The average corporate tax rate in Canada is now below the average U.S. tax rate, and will be more than 6 percentage points lower by 2008.
Small businesses: Significantly lower corporate tax rates in Canada than in the U.S. on annual income above C$75,000. Similar corporate tax rates in Canada and the U.S. on income below C$75,000.
Capital gains: A $500,000 lifetime capital gains exemption for small business shares that has no equivalent in the U.S.
Research and development: A 20-per-cent research and development (R&D) tax credit in Canada for all R&D expenditures compared to the U.S. 20-per-cent credit for incremental R&D.
A 35-per-cent refundable tax credit available to smaller Canadian- controlled private corporations that has no equivalent in the U.S.
Background
In Budget 2003 the Government of Canada announced measures to strengthen the Canadian tax advantage. These measures build on the Five-Year Tax Reduction Plan introduced in 2000―the largest tax cut in the country’s history. The plan reduced personal income tax rates at all income levels and introduced a number of tax measures to promote investment and entrepreneurship in Canada.
Lower Corporate Taxes
Large and Medium-Sized Businesses
The average (federal-provincial) Canadian corporate tax rate, including capital taxes, is now lower than that of the U.S.
In the 2003 budget the Government announced the elimination of the federal capital tax over five years. The tax will be completely eliminated for medium-sized corporations as early as 2004.
By 2008, taking into account announced reductions in provincial tax rates, the average Canadian corporate tax rate will be more than 6 percentage points below the average U.S. rate (see table at the end of document).
Small Businesses
Although average corporate tax rates in Canada and the U.S. are similar on annual income up to C$75,000, they are significantly lower in Canada on income above that amount. In the 2003 budget the Government added to this advantage by announcing that the annual amount of income eligible for the low small business tax rate of 12 per cent would be increased from $200,000 to $300,000 over four years.
Start-up companies and entrepreneurs in Canada can already benefit from several tax provisions that are more advantageous than what is available in other countries. These provisions include a $500,000 lifetime capital gains exemption, tax-free rollovers, and generous R&D tax credits.
Resource Sector
The Government is improving the taxation of the resource sector in Canada, comprising the mining and oil and gas industries, by reducing the corporate tax rate for resource income from 28 to 21 per cent over five years while making improvements to the tax structure.
Research and Development
Canada offers one of the most generous scientific research and experimental development tax incentive regimes in the world.
Eligible R&D expenditures qualify for a 20-per-cent R&D credit, while smaller Canadian-controlled private corporations benefit from a 35-per-cent refundable tax credit on eligible R&D expenditures.
Canada-U.S. Corporate Tax Rate Comparisons - Current and Proposed
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2003 2008
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(%)
Canada
Federal income tax rate
General rate 23.00 21.001
Surtax2 1.12 1.12
24.12 22.12
Provincial average income tax rate3 12.0 9.8
Federal-provincial income tax rate 36.1 31.9
Federal-provincial corporate tax rate (including capital taxes)4 39.4 33.8
United States
Federal income tax rate 35.0 35.0
Average state income tax rate5 4.0 4.0
Federal-state income tax rate 39.0 39.0
Federal-state corporate tax rate (including capital taxes) 40.0 40.0
Difference between Canada and United States
Income tax rate -2.9 -7.1
Corporate tax rate (including capital taxes) -0.6 -6.2
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1 The federal tax rate will drop to this level in 2004.
2 The federal surtax remains at 1.12 per cent (i.e. 4 per cent of the 28-per-cent rate).
3 The provincial average income tax rate is a weighted average.
4 The income tax rate equivalent of capital taxes has been included.
5 The state income tax rate is the effective rate after taking into account the deductibility of state taxes for federal tax purposes.
Federal Corporate Tax Rate Reductions
The Government of Canada is creating a tax advantage for investment and entrepreneurship in Canada. The average Canadian corporate tax rate, including capital taxes, is now lower than that of the U.S. By 2008 it will be more than 6 percentage points below the average U.S. rate.
