budgets. The underlying data for the Finances of the Nation monographs and for the articles in this journal will be published online in the near future. KEYWORDS: BUDGETS n PROVINCIAL n TERRITORIAL n GOVERNMENT FINANCE n REVENUE n EXPENDITURES

CONTENTS Introduction 82 Summary Information 82 Provincial and Territorial Budgets by Jurisdiction 103 British Columbia (Table 12) 108 Tax Highlights 108 Tax Changes 108 Alberta (Table 14) 114 Tax Highlights 114 Tax Changes 114 Saskatchewan (Table 16) 117 Tax Highlights 117 Tax Changes 117

* Of the Canadian Tax Foundation, Toronto. I would like to thank Alan Davis of Toronto, for developing figures 1 through 4, and Geneviève Ferland and Cathleen Hibbard of PricewaterhouseCoopers LLP, Montreal and Toronto, respectively, for developing table 11. I would also like to thank Heather Evans of the Canadian Tax Foundation and Michael Smart of the University of Toronto for their insightful comments, and I especially would like to thank Ken McKenzie of the University of Calgary.

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Manitoba (Table 17) 121 Tax Highlights 121 Tax Changes 121 Ontario (Table 19) 125 Tax Highlights 125 Tax Changes 125 Quebec (Table 21) 137 Tax Highlights 137 Tax Changes 137 New Brunswick (Table 24) 145 Tax Highlights 145 Tax Changes 145 Nova Scotia (Table 25) 147 Tax Highlights 147 Tax Changes 147 Prince Edward Island (Table 26) 149 Tax Highlights 149 Tax Changes 149 Newfoundland and Labrador (Table 27) 151 Tax Highlights 151 Tax Changes 151 Yukon (Table 29) 155 Tax Highlights 155 Tax Changes 155 Northwest Territories (Table 30) 157 Tax Highlights 157 Tax Changes 157 Nunavut (Table 31) 159 Tax Highlights 159 Tax Changes 159

INTRODUCTION This article has two distinct parts. First, it sets out tables and charts that show aggregate figures related to projected 2018-19 budget revenues and expenditures for the various provinces and territories, as well as tables that show corporate income tax rates, personal income tax brackets and rates, and other matters. Second, the article summarizes the projected budget revenues and expenditures in tabular form and also summarizes the tax changes in narrative form, for each province and territory.

SUMMARY INFORMATION Most of the provinces and territories brought down their 2018-19 fiscal-year budgets between January and May 2018. (In Ontario, the new government elected in June 2018 issued an update1 on November 15 to the budget of March 28, 2018.) The

1 Ontario, 2018 Fall Economic Outlook and Fiscal Review, November 15, 2018. finances of the nation n 83 precipitous drop in the price of oil in 2014 became part of history as Alberta’s economy started to recover, although there was a lag in the impact on government revenues. The price of oil has been volatile since that time, but until 2018 was essentially recovering; late in 2018, however, companies were reported to be buying up wells speculatively owing to another dip in oil prices. Alberta had said in its 2017 budget that it was “just now beginning to recover from the steepest and most prolonged slide in oil prices in recent history.”2 During the hot and dry summer of 2018, there were severe forest fires across the country (and in the United States) that will have unknown and long-term effects (following a massive fire in Fort McMurray, Alberta in 2016). Newfoundland and Labrador was hit hard by the 2014 drop in oil commodity prices and still stumbles toward recovery; the province made significant tax changes across the board in 2016 to increase revenues, but continues to face a serious financial situation. New Brunswick experienced an unrelated and extended downturn in its budgetary position and set about stemming deficits in 2015 and 2016. More than half of the provinces and territories projected a budget deficit (with expenditures exceeding revenue) in this cycle, while 5 of the 13 jurisdictions forecasted a surplus (or basically a flat budget) in the 2018-19 fiscal year based on projected increased economic growth and continued moderate spending restraint. Alberta opted not to make major changes in spending and faced major deficits; the province did not expect to return to a balanced budget until 2022-23. Most jurisdictions that issued projections expected to return to a balanced budget or surplus over long periods (four or more years). For example, Manitoba projected a return to surplus before the end of the government’s second term in 2024; Newfoundland and Labrador sees a return to surplus in 2022-23. Because most of the Northwest Territories’ budget is funded through federal transfers, in 2017 the territory concluded that it had only a limited capacity to increase taxes or other own-source revenues to ensure operating surpluses. The Yukon government faced similar pressures; in 2016, the surplus projected by the former government had not materialized and the then new government had been forced to make a special borrowing to meet its financial needs. In recognition of its precarious revenues owing to a dependence on resources, Yukon forecasted its first deficit in 2018-19 if no action was taken, and enlisted advice from its populace concerning expenditure pressures. Saskatchewan rolled back planned reductions for mid-2019 in the general and the manufacturing and processing (M & P) corporate tax rates, but increases in the small business limit as a rule continued. The Office of the Parlia- mentary Budget Officer issued its 2018 report on the sustainability of current provincial and territorial fiscal policies.3 The report concluded that these policies

2 Alberta, Ministry of Treasury Board and Finance, 2017-18 Budget, Fiscal Plan, March 16, 2017, at 3. 3 Office of the Parliamentary Budget Officer,Fiscal Sustainability Report 2018 (Ottawa: Office of the Parliamentary Budget Officer, September 27, 2018) (www.pbo-dpb.gc.ca/en/blog/news/ FSR_September_2018). 84 n canadian tax journal / revue fiscale canadienne (2019) 67:1 were not sustainable over the long term, although they were sustainable over the long term for the government sector as a whole. Overall, the budgets as delivered were neither good news nor bad news for most taxpayers: the majority of tax changes were minor adjustments to personal income tax brackets and rates and some corporate income tax rates, and some sin tax increases. There were fewer tax changes than usual and more cost-cutting measures in some jurisdictions. In British Columbia and Quebec, surpluses were said to support increased spending on social programs. In most cases, however, the subdued economic environment was matched by a muted response to both revenue increases and expenditures, and most provinces modestly reduced spending if they took any action at all. Balanced budgets inspire confidence in investors and consumers, and most provincial and territorial jurisdictions arrived at a close-to-balanced budget without significantly increasing tax revenue except by natural growth and inflation. Ontario’s newly elected government found that the province’s deficit was greater than had been reported previously. In New Brunswick, measures that were recommended following the province’s strategic program review were continued and were considered necessary in order to balance the provincial budget in 2021-22. Alberta forecasted a deficit slightly less than that forecasted in the 2016 and 2017 budgets, however, and anticipates a return to surplus in 2022-23. Manitoba placed the burden of its deficit on the lack of previous fiscal responsibility, as did New Brunswick. Tax expenditures such as tax credits were by and large tightened, and major expenditures on programs such as health were held at 2017 levels or increased modestly in most cases. Ontario took a more conservative position under the newly elected government. Saskatchewan’s 2017-18 revenue measures showed a greater reliance on consumption taxes: there was a shift away from income taxes and the “more volatile non-renewable resource revenues.”4 Risk to the Canadian economy also resided in the high national level of household debt relative to income—upward of 170 percent since 19905 (171.31 in July 2018), but perhaps stabilizing in that range—with growth being spurred on by residential real estate investment, particularly in Vancouver and Toronto. A 2016 property transfer tax increase and other measures in Vancouver cooled that residential real estate market—although perhaps only temporarily—and federal changes since then may have slowed the market in Ontario, particularly in Toronto. (The Bank of Canada increased its interest rates, and the federal government announced stricter rules for mortgages.) The previous Ontario government had renewed its interest in a land transfer tax rate increase for foreign persons, a policy that it had previously rejected. On April 20, 2017, after consulting with the federal minister of finance and the mayor of the city of Toronto, Ontario announced a suite of options intended to

4 Saskatchewan, Ministry of Finance, 2017-18 Budget, Revenue/Tax Background, March 23, 2017, at 3. 5 Tamsin McMahon, “First-Time Homeowners Driving Higher Household Debt: Study,” Globe and Mail, December 8, 2015, updated March 22, 2018. finances of the nation n 85 cool the housing market in Southern Ontario.6 It will take some time to gauge whether the downward effect on real estate prices will be permanent or temporary and whether that effect was caused by government measures or by a more natural stabilizing of the market; in 2018, the market was erratic but seemed to hold steady or rise slightly. The provinces and territories had by and large developed their own carbon reduction plans before 2019—as required by the federal government—or had asked the federal government to impose a plan. As of the date of writing, only four provinces had done neither: Manitoba, New Brunswick, Ontario, and Saskatchewan. Ontario and Saskatchewan have each filed separate constitutional challenges to the federal imposition of a carbon tax. The outcome of this dispute is unknown. Table 1 aggregates the projected budget revenue and expenditure items in each province and territory for the 2018-19 fiscal year. The figures reflect the budget summaries presented in the second part of this article. The different jurisdictions’ budget projections are not strictly comparable, owing in part to accounting differences across the provinces and territories.7 However, the placement of the various jurisdictions’ figures in a single table illustrates trends and distinctions that are intended to stimulate discussion. The provinces and territories are listed in descend- ing order based on each jurisdiction’s original budget projection of its expected tax revenue. Figure 1 presents similar information and includes surpluses and deficits at the right of the figure. Each projected revenue source amount is shown as a percentage of total revenues, and the projected surplus or deficit is shown as a percentage of total expenditures. Figure 2 shows projected tax revenues by source as a percentage of total revenues. Figure 3 shows projected expenditures by spending category as a percentage of total expenditures, and health-care expenditures per capita. The provinces and territories have the primary responsibility for education, health, and social services expenditures. Across all jurisdictions, health-care expenditures averaged about 40 percent of total expenditures, as shown in table 2. For example, for the 2018-19 fiscal year (updated), Ontario projected health-care and long-term-care expenditures of $61,678 million or 38.13 percent of total expenditures ($161,775 million, as shown in table 19). In contrast, in the territories, projected spending on health care in 2018-19 accounted for 18.81 percent of total expenditures for Nunavut, 26.69 percent for the Northwest Territories, and

6 Ontario, Ministry of Finance, “Making Housing More Affordable: Ontario Introducing Housing Affordability Measures for Homebuyers and Renters,” News Release, April 20, 2017 (https://news.ontario.ca/opo/en/2017/04/making-housing-more-affordable.html). 7 For a discussion of accounting differences between Canadian jurisdictions, see Colin Busby and William B.P. Robson, Credibility on the (Bottom) Line: The Fiscal Accountability of Canada’s Senior Governments, 2013, C.D. Howe Institute Commentary no. 404 (Toronto: C.D. Howe Institute, March 2014) (https://dx.doi.org/10.2139/ssrn.2414106). For a reconciliation of changes in the Alberta budget, see Ron Kneebone and Margarita Wilkins, “Recent Changes to Provincial Government Budget Reporting in Alberta” (2018) 10:1 SPP Communiqué [University of Calgary School of Public Policy] 1-8 (http://dx.doi.org/10.11575/sppp.v11i0.43275). 86 n canadian tax journal / revue fiscale canadienne (2019) 67:1 2 (5) 23 29 (54) 904 219 (683) (189) (521) (365) (8,802) (deficit) (14,544) Surplus / b 82 (13) (30) 115 (350) (500) (1,000) Adjustments (1,338) (1,713) (2,201) (9,616) (1,984) (8,356) Total Total (53,624) (56,181) (14,609) (10,863) (17,423) (161,775) (108,693) expenditures 1,333 1,749 2,176 9,427 1,985 7,673 Total Total 54,193 47,879 14,244 10,810 16,787 148,231 109,597 revenues millions of dollars a 94 210 385 245 1,665 2,315 4,567 1,369 3,450 Other 14,671 16,762 21,324 18,580 revenue sources of 770 757 1,005 1,404 1,671 3,225 8,930 8,218 2,462 3,574 4,496 26,006 23,674 Federal transfers d 118 251 120 970 4,537 7,215 5,867 4,601 8,841 30,592 22,899 67,343 100,901 Tax revenue Tax . . Provincial and Territorial Revenues and Expenditures, Budget Projections, Fiscal Year 2018-19 Year Fiscal and Expenditures, Budget Projections, Revenues Territorial and Provincial . . c . . . Other sources of revenue included resource royalties; premiums, fees, and licences; commercial Crown corporation transfers; investment income. Adjustments included consolidation numbers (in some cases) and transfers to from reserve funds. Ontario numbers are from the Fall Economic Outlook and Fiscal Review released by newly elected government on November 15, 2018. tax revenue included mining and royalties of $80 million offshore $974 million. Newfoundland and Labrador’s Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, 29-31. Differences are due to rounding. a b c d Yukon Nunavut . Northwest Territories New Brunswick . Prince Edward Island . TABLE 1 TABLE Province /territory Ontario British Columbia Alberta Saskatchewan Nova Scotia . Newfoundland and Labrador . Manitoba . Quebec finances of the nation n 87

FIGURE 1 Projected Provincial and Territorial Revenues by Source, as a Percentage of Total Revenues, and Projected Surplus/Deficit as a Percentage of Projected Expenditures, Fiscal Year 2018-19

Ontario 68.1 17.5 14.4 9.0

Quebec 61.4 21.6 17.0 0.8

British 55.7 16.3 28.0 0.4 Columbia

Alberta 47.8 17.2 35.0 15.7

Manitoba 52.7 26.8 20.6 3.0

Saskatchewan 50.7 17.3 32.1 2.5

Nova Scotia 54.3 33.1 12.7 0.3

New Brunswick 48.1 34.2 17.7 2.0

Newfoundland 60.0 9.9 30.2 8.2 and Labrador Prince Edward 48.9 38.8 12.3 0.0 Island Northwest 14.4 80.3 5.4 1.3 Territories

Yukon 8.9 75.4 15.8 0.0

Nunavut 5.5 76.8 17.7 2.5

0 20 40 60 80 100 Projected surplus/deﬁcit as a percentage of Percentage of total revenues projected expenditures

Tax Federal Other Deﬁcit Surplus revenue transfers revenue

Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31, and the data summary in table 1. 88 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 2 Projected Provincial and Territorial Tax Revenues by Source as a Percentage of Total Revenues, Fiscal Year 2018-19

Ontario 23.6 9.3 18.0 17.2 68.1

Quebec 27.9 7.3 15.5 10.8 61.4

British Columbia 17.9 7.5 13.5 16.8 55.7

Alberta 23.8 9.5 14.5 47.8

Manitoba 20.7 3.4 14.7 13.9 52.7

Saskatchewan 17.1 4.4 15.1 14.0 50.7

Nova Scotia 26.0 4.9 17.2 6.1 54.3

New Brunswick 17.8 3.3 15.8 11.1 48.1 Newfoundland and Labrador 18.9 2.6 15.2 23.2 60.0 Prince Edward Island 19.1 3.5 15.0 11.2 48.9 Northwest Territories 5.9 1.8 6.7 14.4

Yukon 5.6 0.9 2.4 8.9

Nunavut 1.5 0.8 3.2 5.5

0 20 40 60 80 100 Percentage of total revenues

Personal Corporate Sales tax Other taxes income tax income tax

Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31. finances of the nation n 89

FIGURE 3 Projected Provincial and Territorial Expenditures by Spending Category as a Percentage of Total Expenditures, Fiscal Year 2018-19

Ontario 38.1 19.0 7.8 35.1 4,300

Quebec 39.6 21.4 8.6 30.4 5,100

British 40.4 25.9 5.1 28.6 4,500 Columbia

Alberta 39.3 14.6 3.4 42.7 5,200

Manitoba 38.7 25.6 5.9 29.8 5,000

Saskatchewan 39.5 22.3 3.0 35.2 5,000

Nova Scotia 40.1 12.9 8.2 38.7 4,600

New Brunswick 28.6 13.6 7.0 50.6 3,600

Newfoundland 35.7 10.0 17.1 37.2 5,600 and Labrador Prince Edward 35.8 13.8 6.4 44.1 4,700 Island Northwest 27.0 19.1 1.3 52.6 10,400 Territories

Yukon 32.2 14.4 1.2 52.2 11,200

Nunavut 18.8 11.5 0.1 69.6 10,900

0 20 40 60 80 100 0 5,000 10,000 15,000

Percentage of total expenditures Health expenditures per capita (rounded Health Education Debt Other to nearest $100) servicing expenditures

Source: Based on provincial and territorial budget documents cited in the source notes for tables 4, 12, 14, 16-17, 19, 21, 24-27, and 29-31. 90 n canadian tax journal / revue fiscale canadienne (2019) 67:1 a 39.57 40.38 39.26 38.75 39.46 35.72 40.09 28.81 35.79 26.69 32.21 18.81 38.13 2018-19 40.01 39.10 38.78 39.17 38.02 34.10 40.02 35.32 28.56 25.00 35.18 18.03 38.12 2017-18 41.38 39.95 38.32 39.88 38.65 31.55 40.73 35.87 29.02 24.91 36.97 19.48 38.68 2016-17 Percentage of total expenditures 41.59 39.44 38.23 39.19 38.86 37.36 41.28 35.17 30.31 24.70 30.32 20.07 38.49 2015-16 a 710 462 431 414 6,751 5,765 2,985 4,367 2,770 21,651 22,057 43,013 61,678 2018-19 640 423 451 353 6,681 5,627 2,768 4,214 2,679 20,747 21,449 40,223 53,763 2017-18 617 414 461 338 millions of dollars 6,497 5,588 2,676 4,132 2,602 19,638 20,414 38,372 51,785 2016-17 Health-care expenditures b c d 587 407 372 335 6,088 5,507 4,138 2,617 2,683 19,061 19,684 50,771 37,688 2015-16 . . Provincial and Territorial Health-Care Expenditures, Budget Projections, Fiscal Years 2015-16 to 2018-19 Years Fiscal Expenditures, Budget Projections, Health-Care Territorial and Provincial . . . . . Numbers are from Ontario’s Fall Economic Outlook and Fiscal Review released on November 15, 2018. Numbers are from Ontario’s Quebec accounting was changed after the 2013-14 budget; amounts for 2014-15 fiscal year were reported on a consolidated basis, showing general projected health-care expenditure for 2014-15 would be $32,346 million. fund plus consolidated entities. Using 2013-14 accounting, Quebec’s first budget prepared on a summary basis and The figure for Saskatchewan reflected a change in accounting: the 2014-15 budget was province’s included government core operations, other service organizations, and business enterprises. The figure shown in the Newfoundland and Labrador estimates included an amount for debt servicing. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, 29-31. See those tables for further details. Province /territory British Columbia Alberta Manitoba . Saskatchewan Nova Scotia . Prince Edward Island . New Brunswick . Newfoundland and Labrador . . . Northwest Territories Yukon Nunavut Note: Owing to accounting differences between provinces and territories, direct comparison of the above numbers is not strictly appropriate. Numbers may not add because of rounding. a b c d TABLE 2 TABLE Ontario Quebec finances of the nation n 91

TABLE 3 Health-Care Expenditures in Ontario and the Territories as a Percentage of Total Expenditures and per Capita, 2013-14 to 2018-19 Health-care expenditures as a percentage Health-care expenditures of total expenditures per capita Territorial (Nunavut, Northwest Northwest Territories, Fiscal year Ontario Nunavut Territories Yukon Ontario Yukon) range

percent dollars 2018-19 38.13 18.81 26.97 32.21 4,300 10,400-11,200 2017-18 38.12 18.03 25.00 35.18 3,800 9,500-12,100 2016-17 38.67 19.48 24.70 37.97 3,700 9,100-12,300 2015-16 38.49 20.07 24.70 30.32 3,700 9,100-10,200 2014-15 38.39 20.29 24.30 29.60 3,700 8,600-9,200 2013-14 38.29 20.64 24.81 32.13 3,600 8,400-9,500

Sources: See Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2013-14,” Finances of the Nation feature (2014) 62:3 Canadian Tax Journal 771-812, at 774; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2014-15,” Finances of the Nation feature (2015) 63:1 Canadian Tax Journal 157-215, at 162; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2015-16,” Finances of the Nation feature (2016) 64:1 Canadian Tax Journal 147-206; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2016-17,” Finances of the Nation feature (2017) 65:1 Canadian Tax Journal 87-145, at 96; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2017-18,” Finances of the Nation feature (2018) 66:1 Canadian Tax Journal 37-109, at 51; and this article. The population figures were taken from Statistics Canada, as of the first quarter of 2018. Because the budgets were estimated for 2018-19 and the population data were taken at slightly different dates, the per capita figures were rounded.

32.21 percent for Yukon. However, on a per capita basis, the results of the territories vis-à-vis Ontario appeared to reverse. These trends are reflected in table 3, which sets out the health-care expenditures (as projected in the 2013-14 to 2018-19 budgets) as a percentage of total expenditures and per capita in Ontario and the territories. Table 4 sets out the health-care expenditure projections for all the provinces and territories for 2018-19 as a percentage of total expenditures and per capita. Table 5 shows the provincial and territorial surpluses and deficits since the (revised) budget projections for 2014-158 and also shows figures set out in 2018-19 budgets for planned or targeted surpluses or deficits for up to the ensuing five fiscal years. Most jurisdictions that projected beyond the 2018-19 fiscal year planned for a surplus within the following two to four years. Ontario forecasted a flat budget in 2017-18, which materialized, but in 2018-19 planned for a large deficit: the incom- ing government projected an even larger deficit for 2018-19 and, as noted above, issued an updated economic statement in November 2018.9 Alberta forecasted a

8 See Vivien Morgan, “Survey of Provincial and Territorial Budgets 2015-16,” Finances of the Nation feature (2016) 64:1 Canadian Tax Journal 147-206, at 150, table 1. 9 Supra note 1, at 4-5. 92 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 4 Health-Care Expenditures as a Percentage of Total Expenditures and per Capita, Budget Projections, 2018-19 Health-care expenditures as a percentage Health-care Health-care of total expenditures Province /territory expenditures Population expenditures per capita

millions of dollars ’000s % dollars British Columbia ...... 21,651 4,817.2 40.38 4,500 Alberta...... 22,057 4,286.1 39.26 5,200 Saskatchewan ...... 5,765 1,163.9 39.46 5,000 Manitoba...... 6,751 1,338.1 38.75 5,000 Ontario...... 61,678 14,193.4 38.13 4,300 Quebec...... 43,013 8,394.0 39.57 5,100 New Brunswick...... 2,770 759.7 28.63 3,600 Nova Scotia...... 4,367 953.9 40.09 4,600 Prince Edward Island. . . . . 710 152.0 35.79 4,700 Newfoundland and Labrador ...... 2,985 528.8 35.72 5,600 Northwest Territories. . . . . 462 44.5 26.69 10,400 Yukon ...... 431 38.5 32.21 11,200 Nunavut 414 38.0 18.81 10,900

Sources: Table 2; and population data from Statistics Canada, table 17-10-0005-01 (formerly CANSIM table 051-0001), “Population Estimates on July 1st by Age and Sex” (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501). deficit in 2018-19 and a return to surplus only in 2022-23. Manitoba projected a balanced budget within eight years. Newfoundland and Labrador said that it had met its fiscal targets early and, primarily as a result of lowering government spending, forecasted a return to surplus in 2022-23. On the basis of budget projections in the tables set out in the second part of this article, projected aggregate income tax revenue in the 2018-19 budgets of all provinces and territories was $99.2 billion from personal income tax and $32.8 billion from corporate income tax, for total revenue of $132.0 billion from income tax. Projected aggregate sales tax revenue was $60.6 billion, for a total of $93.4 billion from sources other than personal income tax (that is, corporate income tax and sales tax). Thus, as has been the case since 2014, in 2018-19 the provinces and territories expected to collect slightly more tax revenue from personal income tax than from corporate income tax and sales tax combined. In comparison, the 2018-19 federal budget projected $161.4 billion of revenue from personal income tax, $47.3 billion from corporate income tax, and $8.3 billion from non-resident income tax, for a total of $217.0 billion from income tax, plus $37.7 billion from sales tax10—for a total of $93.3 billion from sources other than personal income tax (corporate income

