Canadian 2009 Budget Announced

by Mike Godfrey, Tax-News.com, Washington

29 January 2009

Canadian Finance Minister, Jim Flaherty announced a number of tax changes in his 2009 budget speech to parliament on Tuesday afternoon, targeted towards business and individual taxpayers, and designed to provide stimulus to the economy.

Budget 2009 builds on business tax relief provided since 2006. Businesses will benefit this year from previously legislated reductions in the corporate income tax rate to 19% in 2009, and going forward, the further reductions to 15% by 2012. The budget also provides some CAD20bn (USD16.4bn) in personal income tax relief this year and in the subsequent five years. The main business changes are summarized below:

Small business

To further support the growth of small businesses, budget 2009 proposes to increase from CAD400,000 to CAD500,000 the amount of small business income eligible for the lower 11% tax rate.

Manufacturing and Processing

Budget 2009 provides further assistance for Canada's manufacturing and processing sector by extending the temporary 50% straight-line accelerated capital cost allowance (CCA) rate to investment in manufacturing or processing machinery and equipment in 2010 and 2011. This will further assist the manufacturing and processing sector in restructuring and retooling to meet the current economic challenges and position itself for long-term success.

Capital Cost Allowance Rate for Computers

In light of the economic slowdown, Budget 2009 proposes a two-year 100% CCA rate for computers acquired after January 27, 2009 and before February 1, 2011. This will allow businesses to fully expense their investment in computers in one year. Businesses in all sectors of the economy, including the service sector, will benefit from this initiative.

Encouraging Mineral Exploration

The temporary 15% mineral exploration tax credit helps companies raise capital by providing an incentive to individuals who invest in flow-through shares issued to finance exploration. Budget 2009 proposes to extend the credit for an additional year, until March 31, 2010 to assist companies' efforts to undertake important exploration programs and facilitate adjustment to new commodity price conditions.

Scientific Research and Experimental Development

The limit of the taxable income phase-out range of the expenditure limit for the enhanced investment tax credit (ITC) rate of 35% on qualified Scientific Research and Experimental Development (SR&ED) expenditures increases accordingly to between CAD500,000 and CAD800,000. This change applies where the previous taxation year ends after 2008.

International Taxation

The government is studying the report issued by the Advisory Panel on Canada’s System of International Taxation and will provide a response in due course, on which consultations will be held. However, certain issues which arose in the context of the Panel’s report merit a more immediate response. These include:

• Interest Deductibilty: Section 18.2 of the Income Tax Act, scheduled to come into force in 2012, constrains the deductibility of interest in certain situations where a Canadian corporation uses borrowed funds to finance a foreign affiliate and a second deduction for that interest is available in the foreign jurisdiction. Early action is being taken in relation to the Panel’s recommendation concerning section 18.2 because of the conclusions of the Panel on the potential effects of the provision on foreign investment by Canadian multinational firms, particularly in the context of the current global financial environment. Accordingly, it is proposed that section 18.2 be repealed.
• Non-Resident Trusts and Foreign Investment Entities: Outstanding proposals for non-resident trusts and foreign investment entities, first introduced in the 1999 Budget, apply in respect of arrangements under which Canadian residents seek to avoid Canadian tax through the use of foreign intermediaries under circumstances designed to circumvent the application of existing anti-avoidance rules. The government has received submissions, including the Panel’s recommendations, on these proposals; the government supports the fundamental policy objective of ensuring that Canadian taxpayers should not be able to avoid paying their fair share of income tax through the use of foreign intermediaries, but will review the existing proposals in light of these submissions before proceeding with measures in this area.
• 2004 Foreign Affiliate Proposals: The government will consider the Panel’s recommendations relating to foreign affiliates before proceeding with the remaining foreign affiliate measures announced in February 2004, as modified to take into account consultations and deliberations since their release.

Acquisition of Control Rules

In reaction to the Federal Court of Appeal decision in La Survivance, it is proposed that the deeming rule regarding the timing of an acquisition of control of a corporation not apply for purposes of determining if a corporation is a small business corporation or a Canadian-controlled private corporation. This amendment will apply in respect of acquisitions of control that occur after 2005, except if the taxpayer elects otherwise for acquisitions of control before January 28, 2009.

E-filing and Penalties

The Canadian Revenue Agency (CRA) will expand its e-filing capabilities and corporations that have annual gross revenues in excess of CAD1m for a taxation year will generally be required to file their income tax returns for the year in electronic format. The measure will apply in respect of corporate income tax returns for taxation years that end after 2009. In addition to the new electronic filing requirements, budget 2009 proposes to introduce a penalty for filing a corporate income tax return in an incorrect format, and to reduce the penalties applicable for late filed or incorrectly filed information returns. The penalty for taxation years that end in 2011 will be set at CAD250, then increased to CAD500 for taxation years that end in 2012 and to CAD1,000 for taxation years that end after 2012.

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