Background
In Budget 2003 the Government of Canada announced measures to strengthen the Canadian tax advantage. These measures build on the Five-Year Tax Reduction Plan introduced in 2000―the largest tax cut in the country’s history. The plan reduced personal income tax rates at all income levels and introduced a number of tax measures to promote investment and entrepreneurship in Canada. (See end of document for a list of tax reduction measures.)
Tax Rate Reductions for Larger Corporations
In 2000 the Government of Canada announced that the general corporate tax rate would be reduced from 28 to 21 per cent by 2004. As of January 2003 the rate has been reduced to 23 per cent. As the table below illustrates, the rate reduction is being phased in over four years.
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2000 2001 2002 2003 2004
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(%)
General federal corporate tax rate 28 27 25 23 21
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Elimination of the Federal Capital Tax
In the 2003 budget the Government announced the elimination of the federal capital tax over five years. Medium-sized businesses with less than $50 million in taxable capital will benefit from full capital tax elimination as of 2004. The table below summarizes the proposed changes to the federal capital tax rate and threshold.
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2003 2004 2005 2006 2007
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Federal capital tax rate (%) 0.225 0.200 0.175 0.125 0.0625
Capital deduction threshold ($ millions) 10 50 50 50 50
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Improving the Income Taxation of the Resource Sector
In the 2003 budget the Government announced that it would improve the taxation of resource income by phasing in over five years:
a reduction of the federal statutory corporate tax rate on income from resource activities from 28 to 21 per cent;
a deduction for income tax purposes of actual provincial and other Crown royalties and mining taxes paid, and elimination of the existing 25-per-cent resource allowance; and
a new tax credit at a rate of 10 per cent for corporations incurring qualifying mineral exploration expenditures in Canada.
The table below shows how the new structure will be phased in:
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2003 2004 2005 2006 2007
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(%)
Corporate income tax rate for the resource sector 27 26 25 23 21
Deductible percentage of existing 25% resource allowance 90 75 65 35 0
Deductible percentage of Crown royalties and mining taxes 10 25 35 65 100
New tax credit for mineral exploration in Canada 5 7 10 10 10
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For Further Information
For general information about federal tax cuts, visit the Department of Finance Canada Web site at
www.fin.gc.ca. Information is also available from the Canada Customs and Revenue Agency (CCRA): visit the CCRA’s Tax Web page at
http://www.ccra-adrc.gc.ca/tax/menu-e.html; or phone your local tax services office (
www.ccra.gc.ca/tso) or the CCRA’s toll-free general enquiries line at 1 800 959-8281.
This is part of a series of bulletins designed to give Canadians useful information about individual elements of the federal government’s Five-Year Tax Reduction Plan introduced in 2000. Bulletins on tax measures and other publications may be viewed on the Web at
www.fin.gc.ca, and copies may be obtained by calling the Department of Finance Canada Distribution Centre at (613) 995-2855.
About the Department of Finance Canada’s Tax Bulletin Series
Below is a list of the tax measures included in the plan:
Full indexation of the personal income tax system was restored as of January 1, 2000, to protect taxpayers from inflation.
Personal income tax rates for all taxpayers were lowered effective January 1, 2001.
The Canada Child Tax Benefit (CCTB) was substantially increased to help low- and middle-income families with children.
Additional tax assistance was provided to those who need it most, including persons with disabilities and caregivers.
Tax support for students in post-secondary education was substantially increased.
The 28-per-cent general corporate income tax rate has been reduced to 23 per cent in 2003, and will fall to 21 per cent in 2004.
The capital gains inclusion rate was reduced to one-half as of October 18, 2000.
Employees may defer the income inclusion from exercising certain employee stock options in publicly listed corporations until the shares are sold.
Individuals may defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares.
As of January 2001, self-employed individuals may deduct the portion of Canada Pension Plan and Quebec Pension Plan contributions that represents the employer’s share.
Under the plan, further measures have been legislated that will provide tax relief in 2004. These measures will:
increase the basic personal amount (the amount an individual can earn tax-free) to at least $8,000 (from $7,756 in 2003);
increase the spouse or common-law partner amount to at least $6,800 (from $6,586 in 2003);
raise the second bracket threshold to at least $35,000 (from $32,183 in 2003);
raise the third bracket threshold to at least $70,000 (from $64,368 in 2003); and
raise the fourth bracket threshold to at least $113,804 (from $104,648 in 2003).