10 Canada, Department of Finance, 2018 Budget, Budget Plan, February 27, 2018, at 320, table A2.7. finances of the nation n 93 56 700 plan 3,502 2022-23 69 75 212 (142) (243) plan (1,400) 3,265 2021-22 4 61 (79) 284 108 (280) (654) plan 2,512 (6,970) 2020-21 6 3 39 281 (388) (124) (507) plan (7,912) 1,771 2019-20 2 29 219 904 (521) (189) (365) (683) plan (8,802) (14,544) 2018-19 millions of dollars 0.6 [1] 21 [26] 246 nil (840) [151] [850] (192) (685) (778) [(775)] [(152)] [(595)] 2,488 budget [(9,066)] [(2,042)] 2017-18 [revised] (10,344) 17 (35) [(17)] (911) (231) [150] (434) [(890)] [(249)] 1,458 2,028 (4,306) [2,737] [2,292] (1,830) budget [(1,000)] [(3,077)] [(1,289)] [(1,717)] (10,421) 2016-17 [revised] (Table 5 is concluded on the next page.) (Table (98) (28) 730 107 [(71)] [(28)] (422) [379] (477) [(466)] [(427)] 1,586 (8,512) budget [1,431] (6,118) (1,093) 2015-16 [(1,012)] [(5,686)] [(6,492)] [(2,093)] [revised] 71 [41] (40) [(35)] (357) [879] (391) (279) (538) [(451)] [(255)] [(101)] 1,692 2,644 (2,350) [1,115] budget [(2,350)] [(1,052)] (12,505) 2014-15 [revised] [(10,933)] . d . . Revised, Projected, and Planned Provincial and Territorial Surpluses and Deficits, 2014-15 Onward Territorial and and Planned Provincial Projected, Revised, . . . b . . . c a Ontario Quebec TABLE 5 TABLE Province /territory British Columbia Alberta New Brunswick . Nova Scotia . Prince Edward Island Saskatchewan Manitoba Newfoundland and Labrador . 94 n canadian tax journal / revue fiscale canadienne (2019) 67:1 plan 2022-23 plan 2021-22 2 plan 2020-21 9 (7) plan 2019-20 (5) 23 (54) plan 2018-19 millions of dollars 7 [6] 23 [75] 167 [(67)] budget 2017-18 [revised] 9 [(8)] (11) 119 [(11)] [155] budget 2016-17 [revised] 23 23 [14] 147 [(14)] [110] budget 2015-16 [revised] 72 36 200 [112] budget 2014-15 [revised] Concluded . f . . . e The numbers shown for 2021-2023 only appear to one decimal. newly elected New Democratic Party government (May 5, 2015) issued an update Projections for future years were included in a revised 2015-16 budget October 2015. for the 2015-16 fiscal year. projections in 2015 do not include other government entities. The budget figures for 2016 and onward as shown are the Manitoba’s reporting entity; no forecast is included in the 2017 budget, but a balanced budget was anticipated “before end of [the] . second term” 2024. accounting for the 2014-15 fiscal year was changed, and amounts were reported on a consolidated basis, showing general fund plus Quebec’s consolidated entities. accounting for the 2016-17 fiscal year was changed; reclassifications preceding appear in appendix III of Prince Edward Island’s estimates. forecast major deficits because of the prior accounting for long-term spending. Yukon The three-year Nunavut forecast in the 2018 budget does not include revolving fund revenues and expenditures showed a surplus of $8,782 2017-18; $8,577 in 2018-19; $47,311 2019-20; and $105,114 2020-21. The operating $54 million deficit the budget includes revolving funds considers accounting adjustments relating to capital. The fiscal deficit is $28 million in 2018-19. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, 29-31. Nunavut TABLE 5 TABLE Province /territory . . Northwest Territories Yukon a b c d e f finances of the nation n 95 tax, non-resident income tax, and sales tax). Thus, as was the case in 2013-14, the federal government projected that in fiscal 2018-19 it will raise almost twice as much revenue from personal income tax than from corporate income tax, non- resident income tax, and goods and services tax (GST) combined, although the personal income tax is a declining number as a share of other revenue sources. See table 6 for a tabular and detailed presentation. Table 6A shows the projected tax revenues for each province and territory as detailed in its 2018-19 budget, including total and per capita amounts. Table 7 shows the corporate income tax rates in the provinces and territories for 2018. From a personal income tax perspective, in recent years three provinces increased their income brackets for high income earners—British Columbia (for 2014, 2015, and 2018), Ontario (from 2012), and Quebec (from 2013)—and Nova Scotia (from 2010) continued with its high rate for taxpayers in the top bracket. Alberta, New Brunswick, Newfoundland and Labrador, and Yukon ushered in new personal income tax rates for high income earners in their 2015-16 budgets. Newfoundland and Labrador increased its tax rates on its tax brackets for 2016; for 2017, in most cases, the province increased those rates more than existing percentage rates. New- foundland and Labrador also imposed a temporary deficit reduction levy that increased with higher tax brackets until the end of calendar 2019; in 2018, that levy applied only to taxable income over $50,000. In the 2017-18 budget, New Bruns- wick lowered its top marginal personal income tax rate from 21.0 percent to 20.3 percent for taxable income exceeding $150,000, retroactive to the beginning of 2016; beginning in 2017, the province’s tax brackets were indexed for inflation. The newly elected government in Ontario vetoed a March 2018 budget proposal to increase tax rates, add a new tax bracket, and eliminate the province’s two surtaxes. Only a minority of jurisdictions do not specifically impose a higher tax rate on high income earners. In 2017, Alberta increased its credit amounts and bracket thresholds, and those amounts were indexed in 2018. Saskatchewan proposed to reduce its personal income tax rates by 0.5 of a percentage point on each of July 1, 2017 and July 1, 2019, but those rates were frozen at the 2018 level: 10.5, 12.5, and 14.5 percent. In 2017, Manitoba introduced indexation of its personal tax brackets and basic personal amount; in 2018, the bracket thresholds were $31,843 and $68,821, and the basic personal amount was $9,382. In Quebec, the government’s November 21, 2017 Economic Plan reduced, retroactively for all of 2017, the lowest tax rate from 16 percent to 15 percent;11 Quebec also increased its basic personal tax. Nova Scotia increased certain personal income tax credits for a taxpayer earning less than $75,000. Prince Edward Island increased certain personal tax credits; however, it continued to impose a surtax on high income earners. Nunavut and the Northwest Territories had higher brackets, perhaps reflecting the higher cost of

11 Quebec, Department of Finance and the Economy, 2017 Budget, Economic Plan, November 2017 Update, Section C: Measures for Individuals, November 21, 2017, at C.5, table C.3. 96 n canadian tax journal / revue fiscale canadienne (2019) 67:1 + 7)

78.2 79.8 83.5 81.7 88.7 93.4 (6 Non-PIT + 6) Canadian Tax Canadian Tax 101.5 113.0 118.4 122.2 130.3 132.0 (5 Income tax Canadian Tax Journal Canadian Tax (7) 52.6 53.3 55.5 53.4 57.7 60.6 Sales tax Provincial and territorial (6) 25.6 26.5 28.0 28.3 31.0 32.8 CIT (5) PIT 75.9 86.5 90.4 93.9 99.3 99.2 4) 69.9 74.0 75.8 80.6 85.6 93.3 + 3 Non-PIT (2 millions of dollars + 2 3) 171.5 180.5 186.5 197.8 202.6 217.0 (1 Income tax (4) 29.9 31.3 32.7 34.6 35.1 37.7 Sales tax Federal (3) 5.4 5.7 6.2 6.5 6.9 8.3 Non- resident tax (2) 37-109, at 51; and this article. Federal 2018 figures from Canada, Department of Finance, Budget, Budget Plan, 34.6 37.0 36.9 39.5 43.6 47.3 CIT 96; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2017-18,” Finances of the Nation feature 87-145, at 96; Vivien Morgan, “Survey of Provincial and Territorial (1) 155; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2016-17,” Finances of the Nation feature (2017) 147-206, at 155; Vivien Morgan, “Survey of Provincial and Territorial PIT 131.5 137.8 143.4 151.8 152.1 161.4 Canadian Tax Journal Canadian Tax Comparison of Projected Revenues from Personal and Corporate Income Tax, Sales Tax, and Non-Resident Tax— and Non-Resident Tax, Sales Tax, Income and Corporate Personal from Revenues Comparison of Projected to 2018-19 Jurisdictions, 2013-14 Territorial and Provincial, Federal, 157-215, at 162; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2015-16,” Finances of the Nation feature (2016) 64:1 157-215, at 162; Vivien Morgan, “Survey of Provincial and Territorial Canadian Tax Journal Canadian Tax 65:1 (2018) 66:1 February 27, 2018, at 320, table A2.7. Tax Journal Canadian Tax Journal 771-812, at 774; Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2014-15,” Finances of the Nation feature (2015) 63:1 771-812, at 774; Vivien Morgan, “Survey of Provincial and Territorial Sources: Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2013-14,” Finances of the Nation feature (2014) 62:3 Sources: Vivien Morgan, “Survey of Provincial and Territorial TABLE 6 TABLE 2013-14 . Fiscal year 2014-15 . 2015-16 . 2016-17 . 2017-18 . 2018-19 . CIT = corporate income tax; PIT personal tax. finances of the nation n 97

TABLE 6A Projected Tax Revenues for Provinces and Territories, by Category and per Capita, 2018-19

Province /territory PIT CIT Sales tax Other Total Per capita

millions of dollars dollars British Columbia ...... 9,836 4,096 7,428 9,232 30,592 6,400 Alberta...... 11, 387 4,551 na 6,961 22,899 5,300 Saskatchewan ...... 2,441 621 2,155 1,998 7,215 6,200 Manitoba...... 3,475 566 2,463 2,337 8,841 6,600 Ontario...... 34,946 15,766 26,727 25,462 100,901 7,100 Quebec...... 30,549 8,028 20,921 7,845 67,343 8,000 New Brunswick...... 1,682 312 1,493 1,050 4,537 6,000 Nova Scotia...... 2,816 531 1,858 662 5,867 6,200 Prince Edward Island. . . . . 390 60 298 222 970 6,400 Newfoundland and Labrador ...... 1,454 201 1,169 1,777 4,601 8,700 Yukon ...... 74 12 na 32 118 3,100 Northwest Territories. . . . . 103 31 na 117 251 5,600 Nunavut ...... 33 18 na 69 120 3,200 Total ...... 99,852 34,164 64,593 58,326 256,935 7,000

CIT = corporate income tax; PIT = personal income tax. living in those territories. Saskatchewan already had a tax bracket that could be said to impose a higher rate on high income earners, as does British Columbia, and several provinces imposed a high rate at a low level of taxable income. (The BC Budget 2017 Update imposed an even higher rate on taxable income over $150,000 starting in 2018.)12 A higher rate planned for high income earners did not materialize in Manitoba when the former government was not re-elected in 2016. Surtaxes are sometimes applied in addition to regular provincial or territorial personal income tax. All federal, provincial, and territorial marginal personal income tax rates on ordinary income and interest, as well as surtaxes, are shown in graphic form in figure 4 as a function of taxable income. Table 8 sets out the provincial and territorial personal income tax brackets and rates for 2018. Table 9 shows the sales tax rates in each jurisdiction for 2018. British Columbia, Saskatchewan, and Manitoba imposed a separate provincial sales tax (PST). Ontario and the Atlantic provinces—Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island—are harmonized sales tax (HST) participating provinces that harmonize sales taxes with the federal GST. Quebec has its own Quebec sales tax (QST), which applies in a manner similar to the GST. Alberta and the three territories do not impose sales taxes. In 2016, each of New Brunswick, Prince Edward Island, and Newfoundland and Labrador increased the provincial portion of its HST so that the combined HST rate in each province was 15 percent,

12 British Columbia, Department of Finance, Budget 2017 Update, Tax Measures, September 11, 2017, at 60. 98 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 7 Provincial and Territorial Corporate Income Tax Rates, 2018 Small Small General M & P business business Province /territory rate rate rate limita

percent dollars British Columbia ...... 12.0 12.0 2.0b 500,000 Alberta...... 12.0 12.0 2.0 500,000 Saskatchewanc...... 12.0 10.0 2.0 600,000 Manitoba...... 12.0 12.0 0.0 450,000 Ontario...... 11.5 10.0d 3.5e 500,000 Quebec...... 11.7 11.7 7.24 or 4.0 500,000 New Brunswick...... 14.0 14.0 2.62f 500,000 Nova Scotia...... 16.0 16.0 3.0 500,000 Prince Edward Island...... 16.0 16.0 4.0 500,000 Newfoundland and Labrador. . . . . 15.0 15.0 3.0 500,000 Northwest Territories...... 11.5 11.5 4.0 500,000 Yukon ...... 12.0 2.5 2.0 or 1.5g 500,000 Nunavut ...... 12.0 12.0 4.0 500,000

M & P = manufacturing and processing. a The threshold is reduced straightline if the Canadian-controlled private corporation (CCPC) and associated corporations had taxable capital between $10 million and $15 million in the preceding year. Ontario adopted the clawback effective May 1, 2014. b British Columbia’s general rate increased from 11 percent to 12 percent in 2018. c Saskatchewan restored its general rate to 12 percent and its M & P rate to 10 percent as of July 1, 2017, and the small business threshold was raised to $600,000 after 2017; the combined federal and Saskatchewan rate applicable to income between $500,000 and $600,000 is 17 percent for the taxation years ending December 31, 2018 and 2019. d In Ontario, the M & P rate applies to income from manufacturing, processing, farming, mining, logging, and fishing operations carried on in Canada and allocated to the province. e Effective January 1, 2018, as announced in the 2017 budget; enacted December 14, 2017. f New Brunswick’s small business rate applies to a small business whose taxable capital does not exceed $15 million. Effective April 1, 2017, the small business rate was lowered from 3.5 percent to 3.0 percent. The government committed to lowering that rate to 2.5 percent over the course of its mandate; the rate dropped to 2.5 percent effective April 1, 2018. g In Yukon, the 1.5 percent rate applies to M & P income of a CCPC up to the small business limit. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31. the same as the rate in Nova Scotia. In 2016, New Brunswick and Newfoundland and Labrador each increased its HST rate by 2 percentage points and Prince Edward Island increased its HST rate by 1 percentage point. In 2017, there was only one sales tax rate increase—in Saskatchewan—out of 13 provincial and territorial jurisdictions; in 2018, there were none. For 2017, Newfoundland and Labrador eliminated its point-of-sale rebate for books except on sales to certain institutions. This was expected to be a permanent removal, but public outcry resulted in the government’s reversing itself for 2018 and subsequent years. finances of the nation n 99

FIGURE 4 Personal Income Tax Marginal Rates Applicable to Taxable Income, 2018

Dollars 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 % % 49.80% 48.00% 50 50 40 40 33.00% 30 30 20 20 10 10 0 0 Federal British Columbia Alberta

53.53% 50.40% 50 47.50% 50 40 40 30 30 20 20 10 10 0 0 Saskatchewan Manitoba Ontarioa

53.31% 53.30% 54.00% 50 50 40 40 30 30 20 20 10 10 0 0 Quebecb New Brunswick Nova Scotia

(Figure 4 is concluded on the next page.) 100 n canadian tax journal / revue fiscale canadienne (2019) 67:1

FIGURE 4 Concluded

Dollars 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 450,000 500,000

% 51.30% % 51.37% 48.00% 50 50 40 40 30 30 20 20 10 10 0 0 Prince Edward Islanda Newfoundland and Yukon Labrador % 47.05% 44.50% 50 Federal income tax 40 Provincial/territorial 30 surtax 20 Provincial/territorial income tax (before 10 surtax) 0 Northwest Territories Nunavut a Surtax calculations assume that the only credit claimed reflects applicable basic personal amounts. b For Quebec, federal income tax has been reduced by the 16.5% provincial abatement. Source: PricewaterhouseCoopers LLP, Tax Facts and Figures: Canada 2018 (Toronto: PwC, 2018), at 4. finances of the nation n 101

TABLE 8 Provincial and Territorial Personal Income Tax Brackets and Rates, 2018

Surtax (percentage of regular Province /territory Tax bracket Rate tax) and top combined ratea

dollars percent British Columbia . . . . 0 to 39,676 5.06 over 39,676 to 79,353 7.70 over 79,353 to 91,107 10.50 over 91,107 to 110,630 12.29 over 110,630 to 150,000 14.70 over 150,000 16.80 Top combined rate of 49.80% Alberta...... 0 to 128,145 10.00 128,145.01 to 153,774 12.00 153,774.01 to 205,032 13.00 205,032.01 to 307,547 14.00 over 307,547 15.00 Top combined rate of 48.00% Saskatchewanb . . . . . 0 to 45,225 10.50 over 45,225 to 129,214 12.50 over 129,214 14.50 Top combined rate of 47.50% Manitobac...... 0 to 31,843 10.80 over 31,843 to 68,821 12.75 over 68,821 17.40 Top combined rate of 50.40% Ontariod...... 0 to 42,960 5.05 Surtax equal to 20% of basic personal tax greater than $4,638 over 42,960 to 85,923 9.15 Additional surtax equal to 36% of basic personal tax greater than $5,936 over 85,923 to 150,000 11.16 over 150,000 to 220,000a 12.16 over 220,000a 13.16 Top combined rate of 53.53% Quebec...... 0 to 43,055 16.00 over 43,055 to 86,105 20.00 over 86,105 to 104,765 24.00 over 104,765 25.75 Top combined rate of 53.31% New Brunswickc. . . . . 0 to 41,675 9.68 41,676 to 83,351 14.82 83,352 to 135,510 16.52 135,511 to 154,382 17.84 over 154,382 20.30 Top combined rate of 53.30% Nova Scotiac...... 0 to 29,590 8.79 29,591 to 59,180 14.95 59,181 to 93,000 16.67 93,001 to 150,000 17.50 over 150,000 21.00 Top combined rate of 54.00%

(Table 8 is concluded on the next page.) 102 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 8 Concluded

Surtax (percentage of regular Province /territory Tax bracket Rate tax) and top combined ratea

dollars percent Prince Edward Island. . . 0 to 31,984 9.80 Surtax equal to 10% of basic provincial tax in excess of $12,500 31,985 to 63,969 13.80 over 63,969 16.70 Top combined rate of 51.37% Newfoundland and Labradore...... 0 to 39,926 8.7 over 39,926 to 73,852 14.5 over 73,852 to 131,850 15.8 over 131,850 to 184,590 17.3 over 184,590 18.3 Top combined rate of 51.30% Northwest Territories. . . 0 to 42,208 5.90 over 42,208 to 84,420 8.60 over 84,420 to 137,428 12.20 over 137,428 14.05 Top combined rate of 47.05% Yukon ...... 0 to 46,605 6.40 46,606 to 93,208 9.00 93, 209 to 144,489 10.90 144,490 to 500,000 12.80 over 500,000 15.00 Top combined rate of 48.00% Nunavut ...... 0 to 44,436 4.00 over 44,437 to 88,873 7.00 over 88,874 to 144,488 9.00 over 144,488 11.50 Top combined rate of 44.50% a The top federal rate, used to arrive at the top combined rate, is 33 percent. b Saskatchewan’s 2017 rates were frozen for 2018. c Not indexed for inflation. Manitoba’s, New Brunswick’s, and Nova Scotia’s tax brackets were indexed starting in 2017. d Ontario’s brackets and rates remain unchanged from 2017, following cancellation of changes proposed in the March 28, 2018 budget. e A deficit reduction levy will be phased out by end of 2019; effective July 1, 2016. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31. finances of the nation n 103

TABLE 9 Provincial and Territorial Sales Tax Rates, Percent, 2018

GST or Provincial federal portion portion of Province /territory of HST HST PST and QST Combineda

British Columbia ...... 5 7 12 Alberta ...... 5 5 Saskatchewanb ...... 5 6 11 Manitoba ...... 5 8 13 Ontario ...... 5 8 13 Quebec ...... 5 9.975 14.975 New Brunswick ...... 5 10 15 Nova Scotia ...... 5 10 15 Prince Edward Island . . . . . 5 10 15 Newfoundland and Labradorc . . 5 10 15 Northwest Territories . . . . . 5 5 Yukon ...... 5 5 Nunavut ...... 5 5

GST = goods and services tax; HST = harmonized sales tax; PST = provincial sales tax; QST = Quebec sales tax. a The rates shown do not yield comparable tax burdens for all jurisdictions. For example, GST and HST allow input tax credits for underlying taxes, eliminate sales tax on exports, and also cover a wider range of goods and services than PST. b Saskatchewan increased its PST rate from 5 percent to 6 percent and also eliminated some exemptions in 2017. c Newfoundland and Labrador reinstated its point-of-sale rebate of PST for printed books for 2018 and subsequent years. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31.

PROVINCIAL AND TERRITORIAL BUDGETS BY JURISDICTION Table 10 summarizes the various dates for the 2018-19 budgets in each province and territory, the name and title of the person who announced the budget, and the announced estimated surplus or deficit. Table 11 sets out the research and development (R & D) tax credits in each province and territory, as updated for the 2018-19 budgets. The table details rates and whether the credit is refundable and otherwise eligible for a carryforward period. In some cases, the credit is also available to an individual. An article in this feature in 2017 focused on the policy behind these subsidies from an economics viewpoint.13 The second part of this article shows, for each province and territory, selected fiscal figures, highlights of tax changes, and a narrative summary of tax changes with

13 Daria Crisan and Kenneth J. McKenzie, “Tax Subsidies for R & D in Canada” (2017) 65:4 Canadian Tax Journal 951-81. 104 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 10 Provincial and Territorial Surplus/(Deficit) Projections, Fiscal Year 2018-19

Projected surplus / Province /territory Budget date Finance minister (deficit)

millions of dollars British Columbia . . . February 20, 2018 Carole Jamesa 219 Alberta ...... March 22, 2018 Joe Cecib (8,802) Saskatchewan . . . . . April 10, 2018 Donna Harpauer (365) Manitoba ...... March 12, 2018 Cameron Friesen (521) Ontario ...... March 28, 2018 Charles Sousa (6,704) November 15, 2018c Victor Fedeli (14,544) Quebec ...... March 27, 2018 Carlos Leitão 904 New Brunswick . . . . January 30, 2018 Cathy Rogers (189) Nova Scotia ...... March 20, 2018 Karen Caseyd 29 Prince Edward Island . . April 6, 2018 Heath McDonalde 2 Newfoundland and Labrador ...... March 27, 2018 Tom Osbornef (683) Northwest Territories . . February 8, 2018 Robert C. McLeod 23 Yukon ...... March 1, 2018 Sandy Silverg (5) Nunavut ...... May 28, 2018 David Akeeagok (54) a Minister of finance and deputy premier. b President of the Treasury Board and minister of finance. c Ontario’s 2018 Fall Economic Outlook and Fiscal Review was released on November 15, 2018 by the newly elected government. Both the budget and the economic statement figures are listed in the Ontario summary, table 19. d Minister of finance and Treasury Board. e Minister of finance and chair of the Treasury Board. f President of the Treasury Board and minister of finance. g Premier and minister of finance. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12, 14, 16-17, 19, 21, 24-27, and 29-31. accompanying tables. The figures for any particular jurisdiction are difficult to compare across jurisdictions. Where relevant, and where the information is accessible, notes that refer to differences in accounting and/or presentation are appended to the tables; it is beyond the scope of this article to analyze differing accounting practices of each jurisdiction and the differences in those practices between jurisdictions. Notes to each table also refer to the jurisdiction’s significant resource revenue, if any. The “tax highlights” section at the beginning of each section contains some of the more important tax changes and, where possible, lists them in order of prece- dence. The narrative summaries of tax changes are categorized under the following eight headings:

1. Corporate income tax: rates, credits, deductions, inclusions, reporting, business income matters, and other items. 2. Personal income tax: rates, credits, deductions, inclusions, and other items. This category may include the taxation of unincorporated businesses. finances of the nation n 105

TABLE 11 Provincial and Territorial Research and Development (R & D) Tax Credits, 2018a

Unused credits R & D tax Carryback Carryforward credit rate Is credit (taxation (taxation Who can claim Province /territory (%) refundable? years) years) the credit?

Albertab ...... 10 ✓ na na Corporationc British Columbia Qualifying CCPCd . . . . . 10 ✓ na na Corporation Other corporation . . . . 10 ✗ 3 10 Corporation Manitoba ...... 15 ✓e/✗ 3 20 Corporation New Brunswick . . . . 15 ✓ na na Corporation Newfoundland and Labrador ...... 15 ✓ na na Corporation and individual Northwest Territories . . . . . na na na na Nova Scotia ...... 15 ✓ na na Corporation Nunavut ...... na na na na Ontario Innovation tax creditf ...... 8 ✓ na na Corporation Business research institute tax creditg ...... 20 ✓ na na Corporation R & D tax credit . . 3.5 ✗ 3 20 Corporation Prince Edward Island ...... na na na na Quebech R & D wage tax crediti ...... 14 to 30 ✓ na na Corporation and individual University R & D tax credit j . . . . 14 to 30 ✓ na na Corporation and individual Private partnership pre-competitive tax creditk . . . . 14 to 30 ✓ na na Corporation and individual Tax credit on fees paid to a research consortium . . . . 14 to 30 ✓ na na Corporation and individual

(Table 11 is continued on the next page.) 106 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 11 Continued

Unused credits R & D tax Carryback Carryforward credit rate Is credit (taxation (taxation Who can claim Province /territory (%) refundable? years) years) the credit?

