What’s more, the pressure continues to mount:
- Canada’s 2025 federal budget projected additional revenue of $1.2 billion annually from strengthening tax compliance and debt collection, combined with new audit powers for the CRA.
- Revised transfer pricing guidelines signal a continued focus on aggressive CRA auditing. This provides recharacterization opportunities under much broader concepts of economically relevant statistics. That means CRA audit teams don’t have to start with the legal arrangement, but instead they may shift towards substance over form and broader consideration of relevance.
- New audit powers on obtaining domestic and foreign information enable the CRA to suspend the statute of limitations and impose monetary penalties.
- Although a comprehensive expenditure review aimed to reduce government spending by 15% cumulatively over three years, more than half of the CRA’s savings are booked to be reinvested in operations. That means there will be very little overall net reduction in this space.
- The CRA has no legislative authority for discretionary settlements. The agency must be principled when resolving disputes under domestic law. This provides limited flexibility to negotiate, especially compared to international double taxation cases under the MAP article in tax treaties.
Taken together, these audit trends and new developments could increase tax risk, chipping away at tax certainty in Canada at a time when the country needs to attract and retain more capital investment. This makes it more difficult for corporations to plan ahead in an already complex market.
Case in point: in January, the EY-Parthenon CEO Outlook Survey showed that persistent geopolitical uncertainty and uneven economic momentum are intensifying the imperative to reimagine the enterprise further and faster. That includes accelerating progress along the AI adoption curve to improve organizational adaptability.
Although Canadian CEOs remain more optimistic than their global counterparts, confidence has dipped since the survey’s previous iteration last September. Increasing tax uncertainty adds another layer to navigate when businesses here are already facing competing priorities and evolving challenges.
Fostering confidence in an evolving tax landscape
In the current business environment, tax leaders need to stay on top of breaking developments and keep their operational and C-suite leaders apprised of tax trends and strategic implications.
Granted, there are opportunities for improvement if the government decides to seize them. Canada could benefit from a comprehensive tax review designed to simplify and streamline tax legislation. By eliminating tax expenditures that don’t achieve intended policy objectives, Canada could broaden the tax base, putting downward pressure on tax rates in a revenue-neutral way.
This would give Canada a greater tax competitive edge and bolster the nation’s attractiveness as an investment destination of choice from the tax policy perspective. For example, the same EY-Parthenon survey showed Canadian CEOs already consider Canada their top investment destination; globally, peers rank Canada second among the world’s destinations of choice. That’s strong sentiment and momentum the country can build on.
On the personal income tax side, Canada could improve its competitive advantage in attracting and retaining top-skilled talent by considering lowering the highest marginal tax rate as well as the taxable income threshold at which it kicks in for individuals. Shifting government tax revenues away from income taxes and more towards consumption taxes — which have lower compliance costs and are less distortionary — may also help Canada improve its overall productivity.
And, as we anticipate significantly more tax disputes on the international front, more mandatory binding arbitration applicable to MAPs could help resolve disputes and eliminate double taxation more quickly.
That said, tax professionals will want to take proactive steps in the face of so much change — even as we wait to see what unfolds over the coming two to five years.
Contributor
Tony Pampena, Partner, Tax