In the 2003 budget the Government announced additional measures that build on the plan and the Canadian tax advantage:
The National Child Benefit supplement of the CCTB, which provides assistance to low-income families with children, is being increased.
A new Child Disability Benefit for low- and modest-income families with a child with a disability is being introduced.
Tax assistance for persons with disabilities will be enhanced.
The limits on tax-assisted savings in registered pension plans and registered retirement savings plans are being increased.
The federal capital tax will be eliminated over five years, and will be completely eliminated for medium-sized corporations in 2004.
The taxation of resource income will be improved by reducing the corporate tax rate of the sector to 21 per cent over the next five years while making changes to the tax structure of this key sector.
The amount of annual income eligible for the 12-per-cent small business tax rate is being increased from $200,000 to $300,000 over four years.
The small business capital gains rollover measure has been enhanced by removing the $2-million limits on the amount of the original investment and reinvestment that may be eligible for the deferral, and extending the length of time available to make a qualifying investment.
The first wave of tax cuts introduced in the budget's five-year, $58-billion tax reduction plan includes the following measures:
full indexation is restored to the personal income tax system, retroactive to January 1, 2000;
the middle tax rate falls to 24 per cent from 26 per cent;
the 5-per-cent deficit reduction surtax is eliminated on incomes up to about $85,000 and reduced for all others; and
maximum annual payments under the Canada Child Tax Benefit will increase by about $250 per child.
In Budget 2000, the Government of Canada set out a five-year tax plan that will deliver cumulative tax reductions of at least $58 billion. Starting in July 2000, the following budget measures will begin to be reflected in the pay cheques and benefits that Canadians receive.
Restoring Full Protection Against Inflation in the Tax System
The Government has restored full indexation to the personal income tax system to protect taxpayers against automatic tax increases caused by inflation. In addition to ending "bracket creep," this measure ensures that the value of payments that Canadians receive under the Canada Child Tax Benefit and the goods and services tax credit is not eroded by inflation. Indexation took effect as of January 1, 2000, but July is the month in which it will begin to be reflected in the pay cheques and benefits Canadians receive.
Reducing the Middle Tax Rate
The middle tax rate will drop to 24 per cent from 26 per cent. For individual taxpayers, this represents federal income tax savings of up to $600 per year.
Under the Five-Year Tax Reduction Plan announced in the 2000 budget, the middle rate will fall to 23 per cent by 2004 at the latest.
Reducing the 5-Per-Cent Surtax
The 5-per-cent deficit reduction surtax will be eliminated for incomes of up to about $85,000 and reduced for all others.
Under the Five-Year Tax Reduction Plan, the surtax rate will fall to 4 per cent from 5 per cent in January 2001, and it will be completely eliminated by no later than 2004.
Increasing the Canada Child Tax Benefit
Starting in July, maximum annual payments under the Canada Child Tax Benefit (CCTB) will rise by about $250 per child as a result of measures announced in the last two budgets. For a first child, the maximum total benefit under the CCTB will rise from $1,805 annually to $2,056. To provide families with the value of indexation for January to June 2000, an additional amount of $25 will be added, bringing the maximum payment for a first child to $2,081.
Under the Five-Year Tax Reduction Plan, the maximum total benefit will rise to $2,400 for a first child by 2004 at the latest.
In Budget 2000, the Government of Canada set out a five-year tax plan that will deliver cumulative tax reductions of at least $58 billion. This plan is designed to leave more money where it belongs ? in the pockets of Canadians.
Starting in July, Canadians will see the benefits of the tax reduction plan on their pay cheques and in the benefits they receive as a result of the following measures:
The Government has restored full indexation to the personal income tax system to protect taxpayers against inflation. In addition to ending bracket creep, this measure ensures that the value of the Canada Child Tax Benefit (CCTB) and goods and services tax credit is not eroded by inflation. Indexation took effect as of January 1, 2000, but July is the month in which it will begin to be reflected in the pay cheques and benefits that Canadians receive.
The middle tax rate will drop to 24 per cent from 26 per cent.