Saskatchewanl Qualifying CCPCm . . . . . 10 ✓ na na Corporation Other corporation . . . . 10 ✗ 3 10 Corporation Yukon ...... 15n ✓ na na Corporation and individual

CCPC = Canadian-controlled private corporation. a Provincial and territorial tax credits are government assistance for federal tax purposes and thus reduce expenditures eligible for the federal R & D deduction and federal tax credit. b Alberta’s R & D credit is 10 percent of the lesser of (1) eligible Alberta R & D expenditures and (2) the maximum expenditure level of $4 million (to a maximum annual credit of $400,000). c When R & D is carried on by a partnership, the R & D credit can generally be claimed by corporate partners except in Newfoundland and Labrador, Quebec, and Yukon, where an individual partner can also claim the credit. However, the credit cannot ever be claimed from a partnership that carries on its R & D in other provinces, such as Alberta and Ontario (except for certain programs). d British Columbia’s refundable R & D tax credit is 10 percent of the lesser of (1) eligible BC R & D expenditures and (2) the federal R & D expenditure limit (to a maximum annual credit of $300,000). e Manitoba’s credit is (1) fully refundable for eligible R & D expenditures incurred in Manitoba by a corporation that has a Manitoba permanent establishment and a contract with a qualifying research institute, and (2) 50 percent refundable for in-house R & D expenditures. f The Ontario innovation tax credit is available on up to $3 million of expenditures for a corporation that has taxable income under $500,000 and taxable capital under $25 million (to a maximum annual credit of $240,000). A corporation is eligible for a partial credit if its taxable income is over $500,000 but less than $800,000 or its taxable capital is between $25 million and $50 million. All current expenditures are eligible. Taxable income and taxable capital thresholds are set in the previous year on a worldwide associated basis. g The Ontario business research institute tax credit applies to 20 percent of qualifying payments (up to $20 million annually on an associated basis) to an Ontario eligible research institute (to a maximum annual credit of $4 million). h For all Quebec R & D tax credits, the following rates and conditions apply: 1. Quebec Canadian-controlled corporations that have fewer than $50 million in assets can claim the 30 percent rate on up to $3 million of R & D wages and/or eligible R & D expenditures for each credit; if assets held are between $50 million and $75 million, the rate is gradually reduced to 14 percent, which is the rate for all other taxpayers. The rates are higher in certain cases. Asset thresholds are set in the previous year on a worldwide associated basis (consolidated). (Table 11 is concluded on the next page.) finances of the nation n 107

TABLE 11 Concluded

2. The tax credit rate is 14 percent for Quebec corporations controlled by non-residents. Asset thresholds do not apply. 3. An exclusion threshold is allocated among the Quebec R & D tax credits proportionally to the amount of eligible expenditures of each R & D tax credit. For each R & D tax credit, the eligible R & D expenditures are reduced by the allocated exclusion, which varies depending on the company’s assets: the exclusion is a. $50,000 for a corporation whose assets are $50 million or less, b. an amount that increases linearly between $50,000 and $225,000 for a corporation whose assets are between $50 million and $75 million, and c. $225,000 for a corporation whose assets are $75 million or more. Asset thresholds are set in the previous year and are not on an associated basis. i A payment may be eligible for the Quebec R & D wage tax credit if the payment was made to (1) an arm’s-length subcontractor (up to 50 percent of the payment) or (2) a non-arm’s- length subcontractor (100 percent for wages paid and 50 percent of a payment to an arm’s-length subcontractor if the payment was made under the non-arm’s-length contract). j Quebec’s university R & D tax credit may be available on 80 percent of a payment to an eligible entity such as a university, a public research centre, or a research consortium. k For the Quebec private partnership pre-competitive tax credit, a qualified expenditure may include (1) wages paid relating to R & D, (2) 80 percent of a payment to an arm’s-length subcontractor (generally excluding a university, a public research centre, and a research consortium contract), (3) payment for some materials, or (4) payment for an overhead (or proxy) amount. l Saskatchewan’s total refundable and non-refundable tax credits are capped at $1 million per taxation year. m Saskatchewan’s refundable R & D tax credit is 10 percent of the lesser of (1) eligible Saskatchewan R & D expenditures and (2) $1 million in qualifying expenditures (maximum annual credit is $100,000). n Yukon’s rate is 20 percent for R & D expenditures made to Yukon College. Source: Table data prepared by Geneviève Ferland of PricewaterhouseCoopers LLP, Montreal, and Cathleen Hibbard of PricewaterhouseCoopers LLP, Toronto.

3. Sales tax: HST, GST, PST, QST. 4. Sin taxes: alcohol, tobacco, and cannabis taxes. 5. Resource-related matters: resource deductions, credits, royalties, and other items. 6. Real estate taxes: land transfer taxes and property taxes. 7. Pensions: includes proposed studies. 8. Other: a catchall category that includes corporate capital tax, general anti- avoidance rule (GAAR) and other anti-avoidance initiatives, partnership and trust matters not covered above, and other items.

These categories have been selected for organizational purposes and for ease of reference only. Some categories may overlap (for example, categories 1, 2, and 5). 108 n canadian tax journal / revue fiscale canadienne (2019) 67:1

British Columbia (Table 12)

Tax Highlights n Corporate income tax rate increases to 12 percent in 2018 (2017 budget) n Top personal rate added for high income earners in 2018 (2017 budget) n No other personal income tax rate or bracket increases

Tax Changes 1. Corporate Income Tax The general corporate tax rate increased by 1 point, from 11 percent to 12 percent, in 2018 as announced in the 2017 budget. The small business tax rate decreased from 2.5 percent to 2 percent after March 2017 as announced in the 2017 budget. The small business tax rate for 2018 was 2 percent as announced in the 2018 budget. The farmers’ food donation tax credit was extended for one year, to the end of 2019. The credit and extension apply to individuals too. The interactive digital media tax credit was extended for corporations for five years, to August 31, 2023. For expenditures incurred on or after February 21, 2018, the BC film incentive tax credit was expanded to include scriptwriting expenditures on BC labour incurred by a corporation before the final script stage of production was complete. Previously, only scriptwriting expenditures incurred after the final script stage were eligible for a tax credit. The 2018 budget extended the book publishing tax credit for three more years, to March 31, 2021.

2. Personal Income Tax The 2018 budget did not increase the personal income tax rates or brackets. The Budget 2017 Update raised the top marginal rate starting in 2018.14 Starting in 2018, “the caregiver tax credit and the infirm dependant tax credit were replaced with a new [non-refundable] BC caregiver credit” that “paralleled the Canada caregiver credit announced in the 2017 federal Budget.”15 To be eligible, British Columbians must care for an eligible adult relative dependent on the caregiver because of his or her mental or physical infirmity, whether or not he or she lives with the caregiver. The maximum credit amount was $4,556—a benefit of $230.33—and was indexed for 2019 and subsequent years. A spousal tax credit or an eligible dependant tax credit could be taken instead if available and greater; a single

14 See supra note 12. 15 British Columbia, Ministry of Finance, 2018-19 Budget, Tax Measures—Supplementary Information, February 20, 2018, at 66. (See also Canada, Department of Finance, 2017 Budget, March 22, 2017.) finances of the nation n 109

TABLE 12 Projected Revenues and Expenditures, British Columbia, Fiscal Year 2018-19

millions of dollars Total revenues ...... 54,193 Total expenditures ...... (53,624) Reserve ...... (350) Surplus /(deficit) ...... 219 Revenue sources Personal income tax ...... 9,836 Corporate income tax ...... 4,096 Sales tax ...... 7,428 Other taxes ...... 9,232 Total tax revenue ...... 30,592 Federal transfers ...... 8,930 Other revenues ...... 14,671 Total revenues ...... 54,193 Expenditures Education ...... 13,897 Health ...... 21,651 Debt servicing ...... 2,739 Other expenditures ...... 15,337 Total expenditures ...... 53,624

Notes: Revenue shown after Insurance Corporation of British Columbia impact. Expenditure figures were estimated by function. Revenue included commercial Crown corporation net income. Source: British Columbia, Ministry of Finance, 2018-19 Budget, February 20, 2018. individual caring for an infirm adult relative could claim the greater of this credit and the eligible dependant tax credit. The elimination of the BC education tax credit for 2019 and following tax years paralleled the elimination of the federal education tax credit. Carryforwards could be used in 2019 and following years for education amounts from pre-2019 tax years. The mining flowthrough share tax credit was extended for one year to the end of 2018. Medical services plan premiums will be eliminated in 2020, following a 50 percent reduction effective in 2018, according to an announcement on December 27, 2017. Individuals were to see annual savings of up to $900; families were to see annual savings of up to $1,800. (The 2017 budget did not increase premiums by 4 percent, as announced in September 2016.) Although at one point a household was required to register for the reduced premium, it seemed that for elimination, registration was not required because the benefit was not determined by income. In November 2017, a task force was established to examine the best replacement policy; a final report with recommendations was released in March 2018. 110 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Medical services premiums were to be replaced by an employer health tax (EHT) effective after 2018. The EHT applies to all employers other than small businesses with a payroll of less than $500,000. The tax is phased in gradually, with rates ranging between 0.98 percent and 1.95 percent depending on payroll, as set out in table 13. Future details were promised on instalments and the sharing of exemption limits among associated corporations.

3. Sales Tax Effective April 1, 2018, the exemption for avalanche airbag backpacks includes all avalanche backpacks, not just those triggered by compressed air. On a date to be specified in regulations, the legislation and regulations are amended to enable online accommodation platforms such as Airbnb to register as PST collectors for the collection and remission of PST and the municipal and regional district tax on accommodation. Thus, owners and lessors—hosts of accommodation units—need not register. The platforms enable or facilitate transactions between buyers and providers of short-term accommodation in the province. From a date specified in regulations, revenue from the municipal and regional district tax collected by municipalities, regional districts, and eligible entities (such as tourism-focused non-profits) can be used to fund affordable-housing initiatives. Currently, those funds can be used only for tourism marketing, programs, and projects. Effective retroactive to April 1, 2013, the British Columbia Provincial Sales Tax Act clarified that PST applies to software provided in optional as-needed maintenance agreements. Effective April 1, 2018, the luxury surtax on passenger vehicles with a purchase price of $125,000 to $149,999 increased from 5 percent to 10 percent (from 12 percent to 15 percent for private sales); for vehicles with a cost of $150,000 or more, the surtax increased from 10 percent to 20 percent (from 12 percent to 20 percent for private sales). The new rates applied to new and previously owned vehicles. Effective on royal assent, services—not just goods and software—may be included in a tax payment agreement between the province and an interjurisdictional railway. Effective retroactive to April 1, 2013, a retailer on a cruise ship in British Col- umbia waters was not required to collect PST on sales made during the course of scheduled sailings.

4. Sin Taxes Tobacco tax on a carton of 200 cigarettes increased from $49.40 to $55.00 (from 24.7 cents to 27.5 cents per cigarette) effective April 1, 2018, and from that date also increased for loose tobacco from 24.7 cents per gram to 37.5 cents per gram. finances of the nation n 111

TABLE 13 BC Employer Health Tax Effective After 2018

Tax as a percentage Annual BC payroll Annual tax of payroll

dollars percent $500,000 or less ...... na na $500,000-$750,000 ...... 7,313 0.98 $750,000-$1,000,000 ...... 14,625 1.46 $1,000,000-$1,250,000 ...... 21,938 1.76 $1,250,000-$1,500,000 ...... 29,250 1.95 Over $1,500,000 ...... 29,250 1.95 plus 1.95% of excess

Source: British Columbia, Ministry of Finance, 2018-19 Budget, Tax Measures, February 20, 2018, at 74.

5. Resource-Related Matters The Motor Fuel Tax Act refund rates for an international fuel tax agreement licensee will increase to reflect carbon tax increases on April 1 of each year from 2018 to 2021, ensuring that the licensee pays carbon tax only on fuel used within the province. Effective April 1, 2018, marine diesel fuel used in interjurisdictional cruise ships and ships prohibited from coasting trade under the Coasting Trade Act is exempt from motor fuel tax, paralleling a carbon tax exemption for those ships. Effective April 1, 2018, motor fuel tax rates on clear gasoline and clear diesel in the Capital Regional District increased from 3.5 cents per litre to 5.5 cents per litre. The tax increase—which is expected to raise $7 million annually—was intended to help finance the Victoria Regional Transit Commission and its share of funding for the Victoria transit system. Effective retroactive to February 18, 2014, an exemption was provided for security for refiner collectors that acquired fuel for retail sale from other refiner collectors. A refund was available for security paid. The Budget 2017 Update increased, effective April 1, 2018, the carbon tax rates by $5 per tonne of carbon dioxide equivalent emissions annually until the rates equal $50 per tonne on April 1, 2021.16

6. Real Estate Taxes Effective February 21, 2018, a further 2 percent tax applied to the residential portion (a residential taxable transaction) with a fair market value (FMV) exceeding $3 million. Previously, the tax was 3 percent of the FMV of a residential taxable transaction that exceeded $2 million.

16 Budget 2017 Update, supra note 12, at 65. 112 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Effective February 21, 2018, the additional property transfer tax rate was increased from 15 percent to 20 percent. Newly added areas were the Capital Regional Dis- trict, the Regional District of Central Okanagan, the Fraser Valley Regional District, and the Regional District of Nanaimo; transitional rules may exempt regional transactions entered into before the effective date, but there are no such rules for Metro Vancouver transactions. Effective for transactions after February 20, 2018, transfers of a bankrupt’s principal residence from a trustee in bankruptcy or a (former) spouse are exempt from the property transfer tax regardless of whether any consideration was exchanged. Announced on January 2, 2018, the property value threshold for the full homeowner grant was increased from $1.6 million in 2017 to $1.65 million in the 2018 tax year. The grant was reduced by $5 for every $1,000 of assessed value that exceeded the threshold. Effective for 2019 and subsequent years, the school tax rate will increase for high-value properties in the residential class including detached homes, stratified condominium or townhouse units, and most vacant land. The tax increase, which applies to residential assessed value exceeding $3 million, is 0.2 percent for property valued at over $3 million and up to $4 million, and 0.4 percent on the value over $4 million. The tax will be administered through the existing school tax system, with municipalities and the provincial surveyor of taxes being responsible for collection. According to longstanding policy, non-residential school property tax rates were increased by inflation plus new construction. Rates were set when revised assessment roll data became available in the spring. However, both the major and light industry classes of school property tax rates were set at the same rate as the business class tax rate, consistent with the policy in the 2008 budget. The Hydro and Power Authority Act was clarified to limit the authority’s school tax liability to land that it owned in fee simple and improvements, without affecting Nisga’a lands or taxing Treaty First Nations lands. The average residential class school property tax increased, in accordance with longstanding policy, by the province’s inflation rate in the previous year. Rates were to be set when revised assessment roll data became available in the spring. Effective for 2019 and subsequent tax years, municipal revitalization property tax exemptions applied to eligible new purpose-built non-stratified rental housing (or substantially renovated with a minimum net gain of five units) if the municipality issued a relevant certificate after February 20, 2018. Terms of the municipal exemption reflect the provincial exemption. A speculation tax on residential provincial property applied first in 2018 as an annual property tax (in Metro Vancouver and the Fraser Valley, Capital, and Nanaimo regional districts, and in the municipalities of Kelowna and West Kelowna) to target foreign and domestic homeowners who did not pay income tax in the province, including owners of vacant property. Most homeowners were exempt up front, including owners of long-term rental properties and certain special cases. A non-refundable income tax credit was available for those who paid income tax; the finances of the nation n 113 credit could be carried forward. The tax rate was $5 per $1,000 of assessed value in 2018 and $20 per $1,000 of assessed value in 2019. The tax was administered by the province, outside the normal property tax system and its cycle. The reporting form collects information such as the taxpayer’s social insurance number (SIN), household information, worldwide income information, information relating to upfront exemptions, and other information useful for audits and enforcement. Relevant information is made available to the Canada Revenue Agency (CRA). The single rural area residential property tax rate increased for 2018 by the previous year’s inflation rate, in accordance with longstanding policy. Similarly, rural area non-residential property tax rates increased by inflation plus the tax on new construction. Rates were set when revised assessment data became available in the spring. Online accommodation platforms were enabled to collect and remit PST and municipal and regional district tax on short-term accommodation, effective on a date proclaimed by regulation. Municipalities, regional districts, and eligible entities, such as tourism-focused non-profits, that receive revenue from the municipal and regional district tax will be allowed to use revenue to fund affordable-housing initiatives. The province is examining the property tax treatment of residential property in the Agricultural Land Reserve as part of its broader review to ensure that such land is being used in farming.

7. Pensions No changes were announced.

8. Other The province introduced several changes to enhance administration and information sharing. The Property Transfer Tax Act was amended to increase the limitation period, enable additional information to be collected, introduce administrative penalties for non-compliance, extend GAAR to the entire Act, and enable tax administrators to access additional information on property transactions, including from the Multiple Listing Service (MLS) database. A fee was to be newly charged to recover the costs of out-of-province audits for the Carbon Tax Act, the Motor Fuel Tax Act, and the Provincial Sales Tax Act, at a date promised to be specified in regulations. The provincial Income Tax Act was amended effective for a transaction entered into on or after February 20, 2018, or a series completed by that date, to introduce a reportable transaction rule paralleling federal rules and requiring pro- active disclosure by taxpayers and their advisers of certain avoidance transactions; that act was also amended to parallel federal rules relating to GAAR effective Febru- ary 21, 2018. Effective on royal assent, the Income Tax Act and the Land Tax Deferment Act were amended to allow information sharing between the two acts, and the Income Tax Act and the Logging Tax Act were also amended, effective on royal assent, to no longer require the lieutenant governor in council to preapprove information-sharing agreements entered into under those acts. Introduction of a 114 n canadian tax journal / revue fiscale canadienne (2019) 67:1 new data collection system to improve the collection and accuracy of oil and natural gas royalty information requires amendments to the Petroleum and Natural Gas Act to ensure privacy of collected information and to allow proper sharing of information. Amendments are effective on royal assent and include changes regarding non-compliance and reporting errors by industry participants, giving tax authorities power to penalize the non-payment of royalties. Work has begun to allow the collection of SINs—expected to begin in 2019—for the homeowner grant application process. The province intends to require developers to collect and report comprehensive information relating to the assignment of pre-sale condominium purchases. The province is taking steps to track beneficial ownership information by requiring additional information as part of the property transfer tax form and to establish a publicly accessible registry of the beneficial owners of all property in British Columbia.

Alberta (Table 14)

Tax Highlights n No new tax increases n Tax credits intended to diversify the economy

Tax Changes 1. Corporate Income Tax A refundable interactive digital media tax credit was introduced. The credit was 25 percent of eligible labour costs incurred after March 2018, with an additional 5 percent for a company that employed workers from underrepresented groups. Details of the diversity and inclusion enhancement were promised to be provided when regulations were introduced. The annual budget was set to reach $20 million by 2020-21. The capital investment tax credit (CITC), announced in the 2016 budget as a part of the Alberta Jobs Plan, benefited a corporation that invested in eligible capital assets beginning in 2017 by providing a 10 percent non-refundable credit for up to two years. The credit benefited spending on property or other capital in eligible industries such as value-added agriculture, M & P, tourism infrastructure, and culture. The 2018 budget extended the credit to 2021-22. Support was $30 million annually. In addition to the CITC and as part of the Alberta Jobs Plan, the government implemented the Alberta investor tax credit (AITC) to support jobs and economic diversification. The 2018 budget also extended the AITC until 2021-22. The AITC was a 30 percent credit for an equity investment in an eligible Alberta business that undertook research, development, or commercialization of new technology, new products, or new processes. The AITC also applied to a business engaged in interactive digital media development, video post-production, digital animation, or tourism. finances of the nation n 115

TABLE 14 Projected Revenues and Expenditures, Alberta, Fiscal Year 2018-19

millions of dollars Total revenues ...... 47,879 Total expenditures ...... (56,181) Risk adjustment ...... (500) Surplus /(deficit) ...... (8,802) Revenue sources Personal income tax ...... 11,387 Corporate income tax ...... 4,551 Sales tax ...... na Other taxes ...... 6,961 Total tax revenue ...... 22,899 Federal transfers ...... 8,218 Other revenues ...... 16,762 Total revenues ...... 47,879 Expenditures Education ...... 8,228 Health ...... 22,057 Debt servicing ...... 1,921 Other expenditures ...... 23,975 Total expenditures ...... 56,181

Notes: The figures showed only net operational revenues and expenditures, including net income of government business enterprises. Debt-servicing costs related to general debt only. “Other revenues” included non-renewable resource revenue of $3,829 million, but were still significantly lower than in 2014-15. The budget was presented on a fully consolidated basis, which includes school boards, universities and colleges, health entities, and the Alberta Innovates corporations. The risk adjustment in the fiscal plan was included to recognize the potential impact of world oil markets on the province’s resource revenue. Source: Alberta, Ministry of Treasury Board and Finance, 2018-19 Budget, March 22, 2018.

An additional 5 percent credit was available for investments in eligible business corporations that met diversity and inclusion criteria; details were promised with the introduction of regulations. The AITC program had an annual budget of $30 million. The tax credit was available via certificate to an eligible individual or corporation that was approved after application. An individual must file the certificate with his or her personal income tax return and can claim a refundable AITC of up to $60,000 per annum, or up to $300,000 over five years. A corporation can claim a non- refundable AITC on its tax return without any maximum limit on the amount of the credit. Funding was provided on a first-come, first-served basis.

2. Personal Income Tax See the description of the AITC above. As promised in the 2016 budget, income tax brackets began to be indexed as of 2017. Credit amounts and bracket thresholds increased by 1.2 percent in 2018. 116 n canadian tax journal / revue fiscale canadienne (2019) 67:1

3. Sales Tax No changes were announced. Alberta does not impose a sales tax.

4. Sin Taxes Alberta would collect the revenue from the sale of cannabis upon legalization in 2018. In December 2017, the provincial and federal governments agreed to principles to govern tax collection and sharing in the first two years in order to keep prices low and curtail the illegal market. The governments agreed to share tax revenues equal to the greater of $1 per gram and 10 percent of the product price; the provinces would receive 75 percent of the tax room and could also collect additional tax of up to 10 percent of the retail price. The federal government would use the federal excise tax to collect the tax on Alberta’s behalf and distribute the revenue to the province. The Alberta Gaming and Liquor Commission (AGLC) collected a markup on wholesale distribution and retail sales of cannabis through the public online system. Markups were limited to costs of the AGLC’s cannabis operations and a reasonable profit margin.

5. Resource-Related Matters A carbon fee (carbon price) was imposed for large emitters effective after 2016. Table 15 shows the rates on major fuels for 2017 and 2018; a full list was contained in the 2016 budget. Some exemptions apply.

6. Real Estate Taxes The total education property tax requisition was frozen for 2018-19. However, the farmland rate increased from $2.48 to $2.56 per $1,000 of equalized assessment and the non-residential rate increased from $3.64 to $3.76 owing to lower assessed values in 2016. The provincial government’s share of total provincial-municipal property tax revenue decreased from 51 percent in 1994 (when the province assumed responsibility for this tax) to 25 percent in 2016.

7. Pensions No changes were announced.

8. Other The Alberta government sought public input into the preparation of its 2018 budget. Scheduled input was received until early February 2018. finances of the nation n 117

TABLE 15 Alberta Carbon Levy Rates, Major Fuels, 2017 and 2018

January 1, 2017 rate January 1, 2018 rate Type of fuel ($20 /tonne) ($30 /tonne)

Diesel ...... 5.35 ¢/L 8.03 ¢/L Gasoline ...... 4.49 ¢/L 6.73 ¢/L Natural gas ...... 1.011 $/GJ 1.517 $/GJ Propane ...... 3.08 ¢/L 4.62 ¢/L

L = litre; GJ = gigajoule. Source: Alberta, Treasury Board and Finance, 2017-18 Budget, Fiscal Plan, March 16, 2017, at 60.

