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Canada Budget To Reduce Tax Burden

by Mike Godfrey,, Washington

21 March 2007

Jim Flaherty, Canada's Minister of Finance, disappointed the investment community by failing to follow through on a pledge to cut capital gains tax in the Conservative government's second budget announcement, although a series of new measures will chip away at the tax and regulatory burden faced by businesses in Canada.

In a bid to help Canadian manufacturing and processing businesses respond to the rising value of the Canadian dollar and global competition, Flaherty announced that certain firms would be permitted to write off their capital investments in machinery and equipment acquired on or after March 19, 2007, and before 2009 using a special two-year 50% straight-line rate.

In addition, the capital cost allowance rate will increase from 4% to 10% for buildings used in manufacturing and processing, and from 45% to 55% for computers.

The Canada-US Tax Treaty will also be updated to help facilitate cross-border investment and commerce.

However, these tax reductions will be accompanied by a campaign against corporate tax evasion and Flaherty said that the government will crack down on corporations that use tax havens by eliminating the deductibility of interest incurred to invest in business operations abroad, improving information agreements with other countries, and providing more resources to the Canada Revenue Agency to strengthen their audit and enforcement activities.

On the compliance front, Flaherty pledged to reduce the federal paper burden on small business by 20% by November 2008 and lower the tax compliance burden on small business by decreasing the frequency of their tax remittance and filing requirements.

The government also intends to ask an expert independent panel to undertake a comprehensive review of Canada’s competition policy and work with the provinces and other partners to create a Canadian advantage in global capital markets, including a common securities regulator administering proportionate, more principles-based regulation for the benefit of investors, businesses and the economy. A senior expert advisor to the Royal Canadian Mounted Police will be appointed to help develop and guide the implementation of a plan to improve the effectiveness of the Integrated Market Enforcement Teams.

On the personal income tax front, new measures include: a new $2,000 child tax credit; tax relief to married couples; and an increase in the lifetime capital gains exemption for farmers, fishermen and fisherwomen, and small business owners from C$500,000 to C$750,000.

Other tax measures include: extending the 15% mineral exploration tax credit by an additional year, until March 31, 2008; establishing a new federal Foreign Convention and Tour Incentive Program to attract foreign conventions and tour groups through a goods and services tax/harmonized sales tax system; doubling the value of goods that may be imported duty- and tax-free by returning Canadian residents after a 48-hour absence from C$200 to C$400; supporting the Vancouver 2010 Olympic and Paralympic Winter Games by providing a series of tax relief measures in order to facilitate the Games.

According to Flaherty, the 2007 Budget will move to restore fiscal balance in Canada while reducing national debt. After paying down $13.2 billion on Canada’s national debt in September 2006, Budget 2007 further reduces the debt by $9.2 billion, he claimed.

"Budget 2007 will strengthen the federation by restoring much-needed fiscal balance," Flaherty noted. "And Canadians come out ahead through real tax relief that benefits working families."

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