The 5-per-cent deficit reduction surtax will be eliminated for incomes of up to about $85,000 and reduced for all others.
In addition, beginning July 1, maximum annual payments under the CCTB will rise by about $250 per child as a result of measures announced in the last two budgets.
Here are some examples of how Canadians will benefit this year and over the next four years as a result of these measures:
As of July, a one-earner family of four with an annual income of $40,000 will be better off by about $45 per month partly because of lower taxes and partly because of CCTB increases. In 2001, this family will save $582. In the year 2004, the annual tax relief will rise to $1,623.
As of July, a two-earner family of four with an annual income of $60,000 will be better off by about $38 per month partly because of lower taxes and partly because of CCTB increases. In 2001, this family will save $501. In the year 2004, the annual tax relief will rise to $1,546.
Promoting Entrepreneurship and Small Business
Entrepreneurs and small businesses are a key source of jobs and economic growth in Canada. The Government is strengthening support for this sector by reducing taxes on small business income and capital gains.
Background
In Budget 2003 the Government of Canada announced measures to strengthen the Canadian tax advantage. These measures build on the Five-Year Tax Reduction Plan introduced in 2000―the largest tax cut in the country’s history. The plan reduced personal income tax rates at all income levels and introduced a number of tax measures to promote investment and entrepreneurship in Canada. (See end of document for a list of tax reduction measures.)
Tax Rate Reductions for Small Business
In the 2003 budget the Government announced an increase in the amount of annual income eligible for the 12-per-cent small business rate from $200,000 to $300,000. The increase will be phased in over four years, starting with a $25,000 increase in the limit for 2003. This initiative builds on a measure implemented in 2001 to reduce the 28-per-cent corporate tax rate on annual business income between $200,000 and $300,000 to 21 per cent.
What About Business Income in Excess of $300,000?
Another part of the tax reduction plan is to reduce the 28-per-cent general corporate income tax rate. As of 2003 the rate has been reduced to 23 per cent, and in 2004 it will be reduced to 21 per cent. This benefits businesses of all sizes that have income that is subject to the general corporate tax rate.
Capital Gains Tax Reduction
In 2000 the Government reduced the capital gains inclusion rate from three-quarters to one-half. The inclusion rate is the portion of a capital gain that is subject to income tax.
Example―Tax Savings on Capital Gains
In 1999 an individual would have paid $2,284 at most in federal income taxes on a $10,000 capital gain. Today the maximum that the individual would pay is only $1,450―a savings of $834. The table below provides details on the tax savings.
--------------------------------------------------------------------------------
1999 Today
--------------------------------------------------------------------------------
Capital gain $10,000 $10,000
Inclusion rate three-quarters one-half
Taxable capital gain $7,500 $5,000
Federal taxes payable (before federal surtax) $2,175 $1,450
Federal surtax payable $109 Surtax eliminated
Total federal taxes payable $2,284 $1,450
Total federal tax savings $834
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Tax-Free Rollovers for Small Business
In 2000 the Government introduced a measure that allows individuals to defer the tax on capital gains from the sale of shares in an eligible small business corporation where proceeds are reinvested in another eligible small business. Specifically, to qualify for the tax-free rollover, the business may have no more than $50 million in assets immediately after the investment.
To encourage greater access to risk capital, the 2003 budget eliminated the $2-million limits on the amount of the original investment and reinvestment that may be eligible for the deferral, and extended the allowable period for the reinvestment to any time in the year of disposition or within 120 days after the end of that year.
Example―How the Tax-Free Rollover Works
Charles earns $65,000 per year and owns shares in an eligible small business corporation. He sells shares so that he can free up some cash to invest in shares of a new small business with some other partners. He realizes a $10,000 capital gain on the sale of the shares.
In 1999 three-quarters of the capital gain (i.e. $7,500) would have been taxed at the 29-per-cent top federal rate, plus the 5-per-cent federal surtax. This means that Charles would have paid $2,284 in federal income tax on the capital gain. About $1,418, on average, of provincial tax would also have been payable, leaving only $6,298 available to be invested in the new small business. In 2003, as a result of the rollover measure, tax on the capital gain would be deferred, which means that the entire $10,000 would be available to be invested in the new business.