Saskatchewan (Table 16)

Tax Highlights n General and M & P corporate rates revert to pre-July 2017 rates n Personal income tax rates frozen at 2018 rates n Sales tax exemptions for vehicles amended

Tax Changes 1. Corporate Income Tax The 2017 budget announced that the general corporate income tax rate was reduced by 0.5 of a percentage point on July 1, 2017 and is reduced again by that amount on July 1, 2019, for a total reduction from 12 percent to 11 percent. The rate reduction was prorated for straddle corporate taxation years. The M & P income tax rate was thus reduced from 10 percent to 9 percent. The 2018 budget restored the general corporate rate to 12 percent after 2017 and restored the province’s M & P rate to 10 percent after 2017. There was no change to the small business threshold, which rose from $500,000 to $600,000 after 2017 in accordance with the 2017 budget. The 2 percent rate for Canadian-controlled private corporations (CCPCs) is still applicable to active business income within that threshold. To encourage business investment, the 2018 budget introduced a new Sas- katchewan value-added agriculture incentive (SVAI) to provide a non-refundable 15 percent corporate income tax credit for qualifying new capital expenditures. Eligible activities were defined as the physical transformation or upgrading of any raw/primary agricultural product or any agricultural by-product or waste into a new or upgraded product. Examples of such activities included pea protein processing, canola seed crushing, oat milling, malt production, and cannabis oil processing; cleaning, bagging, handling, and/or storing of primary products did not qualify. Qualifying projects included new or existing value-added agriculture facilities making capital expenditures of at least $10 million related to new or expanded productive capacity. Applicants were encouraged to contact the Saskatchewan Ministry of Trade and Export Development for further information or for conditional approval; in the 118 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 16 Projected Revenues and Expenditures, Saskatchewan, Fiscal Year 2018-19

millions of dollars Total revenues ...... 14,244 Total expenditures ...... (14,609) Surplus /(deficit) ...... (365) Revenue sources Personal income tax ...... 2,441 Corporate income tax ...... 621 Sales tax ...... 2,155 Other taxes ...... 1,998 Total tax revenue ...... 7,215 Federal transfers ...... 2,462 Other revenues ...... 4,567 Total revenues ...... 14,244 Expenditures Education ...... 3,263 Health ...... 5,765 Debt servicing ...... 434 Other expenditures ...... 5,147 Total expenditures ...... 14,609

Notes: Saskatchewan’s summary budget presentation includes government core operations, government service organizations (such as ministries, boards of education, and health regions), and government business enterprises (such as Crown corporations). “Other revenues” included non-renewable resource revenue of $1,482 million for fiscal year 2018-19. Debt servicing is for general debt. The debt servicing from government business enterprises has been netted against the net income from government business enterprises, which is included in the revenue figure above. Source: Saskatchewan, Ministry of Finance, 2018-2019 Budget, April 10, 2018.

next stage, the ministry issued a letter of conditional SVAI approval. After construction of new facilities was completed and operations were initiated, the conditionally approved applicant would provide evidence of eligibility, confirmed by a certificate granted by the ministry that indicated the amount of qualifying capital expenditures. A claim for the SVAI credit was made by submitting the certificate of eligibility to the Saskatchewan Department of Finance along with the CRA’s notice of assessment. A rebate of the credit was limited to 20 percent of expenditures in year 1 of operations, 30 percent in year 2, and 59 percent in year 3. Unused credits could be carried forward for up to 10 years after the facility began operations. The program will terminate after 2022. To encourage business investment in early-stage technology startups, the 2018 budget introduced the Saskatchewan technology startup incentive (STSI) to address the capitalization challenges faced by Saskatchewan technology startups. The non- refundable credit was equal to 45 percent of qualifying new investments in eligible finances of the nation n 119 small businesses—that is, early-stage technical startups that (1) develop new technologies in a new way, to create proprietary new products, services, or processes that are repeatable and scalable; (2) have fewer than 50 employees; (3) are incorporated and headquartered in Saskatchewan; and (4) have a majority of staff and operations located in Saskatchewan. Investors may be accredited—including local investment fund managers and financial institutions—or non-accredited (they can invest within the limits of provincial securities legislation). Venture capital corporations may also raise capital and invest under the STSI program’s terms. On making an investment, an eligibility certificate from Innovation Saskatchewan may be used to claim a credit of up to $140,000 per annum or $225,000 in total. Credits may be carried forward for four years after making an investment. During the minimum hold period of two years, the investee cannot be acquired, go public, or leave the province. At the end of two and a half years, the program will be evaluated. For further information, interested parties are encouraged to contact Innovation Sas- katchewan at 306-933-7389.

2. Personal Income Tax The 2017 budget reduced the province’s three personal income tax rates, one corresponding to each marginal tax bracket: each rate (11, 13, and 15 percent) was reduced by 0.5 of a percentage point first on July 1, 2017 and again on July 1, 2019, to new rates on the latter date of 10, 12, and 14 percent, respectively. The 2018 budget temporarily froze tax rates before any deduction for 2019 and 2020; thus, personal tax rates were frozen at 2018 levels: 10.5, 12.5, and 14.5 percent. The dividend tax credit for non-eligible dividends was increased in 2018: from 3.367 percent in 2017, to 3.333 percent in 2018, and to 3.362 percent after 2018. The credit increase accounts for an automatic increase in provincial income taxes as a result of a federal change beginning in 2018. Saskatchewan did not mirror a federal change to consolidate its caregiver-related income tax credits into a single caregiver tax credit. Saskatchewan maintained the existing provincial infirm dependant tax credit and caregiver tax credits for a total maximum credit amount of $9,464, as compared with the federal maximum credit of $6,883. The STSI, discussed above, was also available to an individual.

3. Sales Tax On February 26, 2018, Saskatchewan announced that the following insurance premiums were immediately exempt from the 6 percent PST, retroactive to August 1, 2017 (when insurance premiums became taxable in the province): individual and group life insurance; individual and group health, disability, accident, and sickness insurance; and agriculture insurance, including crop and livestock insurance, hail insurance, and margin/income insurance. Following substantial consultations with Saskatchewan’s vehicle dealers, the PST exemption for used light trucks was eliminated effective April 11, 2018. PST continued to apply to all other used vehicles. 120 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The 2018 budget announced, effective April 1, 2018, the restoration of the trade-in allowance for PST: the value of a trade-in was now PST-exempt on the purchase of a vehicle. The budget also announced that in lieu of a $3,000 deduction, a purchaser of a used vehicle acquired through a private sale and registered for personal or farm use (non-commercial) was eligible for a $5,000 deduction for PST purposes. The budget also announced that PST did not apply to used vehicles that were gifted by a qualifying family member, such as a spouse, parent, legal guardian, child, grandparent, grandchild, or sibling. Rules in place prevented unfair avoidance of tax. An exemption since 2003 for ENERGY STAR® certified appliances was intended to encourage the purchase of such items by consumers. The PST exemption was felt to be no longer needed—those appliances now were standard and represented a majority of sales—and the budget eliminated the PST exemption effective April 11, 2018. PST applied to all sales of cannabis in the province. In 2018, the government changed its PST legislation so that it could collect the tax from an out-of-province vendor (including streaming services such as Netflix) if the supply was used or consumed in the province.

4. Sin Taxes Saskatchewan announced that it intended to enter into a two-year agreement with the federal government concerning the payment to the province of 75 percent of the federal excise duty collected on cannabis sales. Saskatchewan would also receive its share of revenue above the $100 million cap on federal revenues therefor. PST also applied to all sales of cannabis in the province. Uncertainty concerning the date of legalization, the size of the market, and the anticipated retail price meant that no revenue from such sales was included in the 2018 budget.

5. Resource-Related Matters No changes were announced. The budget did not introduce a carbon tax.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other There was no discussion in the budget of a Saskatchewan carbon-pricing regime; Saskatchewan said that it will launch a judicial challenge to the federal government’s proposed nationwide tax. finances of the nation n 121

Manitoba (Table 17)

Tax Highlights n No new taxes or tax increases n Some tax credits extended and new credits created n Small business deduction threshold increases to $500,000 after 2018

Tax Changes 1. Corporate Income Tax The small business deduction threshold was increased from $450,000 to $500,000 after 2018. The small business provincial rate was 0 percent for active business income up to the threshold. The book publishing tax credit—for an individual or a corporation—was extended by the 2017 budget for one year, to December 31, 2018. The refundable credit, which was intended to support the development of the province’s book publishing industry, was equal to 40 percent of eligible Manitoba labour costs. The 2018 budget again extended the credit for one additional year, to December 31, 2019. The cultural industries printing tax credit—available to an individual or a corporation—was also extended for one year, to December 31, 2019. The credit was intended to assist in the development of the province’s printing industry. A refundable corporate tax credit for child-care centre development was introduced to stimulate the creation of licensed child-care centres in workplaces. The new credit was available after budget day and before 2021 to a taxable private corporation that created a new child-care centre, for a total credit benefit of $10,000 per infant or preschool space created, up to a maximum of 200 spaces. The corporation must not be primarily engaged in child-care services. The credit could be claimed over five years. For the small business venture capital tax credit—available to an individual or a corporation—the $15 million revenue cap on an eligible corporation’s size was eliminated, and the investment minimum was lowered from $20,000 to $10,000; both changes were effective March 12, 2018. These changes made the credit accessible to larger corporations and also allowed smaller investments by shareholders. The rental housing construction tax credit would be eliminated after 2018, but this would not affect projects under provincial review or those that were already provincially approved provided that the project was available for use before 2021.

2. Personal Income Tax Pursuant to the 2016 budget, the personal income tax brackets and base personal amount were indexed to inflation starting in 2017; the indexing factor of 1.5 percent was set in November 2016. In 2018, the personal income tax brackets were $0 to $31,843, over $31,843 to $68,821, and over $68,821; indexation was expected to continue in subsequent years. 122 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 17 Projected Revenues and Expenditures, Manitoba, Fiscal Year 2018-19

millions of dollars Total revenues ...... 16,787 Total expenditures ...... (17,423) In-year adjustments / lapse ...... 115 Surplus /(deficit) ...... (521) Revenue sources Personal income tax ...... 3,475 Corporate income tax ...... 566 Sales tax ...... 2,463 Other taxes ...... 2,337 Total tax revenue ...... 8,841 Federal transfers ...... 4,496 Other revenues ...... 3,450 Total revenues ...... 16,787 Expenditures Education ...... 4,453 Health ...... 6,751 Debt servicing ...... 1,034 Other expenditures ...... 5,185 Total expenditures ...... 17,423

Notes: The summary budget’s government reporting entity included core government, Crown corporations, government business entities, and public sector organizations. In-year adjustments / lapse may represent an increase in revenue and/or a decrease in expenditures. Expenditures for health and education were shown by department. Source: Manitoba, Department of Finance, Budget 2018, March 12, 2018.

The 2018 budget announced a large increase in the basic personal amount for the 2019 and 2020 taxation years, to $10,392 and $11,402, respectively. The basic personal amount increased, to match inflation, from $9,271 in 2017 to $9,382 in 2018. The 2018 budget announced that the labour-sponsored fund tax credit—virtually unused by Manitobans since its introduction in 1991-92—would be eliminated for shares acquired after 2018. This budget measure was not implemented, and approved shares acquired after 2018 continue to be eligible for the credit. A claim for the primary caregiver tax credit was simplified. Preapproval by the regional health authorities or by Manitoba Families was eliminated. The credit eligibility process was also changed: in lieu of an application, a caregiver must submit a copy of a completed registration form to Manitoba Finance and claim the credit on his or her income tax return. A caregiver who applied to Manitoba Health or Manitoba Families between January 1 and March 12, 2018 had his or her form forwarded to Manitoba Finance for registration. The process was also simplified by introducing a flat annual $1,400 credit for any caregiver, eliminating the calculation of the credit based on the number of days that care was provided, but eligibility finances of the nation n 123 remained subject to an existing 90-day threshold of care before a credit could be claimed. The education property tax credit was amended effective after 2018; from 2019, the credit would be based on school taxes and the $250 deductible would be eliminated. The seniors’ education property tax credit would also be calculated on the school tax portion. With this change, all property tax credits would be based on school taxes effective beginning in 2019. See the discussion of corporate income tax changes above, some of which apply to an individual.

3. Sales Taxes Effective after April 2018, two new sales tax exemptions were introduced, for drill bits designed specifically for oil or gas exploration or development, and for fertil- izer bins used in a farming operation. The 2018 budget confirmed that the PST rate would drop to 7 percent by 2020.

4. Sin Taxes Effective at midnight on March 12, 2018, the tobacco tax rate for fine-cut tobacco increased from 28.5 cents per gram to 45 cents per gram. The rate on cigarettes, cigars, and raw-leaf and other tobacco products remained unchanged.

5. Resource-Related Matters Effective September 1, 2018, Manitoba’s carbon tax imposed a tax of $25 per tonne of greenhouse gas emissions that applied to gas, liquid, and solid fuel products intended for combustion in Manitoba. Existing international fuel tax agreement rules for commercial transportation and trucking that prorate fuel-use charges to a jurisdiction also applied to the carbon tax in Manitoba. Not subject to the carbon tax were certain fuel uses and exemptions provided to protect sectors and industries that are trade-exposed to jurisdictions that do not have a comparable carbon price, to protect the agricultural sector, and to apply only to emissions in the province. The main exemptions were for agricultural process emissions, marked fuels, and output-based pricing system entities that emitted at least 50,000 tonnes of CO2- equivalent per year. (A smaller entity was exempt if government-approved.) The carbon tax was collected and remitted as follows: on transportation fuels, through the existing fuel tax system; on natural gas, by Manitoba Hydro; and on other products, by the purchaser. The carbon tax will be returned to Manitobans in the form of tax cuts in the next four years. The carbon tax rates applied to major fuels are shown in table 18.

6. Real Estate Taxes The government promised that the education property tax would be calculated differently, and the administration of the tax would be streamlined to benefit low-income renters and municipalities. 124 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 18 Manitoba Carbon Tax Rates by Select Fuel Type, 2018-2022

Type of fuel Tax rate per unit

Gasoline ...... 5.32 ¢/L Diesel ...... 6.71 ¢/L Natural gas ...... 4.74 ¢/m3 Propane ...... 3.87 ¢/L

L = litre; m3 = cubic metre. Source: Manitoba, Department of Finance, 2018 Budget, Tax Measures, March 12, 2018, C3, figure 1.

7. Pensions No changes were announced.

8. Other Effective after 2018, the profits tax of 1 percent applicable to credit unions and caisses populaires with taxable income of over $400,000 was eliminated. The special tax deduction for credit unions and caisses populaires, which allowed for lower tax on part of their income, was phased out over five years starting after 2018, in line with similar measures adopted by some provinces and the federal government. These entities have continued access to the small business deduction. Administrative and technical updates were made. Tobacco tax enforcement measures and the administration of the insurance corporations tax were streamlined. The following changes were made to the provincial Income Tax Act: streamlining of the application for the education property tax credit on the property tax statement in order to ensure self-assessment (depending on the timing of notification by the relevant municipality); removal of ambiguity regarding access to the community enterprise development tax credit via regulations; updating of the R & D tax credit to ensure consistency with federal income tax changes; retroactive amendment of the small business deduction for credit unions to ensure that the administration of the deduction reflects provincial policy and legislation; amendment of right-of- recovery provisions to reflect the federal administration of the deduction of Manitoba tax credits from a taxpayer who owes tax in another province; and amendment of green energy equipment tax credit regulations to allow related retroactive regulations by the minister of finance. The province promised amendments that would allow chiropractors to provide professional services through professional corporations. An insurance business must now file and pay its 2018 insurance corporations tax electronically, using the province’s online tax system, TAXcess; a 2018 return is due on March 20, 2019. There was no rate change, but the previous requirement to pay quarterly instalments was eliminated. finances of the nation n 125

Ontario (Table 19)

Tax Highlights n Small business rate reduced by 1 percentage point n Surtaxes on personal income tax not eliminated n Personal income tax rates and brackets not changed

Tax Changes 1. Corporate Income Tax The Ontario research and development tax credit (ORDTC) was enhanced by the previous government to support large businesses making significant investments in R & D. The ORDTC was a 3.5 percent non-refundable tax credit on eligible R & D tax expenditures. Effective for eligible expenditures incurred after March 27, 2018, qualifying companies were to be eligible for a 5.5 percent rate (prorated for straddle taxation years) on expenditures in excess of $1 million in a taxation year (prorated for short taxation years). The enhanced rate was available only if the eligible expenditures were at least 90 percent of such expenditures in the previous year, grossed up for a short taxation year and consolidated for amalgamations or wind- ups. The newly elected government said that it would not proceed with these enhancements. The Ontario innovation tax credit (OITC) was increased by the previous government for expenditures incurred after March 27, 2018 from 8 percent to 12 percent (prorated for straddle years) to encourage small and medium-sized businesses to engage in R & D. If a qualifying corporation had a ratio of R & D expenditures to gross revenues that was (1) at most 10 percent, the company was eligible for the regular 8 percent OITC; (2) between 10 percent and 20 percent, the enhanced rate (12 percent) applied on a straightline basis; and (3) at least 20 percent, the enhanced 12 percent rate applied. Both gross revenues and R & D expenditures were those attributable to Ontario operations and were aggregated for associated corporations. The newly elected government said that it would not proceed with this or (as noted) the preceding initiative, but will “ensure that support provided for research and development is effective and efficient.”17 The 2018 budget extended eligibility (via regulatory amendment) for the Ontario interactive digital media tax credit to film and television websites purchased or licensed by a broadcaster and embedded in its website, applicable to websites that hosted content related to film, television, or Internet productions that did not receive either a certificate of eligibility or a letter of ineligibility before November 1, 2017. (Unless otherwise noted, this and other items in the Ontario corporate tax section were not mentioned in the 2018 Fall Economic Outlook and Fiscal Review of the

17 Ontario, Ministry of Finance, A Plan for the People—2018 Ontario Economic Outlook and Fiscal Review, Background Papers, Annex: Details of Tax Measures, Research and Development Tax Credits, at 155. 126 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 19 Projected Revenues and Expenditures, Ontario, Fiscal Year 2018-19

March 2018 November 2018

millions of dollars Total revenues ...... 152,461 148,231 Total expenditures ...... (158,465) (161,775) Reserve ...... (700) (1,000) Surplus /(deficit) ...... (6,704) (14,544) Revenue sources Personal income tax ...... 35,612 34,946 Corporate income tax ...... 15,137 13,766 Sales tax ...... 26,608 26,727 Other taxes ...... 26,024 25,462 Total tax revenue ...... 103,381 100,901 Federal transfers ...... 26,606 26,006 Other revenues ...... 22,474 21,324 Total revenues ...... 152,461 148,231 Expenditures Education ...... 28,214 30,737 Health ...... 61,278 61,678 Debt servicing ...... 12,543 12,543 Other expenditures ...... 56,430 56,817 Total expenditures ...... 158,465 161,775

Notes: The figures included those for government business enterprises. Expenditures were shown by ministry. Sources: Ontario, Ministry of Finance, 2018 Budget, March 28, 2018, and 2018 Fall Economic Outlook and Fiscal Review, November 15, 2018. newly elected government.) The previous government became aware that business models in the film and television industries often required that a website purchased and licensed by a broadcaster be integrated within the broadcaster’s website for a seamless user experience. In the 2017 fall economic outlook, the previous Ontario government proposed to lower the Ontario corporate income tax rate on small businesses from 4.5 percent to 3.5 percent. This item was not specifically mentioned in the 2018 fall economic outlook. The 2017 fall economic outlook also proposed that the M & P tax credit would reduce the corporate income tax rate to 10 percent. The previous government proposed to parallel the federal 2018 budget limit on the small business deduction for passive investment income between $50,000 and $150,000 earned in the taxation year: effective for taxation years beginning after 2018, the federal small business limit is phased out straightline for a CCPC and associated corporations that earn passive investment income within the specified range. (This limit was in addition to the province’s phaseout of its small business finances of the nation n 127 deduction if the CCPC or associated corporations had between $10 million and $15 million in taxable capital employed in Canada; the effective limit was the lesser of the limit on taxable capital and the business limit on the basis of passive investment income.) The phasing out of the small business limit was another item that the newly elected government said that it would not proceed with; proposed legislation ensured that Ontario did not parallel the federal change. The 2018 budget indicated that the province was reviewing different countries’ initiatives—patent boxes, tax refunds, deductions, and exemptions—in order to keep ownership in the province of R & D performed in Ontario. The previous government promised to develop an incentive that works best for Ontario. The newly elected government made no specific mention of these initiatives in its 2018 fall economic outlook. The 2018 Ontario budget promised to parallel 2018 federal budget measures that address sophisticated financial instruments and structured share repurchase transactions of some Canadian financial institutions that realized artificial tax losses.18 Ontario’s newly elected government did not specifically mention these initiatives in the 2018 fall economic outlook. The EHT (employer health tax) exemption will increase in 2019 from $450 to $490 on the basis of Ontario’s consumer price index. The exemption increase will reduce the EHT, on average, by about $690 in 2019 for some 58,000 employers. The 2018 budget proposals to target the EHT exemption and the incorporation of the federal anti-avoidance rules—which would have slightly increased the EHT for 20,000 Ontarians—will not be proceeded with, according to the 2018 fall economic outlook. The newly elected government promised in the 2018 fall economic outlook to follow any federal initiative that expensed new depreciable assets—in response to the current US tax reform.19

2. Personal Income Tax The 2018 budget proposed, for the 2018 taxation year, to eliminate the personal surtaxes (20 percent and 36 percent) and to amend the personal income tax brackets and rates. The newly elected government said that it would not be proceeding with this proposal. The former government said that the proposed changes were intended to simplify the personal income tax calculation, and the elimination of the surtaxes would ensure that non-refundable tax credits provided the same maximum relief to all taxpayers. The newly elected government agreed that these proposals, now cancelled, would have meant a personal income tax increase of about $200 on average for approximately 1.8 million people.

18 For the federal definitions of synthetic equity and securities lending arrangements, and the stop-loss rule applicable to share repurchases, see Kevin Kelly and Sona Dhawan, “Share Repurchase Programs” (2018) 26:6 Canadian Tax Highlights 9-10. 19 Tax Cuts and Jobs Act, Pub. L. no. 115-97, signed into law December 22, 2017. 128 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The 2018 budget proposed to enhance support for charitable giving by increasing the tax credit rate on donations exceeding $200 to 17.5 percent. The newly elected government did not include a specific reference to this proposal in the 2018 fall economic outlook. The 2018 Ontario budget promised to parallel a 2018 federal budget measure that limited income sprinkling through the use of private corporations, effective for 2018 and subsequent years. (Income sprinkling—also referred to as “income splitting”—involved diverting income from a high-income individual to a minor or other family member so that the income would be taxed at a lower combined federal and provincial rate.) Thus, Ontario personal income tax at the top marginal rate would apply to the split income of an adult family member who was not active in the business. The only specific mention of this initiative in the 2018 fall economic outlook was a reference to a federal change that allows payers of the tax on split income to apply the disability credit against that tax; Ontario will parallel that change. The 2018 fall economic outlook suggested that, starting in 2019, the government would introduce a new non-refundable tax credit for low-income individuals and families (the “LIFT credit”) to eliminate or reduce the provincial income tax for low-income taxpayers with employment income (who had not been in prison for more than six months in the year). The maximum credit is the lesser of $850 and 5.05 percent of employment income, reduced by 10 percent of the greater of adjusted individual net income over $30,000 (up to $38,500) and adjusted family net income over $60,000 (up to $68,500), including a spouse’s or common-law partner’s income at year-end. The credit is limited to the Ontario personal income tax payable, excluding the Ontario health premium. The taxpayer must be a Canadian resident at the beginning of the year and an Ontario resident at year-end. Critics say that more assistance to low-income workers would be offered by reinstating the previous government’s increased minimum wage of $15 an hour in 2019. The newly elected government’s 2018 fall economic outlook promised to adjust the non-eligible dividend tax credit calculation to maintain the applicable rate at 3.2863 percent. The newly elected government’s 2018 fall economic outlook promised to parallel a federal change that modified the pension income tax credit to take into account additional federal veteran’s benefits.

3. Sales Tax Ontario HST would apply to First Nations members who purchased cannabis off- reserve, consistent with a status Indian’s current off-reserve purchases of alcohol and tobacco. However, it was proposed that a status Indian who was registered to obtain medical cannabis from a licensed producer should be eligible for the point-of-sale rebate of the 8 percent provincial portion of the HST for purchases delivered off- reserve. The newly elected government’s 2018 fall economic outlook promised to remove a reference to the Canadian Red Book and the Canadian Older Car/Truck Red Book in regulation 1012 under the Retail Sales Tax Act. finances of the nation n 129

The 2018 fall economic outlook also promised to remove a spent provision that provided one-time support to a business during the transition to HST in 2010. In addition, certain amendments to regulations were promised that would replace outdated references to the GST and change references to PST to refer instead to HST.

4. Sin Taxes The previous government promised to amend the small beer manufacturer’s tax credit and the definition of a microbrewer in the Alcohol and Gaming Regulation and Public Protection Act, 1996, to encourage growth of small beer manufacturers and microbrewers. Both amendments were to be effective from March 1, 2018. This initiative was not specifically mentioned in the 2018 fall economic outlook. On October 18, 2018, the newly elected government proposed not to move forward with the basic tax rate increase on beer that was scheduled by the previous government for November 1, 2018. Subject to legislative approval, from Novem- ber 1, 2018, the basic beer tax rate would remain at rates that were set to apply from March 1, 2018 to February 28, 2019. Earlier in the year, the newly elected government reduced the minimum beer price to $1 per bottle plus deposit. The government also promised a review that might result in beer and wine being available for sale in corner, grocery, and big-box stores. Increased hours (9 a.m. to 11 p.m., seven days a week) for the Beer Store, Liquor Control Board of Ontario stores, and authorized grocery stores were said to improve choice for consumers. To provide regulated and restricted access to cannabis, the federal government’s 2018 budget proposed a new federal excise duty at a flat rate (imposed at the time of packaging) of $1 per gram or $1 per seedling. A lower rate was imposed for trim versus flower. At the time of delivery to a purchaser, a 10 percent ad valorem rate applied: the licensee was liable to pay the duty at the higher of the flat rate and the ad valorem rate. The federal government agreed with most provinces and territories—and Ontario intended to enter into such an agreement—to pay to a participating jurisdiction 75 percent of the duty raised (and any excess over $100 million otherwise earned in duty by the federal government) for the first two years after legalization. This sharing with Ontario applied to sales intended for Ontario. The newly elected government reduced the estimate of the provincial share of federal excise duty revenue by $18 million, partially offset by a reduction in net costs (primarily from retail storefronts’ construction by the Ontario Cannabis Store) of $15 million, for a net reduction of $3 million in revenues from cannabis. The gaming commission will enforce the provincial rules, including the minimum age of over 18. Proximity to children’s playgrounds, hospitals, and child-care facilities is also restricted. Permitting the sale of cannabis through private retail stores means that the government will avoid the capital expenditure of a bricks-and- mortar province-run store. As indicated in the 2017 budget and confirmed in the 2018 budget, effective at 12:01 a.m. on March 29, 2018, the tobacco tax rate increased from 16.475 cents to 18.475 cents per cigarette (equal to an increase of $4 per carton) and per gram for 130 n canadian tax journal / revue fiscale canadienne (2019) 67:1 tobacco products other than cigars. Tobacco tax on a pack of 20 cigarettes equalled $3.70; on a pack of 25 cigarettes, $4.62; and on a carton of 200 cigarettes, $36.95. The rate of tobacco tax on the taxable price of cigars remained at 56.6 percent. A further increase of $4 per carton of cigarettes was planned for 2019, but the new government said in its 2018 fall economic outlook that it would not move forward with this initiative. The previous government amended the Tobacco Tax Act in May 2017 to require that, effective for 2018, restrictions existed on the import, possession, sale, and delivery of cigarette filter components to registered tobacco manufacturers, subject to certain exemptions (for example, for transporters of such components). Penalties and offence provisions applied, and authorities were permitted to seize and cause forfeiture. This initiative was not specifically mentioned in the 2018 fall economic outlook, but Ontario issued a release thereon, which is available on the government’s website.20

5. Resource-Related Matters The previous government proposed to no longer require First Nation individuals and band councils to apply for and use a certificate of exemption (an Ontario gas card) issued by the Ministry of Finance as proof of entitlement when purchasing gasoline on-reserve, effective in 2019. The regulatory proposal substitutes for the Ontario gas card a certificate of Indian status or a secure certificate of Indian status card from individuals; band councils would use an identifier issued by the government. This initiative was not specifically mentioned in the 2018 fall economic outlook. Owing to late tax-rate changes, the previous Ontario government said that Florida may require an additional tax payment under the international fuel tax agreement for activity during the first quarter of 2018. This matter was not specifically raised in the 2018 fall economic outlook. The 2017 Ontario fall economic outlook proposed changes to the Mining Tax Act that expedited a functional-currency election, effective on the day (Decem- ber 14, 2017) that the omnibus act received royal assent. The 2018 fall economic outlook did not specifically mention this initiative. Relief from taxes under the Electricity Act, due to expire at the end of 2018, is extended by the 2018 fall economic outlook until the end of 2022. Relief applies to the transfer tax (reduced from 33 percent to 22 percent under the proposal’s time extension, and to 0 percent for transfers by municipal electrical utilities with fewer than 30,000 customers) and certain payments in lieu of taxes (PILs) payable on the transfer of electricity assets to the private sector. Capital gains from PILs deemed dispositions are also PILs-exempt.