For Further Information
For general information about federal tax cuts, visit the Department of Finance Canada Web site at
www.fin.gc.ca. Information is also available from the Canada Customs and Revenue Agency (CCRA): visit the CCRA’s Tax Web page at
http://www.ccra-adrc.gc.ca/tax/menu-e.html; or phone your local tax services office (
www.ccra.gc.ca/tso) or the CCRA’s toll-free general enquiries line at 1 800 959-8281.
This is part of a series of bulletins designed to give Canadians useful information about individual elements of the federal government’s Five-Year Tax Reduction Plan introduced in 2000. Bulletins on tax measures and other publications may be viewed on the Web at
www.fin.gc.ca, and copies may be obtained by calling the Department of Finance Canada Distribution Centre at (613) 995-2855.
About the Department of Finance Canada’s Tax Bulletin Series
Below is a list of the tax measures included in the plan:
Full indexation of the personal income tax system was restored as of January 1, 2000, to protect taxpayers from inflation.
Personal income tax rates for all taxpayers were lowered effective January 1, 2001.
The Canada Child Tax Benefit (CCTB) was substantially increased to help low- and middle-income families with children.
Additional tax assistance was provided to those who need it most, including persons with disabilities and caregivers.
Tax support for students in post-secondary education was substantially increased.
The 28-per-cent general corporate income tax rate has been reduced to 23 per cent in 2003, and will fall to 21 per cent in 2004.
The capital gains inclusion rate was reduced to one-half as of October 18, 2000.
Employees may defer the income inclusion from exercising certain employee stock options in publicly listed corporations until the shares are sold.
Individuals may defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares.
As of January 2001, self-employed individuals may deduct the portion of Canada Pension Plan and Quebec Pension Plan contributions that represents the employer’s share.
Under the plan, further measures have been legislated that will provide tax relief in 2004. These measures will:
increase the basic personal amount (the amount an individual can earn tax-free) to at least $8,000 (from $7,756 in 2003);
increase the spouse or common-law partner amount to at least $6,800 (from $6,586 in 2003);
raise the second bracket threshold to at least $35,000 (from $32,183 in 2003);
raise the third bracket threshold to at least $70,000 (from $64,368 in 2003); and
raise the fourth bracket threshold to at least $113,804 (from $104,648 in 2003).
In the 2003 budget the Government announced additional measures that build on the plan and the Canadian tax advantage:
The National Child Benefit supplement of the CCTB, which provides assistance to low-income families with children, is being increased.
A new Child Disability Benefit for low- and modest-income families with a child with a disability is being introduced.
Tax assistance for persons with disabilities will be enhanced.
The limits on tax-assisted savings in registered pension plans and registered retirement savings plans are being increased.
The federal capital tax will be eliminated over five years, and will be completely eliminated for medium-sized corporations in 2004.
The taxation of resource income will be improved by reducing the corporate tax rate of the sector to 21 per cent over the next five years while making changes to the tax structure of this key sector.
The amount of annual income eligible for the 12-per-cent small business tax rate is being increased from $200,000 to $300,000 over four years.
The small business capital gains rollover measure has been enhanced by removing the $2-million limits on the amount of the original investment and reinvestment that may be eligible for the deferral, and extending the length of time available to make a qualifying investment.
The government of Canada has put forward a set of measures that makes significant progress towards replacement of the Goods and Services Tax.
The signing of the Memoranda of Agreement between the federal government and the governments of Nova Scotia, New Brunswick and Newfoundland and Labrador marks a significant first step towards an integrated, federal-provincial sales tax. With the province of Quebec concluding the harmonization process this year, the government is committed to work with the remaining provinces to make this a national system.
The government is also introducing over 100 measures to streamline and simplify the operation of Canada's sales tax. These measures are an essential part of the new architecture of a much-improved system.
Taken together, this package constitutes a major advance in responsible sales tax reform. Consumers, taxpayers and business - particularly small business - will benefit.
House of Commons Standing Committee on Finance
In 1994, the House of Commons Standing Committee on Finance conducted an extensive review of sales tax reform options. During the review, the Committee heard from nearly 500 witnesses and received more than 700 briefs. The Finance Committee considered a wide range of alternative sources of revenue for the federal government and rejected all of them [1]. In its June 1994 report, the Committee concluded that a harmonized value-added tax was the best option. As the Committee noted, the harmonization of federal and provincial sales taxes offers key benefits to Canadians, including simplified tax compliance for business, lower administration costs through the elimination of existing overlap and duplication, and increased economic efficiency and competitiveness.
In addition, the Committee recommended a two-level approach to tax-included pricing. Under this approach, goods and services would be priced for public consumption on a tax-included basis, while receipts and invoices would show the amount of value-added tax payable or the rate at which value-added tax was charged.
Sales tax harmonization discussions with the provinces
Since the release of the Finance Committee's report, the federal government has been actively seeking agreement with provinces interested in harmonization. The harmonization agreements announced today represent a significant step towards the goal of a harmonized federal-provincial sales tax system.
Benefits of harmonization using a value-added tax model
Harmonizing federal and provincial sales taxes on the basis of a value-added tax model offers important benefits for Canadians, including:
benefits to consumers;
economic benefits resulting from the improved competitiveness of Canadian businesses;
lower compliance costs for Canadian businesses;
more efficient tax administration and the elimination of government overlap and duplication; and
the opportunity to implement a two-level approach to tax-included pricing.
Benefits to consumers
Value-added taxes largely eliminate the hidden taxes on business inputs (i.e. the items that businesses buy in order to make their products, deliver their services, and keep their businesses running), which increase consumer prices for many goods.
Replacing the current federal and provincial sales taxes with a harmonized value-added tax will:
remove distortions which increase the price of certain goods;
reduce compliance costs, thereby contributing to lower prices; and
make both the final price of a good or service and the total sales tax applied to that good or service more transparent.
Economic benefits
The key economic advantage of the value-added tax model is the improved competitiveness resulting from the reduction of indirect taxes on business inputs and lower business compliance costs. The reduction in taxes on business inputs will:
eliminate tax cascading inherent in current provincial retail sales tax systems; and
minimize distortions in investment decisions associated with the taxation of business investment in capital stock.
Elimination of sales tax cascading
Tax cascading occurs when businesses pay sales tax on goods and services used at each stage of the production and distribution chain (e.g., heat, office supplies, etc.). Businesses account for the tax paid on their inputs by increasing their price to the next buyer in the production and distribution chain. Therefore, tax cascading effectively increases prices at each stage from production to final sale to the consumer. A value-added tax removes tax on business inputs and eliminates sales tax cascading through the input tax credit (ITC) mechanism. Therefore, federal-provincial sales tax harmonization using a value-added tax model will greatly improve the productivity and competitiveness of the Canadian economy by:
lowering the tax embedded in the prices of Canadian exports, thereby increasing the competitiveness of Canadian products in international markets;
increasing the competitiveness of Canadian-produced goods vis-?vis imports;
eliminating price distortions between products that use a high percentage of taxable inputs and those that do not; and
eliminating locational distortions, where businesses seek to locate in low-tax rate jurisdictions to minimize costs and selling prices.
Elimination of distortions in investment decisions
Nationally, over one-third of provincial retail sales tax revenues are raised through the taxation of business inputs (the actual share of provincial retail sales tax paid by business varies from province to province). In addition to contributing to the problems associated with tax cascading, the taxation of business capital investment under provincial retail sales taxes hampers Canadian economic growth by making investment in Canadian industries more costly to both domestic and foreign investors. It also distorts investment choices by introducing an artificial, taxation-based variable into the decision of which province and what industry to invest in. This can lead to an allocation of capital investment based in part upon relative taxation liabilities, and may produce less than optimal gains in terms of increased employment and national wealth.
The elimination of the sales tax burden on capital investment under the harmonized federal-provincial value-added tax will ensure that the allocation of capital in Canada is optimized, resulting in a higher and more productive utilization of the country's capital resources.