20 Ontario, Ministry of Finance, “Oversight of Cigarette Filter Components,” tobacco tax (www.fin.gov.on.ca/en/tax/tt/cigarettefilter.html). finances of the nation n 131

6. Real Estate Taxes The 2018 budget announced that it proposed to pass a regulation to allow land transfer tax for certain unregistered dispositions of beneficial interests in land through certain types of partnerships and trusts, to be payable within 30 days from the end of the calendar quarter of the disposition, rather than within 30 days of the disposition. The change was intended to reduce the administrative burden of reporting and payment. The 2018 fall economic outlook did not specifically mention this initiative. The previous government planned to post on its website guidance regarding minimum information and documentation that a partnership or the authorized rep- resentative of a trust should provide when submitting a consolidated quarterly filing for the land transfer tax. The 2018 fall economic outlook did not specifically refer to this initiative. The previous government announced that the province continued to review issues raised in earlier consultations regarding the land transfer tax. The 2018 fall economic outlook did not specifically refer to this initiative. As part of a commitment announced in the 2017 budget, the 2018 budget made further rate adjustments to modernize the property taxation of railway rights-of- way. Ontario reduced further rate inequities by increasing the lowest property tax rates on mainline railway rights-of-way to a minimum of $110 per acre in 2018. (The lowest mainline rate in 2016 was about $35 per acre.) The newly elected government did not specifically refer to this initiative in the 2018 fall economic outlook. In recognition of challenges faced by the shortline sector of the railway industry, the 2018 budget promised to continue to freeze shortline railway property tax rates at 2016 levels. The 2018 fall economic outlook did not specifically refer to this initiative. In response to municipal concerns regarding the property tax revenue received in respect of high-tonnage rail lines, the 2018 budget announced that, beginning in 2018, municipalities would have the option to increase rates per acre of high- tonnage rail lines in accordance with a new adjusted tax rate schedule. Details were promised to be provided in the spring of 2018. The 2018 fall economic outlook did not specifically refer to this initiative. The 2018 budget amended the Assessment Act to exempt non-profit child-care facilities that leased space in otherwise tax-exempt properties. This is consistent with the Municipal Property Assessment Corporation’s (MPAC’s) historical treatment of these facilities. The 2018 fall economic outlook did not specifically refer to this initiative. The 2018 budget committed to granting the city of Toronto the right to provide a property tax reduction of up to 50 percent to qualifying facilities that offer affordable spaces for the arts and culture sector. The 2018 fall economic outlook did not specifically refer to this initiative. Businesses on land owned by Victoria University in Toronto benefited from a property tax exemption, unlike other businesses and provincial universities. The 132 n canadian tax journal / revue fiscale canadienne (2019) 67:1

2018 budget committed to legislative amendments to ensure that only lands owned and occupied by the university were exempt. Any property tax increases to tenants would be phased in over several years. The 2018 fall economic outlook did not specifically refer to this initiative. The 2018 budget promised to review—including consultation with affected municipalities and airport authorities—payments in lieu of property taxes based on airport annual passenger rates (previously calculated in 2001 when the payments in lieu of property taxes were introduced). The 2018 fall economic outlook did not specifically refer to this initiative. As a result of a review promised in the 2017 budget (of the municipal portion of the education property tax’s vacancy rebate and reduction programs), the 2018 budget promised to align the education property tax with recent changes to municipal vacancy programs—related to the 2016 budget—to ensure greater provincial consistency. The changes were to take effect in 2019, to ensure adequate business planning. The 2018 fall economic outlook did not specifically refer to this initiative. According to the 2018 budget, an adjustment to the education property tax rate calculation from the 2016 budget would be maintained in 2018. Ontario would also continue to monitor this tax, including the ability to verify accurate remittance. The 2018 fall economic outlook did not specifically refer to this initiative. For the 2016 assessment update, Ontario had introduced an advance disclosure process that allowed businesses to contribute to determining the finalization of assessed values. To strengthen this process, the 2018 budget proposed that for the 2021 taxation year, the valuation date would be January 1, 2019, to encourage a more open exchange of information. The 2018 fall economic outlook did not specifically refer to this initiative. Ontario also started to review requests for information by property owners. In addition, to ensure that compliant parties were not disadvantaged during valuation or on appeal, the previous government promised to review the format of MPAC’s requests and to make amendments in the fall of 2018 to address non-compliance. The 2018 fall economic outlook did not specifically refer to this initiative. Effective December 16, 2017, Teraview, Ontario’s land registration system, was updated to include new land transfer tax statements on the application of the non- resident speculation tax (NRST). These new statements replaced the three statement options available when NRST was introduced. NRST could not be paid at the time of electronic registration until December 30, 2017. Transfers subject to NRST and registered before December 30, 2017 required prepayment to the Ministry of Finance of both NRST and land transfer tax. If documents were required to be registered at the Land Registry Office before or after December 29, 2017, NRST payable must be prepaid (along with land transfer tax) to the Ministry of Finance. The land transfer tax affidavit was amended to incorporate requiredNRST statements. The 2018 fall economic outlook did not specifically refer to this initiative. Provincial land tax is property tax paid in unincorporated areas of northern On- tario outside municipal boundaries. A review of the tax was announced in 2013, and finances of the nation n 133 the final phase of reform was announced in 2017, including confirmation that the tax rate would be $250 per $100,000 of assessed value. This initiative was not specifically referred to in the 2018 fall economic outlook. Annual rate changes, starting in 2018, are shown in table 20. The 2018 fall economic outlook proposed to amend the Assessment Act to create an Ontario property tax exemption for properties occupied by branches of the Royal Canadian Legion.

7. Pensions See the discussion under “Other” below.

8. Other Ontario promised to follow federal anti-avoidance rules relating to the small business deduction for the EHT exemption; starting in 2019—subject to seeking public comment on these changes—the exemption will be available only for an individual, a charity, a not-for-profit organization, a private trust, a partnership, or aCCPC , and the province will incorporate federal anti-avoidance rules precluding the multiplica- tion of the small business deduction and set a rate for associated employers consistent with the exemption. The newly elected Ontario government seems to have reversed the province’s position on exploring measures that target the EHT exemption. Ontario announced that it continued to work closely with the federal, provincial, and territorial governments and the CRA to combat aggressive tax-planning schemes eroding the common tax base. The 2017 budget created a group of expert tax advisers for this purpose. In furtherance of its efforts to combat the underground economy, Ontario promised several measures. Regarding electronic sales suppression, Ontario promised to address the practice and also mandate that prescribed businesses update their electronic cash register systems to meet legal requirements that stop businesses from manipulating sales transaction information. Continued consultation was promised for the coming months in order to ensure, inter alia, a reasonable transition period; the province also promised to consider financial and other support. Both initiatives were part of a provincial commitment to make the transition as easy as possible. The newly elected government’s website contains information on the issue, but the legislation enacted by the previous government—The Revenue Integ- rity Act—will not come into force until a date is proclaimed. To address unregulated tobacco, the 2018 budget committed to a balanced approach of enforcement and partnerships. In addition to work done imposing penalties and seizing tobacco products, Ontario would penalize and thus prevent the diversion of raw-leaf tobacco; implement “track and trace” technology to monitor the movement and location of raw-leaf tobacco; support the Ontario Provincial Police (OPP) in expanding the contraband tobacco enforcement team; expand police services to fund and thus support tobacco investigations; and make legislative 134 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 20 Changes to Provincial Land Tax Rates (per Assessed Value of $100,000), 2018-2021

Residential property class 2018 2019 2020 2021

dollars Inside school board ...... 5 5 5 3 Outside school board ...... 40 40 40 15

Source: Ontario, Ministry of Finance, 2015 Budget, Budget Papers, April 23, 2015, at 338. amendments that would allow a court to authorize tracking devices in an investigation, in order to improve the tracking and monitoring of unregulated tobacco. The 2018 fall economic outlook did not specifically refer to these initiatives. To improve administrative effectiveness or enforcement, to maintain collections, and to enhance legislative clarity and flexibility to preserve policy intent, the 2018 budget proposed to amend various acts, including the Municipal Tax Assistance Act and various statutes administered by Ontario Finance. Additional proposed legislative initiatives included amendments to the Pooled Registered Pensions Plans Act, 2015, to incorporate the federal process for entering into or amending an existing agreement in the federal act, and amendments to the Climate Change Mitigation and Low-carbon Economy Act, 2016, for the reimbursement of expenditures by the Crown for funding initiatives that are reasonably likely to reduce or support a reduction of greenhouse gas emissions. These items were not specifically mentioned in the 2018 fall economic outlook by the newly elected government. The newly elected government promised to end the former government’s cap- and-trade carbon tax effective July 3, 2018. The 2018 fall economic outlook says that the next stage of the provincial strategy involves achieving transparency for the actual cost of a federal carbon tax in the absence of a provincial carbon tax. A constitutional challenge was later filed by the province. The newly elected government also took action on so-called hallway health care by reducing pressure on hospitals—for example, by investing more in hospital beds and spaces in hospitals and communities. Increased investment in long-term-care beds will be made over the next five years, along with more investment in the treatment of mental health and addiction issues. Starting in March 2019, individuals under the age of 25 who are not covered by private plans will have eligible prescriptions covered. March 27, 2019 will be designated as Special Hockey Day to celebrate the contributions of those involved in this important initiative. In the 2018 fall economic outlook, the newly elected government also froze driver’s licence fees. The new government announced a provision built into the fiscal plan for tax measures to strengthen Ontario’s economy, such as paralleling a potential federal response to the accelerated capital cost allowance for new assets to address US tax reform. finances of the nation n 135

The environmental commissioner, the child and youth advocate, and the French-language services commissioner will become part of the auditor general’s office or of the provincial ombudsman’s office, according to the 2018 fall economic outlook. The 2018 fall economic outlook said that the newly elected government plans to reduce electricity bills by 12 percent and will end green energy contracts, close the Thunder Bay generating station, and extend operation of the Pickering nuclear generating station until 2024. The Ontario Energy Board will have its governance modernized to deliver accountability and predictability. The government is planning to publicly review current electricity pricing for industrial users. To encourage and allow more time for consolidation in the electricity distribution sector, the 2018 fall economic outlook extended two time-limited transfer tax incentives and a capital gains exemption under the deemed disposition rules (scheduled to expire at the end of 2018) until the end of calendar 2022. Ontario plans consultations to consider different ways to promote the electricity distribution sector. Ontario will support its partners who wish to expand oil distribution and also protect their competitiveness from the federal carbon tax. The Access to Natural Gas Act, 2018, tabled by the newly elected government, proposes a program to provide natural gas to outlying communities that will thereby become more attractive for job creation and new business growth. The new government promised to expand broadband and cellular projects in rural and northern communities and some urban areas. The 2018 fall economic outlook said that a strategy for achieving these objectives would be released in early 2019. The minister of agriculture, food, and rural affairs will launch an agricultural advisory group to inform government policies. The newly elected government plans to dissolve the Ontario College of Trades and create a more modern outcomes-focused system. The new government plans to review support for apprentices and businesses that employ and train them. In addition, the government will review the workers’ compensation system to ensure that it remains sustainable. The new government will create efficiencies in the pension sector by supporting mergers and conversions that will reduce costs and increase efficiencies, including some under way in the hospital, municipal, and university sectors. Changes to the Pension Benefits Act also have been proposed that would allow plan administrators to allow electronic beneficiary designations to reduce red tape. Ontario wishes to support a streamlined capital markets regulatory system and will respect any related Supreme Court of Canada decision. The new Financial Services Regulatory Authority of Ontario (FSRAO) will deter fraud, foster competition and innovation, and streamline the regulatory processes. The new government proposes to amalgamate the FSRAO with the Ontario Deposit Insurance Corpora- tion to simplify the province’s regulation. The new Ontario government is committed to working with willing partners to ensure sustainable northern development and will review the Far North Act, 2010, 136 n canadian tax journal / revue fiscale canadienne (2019) 67:1 to ensure that land-use planning aligns with local, First Nations, and provincial priorities. The government will also continue to explore ways to encourage development of northern natural resources and will establish a special mining working group to focus on speedier regulatory approvals and the attraction of major new investments. Algoma will be supported in its business restructuring; Ontario will continue to dedicate the resources necessary to fight forest fires across the province; and highway 11/17 will be enhanced by two additional lanes in certain stretches. The province will review other initiatives to meet northerners’ transportation needs, including rail and bus services. Ontario will develop a plan to assume responsibility for the Toronto Transit Commission in order to rationalize transportation in the Greater Toronto Area (GTA) and Greater Hamilton Area; a special adviser was appointed in August 2018. A review of high-speed rail’s future in Southwestern Ontario is under way. The province will resume the environmental assessment for the GTA west highway corridor, suspended in 2015, to relieve congestion in the GTA. A review of the Metrolinx agency will proceed with the aim of developing an efficient regional transit system. The newly elected government ended the drive clean program for passenger and light-duty vehicles effective April 1, 2019, owing to enhanced automobile industry standards. A plan to be launched in the spring of 2019 will aim at increasing housing supply through consultation and over the longer term through actions rolled out over the next 18 months. Reintroduction of a rent control exemption for new rental units first occupied after November 15, 2018 is intended to encourage an increase in housing supply. Increased fairness in automobile insurance rates, reduction of the regulatory burden in automobile insurance, and increased computerization of the industry will be initiated by the new government. Regulatory oversight will also be ensured for financial planners and advisers to give comfort to consumers. Public consultation began in September 2018 to reform education, including changes to the severity of responses to cases involving sexually abusive teachers. Math skills are important to success in the labour market; the new government thought that supporting a focus on fundamentals was more important to this end than the current discovery-based learning environment. Free speech on university and college campuses will be supported by the development by schools of a policy backed by an annual report; the government set a deadline of January 1, 2019. Non- compliant schools may be subject to a reduction in operating grant funding. The newly elected government’s 2018 fall economic outlook promised to reform social assistance with a view to improving employment outcomes. Variable benefit accounts planned by the new government will allow retirees with defined benefit plans to receive income directly from their plans. Additional funding for digital, investigative, and analytical resources is available for fighting criminals, and a new team led by Crown attorneys will ensure that the best evidence is available to detain individuals charged with serious firearm of- fences. Nine new OPP detachments will replace aging facilities, and the aging Public finances of the nation n 137

Safety Radio Network—a critical resource for frontline and emergency responders—will be replaced. Adjudicative tribunals accountable to the attorney general will be reviewed for efficiency. A public awareness campaign will provide information on the dangers and identification of illegal tobacco. Completion of a monument to Canadians who served in Afghanistan, promised by the newly elected government, is expected in the fall of 2019. Green bonds capitalize on low interest rates and enable Ontario to raise funds, for example, for transit initiatives, extreme-weather resistant infrastructure, and energy conservation and efficiency projects such as health- and education-related projects. The 2018 fall economic outlook said that Ontario planned to issue its next green bond by the end of the 2018-19 fiscal year. The 2018 fall economic outlook promised to list province-wide consultations for the 2019 budget. Individuals and organizations can also e-mail or mail submissions directly to the Ontario minister of finance.

Quebec (Table 21)

Tax Highlights n Small business rates standardized n Health-care contributions reduced n Sales tax on digital economy

Tax Changes 1. Corporate Income Tax The threshold entitlement to reduced health-care contributions increased from $5 million in 2018 to $5.5 million in 2019, and will continue to increase in equal annual amounts until the threshold reaches $7 million in 2022. The threshold will be indexed automatically in 2023 and subsequent years. A small or medium-sized business (SMB) that was an eligible specified employer whose payroll did not exceed $1 million and that was in the primary or manufacturing sector or in the service or construction sector, had its rate of health services fund contributions decreased from 1.5 percent to 1.25 percent and from 2.3 percent to 1.65 percent, respectively, on a straightline basis over five years starting on budget day. The contribution rate also decreased if the eligible specified employer in any of those sectors had an annual payroll between $1 million and $5 million; the rate was gradually reduced and varied from 1.65 to 4.26 percent, and the payroll limit gradually increased from $5 million to $7 million. The small business income tax rate was gradually reduced for an SMB not in the primary or manufacturing sector and reaches 4 percent in 2021. This change was effective for a taxation year that ended after budget day; the first instalment thereafter can be adjusted. The maximum rate for an SMB in 2021 and subsequent years will be 7.5 percent; the gradually reduced additional deduction for an SMB in the primary or manufacturing sector is then eliminated. Table 22 reflects these changes. 138 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 21 Projected Revenues and Expenditures, Quebec, Fiscal Year 2018-19

millions of dollars Total revenues ...... 109,597 Total expenditures ...... (108,693) Contingency reserve ...... nil Surplus /(deficit) ...... 904 Revenue sources Personal income tax ...... 30,549 Corporate income tax ...... 8,028 Sales tax ...... 16,967 Other taxes ...... 11,799 Total tax revenue ...... 67,343 Federal transfers ...... 23,674 Other revenues ...... 18,580 Total revenues ...... 109,597 Expenditures Education ...... 23,273 Health ...... 43,013 Debt servicing ...... 9,380 Other expenditures ...... 33,027 Total expenditures ...... 108,693

Notes: The figures were presented on a consolidated basis, showing general fund plus consolidated entities; this accounting represented a change from the 2013 budget’s solely general fund figures. The figures shown for expenditures were by department, except for debt servicing. Source: Quebec, Department of Finance and the Economy, 2018-2019 Budget, March 27, 2018.

A new refundable tax credit for an employee of an SMB was intended to encourage training. After budget day and before 2023, an SMB (a qualified corporation that has a Quebec establishment and carries on business in Quebec) could claim up to 30 percent of eligible training expenditures, to a maximum of $5,460 per annum, if the SMB’s payroll for the taxation year or fiscal period did not exceed $5 million. For other SMBs, the total 30 percent rate of credit decreased linearly until payroll reached $7 million. After budget day, on-the-job training credits were enhanced for aboriginal workers, and the maximum weekly qualified expenditure limit and hourly rate increased for all eligible trainees. An additional capital cost allowance (CCA) of 60 percent replaced the 35 percent additional CCA introduced in the March 2017 Quebec Economic Plan for two years. The new CCA rate is available for two years for new manufacturing or processing equipment and for new general-purpose electronic data-processing equipment, both acquired after March 27, 2018 and before April 2020. A tax holiday for an investment project carried on after budget day was broadened to extend to the development of an eligible digital platform. An eligible digital finances of the nation n 139

TABLE 22 Minimum Tax Rate Applicable to Income Eligible for the Small Business Deduction (SBD)

Applicable rate Post-budget January 1, day to 2021 and 2018 to December subsequent budget day 31, 2018 2019 2020 years

percent General tax rate . . . . . 11.7 11.7 11.6 11.5 11.5 Maximum SBD ratea . . . (3.7) (4.7) (5.6) (6.5) (7.5) Net SMB rate ...... 8.0 7.0 6.0 5.0 4.0 Additional deductionb (primary and manufacturing sectors) ...... (4.0) (3.0) (2.0) (1.0) — Total ...... 4.0 4.0 4.0 4.0 4.0

SMB = small and medium-sized businesses. a Reduced linearly if the corporate employees’ remunerated hours are more than 5,000 and less than 5,500, or if the corporate primary and manufacturing activities are between 25 percent and 50 percent. b Reduced linearly if the proportion of corporate primary and manufacturing activities is between 25 percent and 50 percent. Source: Quebec, Department of Finance and the Economy, 2018-2019 Budget, Additional Information, March 27, 2018, at A.62, table A.6. platform meant a computer environment enabling content management or use that served as an intermediary in accessing information, services, or property supplied or edited by the corporation or partnership or by a third party, and that was not a tax- exempt platform. The refundable tax credit for the production of multimedia events or environ- ments presented outside Quebec was amended to remove the $350,000 per production limit. An application must be submitted for an advance ruling or a certificate (if no prior advance ruling application had been made) to the Société de développement des entreprises culturelles (SODEC) after budget day. A temporary refundable tax credit was introduced for expenditures related to the digital transformation of print media activities incurred after budget day and before 2023. A qualification certificate from Investissement Québec was required to the effect that the company produced and disseminated a print or digital information medium containing original written content. The credit was 35 percent of the lesser of eligible digital conversion costs and the annual limit of $20 million. Tax assistance of up to $7 million was provided annually. For the refundable tax credit for film dubbing, the limit of 45 percent of consideration paid for the performance of a dubbing contract was eliminated effective after budget day. 140 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Amendments ensure that a virtual reality documentary may provide fewer than 30 minutes of programming (per episode in the case of a series) for the purposes of the refundable film production services credit. This amendment will apply to qualified productions for which a certificate application was filed with SODEC after budget day.

2. Personal Income Tax Pursuant to the November 21, 2017 Economic Plan Update, the tax rate for the lowest tax bracket was reduced retroactive for all of 2017 from 16 percent to 15 percent. A new first-time home buyer’s non-refundable tax credit for a qualifying housing unit acquired after 2017 was available in 2018 to a non-trust individual Quebec resident in an amount not exceeding 15 percent (the current first taxable income bracket) of a $5,000 acquisition cost. The unused portion of this maximum credit of $750 is not transferable to a spouse. The individual (or spouse), or a specified disabled person in need of a more accessible home, must have intended to occupy the home no more than one year after the purchase, and the individual or spouse cannot have owned a housing unit that was occupied by the individual in the fourth preceding calendar year before the acquisition. The RénoVert refundable tax credit was extended for another year to the end of March 2019 (for qualified expenses paid before 2020) for households that have not reached the $52,500 maximum. Tax-shield benefits were enhanced; the maximum increase in eligible work income was raised from $3,000 to $4,000 (in the previous year) for each household member as of 2018. The threshold for the tax credit to encourage experienced workers to stay in the labour market was lowered from 62 to 61 years of age. The new category of 61-year- old workers could claim a tax credit on a maximum of $3,000 of eligible work income in 2018; maximum eligible work income for older workers was increased by $1,000. The tax credit for a person living alone was broadened to include an individual who ordinarily resided in a self-contained domestic establishment maintained by the individual for himself or herself and for another person who was under 18 or was an eligible student for whom the individual was the parent, grandparent, or great- grandparent where the individual ordinarily lived in the establishment throughout the year or until death. The individual who maintained such an establishment could claim the tax credit for persons living alone, for 2018 and subsequent years. The refundable tax credit limit applicable to child-care expenses for a child with a severe and prolonged impairment in mental or physical function and for other children under the age of seven at year-end was $13,000 and $9,500, respectively, for 2018. The limit for impaired children allowed for expenses of up to $50 per day for full-time child care and otherwise up to $36.50 for children under the age of seven. The two limits mentioned above and the other annual limit of $5,000 (for all other cases) are automatically indexed as of 2019. finances of the nation n 141

The tax credit of up to $6,250 for the first major cultural gift (after July 3, 2013) was extended for five years starting in 2018 and ending after 2022. After March 2018, the Youth Alternative Program was replaced by the Aim for Employment Program, the benefits received from which were taxable. Informal caregivers of an eligible relative (not lived with or housed, but regularly and continuously helped) were eligible for a supplementary tax credit that consisted of a basic amount of $652 for 2018 plus, now, a supplement of $533 (indexed after 2018); that supplementary credit was reduced depending upon the relative’s income for that year. The supplement was reduced for 2018 at a rate of 16 percent for each dollar of income in excess of a threshold of $23,700. The minimum period in the year of assistance must consist of at least 185 out of 365 consecutive days. An eligible relative, inter alia, must not live in a dwelling in a private seniors’ residence or in a public network facility and must have a severe or prolonged impairment. In a con- jugal co-residence, the tax credit was a lump sum of $1,015 for 2018. Effective March 27, 2018, a nurse practitioner could certify the impairment that is required for this credit, or certify that the relative could not live alone or needed assistance in carrying out a basic activity of daily living. The refundable tax credit for volunteer respite for informal caregivers was increased, depending on the number of hours of service. The current system of a $500 credit for 400 hours or more was replaced by a sliding scale: a $250 credit for 200 to under 300 hours; a $500 credit for 300 to under 400 hours; and a $750 credit for 400 hours and more. The annual “envelope” for each care recipient of an informal caregiver was raised from $1,000 to $1,500. The refundable tax credit for the acquisition or rental of property intended to help seniors to live longer independently was increased for 2018 and subsequent years through a reduction from $500 to $250 of the threshold for claiming the credit and an extension of the qualified property list; additions will include hearing aids and walkers.