Lower compliance costs for Canadian businesses
In addition to these economic benefits, federal-provincial sales tax harmonization offers other equally important benefits. In particular, the implementation of a fully harmonized federal-provincial sales tax system will represent a major simplification of the tax system for Canadian businesses. For example, businesses operating under a harmonized sales tax system would use a single set of operating rules for sales tax purposes and would be required to fill out fewer forms.
Additionally, a single tax administrator will significantly reduce the costs to business associated with complying with two or more separate sales tax systems on a daily basis. These costs are disproportionately borne by small- and medium-sized firms, which typically do not have the accounting capacity to easily cope with this additional burden.
More efficient administration/reduced overlap and duplication
Canadians are demanding that their governments become more efficient in the administration and collection of taxes. Sales tax harmonization will enable Canadian governments to greatly reduce tax administration costs by consolidating sales tax bureaucracies. The consolidation of federal and provincial sales tax administrations eliminates the costly duplication of sales tax collection and enforcement functions within governments.
More efficient administration also creates the potential for further simplifications in the tax system. For example, a fully harmonized sales tax with a single rate and a common base facilitates the development of new sales tax accounting systems, which could eliminate most of the current compliance burden on small business. Under such a system, businesses could file for all federal and provincial sales taxes and income taxes using a consolidated return.
Other benefits
A harmonized federal-provincial value-added tax will also minimize transition costs for businesses, and provide a stable and reliable source of revenue for all governments.
Measures to simplify and improve the fairness of the federal sales tax
The federal government is taking steps to make significant changes to the operation of Canada's value-added tax system to improve the fairness and efficiency of the tax and to facilitate federal-provincial sales tax harmonization. Many of these proposed changes were developed in response to concerns raised by businesses and other organizations during consultations over the last two years. The package of over 100 legislative proposals can be categorized as follows:
measures to simplify the operation of the tax for many businesses, charities and non-profit organizations;
measures to improve the fairness of the federal sales tax for businesses and consumers; and
clarifications and measures to ease compliance.
In addition, as part of the government's ongoing changes to simplify the operation of the federal sales tax for Canadian taxpayers, Revenue Canada is reducing the number of forms required to calculate sales tax in certain circumstances and is studying the harmonization of administrative measures for all federal taxes.
Simplification measures
One of the government's key priorities is to simplify the federal sales tax system. Well over one-third of the proposed modifications are aimed at achieving this goal. Extensive consultations were undertaken with businesses and public sector organizations to find ways to substantially simplify the tax as it applies to businesses and public sector bodies. The proposed measures include:
a simplified treatment of used goods;
streamlining the tax treatment of charities and non-profit organizations - fewer charities and non-profit organizations will be required to register and administer the federal sales tax; and
simplifying the calculation of employee benefits - enabling businesses to make a one-step calculation of tax using the same information generated for income tax purposes.
Fairness measures
The government is committed to restructuring the federal sales tax system to make it fairer for Canadians. The proposed measures will accomplish this by ensuring competitive equity between businesses and increasing the fairness of the tax for consumers. Proposals included in this category are:
a variety of measures to enhance the international competitiveness of Canadian service providers;
changes in the tax treatment of certain health care services; and
fairer application of housing rebates.
Clarifications and measures to ease compliance
The package of changes to the federal sales tax also includes proposals to clarify the application of the tax and to ease compliance for businesses. These changes will ensure that the federal sales tax is clear in its application and does not contain measures that unnecessarily complicate administration. The proposed measures include:
clarifications of certain educational services - e.g., the definitions of "public college", "vocational school", and the tax treatment of university meal plans;
streamlining the administration of tourist rebates and extending the eligibility for rebates to businesses; and
clarification of the application of the federal sales tax to trustee services, personal trusts, trustee liabilities and obligations and estates as well as changes to existing partnership rules.
Harmonized administrative measures
During the next year, the Minister of Finance and the Minister of National Revenue will work together to develop legislative proposals to harmonize accounting, interest, penalty and related administrative and enforcement provisions of the various federal taxing statutes, including the Excise Tax Act, Excise Act, Income Tax Act, Customs Act, Customs Tariff and Special Import Measures Act. The purpose of this initiative is to simplify the payment of taxes and the processing of returns for taxpayers and Revenue Canada