3. Sales Tax Starting after 2018, the budget implemented mandatory QST registration for a supplier of certain property or services in Quebec who is located in Canada (but outside Quebec) and has no physical or significant presence in Quebec (a non- resident supplier), and does not have taxable supplies in Quebec that exceed $30,000. The supplier must register with Revenu Québec and collect and remit QST on certain supplies in the province to specified Quebec consumers. A specified Quebec consumer for the purposes of these rules is a person who is not a QST registrant and whose usual place of residence is in Quebec. A non-resident supplier located in Canada must collect and remit QST on taxable corporeal movable property supplied in Quebec. The Quebec government will take into account models from other jurisdictions that have similar systems. These registration rules govern Quebec presence in regard to the digital economy. Mandatory registration also applies to digital property and services 142 n canadian tax journal / revue fiscale canadienne (2019) 67:1 distribution platforms with respect to certain taxable supplies made that control key elements of transactions with certain Quebec consumers. The non-resident was not considered to be a registrant generally and could not claim input tax refunds; registered recipients could not recover tax paid either. However, a qualifying non-resident could register under the general system instead, and must provide security of a value and in a form acceptable to the minister. A non-resident of Quebec and of Canada must collect and remit QST on certain supplies in Quebec to Quebec consumers, if such platforms control the key elements of transactions such as billing, transaction terms and conditions, and delivery terms. A digital platform means a platform that provides a service to a non-resident supplier by means of e-communication (such as an application store or a website) that enables the non-resident to make certain taxable supplies in Quebec to specified Quebec consumers—and enabling digital platforms—from 2019; a non-resident of Canada must do so after August 2019. The non-resident supplier must exceed $30,000 for all taxable supplies to persons reasonably considered to be consumers. A platform is not considered to control key elements of a transaction if it only supplies a transport service (as do digital platforms operated by Internet service providers and telecom- munications companies), a service providing access to a payment system, or an advertising service that informs customers of various types of movable property or services offered by the non-resident supplier and links customers to the supplier’s website. An existing agreement requires the Canada Border Services Agency to be responsible for the collection (on behalf of the Quebec government) of QST applicable to property imported by a Quebec individual. In the spring of 2018, Quebec started a plan of cooperation with the federal government to improve tax collection at the borders.

4. Sin Taxes Quebec promised to enter into an agreement with the federal government to receive revenue equal to an additional excise duty on cannabis intended for sale in Quebec.

5. Resource-Related Matters An allowance for environmental studies was introduced in the Mining Tax Act: deduction of an amount up to an operator’s cumulative environmental studies expenses account at year-end for expenses incurred after budget day. Consequential adjustments were made for the fiscal year ending after budget day to the refundable duties credit for losses. The refundable tax credit for the production of ethanol, cellulosic ethanol, and biodiesel fuel in Quebec was extended for five years until the end of March 2023 to promote their production and consumption in Quebec. After March 2018 and in order to simplify the application of the tax credit and to improve the predictability of the assistance that might be obtained by a qualified corporation, a fixed rate of 3 cents, 16 cents, and 14 cents, respectively, per litre of ethanol, cellulosic ethanol, finances of the nation n 143 and biodiesel fuel was used to calculate the tax credit; the monthly ceiling on the production of each was also then raised to 821,917 litres times the number of days in the particular month. To modernize and transform the forestry sector and bioenergy, a refundable tax credit was introduced for pyrolysis oil production in Quebec. After March 2018, the refundable tax credit was set for five years and was calculated at the rate of 8 cents per litre up to 100 million litres per year. The credit was granted to a qualified corporation that after March 2018 produced eligible pyrolysis oil in Quebec from residual forest biomass sold in and intended for Quebec.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other Amendments were promised to the legislation constituting the Capital régional et coopératif Desjardins (CRCD) and to related tax legislation to create a new class of shares for the claiming by an individual of a temporary non-refundable tax credit of 10 percent of the value of the shares or fractional shares converted, up to a value of $15,000 for a maximum credit of $1,500. Only current shareholders who have held CRCD shares for at least seven years could acquire this new class through exchange or conversion after February 2018; the shares were redeemable after a new, mandatory retention period. The tax credit for all shares in the existing class (acquired after February 2018) was reduced from 40 percent to 35 percent. The tax credit rate was maintained at 20 percent for an eligible share in Fond action (le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l’emploi, a labour-sponsored fund) acquired in the three fiscal years before June 2021. A limit will be imposed on capital raised by Fond action to control the expenditure attributable to this new government support. The holder of a taxi driver’s permit was granted a temporary increase, in 2017 and 2018, in the refundable tax credit available of up to $500, from a maximum of $569 and $574 to $1,069 and $1,074, respectively. Some taxpayers are only eligible for one-half of the maximum credit under current rules. A new notice of assessment was sent before June 2018 to all taxpayers for whom Revenu Québec had already determined the 2017 credit. The refundable tax credit attributing a work premium was enhanced by an increase of 2.6 percentage points over five years (from 2018 to 2022) of the rate for calculating the work premium. Starting in 2018, there was a relaxation of eligibility for the supplement to the work premium. Annual Quebec Pension Plan (QPP) contributions increased for employers and employees to reflectQPP enhancements phased in from 2019 to 2024. 144 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The dividend tax credit rate for the gross-up amount of eligible dividends received was decreased to reflect provincial and federal changes, from 11.9 percent of the gross-up amount to 11.86 percent if received after the budget day and before 2019. The rate was reduced to 11.78 percent in 2019 and to 11.70 percent after 2019. The rate of dividend tax credit for non-eligible dividends received was similarly reduced from 7.05 percent of the dividend gross-up amount to 6.28 percent for dividends received after budget day and before 2019, to 5.55 percent in 2019, 4.77 percent in 2020, and 4.01 percent in 2021 and subsequent years. The dual-basis compensation tax for financial institutions was extended for an additional five years in 2017. Rates for the new periods are set out in table 23; the compensation tax rates applicable to amounts paid as wages were adjusted after March 2018. The financial institution (throughout the year) must pay a compensation tax on wages paid after March 2018 at the applicable rate times the lesser of wages paid and the maximum taxable for the year, as shown in table 23. In April 2017, the National Assembly’s Committee on Public Finance tabled a report on recommendations to the government for combatting the erosion of its tax base; the Tax Fairness Action Plan was published in November 2017 as Quebec’s response to those recommendations. The plan identified 14 measures to prevent that erosion, divided into five strategic areas including the sales tax measures covered above. Quebec also recommended measures to recover personal and corporate income tax owed to it, strengthen tax and corporate transparency, and block access to government contracts for abusive tax avoiders, including those who use tax havens in abusive tax avoidance. The use of the Registraire des entreprises du Québec will receive a boost to information technology development in order to improve the quality of information on the more than 900,000 companies registered and to enable more efficient use of the register. Quebec will also test the reliability of information in registries of which the province supported harmonization during negotiations of the Canadian free trade agreement. In 2017, Quebec announced its review of the voluntary disclosures program (VDP) to take into account, among other things, December 2017 federal changes to tighten eligibility for the CRA’s VDP. Consultations with Revenu Québec regarding changes to the program were promised to be carried out in 2018-19. A reward would be offered by Quebec for a tax informant to cover significant personal, social, or professional costs if at least $100,000 of tax was recoverable. Certain information must be provided by the informant. Quebec announced that it would amend its legislation to harmonize with the federal proposals on the tax on split income, and legislation proposed by the federal government on lookthrough rules for partnerships and trusts, as well as proposals to improve anti-avoidance rules to prevent the use of financial instruments to gain a tax advantage by creating artificial losses. Quebec promised funding to support the abuse of employment agencies to inform employees of their rights and responsibilities. Quebec also promised to subject food trucks and trailers to mandatory billing procedures through a sales recoding module (SRM) to be implemented by the finances of the nation n 145

TABLE 23 Rates of Compensation Tax for Financial Institutions After Adjustments

April 1, 2018- April 1, 2019- April 1, 2020- April 1, 2022- Amounts paid as wages March 31, 2019 March 31, 2020 March 31, 2022 March 31, 2024

percent Bank, loan or trust corporation, or one trading in securities (up to $1.1 billion) . . . 4.29 4.22 4.14 2.80 Savings and credit union (up to $550 million) . . . . . 3.39 3.30 3.26 2.20 Any other persona (up to $275 million) . . 1.37 1.34 1.32 0.90 Insurance premiums and amounts in re insurance fund . . . . 0.48 0.48 0.48 0.30 a Excluding an insurance company and a professional order that created an insurance fund under section 86.1 of the Professional Code, RSQ, c. C-26. Source: Quebec, Department of Finance and the Economy, 2018-2019 Budget, Additional Information, March 27, 2018, at table A.9. summer of 2019. The measure will be similar to the establishment of SRMs in res- taurants and bars. Quebec’s Balanced Budget Act is intended to require the province to maintain a balanced budget and requires the establishment of a stabilization reserve to facilitate multi-year budget planning and also to allow sums to be deposited in the Genera- tions Fund. Reporting obligations are required that depend on the size and cause of a deficit. The stabilization reserve is used to balance a projected budget deficit without requiring additional action such as spending reductions or revenue increases. To keep the budget balanced, the government planned to use $3 billion from the stabilization reserve for fiscal years 2018-19 to 2020-21.

New Brunswick (Table 24) Tax Highlights n Corporate income tax rate did not increase n Personal income tax rates did not increase n Small business rate reduced to 3 percent

Tax Changes 1. Corporate Income Tax The small business income tax rate decreased from 3.5 percent to 3 percent, effective April 1, 2017. The New Brunswick government committed to a reduction of that rate to 2.5 percent during its mandate, by the end of 2018. 146 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 24 Projected Revenues and Expenditures, New Brunswick, Fiscal Year 2018-19

millions of dollars Total revenues ...... 9,427 Total expenditures ...... (9,616) Contingency reserve ...... nil Surplus /(deficit) ...... (189) Revenue sources Personal income tax ...... 1,682 Corporate income tax ...... 312 Sales tax ...... 1,493 Other taxes ...... 1,050 Total tax revenue ...... 4,537 Federal transfers ...... 3,225 Other revenues ...... 1,665 Total revenues ...... 9,427 Expenditures Education ...... 1,305 Health ...... 2,770 Debt servicing ...... 675 Other expenditures ...... 4,866 Total expenditures ...... 9,616

Notes: Figures were shown on a main estimates basis. About $266 million of federal transfers was provided in the form of conditional federal grants. Expenditure figures were shown by department. “Other revenues” included $70 million in forest and mining royalties. The contingency reserve was eliminated in this budget. Nursing home consolidation was reflected in the revenues and expenditures. Source: New Brunswick, Department of Finance, 2018-2019 Budget, January 30, 2018.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Sin Taxes No changes were announced.

5. Resource-Related Matters No changes were announced.

6. Real Estate Taxes No changes were announced. finances of the nation n 147

7. Pensions No changes were announced.

8. Other The strategic program review process was completed, as announced in 2016. The review process identified measures to reduce the accumulating debt and put the province on track to balance the budget in 2020-21. The initiatives identified continue to be implemented; consequently, the government did not introduce new revenue measures or expenditure restraint in the 2018 budget. New Brunswick was consulting to develop its own carbon-pricing policy to address federal government requirements. Pre-budget consultations were held with provincial residents.

Nova Scotia (Table 25)

Tax Highlights n No corporate tax rate changes n Some personal income tax credits increased for a taxpayer earning less than $75,000

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax Effective for 2018 and subsequent years, some personal income tax credits—a basic personal amount, a spousal amount, an amount for an eligible dependant, and an age amount—increased for an individual whose taxable income was under $25,000; the increase phases out straightline until taxable income reaches $75,000, when it is eliminated. The first three amounts increased from $8,481 to $11,481 and the age amount for low-income seniors increased from $4,141 to $5,606. The 2018 budget removed the upper limit on eligible medical expenses for the tax credit for a financially dependent relative; the cap used to be set at $10,000. To provide greater access to the caregiver benefit program, the government expanded eligibility criteria, such as moderate to significant memory loss, a high risk of falls, and a high level of physical impairment. Another eligibility expansion was promised for the spring of 2019. Effective after 2018, a new innovation equity tax credit was introduced. The budget did not contain details but promised a more narrowly focused credit that had a threshold consistent with other provinces’ programs. The existing credit was to be phased out over time. Enhancements were made to income assistance: exclusion of child support payments in calculating eligibility and an increase in the tax-free poverty reduction 148 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 25 Projected Revenues and Expenditures, Nova Scotia, Fiscal Year 2018-19

millions of dollars Total revenues ...... 10,810 Total expenditures ...... (10,863) Reserve and consolidating adjustments ...... 82 Contribution to fiscal capacity for Provincial Health Complex ...... nil Surplus /(deficit) ...... 29 Revenue sources Personal income tax ...... 2,816 Corporate income tax ...... 531 Sales tax ...... 1,858 Other taxes ...... 662 Total tax revenue ...... 5,867 Federal transfers ...... 3,574 Other revenues ...... 1,369 Total revenues ...... 10,810 Expenditures Education ...... 1,398 Health ...... 4,367 Debt servicing ...... 894 Other expenditures ...... 4,204 Total expenditures ...... 10,863

Notes: Revenue source figures were for general revenue fund only with adjustments for consolidation. Expenditure figures were shown by department, general revenue fund. Source: Nova Scotia, Department of Finance and Treasury Board, 2018-2019 Budget, March 20, 2018.

credit from $250 to $500 per year (for clients without children and annual income of no more than $12,000).

3. Sales Tax No changes were announced.

4. Sin Taxes The province agreed in principle to the taxation of cannabis with the federal government collecting federal and provincial duties.

5. Resource-Related Matters No changes were announced.

6. Real Estate Taxes No changes were announced. finances of the nation n 149

7. Pensions No changes were announced.

8. Other No changes were announced.

Prince Edward Island (Table 26)

Tax Highlights n Some personal tax credits increased n Small business tax rate reduced to 4 percent

Tax Changes 1. Corporate Income Tax The small business tax rate was reduced to 4 percent, representing the first decrease in a “multi-year commitment.” The rate seemed to apply for the entire calendar year. A new small business investment grant gave a company and an individual a 15 percent rebate on business investments of up to $25,000 for expenses incurred after April 5, 2018.

2. Personal Income Tax The basic personal amount and spouse and spousal equivalent amounts were increased by $500 in 2018 and $500 in 2019. The 2018 budget introduced a program, Island Advantage, to support post- secondary students. Debt reduction was increased for a grant available to students living in the province three years after graduation, from $2,000 to $3,500 per annum of study.

3. Sales Tax The provincial portion of HST was to be rebated on a residential electricity bill each month. The same tax was rebated on firewood, pellets, and propane through a point- of-sale credit or rebate.

4. Sin Taxes No changes were announced.

5. Resource-Related Matters No changes were announced.

6. Real Estate Taxes No changes were announced. 150 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 26 Projected Revenues and Expenditures, Prince Edward Island, Fiscal Year 2018-19

millions of dollars Total revenues ...... 1,985 Total expenditures ...... (1,984) Reserve and consolidating adjustments ...... nil Surplus /(deficit) ...... 2 Revenue sources Personal income tax ...... 390 Corporate income tax ...... 60 Sales tax ...... 298 Other taxes ...... 222 Total tax revenue ...... 970 Federal transfers ...... 770 Other revenues ...... 245 Total revenues ...... 1,985 Expenditures Education ...... 273 Health ...... 710 Debt servicing ...... 127 Other expenditures ...... 874 Total expenditures ...... 1,984

Notes: Revenue and expenditure figures were consolidated. Expenditure figures were shown by department. (Column may not add because of rounding.) Source: Prince Edward Island, Department of Finance, 2018-2019 Budget, April 6, 2018.

7. Pensions No changes were announced.

8. Other In the 2017 budget, the provincial government promised to prepare a report on existing income tax credits to determine their cost and effectiveness, but there was no mention of this review in the 2018 budget documents. A carbon-pricing mechanism was promised to be introduced after the current fiscal year. However, in July 2018, the PEI government confirmed that a climate plan submitted to the federal government by September 1, 2018 will not maintain a carbon tax or a plan for a cap-and-trade system, forcing the federal government to introduce its carbon pricing as of January 2019. The dividend tax credit will be adjusted to preserve integration. finances of the nation n 151

Newfoundland and Labrador (Table 27)

Tax Highlights n No new or increased taxes or fees n Book sales tax rebate restored pre-budget n Payroll tax decreased n Carbon tax still being finalized

Tax Changes Corporate Income Tax No changes were announced.

Personal Income Tax The government announced a non-refundable search and rescue volunteer tax credit of up to $3,000 for first responders, effective in 2019. A new home purchase program was introduced to provide an individual with a grant of up to $3,000 to help purchase a newly constructed or never-before-purchased home that costs under $400,000. The temporary deficit reduction levy was reduced but in force for 2018, as shown in table 28. The levy will be in place until 2019.

3. Sales Tax A sales tax exemption—a point-of-sale rebate of the 10 percent provincial HST for printed books—that was removed in the 2016 budget was restored by government announcement for 2018 and following years.

4. Sin Taxes No changes were announced.

5. Resource-Related Matters The government announced that it was currently finalizing its provincial approach to the carbon tax, as directed by the federal government. Newfoundland and Labra- dor promised to phase out the temporary gas tax (introduced in 2016) as the carbon tax becomes effective. The government promised to invest $1.7 million in its mineral incentive program.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced. 152 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 27 Projected Revenues and Expenditures, Newfoundland and Labrador, Fiscal Year 2018-19

millions of dollars Total revenues ...... 7,673 Total expenditures ...... (8,356) Oil revenue risk adjustment ...... nil Surplus /(deficit) ...... (683) Revenue sources Personal income tax ...... 1,454 Corporate income tax ...... 201 Sales tax ...... 1,169 Other taxes ...... 1,777 Total tax revenue ...... 4,601 Federal transfers ...... 757 Other revenues ...... 2,315 Total revenues ...... 7,673 Expenditures Education ...... 838 Health ...... 2,985 Debt servicing ...... 1,428 Other expenditures ...... 3,105 Total expenditures ...... 8,356

Notes: Expenditures were reported by department, except for debt expenses. Health expenditure covers “the health-care sector.” Debt servicing included “debt charges and financial expenses.” Expenditures were a combination of current and capital account expenditures by department in the government reporting entity. Offshore royalties were shown as $975 million and were included in “other” tax revenue, along with $80 million from mining tax and royalties. The total revenue figure includes net income of government business enterprises. Source: Newfoundland and Labrador, Department of Finance, 2018 Budget, March 27, 2018.

8. Other A comprehensive independent review of the provincial tax system was promised in the 2017 budget. The review was intended to simplify the tax system and reduce costs for the government and taxpayers, and ensure that the tax system was fair and competitive. The review continued; recommendations expected to be submitted by November 2018 will be considered in the 2019 budget. The 2018 budget announced a gradual decrease in automobile insurance. Begin- ning after 2018, the tax will be reduced by 2 percent (from 15 percent) and by another 1 percent after each of 2019, 2020, and 2021. The government promised to review the tax and make reductions as the fiscal situation improves. The payroll tax for employers was reduced, effective after 2018. The threshold— below which no tax is payable—was increased from $1.2 million to $1.3 million. Associated corporations must file an allocation agreement regarding the threshold, as must employers in partnerships. finances of the nation n 153

TABLE 28 Temporary Deficit Reduction Levy Amounts for 2018 (Based on Individual Taxable Income)

Individual Temporary deficit taxable reduction levy income Base +10% amount

dollars ≤ $50,000 ...... ≤ 50,000 na na 0 > $50,000 to ≤ $51,000 ...... 50,250 0 25 25 50,500 0 50 50 50,750 0 75 75 > $51,000 to ≤ $55,000 ...... 100 > $55,000 to ≤ $56,000 ...... 55,250 100 25 125 55,500 100 50 150 55,750 100 75 175 > $56,000 to ≤ $60,000 ...... 200 > $60,000 to ≤ $61,000 ...... 60,250 200 25 225 60,500 200 50 250 60,750 200 75 275 > $61,000 to ≤ $65,000 ...... 300 > $65,000 to ≤ $66,000 ...... 65,250 300 25 325 65,500 300 50 350 65,750 300 75 375 > $66,000 to ≤ $70,000 ...... 400 > $70,000 to ≤ $71,000 ...... 70,250 400 25 425 70,500 400 50 450 70,750 400 75 475 > $71,000 to ≤ $75,000 ...... 500 > $75,000 to ≤ $76,000 ...... 75,250 500 25 525 75,500 500 50 550 75,750 500 75 575 > $76,000 to ≤ $80,000 ...... 600 > $80,000 to ≤ $81,000 ...... 80,250 600 25 625 80,500 600 50 650 80,750 600 75 675 > $81,000 to ≤ $100,000 ...... 700 > $100,000 to ≤ $101,000 . . . . . 100,250 700 25 725 100,500 700 50 750 100,750 700 75 775 > $101,000 to ≤ $125,000 . . . . . 800 > $125,000 to ≤ $126,000 . . . . . 125,250 800 25 825 125,500 800 50 850 125,750 800 75 875

(Table 28 is concluded on the next page.) 154 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 28 Concluded

Individual Temporary deficit taxable reduction levy income Base +10% amount

dollars > $126,000 to ≤ $175,000 . . . . . 900 > $175,000 to ≤ $176,000 . . . . . 175,250 900 25 925 175,500 900 50 950 175,750 900 75 975 > $176,000 to ≤ $250,000 . . . . . 1,000 > $250,000 to ≤ $251,000 . . . . . 250,250 1,000 25 1,025 250,500 1,000 50 1,050 250,750 1,000 75 1,075 > $251,000 to ≤ $300,000 . . . . . 1,100 > $300,000 to ≤ $301,000 . . . . . 300,250 1,100 25 1,125 300,500 1,100 50 1,150 300,750 1,100 75 1,175 > $301,000 to ≤ $350,000 . . . . . 1,200 > $350,000 to ≤ $351,000 . . . . . 350,250 1,200 25 1,225 350,500 1,200 50 1,250 350,750 1,200 75 1,275 > $351,000 to ≤ $400,000 . . . . . 1,300 > $400,000 to ≤ $401,000 . . . . . 400,250 1,300 25 1,325 400,500 1,300 50 1,350 400,750 1,300 75 1,375 > $401,000 to ≤ $450,000 . . . . . 1,400 > $450,000 to ≤ $451,000 . . . . . 450,250 1,400 25 1,425 450,500 1,400 50 1,450 450,750 1,400 75 1,475 > $451,000 to ≤ $500,000 . . . . . 1,500 > $500,000 to ≤ $501,000 . . . . . 500,250 1,500 25 1,525 500,500 1,500 50 1,550 500,750 1,500 75 1,575 > $501,000 to ≤ $550,000 . . . . . 1,600 > $550,000 to ≤ $551,000 . . . . . 550,250 1,600 25 1,625 550,500 1,600 50 1,650 550,750 1,600 75 1,675 > $551,000 to ≤ $600,000 . . . . . 1,700 > $600,000 to ≤ $601,000 . . . . . 600,250 1,700 25 1,725 600,500 1,700 50 1,750 600,750 1,700 75 1,775 > $601,000 1,800 finances of the nation n 155

Yukon (Table 29)

Tax Highlights n Corporate and small business income tax rates not increased n Tobacco tax increased

Tax Changes 1. Corporate Income Tax The small business rate was reduced to 2 percent effective July 1, 2017. The government promised to examine the implications of this change before reducing the future rate to 0 percent as previously promised.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Sin Taxes Tobacco taxes increased from $0.25 to $0.30 per cigarette and per gram of loose tobacco for April 1, 2018. As announced in the 2017 budget, effective January 1, 2019, the tobacco tax rate is to be indexed to inflation. Yukon will keep Yukoners informed as the implementation of the cannabis plan evolves; an informal agreement with the federal government was reached.

5. Resource-Related Matters No changes were announced.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other Upgrading the ability of the Department of Finance to gather and analyze information was intended to modernize budgeting and reporting systems and create a more evidence-based budgeting approach. A Financial Advisory Panel report was announced to examine the territory’s finances and consult with the public about budgetary planning with a goal of reducing or eliminating projected deficits. Yukon will proceed with three of the panel’s recommendations including a review of health and social services, but will not proceed with a recommendation to proceed with an HST. 156 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 29 Projected Revenues and Expenditures, Yukon, Fiscal Year 2018-19

millions of dollars Total revenues ...... 1,333 Total expenditures ...... (1,338) Reserve ...... nil Surplus /(deficit) ...... (5) Revenue sources Personal income tax ...... 74 Corporate income tax ...... 12 Sales tax ...... na Other taxes ...... 32 Total tax revenue ...... 118 Federal transfers ...... 1,005 Other revenues ...... 210 Total revenues ...... 1,333 Expenditures Education ...... 193 Health ...... 431 Debt servicing ...... 16 Other expenditures ...... 698 Total expenditures ...... 1,338

Notes: Expenditure figures for education and health were shown in consolidated and non- consolidated budgets by department. The health figure includes an amount for social services. Non-consolidated reporting was used to reflect the announced surplus/(deficit) figure; the consolidated surplus was reported as $11 million. Consolidated reporting includes territorial corporations. The debt-servicing figure shown represents expenditures on loan programs. Debt servicing is prorated. The Yukon government signed a devolution agreement with the federal government in 2003 to assume land and resource management responsibilities. Amendments to the resource revenue-sharing arrangement in 2012 ensured that more resource revenue generated in the Yukon would be available for use in the territory. Source: Yukon, Department of Finance, 2018-2019 Budget, March 1, 2018. finances of the nation n 157

Northwest Territories (Table 30)

Tax Highlights n No new taxes or income tax increases

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Sin Taxes The territory promised to work with stakeholders on a proposed approach to sugary drinks. The informal agreement with the federal government on the legalization of cannabis and its sale was announced. The 2018 budget did not include revenue for the related tax because legalization had not yet occurred and there would be offsetting costs.

5. Resource-Related Matters The carbon tax becomes effective on July 1, 2019. Territorial rates will increase gradually and annually from $20 per tonne of greenhouse gas emissions to $50 per tonne.

6. Real Estate Taxes Property and education mill rates were adjusted for inflation effective April 1, 2018. Proposals were promised to be developed in 2018-19 for a land transfer tax similar to that in other jurisdictions. A lower rate would apply to lower-value property.

7. Pensions No changes were announced.

8. Other No changes were announced. 158 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 30 Projected Revenues and Expenditures, Northwest Territories, Fiscal Year 2017-18

millions of dollars Total revenues ...... 1,749 Total expenditures ...... (1,713) Infrastructure contribution, deferred maintenance, fund profit / loss . . . . (13) Surplus /(deficit) ...... 23 Revenue sources Personal income tax ...... 103 Corporate income tax ...... 31 Sales tax ...... na Other taxes ...... 117 Total tax revenue ...... 251 Federal transfers ...... 1,404 Other revenues ...... 94 Total revenues ...... 1,749 Expenditures Education ...... 327 Health ...... 462 Debt servicing ...... 23 Other expenditures ...... 901 Total expenditures ...... 1,713

Notes: Figures showed health and education expenditure by department; the education figure was a composite for the Department of Education, Culture, and Employment, and the health figure included social services. The stated surplus was on a non-consolidated basis. On April 1, 2014, the Northwest Territories took responsibility for the management of its land, water, and non-renewable resources. The Northwest Territories started to receive resource revenues under devolution in 2014-15; half is offset against federal territorial formula financing grants, up to 25 percent of the balance will be shared with aboriginal governments, and 25 percent of the balance will be saved in the Heritage Fund. The Northwest Territories and the federal government signed a devolution agreement on March 11, 2013. The debt-servicing amount was based on last year’s estimate for this fiscal year owing to a lack of current estimates availability. The forecasted amount for the 2017-18 budget was $36 million. Source: Northwest Territories, Department of Finance, 2018-2019 Budget, February 8, 2018. finances of the nation n 159

Nunavut (Table 31)

Tax Highlights n No new taxes

Tax Changes 1. Corporate Income Tax A fuel tax rebate for mining exploration was eliminated as of May 14, 2019; in its place a funded system was implemented by the Department of Economic Develop- ment and Transportation.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Sin Taxes No changes were announced, but the Nunavut government passed the Cannabis Act in June 2018. Cannabis went on sale online in Nunavut on October 17, 2018, when the sale and use of cannabis became legal in Canada.

5. Resource-Related Matters The Nunavut Department of Finance announced that the territory did not intend to administer a territorial carbon tax and that the federal system would apply in Nunavut. See also the eliminated rebate for fuel tax discussed above.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other No changes were announced. 160 n canadian tax journal / revue fiscale canadienne (2019) 67:1

TABLE 31 Projected Revenues and Expenditures, Nunavut, Fiscal Year 2018-19

millions of dollars Total revenues ...... 2,176 Total expenditures ...... (2,201) Supplementary requirements, revolving funds, and contingencies . . . . . (30) Surplus /(deficit) ...... (54) Revenue sources Personal income tax ...... 33 Corporate income tax ...... 18 Sales tax ...... na Other taxes ...... 69 Total tax revenue ...... 120 Federal transfers ...... 1,671 Other revenues ...... 385 Total revenues ...... 2,176 Expenditures Education ...... 253 Health ...... 414 Debt servicing ...... 2 Other expenditures ...... 1,532 Total expenditures ...... 2,201

Notes: Main estimates were prepared on a non-consolidated basis. Surplus/(deficit) was shown on a main estimates basis and not the public account basis, which funds revenues and expenditures. Expenditure figures appeared to be shown by department. The debt-servicing expenditure was reported on a cash, non-consolidated basis. (Column may not add because of rounding.) Nunavut is in the process of negotiating a devolution agreement with the federal government. The territory was officially established in 1999 and was formerly part of the Northwest Territories. Source: Nunavut, Department of Finance, 2018-2019 Budget, May 28, 2018. canadian tax journal / revue fiscale canadienne (2019) 67:1, 187 - 208 https://doi.org/10.32721/ctj.2019.67.1.itp

International Tax Planning Co-Editors: Ken Buttenham and Ian Bradley*

TRANSFER PRICING AND TRANSACTIONS BETWEEN FOREIGN ENTITIES Byron Beswick**

The application of Canadian transfer-pricing rules to transactions with and between foreign affiliates remains uncertain, particularly in light of certain recent Canada Revenue Agency administrative positions. Such uncertainty creates significant transactional and reporting risks for multinational enterprises. The purpose of this article is to examine one particular area of uncertainty—the proper application of Canadian transfer-pricing rules to a transaction between foreign entities. The author concludes that Canada’s transfer- pricing rules do not apply to a transaction between two foreign entities except to the extent that one or both entities come within the charging provisions in the Income Tax Act, and further concludes that this limitation on the application of the transfer-pricing rules is appropriate from a policy perspective. KEYWORDS: TRANSFER PRICING n ARM’S LENGTH n FOREIGN AFFILIATES n NON-RESIDENTS n STATUTORY INTERPRETATION n TAX POLICY

* Of PricewaterhouseCoopers LLP, Toronto. ** Of Felesky Flynn LLP. I thank Siobhan Goguen, Ian Bradley, and Ken Buttenham for their observations and comments on earlier drafts of this article. The views expressed in this article and any errors are my own. 187 canadian tax journal / revue fiscale canadienne (2019) 67:1, 209 - 34 https://doi.org/10.32721/ctj.2019.67.1.ptp

Personal Tax Planning Co-Editors: Brian J. Anderson,* Jim MacGowan,** Sonia Gandhi,** and Dino Infanti***

With this issue of the journal, we welcome Brian Anderson, CPA, CA, Jim MacGowan, CPA, CA, CFP, Sonia Gandhi, CPA, CA, and Dino Infanti, CPA, CA, as the new co-editors of the Personal Tax Planning feature. Brian is a tax partner with Deloitte LLP in Winnipeg, with over 35 years of experience. His focus is on tax planning and on business succession for business owners. He has lectured for CPA Manitoba in both student education and professional development. Jim is the senior tax partner in the Deloitte Atlantic practice. He has practised tax for 30 years, with a focus on providing income tax advice to private companies and their shareholders. Sonia is a tax partner with KPMG’s global mobility services tax practice in Toronto. She has over 20 years of experience advising clients in a broad range of income tax matters, including corporate tax, personal tax, and trust and estate planning. Dino is partner and national leader with KPMG’s Enterprise Tax Practice. With over 20 years of experience, Dino specializes in owner-managed enterprises in a variety of tax-related areas, including estate and succession planning, corporate restructuring, and divestitures.

INCOME-SPLITTING UPDATE Sean Grant-Young**** and Katie Rogers*****

This article aims to provide a general understanding of the federal income tax legislation dealing with “income splitting” from the time the Income War Tax Act was introduced, in 1917, to the passage of the most recent amendments in June 2018. The authors review the evolution of the attribution rules and briefly discuss some of the relevant case law. In addition, they provide a summary of the latest amendments, as initially proposed in 2017 and as subsequently revised. Finally, the authors outline several planning techniques that, when implemented correctly, should allow taxpayers to manage their personal cash flow and wealth without offending the new rules. KEYWORDS: INCOME SPLITTING n AMENDMENTS n TAX PLANNING

* Of Deloitte LLP, Winnipeg. ** Of KPMG LLP, Halifax. *** Of KPMG LLP, Vancouver. **** Of Deloitte LLP, Kitchener. ***** Of Deloitte LLP, Saint John.

209 canadian tax journal / revue fiscale canadienne (2019) 67:1, 235 - 62 https://doi.org/10.32721/ctj.2019.67.1.pfp

Planification fiscale personnelle Co-rédacteurs de chronique : Brian J. Anderson*, Jim MacGowan,** Sonia Gandhi** et Dino Infanti***

Dans ce numéro de la Revue, nous souhaitons la bienvenue à Brian Anderson, CPA, CA, Jim MacGowan, CPA, CA, CFP, Sonia Gandhi, CPA, CA et Dino Infanti, CPA, CA à titre nouveaux co-rédacteurs de la chronique de Planification fiscale personnelle ( Personal Tax Planning). Brian est associé chez Deloitte LLP à Winnipeg et compte plus de 35 ans d’expérience en fiscalité. Sa pratique est axée sur la planification fiscale et la transmission d’entreprises pour les propriétaires dirigeants. Il a donné des cours à l’éducation aux étudiants et au perfectionnement professionnel pour CPA Manitoba. Jim est associé sénior en fiscalité au sein de Deloitte Atlantic Practice. Il pratique la fiscalité depuis plus de 30 ans et se spécialise dans les services-conseils aux sociétés privées et à leurs actionnaires. Sonia est associée en fiscalité chezKPMG et elle oeuvre dans le département de la mobilité internationale à Toronto. Forte de ses 20 ans d’expérience en consultation fiscale, elle a travaillé sur une variété de mandats en fiscalité, tant en matière de fiscalité corporative, de fiscalité des particuliers que dans le domaine des fiducies et de la planification successorale. Dino est associé et leader national chezKPMG . Il travaille pour les PMEs et leur fournit des conseils en matière de planification fiscale et successorale, de réorganisations corporatives et de ventes d’entreprises.

L’ÉVOLUTION DU FRACTIONNEMENT DU REVENU Sean Grant-Young**** et Katie Rogers*****

Cet article vise à donner un aperçu général de la législation fiscale fédérale traitant du « fractionnement du revenu », à partir de la publication de la Loi de l’impôt de guerre sur le revenu en 1917 jusqu’aux modifications les plus récentes datant de juin 2018. Les auteurs passent en revue l’évolution des règles d’attribution et abordent brièvement certains arrêts pertinents de la jurisprudence. Ils résument en outre les dernières

* De Deloitte LLP, Winnipeg. ** De KPMG LLP, Halifax. *** De KPMG LLP, Vancouver. **** De Deloitte LLP, Kitchener. ***** De Deloitte LLP, Saint John.

235 236 n canadian tax journal / revue fiscale canadienne (2019) 67:1 modifications législatives, telles qu’elles ont été proposées initialement en 2017 puis dans leurs versions révisées. Enfin, les auteurs présentent plusieurs techniques de planification qui, lorsqu’elles sont mises en oeuvre adéquatement, devraient permettre aux contribuables de gérer leurs flux de trésorerie et leurs patrimoines personnels sans enfreindre les nouvelles règles. MOTS CLÉS : FRACTIONNEMENT DU REVENU n MODIFICATIONS n PLANIFICATION FISCALE canadian tax journal / revue fiscale canadienne (2019) 67:1, 263 - 79 https://doi.org/10.32721/ctj.2019.67.1.ctr

Current Tax Reading Co-Editors: Robin Boadway, Kim Brooks, Jinyan Li, and Alan Macnaughton*

Joseph Bankman, Mitchell A. Kane, and Alan Sykes, Collecting the Rent: The Global Battle To Capture MNE Profits, NYU Law and Economics Research Paper no. 18-38 (New York: New York University School of Law, November 2018), 48 pages (https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3273112)

Multinational enterprises (MNEs) earn substantial profits or economic rents in multiple jurisdictions, often paying little tax to the host countries. To capture a share of MNE profits, countries have attempted to use several policy instruments, including income tax, antitrust laws, tariffs, and other types of trade policies. Each of these instruments has pros and cons in terms of its effects on economic welfare (nationally and worldwide) and on the distribution of rents among countries. Typ- ically, these various instruments have been discussed separately in the literature on the respective policy areas (tax, trade, antitrust law, etc.). This paper offers a comprehensive examination of these instruments and the circumstances in which one instrument may be better from a national or a global perspective. It focuses in particular on US-based MNEs earning rents from other countries. The overarching theme is that a jurisdiction’s ability to capture MNE rent is “a function of the extent to which the jurisdiction has monopsonistic market power,” and that without such power “no [policy] instrument will be effective.”1 Part II of the paper provides an overview, explaining the notion of economic rent, government objectives and leverage, and the role of international cooperation. The main sources of MNEs’ true economic rents include holding rights to intellectual property (IP), enjoying economies of scale, reducing transaction costs, and tax planning. Efficiency is a main government objective, and extracting true economic rents, according to economic theory, is efficient since it will not alter behaviour in the economy. However, jurisdictions also pursue political goals where foreign MNEs are perceived to be earning rent locally without paying their fair share of taxes. Such

* Robin Boadway is of the Department of Economics, Queen’s University, Kingston, Ontario. Kim Brooks is of the Schulich School of Law, Dalhousie University, Halifax. Jinyan Li is of Osgoode Hall Law School, York University, Toronto. Alan Macnaughton is of the School of Accounting and Finance, University of Waterloo. 1 At 5.

263 264 n canadian tax journal / revue fiscale canadienne (2019) 67:1 policies result in welfare losses both for the jurisdiction adopting these policies and globally, and they would work only if MNEs had no equally good opportunities elsewhere. International cooperation seeks to reduce the inefficiencies. Part III of the paper discusses tax instruments designed to extract MNE rents, including source-based income tax with separate entity accounting and adherence to the arm’s-length standard; provisions that extend the reach of source taxation (for example, by lowering the threshold for the taxation of business profits, expanding the scope of withholding taxes, and applying a minimum tax to outgoing payments); unitary taxation with formulary apportionment (such as the EU common consolidated corporate tax base); and destination-based consumption taxes. To facilitate the assessment of the effect of these instruments, three stylized examples are provided: “Computer,” a US-based MNE that creates and produces tangible property; “Soft- ware,” a US-based MNE that derives economic rents from holding proprietary computer code and other valuable intangibles; and “Coffee,” a US-based MNE that derives economic rents from IP in trademark and expertise, and synergies in its global operations. After analyzing the effect of each tax instrument on Computer, Software, and Coffee, the paper draws the following conclusions about the ability of the import (market) country to tax rents:2

n “very low” for Computer, “none” for Software, and “very low” for Coffee under source-based taxation; n “substantial” for each of Computer, Software, and Coffee under formulary apportionment (assuming no tax planning); n “low” for Computer and “substantial” for Software and Coffee under formulary apportionment (assuming tax planning); and n “low” for Computer, Software, and Coffee under destination-based consumption taxes.

Part III of the paper also discusses non-tax policy instruments, including government purchasing and state-owned enterprises, price regulation, antitrust and trade policy, and excise taxes. It explains the ways in which each instrument can extract rent—for example, antitrust actions can capture rent by forcing MNEs to lower their prices or licensing fees, or by levying fines. It also explores the implications of the use of a particular instrument. Part IV provides some conclusions drawn from a general comparison of tax and non-tax instruments. First, conventional (source-based) income tax is ineffective for import nations because it can be levied only where profits are earned, and IP income can be earned elsewhere. Expanded withholding taxes and destination-based consumption taxes are also poor tools for claiming rents because they are not tied to profits. Second, non-tax instruments, although facing challenges as well, can be effective in many circumstances. “Antitrust [policy] especially affords an attractive

2 At 17, table 1; 25, table 2; 26, table 3; and 30, table 4. current tax reading n 265 option where a plausible (or even somewhat plausible) legal theory can be constructed.”3 Third, tax instruments and non-tax instruments can be substitutes for each other. For example, an antitrust policy that garners all MNE rents makes other policies irrelevant. Overall, this paper advances thinking about the relationship between income tax and other policy instruments for extracting a share of MNE profits by an import country. From the perspective of MNEs, if countries resort to using more unilateral antitrust policies as opposed to trade or income tax policies, the lack of international cooperation on antitrust policies may lead to uncertainties and economic double taxation. J.L.

Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, “Tax Evasion and Inequality,” American Economic Review (forthcoming) (https://gabriel-zucman.eu/files/AJZ2017.pdf ) This is the best study of tax evasion among the wealthy that I have ever seen. The results are striking: using three different Scandinavian data sets, the authors show that the top 0.01 percent of the richest households ranked by wealth evade about 25 percent of their income tax liability. In contrast, the best previously available data showed that tax evasion was less than 5 percent at all levels of wealth.4 Scandinavian governments participated in the study and verified that, in their view, the amounts described as evasion were not the result of legitimate tax planning. The main data set used in the study stems from 2007. A systems engineer employed by HSBC Private Bank Switzerland, the Swiss subsidiary of the banking giant HSBC—Hervé Falciani—obtained the complete internal records of the 30,000 clients of the bank.5 He provided the data to the French government, which shared the information with governments around the world, including Canada’s.6 Importantly, this “Falciani list”7 contained the names of the beneficial owners of the wealth managed by the bank, even though that wealth may have been held through companies, trusts, etc., which would otherwise hide beneficial ownership.HSBC Switzerland was required to maintain this information under rules against money laundering, and it apparently complied with those rules.

3 At 48. 4 At 2. (All references to pages of the article are to the online version cited at the head of this review.) 5 At 4. 6 Anthony Sylvain, “The CRA’s Win Against Undisclosed Offshore Accounts” (2018) 8:4 Canadian Tax Focus 12-13. 7 This is also called “the Lagarde list,” referring to Christine Lagarde, who was the French minister of finance at the time (and is now the managing director of the International Monetary Fund). 266 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The tax authorities of Denmark, Sweden, and Norway attempted to match all accounts potentially connected to their respective countries (that is, accounts whose owner, attorney controlling the account, or other related party had an address in Scandinavia or Scandinavian nationality). The funds in these accounts constituted about 1 percent of all the wealth in HSBC accounts contained on the list.8 The matching succeeded in about 90 percent of the cases.9 After detailed investigation, Denmark and Norway concluded that 90-95 percent of the beneficial owners of these accounts had not reported this income on their tax return (and, in the case of Norway’s wealth tax, had not reported the assets on that return). The article strongly implies that the governments’ view was that the accountholders should have reported the income—that their failure to do so was not the result of legitimate tax planning but rather amounted to tax evasion.10 This conclusion by the tax authorities does not mean that all of these people were convicted of evading taxes. The listing of a particular account on the leaked (and thus unofficial) list was considered insufficient to establish in court the existence of a hidden account. Thus, governments sought information from the account- holder and the Swiss authorities; in many cases, neither of them cooperated, and the prosecution fell apart.11 In addition (although this is not mentioned in the article), one would expect that proving evasion would require proof of intent. At least in Canada, this has often been difficult to establish. Still, the lack of tax-evasion con- victions is not all that serious a qualification to the study; it seems fair to rely on the governments’ view that tax was owing. My main reservation is that it would have been good to know how many of the accountholders successfully disputed the re- assessment (even though that success may have been on evidentiary grounds rather than being based on the actual absence of evasion). The final sample in the HSBC data set consisted of 520 households that had at least one HSBC Switzerland account, “declared themselves taxable in Scandinavia . . . [and] could be matched to a tax return.”12 The Norwegian households in the sample could also be established to have not paid taxes on the account, while in the other two countries there was only the 90-95 percent probability that they had not. For ease of exposition, the authors of the article treat all 520 households as tax evaders as a result of having hidden wealth at HSBC Switzerland. The next step in the analysis was to place these 520 households in the wealth distribution. This was relatively easy, given the Scandinavian setting. The governments involved directly observe the market value of most wealth components for

8 At 6. 9 At 5. 10 At 6. 11 At 6-7, note 11. Presumably the tax authorities also sought information from HSBC Switzerland, but this is not discussed in the article. 12 At 7. current tax reading n 267 the entire population, at an individual level, by requiring reporting by third parties such as banks and mutual funds. The results are as follows. The fraction of Scandinavian households who hid assets at HSBC Switzerland was negligible up to the top 1 percent of wealth, but then rose steadily to almost 1 percent of the top 0.01 percent of the wealth distribution (the top 100 of every million households in the wealth distribution). The rise in the proportion who hid assets was quite steep, even within the top 1 percent of the wealth distribution. In particular, households in the top 0.01 percent (US $45 million in wealth) were 13 times more likely to be hiding assets in HSBC Switzerland than those in the bottom half of the top 1 percent of the wealth distribution (between US $2 million and US $3 million in wealth).13 Given that a household had a hidden account at HSBC Switzerland, approximately 40 percent of its wealth was held there.14 The figure is almost the same across the whole income distribution. Thus, offshore-investing tax evaders do not just dip a toe in the water when it comes to tax cheating: if they are in, they are in in a big way. On the other hand, even the top 0.01 percent of the wealth distribution had only a 1 percent probability of having an unreported HSBC account. Does that mean that the wealthy are generally law abiding and comply fully with the tax law? Not likely: HSBC Switzerland is just one bank in a tax haven, and it “managed around 2% of the wealth held offshore globally at the time of the leak.”15 HSBC Switzerland had no particular focus on Scandinavia. In particular, Scandinavian residents owned about 1 percent of the wealth held at HSBC Switzerland and 1 percent of all the wealth held in all Swiss banks.16 This point is discussed further below. To support generalizations beyond HSBC Switzerland, the authors examined two other data sources of lesser value, on the basis that those data might provide useful corroboration. One source was the Panama papers leak, from the law firm Mossack Fonseca. It has three main drawbacks: (1) beneficial owners are not provided in this data set, so the authors instead worked with data on the owners of the shell companies set up by the law firm; (2) the authors were unable to offer any evidence that these households used the shell companies to evade tax, since investigation by governments is ongoing; and (3) there are only 165 Scandinavian households involved (less than one-third of the sample with HSBC accounts).17 Still, the wealth distribution pattern is similar: very few households that owned Mossack Fonseca shell companies were in the bottom 99.9 percent of the wealth distribution, while the probability reached 1.2 percent in the top 0.01 percent of the wealth distribution.18 The authors

13 At 12 and 32, figure 1. 14 At 33, figure 2. 15 At 12. 16 At 6. 17 At 8. 18 At 13. 268 n canadian tax journal / revue fiscale canadienne (2019) 67:1 infer that wealth concealment using shell corporations might be a more sophisticated form of tax avoidance than owning offshore bank accounts. The other corroborating data set examined by the authors consisted of households in Norway and Sweden that had declared hidden wealth to the tax authorities in return for reduced penalties. This has the advantage of being a large sample (8,200 households versus 520 for HSBC Switzerland and 165 for the Panama papers) and, by definition, tax evasion is involved. The main drawback of the sample is that there might be different incentives for people at different wealth levels to participate in an amnesty. Empirically, the authors find that the probability of hiding assets at HSBC Switzerland and the probability of participating in an amnesty are remarkably similar. The more striking finding, as compared with the results for the Panama papers, is the high absolute rate of participation in the amnesty at the top end of the wealth distribution: fully 14 percent of the top 0.01 percent of the wealth distribution dis- closed assets in a tax amnesty between 2009 and 2015.19 On average, these evaders hid close to one-third of their wealth, a little lower than the proportion hidden by households with HSBC Switzerland accounts (40 percent). That is a lot of tax evaders, and a lot of tax evasion. The key piece of data contributed by the tax amnesty analysis is that tax evaders did not appear to especially favour HSBC Switzerland: about 99 percent hid assets in other offshore banks.20 Thus, to determine the proportion of the wealth of top-end households who hide wealth, one could scale up the proportion of the top 0.01 percent who hide wealth in HSBC Switzerland (about 1 percent) by the ratio of total offshore wealth to HSBC-managed wealth (about 50:1). To take this further, bring in the proportion of the total household wealth assumed to be hidden (about 40 percent for HSBC accountholders) and some rate-of-return assumptions, and one can estimate the proportion of tax evaded. As a benchmark scenario, the top 0.01 percent in Scandinavia evade 25 percent of their true income tax liability through tax havens.21 This is far higher than the percentage of tax believed to be evaded by the general population through the use of offshore investments (0.6 percent).22 One would reach for a high-marginal-rate explanation of this behaviour among high-wealth households, but taxes on capital income are low in Scandinavia. Further, tax morale is believed to be high in Scandinavia—there is not the culture of tax evasion observed in some parts of the world. So how can one explain the high evasion rate? Clearly, it is easier to hide income from wealth than it is to hide income from labour, but the authors take a different tack. Their view is that previous scholars have focused too much on the demand for tax-evasion services and have ignored

19 At 13. 20 At 15. 21 At 17. 22 At 18. current tax reading n 269 factors affecting the supply of these services. The authors argue that there is a wealth-concealment industry that primarily targets very wealthy customers, and they present a model to make the argument more rigorously. Given this causal analysis, the authors’ prescription for policy remedies is that governments should stop focusing on increasing penalties on evaders and start focusing on increasing the sanctions on providers of tax-evasion services—which they appear to think of as financial institutions, rather than accountants and lawyers in public practice. Noting that the US government has succeeded in shutting down only three relatively small financial institutions for providing tax-evasion assistance (Wegelin, Neue Zürcher Bank, and Bank Frey), the authors argue for more focus on the biggest players: “If financial regulation ensures no bank is so big that it cannot be shut down, then tax evasion could be curbed significantly.”23 A.M.

Richard S. Collier and Joseph L. Andrus, Transfer Pricing and the Arm’s Length Principle After BEPS (Oxford, UK: Oxford University Press, 2017), 306 pages Transfer pricing has been at the centre of international tax debates in recent years and featured prominently in the base erosion and profit shifting BEPS( ) project launched by the Group of Twenty (G20) and the Organisation for Economic Co- operation and Development (OECD) in 2013. A rich body of literature examines the arm’s-length principle that is the cornerstone of transfer-pricing rules in over 100 countries. This book by Collier and Andrus adds to the literature by offering not only a rich historical account of the creation and evolution of the arm’s-length principle, but also insights on whether that principle is viable after BEPS. Collier is a professor at Oxford University; Andrus is a former head of the transfer-pricing unit at the OECD’s Centre for Tax Policy and Administration and was involved in the BEPS project. The book has eight chapters. Chapters 1 and 2 trace the emergence and development of the arm’s-length principle. Chapter 3 discusses practical application of the principle. Chapter 4 examines the practical and theoretical problems in applying the arm’s-length principle, and chapter 5 focuses on the problems regarding capital. Chapters 6 through 8 discuss how the BEPS project modified the transfer-pricing rules, merits of these modifications, and prospects for the arm’s-length principle after BEPS. Readers who are familiar with the current transfer-pricing rules may be interested in reading chapters 1 and 2. Chapter 1 explains why double taxation became a serious issue after the First World War and recounts the early work of the International Chamber of Commerce on income allocation. It also details the work of the League of Nations, including the 1923 report of the four economists (Bruins, Einaudi,

23 At 25. 270 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Seligman, and Stamp) that laid the theoretical foundation of international taxation based on economic allegiance. The 1923 report suggested that taxing rights over impersonal taxes (including corporate taxes) should be divided according to the classifi- cation of income between residence and source countries by reference to the economic allegiance approach. Chapter 1 also details the work of technical experts who were charged by the Financial Committee of the League of Nations to find “viable solutions to the problem of double taxation”24 from an administrative and practical point of view. On the basis of the then current operation of tax systems, as opposed to the work of the four economists, the 1925 technical experts’ report took the approach that business profits should be taxed in the source state, and where an enterprise carried on its activities in several states (such as through a branch, an establishment, or a stable commercial or industrial organization), the total profits would be divided among those states so that each state would tax the portion of the net income produced in its own territory. The notion of “permanent establishment” was introduced in a draft tax convention included in the 1927 report of the expanded committee of technical experts on double taxation and tax evasion. “Affiliated companies” or subsidiaries were included in the definition of permanent establishment. On the issue of allocation of profits and the creation of the arm’s-length principle to function as both a profit-allocation rule and an anti-abuse rule, chapter 1 discusses reports by Michell B. Carroll commissioned by the League of Nations. Carroll rejected the notion that subsidiaries should be treated as permanent establishments on the ground that in law a subsidiary is different from a branch, and he recommended treating each subsidiary as a separate entity for tax purposes. To prevent companies from diverting income through the use of local subsidiaries as “dummies” or “fictitious entities,” Carroll recommended an arm’s-length rule that was similar to a provision in the Canadian Income War Tax Act and the US Internal Revenue Code. The Canadian provision stipulated that

where any corporation carrying on business in Canada purchases any commodity from a parent, subsidiary or associated corporation at a price in excess of the fair market price or where it sells any commodity to such a corporation at a price less than the fair market price, the Minister may, for the purpose of determining the income of such corporation, determine the fair price at which such a purchase or sale shall be taken into the accounts of such corporation.25

24 At 18, referring to Technical Experts Report, Double Taxation and Tax Evasion—Report and Resolution Submitted by the Technical Experts to the Financial Committee (Geneva: League of Nations, 1925), document F.212. 25 At 34, quoting from the Income War Tax Act, 1917, SC 1917, c. 28, subsection 3(2), amended by paragraph 3(2)(b) of the Income War Tax Act, SC 1924, c. 46. current tax reading n 271

Carroll further recommended that branches be treated “in so far as possible as independent entities.”26 The separate accounting approach found its way into subsequent draft model conventions, but in different provisions: one for branches or permanent establishments (a predecessor of current article 7 of the OECD model tax convention) and another for subsidiaries (a predecessor of current article 9 of the OECD model).27 Chapter 2 shows the dynamic, continuous, and often dramatic evolution of the arm’s-length principle from the 1930s to 2013, especially with respect to the transfer- pricing methods, the rise of profit-based methods, and increasing complexity. The authors note the actual divergence in the approach to income allocation for branches and subsidiaries, and suggest that central to that divergence was the treatment of investment capital under articles 7 and 9 of the OECD model. The problems surrounding the treatment of capital in terms of the transfer and use of, and the rewards to, capital are discussed throughout the book, and chapter 5 is dedicated to these problems. The authors conclude that the “ALP [arm’s-length principle] does not and cannot provide an adequate platform to address important issues related to capital” and that “capital movements and the amount and mix of capital in individual members of an MNE group simply cannot be regulated by the ALP alone.”28 After examining the revision of transfer-pricing rules resulting from the BEPS project, the book suggests that the “complexities created by the BEPS outcomes, and the added tensions focused on separate entity-permanent establishment dichotomy as a result of BEPS, represent serious new problems.”29 Also, “further changes to the ALP, beyond those made in the BEPS project, will be required if the ALP is to continue to form the basis for the income allocation rules used in the international tax system.”30 These further changes must address the issues of complexity and vulner- ability to avoidance. The BEPS project has made improvements, but they are far from enough. The book ends with a warning: “Engaging with these issues is enor- mously challenging but it is not optional.”31 J.L.

26 At 35, quoting from Mitchell B. Carroll, Taxation of Foreign and National Enterprises, vol. IV, Method of Allocating Taxable Income (Geneva: League of Nations, 1933), C.425(b).M.217(b).II.A, at 177. 27 Organisation for Economic Co-operation and Development, Model Tax Convention on Income and on Capital: Condensed Version 2017 (Paris: OECD, November 2017) (https://doi.org/ 10.1787/mtc_cond-2017-en) (herein referred to as “the OECD model”). 28 At 260. 29 At 261. 30 At 263. 31 At 295. 272 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Tatiana Falcao and Bob Michel, “Scope and Interpretation of Article 12A: Assessing the Impact of the New Fees for Technical Services Article” [2018] no. 4 British Tax Review 422-40

Article 12A was added to the United Nations Model Double Taxation Convention between Developed and Developing Countries (2017).32 It allows a contracting state to impose a gross-basis withholding tax on fees for technical services paid to a resident of the other contracting state. It has no counterpart in the OECD model. In terms of the method of collection and the source rule, article 12A is like article 12 (royalties). In terms of theoretical justifications, article 12A is similar to article 7 (business profits), article 5 (permanent establishment), article 14 (independent personal services), and article 17 (artistes and sportspersons) in that the source country has the taxing rights over fees for services. The effect of this new provision is to enable the client/payer’s country and the service provider’s country to share the taxing rights when the service provider has no substantive presence (in the form of a permanent establishment or fixed base) in the client’s country. Falcao and Michel unpack article 12A in terms of its policy considerations, scope, relationship with other provisions covering services, and potential implications for taxing digital technical services. For example, they discuss the meaning of “technical services”—“services that involve the application of specialized knowledge, skill or expertise with respect to a particular art, science, profession or occupation”33—and how such fees can be distinguished from “royalties” (whether the transaction involves the use of information), from “business profits” arising from services rendered through a permanent establishment, or from fees for “independent personal services” that are professional services. The authors do not consider the possible national or global welfare cost of the withholding tax on fees for technical services or tax-planning issues. Because the gross-basis withholding tax under article 12A could be excessive for service providers that incur significant expenses, Falcao and Michel suggest that service providers may be encouraged to opt for having a permanent establishment in the client’s country in order to pay tax on a net basis. Article 12A may also act as a “powerful instrument” to tackle some of the issues arising from the digitization of the economy.34 In terms of the policy significance, the authors note the “astounding number” of treaties concluded by developing countries that have already included a provision based on article 12A.35 They applaud article 12A as a “clear first step towards more assertive source country taxation with the aim of avoiding the erosion

32 United Nations, United Nations Model Double Taxation Convention Between Developed and Developing Countries 2017 Update (New York: United Nations, 2018) (herein referred to as “the UN model”). 33 Commentary on article 12A, at paragraph 64. 34 At 439. 35 Ibid. current tax reading n 273 of the tax base and the simplification of the administration of taxes at [the] source country level.”36 J.L.

Catherine A. Brown, “Taxation and the Cross-Border Trade in Services: Rethinking Non-Discrimination Obligations” (2018) 21:2 Florida Tax Review 715-61 (http://dx.doi.org/10.5744/ftr.2018.0012) This article examines non-discrimination obligations under international-trade law and tax law. Brown argues that the non-discrimination provision in tax treaties37 permits discriminatory tax practices in the importing country because it does not cover non-resident service providers in the absence of a permanent establishment in that country. Discriminatory tax practices may include “aggressive interim withholding tax, high gross withholding tax, cumbersome administrative and compliance provisions, lack of transparency, excessive fees, and lengthy refund procedures.”38 The withholding tax under section 105 of the Canadian Income Tax Regulations is one such measure; withholding tax under the newly added article 12A of the UN model is another. These discriminatory tax measures constitute trade barriers to non-resident service providers, and thus violate trade-law principles. However, because trade law, such as the General Agreement on Trade in Services, carves out tax matters in favour of tax treaties, the problem is better addressed through reforming treaty law. Brown proposes that the non-discrimination article in tax treaties be expanded by including a minimum non-discrimination obligation in respect of non-resident service providers: “[T]he non-resident service provider would not be subject to any taxation or any requirement connected therewith that is other or more burden- some.”39 Alternatively, she proposes, the mutual agreement procedure could be expanded to permit a resident of a contracting state to use the procedure to address potentially discriminatory tax practices. These proposals seek to strike a balance between respecting tax sovereignty in treating resident and non-resident service providers differently and protecting non-resident service providers from tax measures that are arguably discriminatory. Considering the rapid growth in cross-border trade in services, including digital services, and the emerging controversies surrounding the digital services tax that targets predominantly US-based firms, tax discrimination is an important issue. This article offers some interesting ideas to reduce tax discrimination. J.L.

36 At 440. 37 OECD model, supra note 27, article 24; UN model, supra note 32, article 24. 38 At 718. 39 At 753. Appendix A (at 759) contains a proposed non-discrimination obligation to be added to article 24 of the OECD model, supra note 27, or the UN model, supra note 32. 274 n canadian tax journal / revue fiscale canadienne (2019) 67:1

Bernardin Akitoby, Anja Baum, Clay Hackney, Olamide Harrison, Keyra Primus, and Veronique Salins, Tax Revenue Mobilization Episodes in Emerging Markets and Low-Income Countries: Lessons from a New Dataset, IMF Working Paper no. WP/18/234 (Washington, DC: IMF, November 2018), 44 pages Raising enough tax revenue is important in any country, and particularly critical in low-income countries and emerging markets. In fact, the capacity to mobilize tax revenue is at the core of state building and development. But how to mobilize sufficient tax revenue is a difficult question. This article seeks to answer that question through a novel data set that covers 55 episodes of large tax revenue increases (an average increase in the ratio of tax to gross domestic product of 0.5 percent per year over three years or more) in low-income countries and emerging markets. Two of the main findings (which are not surprising) are that many countries pursued tax administration and tax policy reforms in parallel, and many countries focused on indirect taxation. The authors also observe that a high-level political commitment and buy-in from all stakeholders were crucial. J.L.

Ruth Mason and Leopoldo Parada, “Digital Battlefront in the Tax Wars” (2018) 92:12 International Tax Notes 1183-97

Wei Cui, “The Digital Services Tax: A Conceptual Defense,” October 26, 2018, 28 pages (https://papers.ssrn.com/sol3/papers.cfm?abstract_id= 3273641) (https://dx.doi.org/10.2139/ssrn.3273641)

A digital services tax (DST) was proposed by the EU Commission as a short-term solution to the problem of taxing digital businesses that have no physical presence in the European Union.40 It is not an income tax and thus is neither covered by tax treaties nor creditable in the taxpayer’s country of residence. The proposed 3 percent DST applies to taxable revenue from certain digital services, such as advertising, making available to users a multi-sided digital interface, and the transmission of data collected about users and generated from users’ activities on digital interfaces. The tax targets companies that earn revenue from users in the European Union in excess of a defined threshold—specifically, a company whose worldwide revenue exceeds €750 million and whose taxable revenue obtained within the European Union exceeds €50 million in a financial year.

40 The proposed long-term solution involves the adoption of a “significant digital presence” jurisdictional nexus test and the determination of taxable profit under the proposed common consolidated corporate tax base. See European Commission, Proposal for a Council Directive on the Common System of a Digital Services Tax on Revenues Resulting from the Provision of Certain Digital Services, COM (2018) 148 final (Brussels: European Commission, March 21, 2018) (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018PC0148& from=EN). current tax reading n 275

Mason and Leopoldo take the position that using size-based taxability thresholds could constitute a covert illegal nationality discrimination that violates the fundamental freedoms protected by EU law if the effect of those thresholds is to disproportionately tax foreign companies while disproportionately exempting smaller domestic companies. For example, if France imposed the DST on an Irish subsidiary of a US company but not on a French company, it would violate EU law. In fact, the DST has been known as a tax on American companies such as Google, Amazon, Netflix, and Airbnb. Mason and Leopoldo provide an analytical framework that could be used by the European Court of Justice in challenges to size thresholds set out in the DST. Cui is sympathetic to the view of the EU taxation commissioner that “digital taxation is no longer a question of ‘if’—this ship has sailed.”41 Cui offers location-specific rent as a conceptual defence of the DST. In his view, digital platforms generate location- specific rent in both producer and consumer countries. The rent is attributed to a country because it arises from users residing there. The DST seeks to capture such rent by taxing gross revenue. As to the optimal technical design of the DST as a turnover tax, while acknowledging the need for further investigation, he dismisses claims that traditional corporate profit accounting combined with the arm’s-length principle is superior to the DST. In this respect, Cui’s position differs from that of the European Union (and the UK government, which has imposed a similar DST) that the DST is a temporary solution before a long-term, presumably better, solution is found within the architecture of corporate income tax regime coordinated by tax treaties. He regards the DST as a tax on a new tax base created by digital platforms. This new type of tax is not necessarily inefficient in taxing loss-making companies because, among others, digital platforms enjoy low marginal costs of production. Cui even suggests that the DST may enhance efficiency by deterring excessive entry and market fragmentation in natural monopoly contexts. As to the need for international coordination, Cui argues that a DST requires less treaty-based coordination because the producer country typically allows a deduction for the DST under its domestic law, and that there is no clear evidence that treaty-based coordination would make the tax more efficient. J.L.

Ivan O. Ozai, “Tax Competition and the Ethics of Burden Sharing” (2018) 42:1 Fordham International Law Journal 61-100 Existing literature on tax competition has typically explained why nation states engage in tax competition, when such tax competition is “harmful” to other countries, and what the implications are for the level of social welfare of developed countries and economic development of developing countries. This article adds to the literature

41 Cui, at 3, citing “Keynote Speech by Commissioner Moscovici at the ‘Masters of Digital 2018’ Event,” European Commission Press Release no. SPEECH/18/981, February 20, 2018. 276 n canadian tax journal / revue fiscale canadienne (2019) 67:1 by showing that the ethical analysis of tax competition should include the sharing of the burden of curbing tax competition. The author takes the position that curbing tax competition produces winners (typically large and powerful countries whose tax base is protected) and losers (typically small island economies that have specialized in hosting offshore finance centres, often encouraged by international organizations), thus creating “costs for some countries while favouring others.”42 He suggests that all countries have the ethical obligation to share such costs, and that normative principles can be similar to those applicable to the sharing of costs of curbing climate change. Instead of providing definitive answers on how to share the burden, the author focuses on the moral justifications and normative principles, including the responsible- party-pays principle, the beneficiary-pays principle, and the ability-to-pay principle. All principles lead to the conclusion that rich developed countries have moral obligations to share the costs. The responsible-party-pays principle is based on the reparative justice idea, requiring countries that are responsible for tax competition to bear the cost of curbing tax competition. Who is responsible for tax competition? The author suggests that it is not just low-tax countries, but also the existing international tax regime created by the League of Nations and developed countries that adopt tax policies in favour of tax competition. Under the beneficiary-pays principle, a retrospective or prospective beneficiary of tax competition should pay for the costs of curbing tax competition. The author explains that prospective winners of curbing tax competition are rich developed countries. From a political viewpoint, requiring winners from curbing tax competition to compensate losers is helpful to creating a global solution and is more just. The ability-to-pay principle that has been relied on to share the tax burden among citizens of one country can be extended to sharing the burden among countries. The author acknowledges the challenges in applying the principle, such as how to measure intercountry inequality. Owing to the complexity of the problem of tax competition, the author suggests that no single principle is adequate. Since the international institutional reforms tend to reproduce the existing imbalance in global power, in the absence of explicit consideration of the ethics of burden sharing, low-tax developing countries would end up bearing most of the cost of curbing tax competition. That would not achieve fairness. Conceptualizing curbing tax competition as a parallel to combating climate change in terms of the moral issues and principle-based solutions is an interesting approach. It is unclear how insights from climate change literature can inform international tax reforms. One can imagine that the respective international legal regimes are significantly different in the areas of climate change and taxation. There are practical, technical, and political challenges in reforming a century-old international tax system. Fresh reform ideas are always a good thing. J.L.

42 At 79. current tax reading n 277

Joel Wood, “The Pros and Cons of Carbon Taxes and Cap-and-Trade Systems” (2018) 11:30 SPP Briefing Papers [University of Calgary School of Public Policy] 1-19 (https://doi.org/10.11575/sppp.v11i0.52974) This paper considers the pros and cons of carbon tax, cap-and-trade, and a hybrid of carbon tax and cap-and-trade as policy instruments that can be used by Canadian provinces to reduce greenhouse gas emissions. At present, British Columbia has a carbon tax, Quebec (and Ontario until the recent change of government) uses a cap- and-trade regime, and Alberta has a hybrid—carbon tax for smaller emitters and cap-and-trade for large industrial emitters. According to the author, all three instruments can “satisfactorily achieve emissions reductions.”43 The pros and cons of each instrument can be assessed in terms of its impact on economic competitiveness and other considerations, such as carbon-pricing certainty, impact on innovative research into cleaner technologies, complexity and cost effectiveness, visibility to consumers, and the amount of revenue that the instrument can generate. Under the criterion of economic competitiveness, a cap-and-trade policy is more advantageous because tradable emissions permits can be allocated so as to minimize the negative effects on competitiveness. Under other criteria, a carbon tax is superior. The author suggests that provincial governments consider and weigh the pros and cons of each instrument in light of their province’s economic and emissions profile. J.L.

Kristina L. Novak, Mark P. Thomas, and Cym H. Lowell, “United States: Treatment of Intangibles Under New US Tax Regime” (2018) 25:4 International Transfer Pricing Journal 259-66 One of the most challenging issues in international taxation is the treatment of intangibles (IP) that are the crown jewels of MNEs. These challenges pertain to the identification and characterization of IP, valuation of IP, determination of return on IP, and allocation of IP income to involved jurisdictions. As a result, IP income can be highly mobile for tax purposes. The G20/OECD BEPS project (actions 8-10 and 13) and the subsequent updates to the OECD transfer-pricing guidelines have de-emphasized the importance of legal ownership and intra-firm contractual arrangements in allocating IP income, but these measures have also increased complexity and, arguably, uncertainty, and have remained in the traditional arm’s-length framework.44 The United States has been cool to the BEPS project and introduced its own measures on IP as part of the Tax Cuts and Jobs Act (“the 2017 US Tax Act”) to enhance and protect the US tax base. These measures may have the effect of simpli- fying the US taxation of IP and setting a new direction that cannot be ignored by other countries. This article provides a succinct overview of these measures.

43 At summary. 44 See Richard S. Collier and Joseph L. Andrus, Transfer Pricing and the Arm’s Length Principle After BEPS, reviewed earlier in this feature. 278 n canadian tax journal / revue fiscale canadienne (2019) 67:1

The authors note the expansion of IP by the 2017 US Tax Act. The amended definition of “intangibles” in the Internal Revenue Code IRC( ) includes “any goodwill, going concern value, or workforce in place . . . or any other item the value or potential of which is not attributable to tangible property or the services of any individual.”45 The authors note that the 2017 US Tax Act also authorizes the US tax authority to utilize aggregate or realistic alternative IP valuation techniques, a provision that was “plainly intended to validate a US Tax Authority litigation strategy rejected by the courts”46 in cases such as Amazon.com Inc. v. Comm.47 The notion of IP income introduced in the 2017 US Tax Act is based on the distinction between the return to routine functions and the return to non-routine functions: IP income is deemed to be the margin in excess of a normative return of 10 percent on tangible assets. It is reflected in the “global intangible low-taxed income” (GILTI) regime.48 Furthermore, conceptually, GILTI is viewed similarly to passive investment income and taxed under a regime like the controlled foreign corporation (CFC) rules, albeit at half of the standard US corporate tax rate. In terms of allocating IP income to the United States, the authors explain that the GILTI rules reflect, in effect, a 50-50 profit split with the foreign country. They state that “the GILTI rules do not declare that the underlying transfer pricing is wrong” but “[r]ather they simply provide that the US will tax some of this return under a CFC model (with a 50% deduction and 80% FTC [foreign tax credit] for US entities [that are not passthrough entities].”49 The foreign-derived intangible income (FDII) rules are intended to provide an incentive for the location of economic activity in the United States through providing a lower effective tax rate of 13.125 percent (as opposed to the standard rate of 21 percent). According to the authors, the base erosion and anti-abuse tax (BEAT) has the practical impact of imposing a 10 percent minimum tax on US-based companies in respect of base-erosion payments to related non-US parties. BEAT “also fits into a model of imposing a 50-50 or so profit-split on the combined income arising from US economic activities (without any modification of transfer pricing methodologies or further definition of ‘intangibles’).”50 As to the future posture of the arm’s-length standard, embodied in IRC section 482, the authors are of the view that it is “under a cloud of suspicion,”51 and tax planners should take note of the 50-50 profit-split theory adopted by the 2017US Tax Act in order to protect the US tax base. The authors point out the impact of the GILTI, FDII, and BEAT rules as follows:

45 At 260, referring to section 936(h)(3)(B) of Internal Revenue Code of 1986, as amended. 46 Ibid. 47 148 TC 8 (2017). 48 At 261. 49 Ibid. 50 At 263. 51 At 265. current tax reading n 279

These provisions are not specifically framed in terms of exceptions to the arm’s length principle or definition of “intangibles” of the OECD Guidelines or Section 482 of the US Code. On the other hand, they certainly reflect aUS Congressional conclusion that the existing transfer pricing and related principles of US law are not, on their own, sufficient to protect theUS tax base from aggressive ETR [effective tax rate] Strategies of MNEs. These mechanisms could be viewed as introducing an underlying “intangible” in the form of a price to be paid for access to the US marketplace. It can certainly be anticipated that other countries will continue to protect their own tax bases. If other countries embraced the same mechanisms, there would likely be many years of serious bilateral and multilateral controversy. This may, in the end, lead to the development of [a] new global standard.52 J.L.

52 At 265-66.