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'Mistake' Could Double Canadian Credit Unions' Tax Rate

by Mike Godfrey, Tax-News.com, Washington

30 August 2013


A so-called "technical issue" thrown up by the 2013 Canadian Budget has threatened to more than double the corporate tax rate paid by credit unions.

A spokesperson for Finance Minister Jim Flaherty has admitted the "mistake," and has stressed that his department is working on fixing it.

Flaherty was put under pressure by the New Democratic Party (NDP) to explain what it called "radical tax increases" that would have seen the rate go up from 11 percent to 28 percent, rather than to the intended 15 percent.

The NDP was responding to a report published by Deloitte on the planned five-year phase-out of the additional deduction for credit unions and caisses populaires. Deloitte warned that the technical amendments implementing this change "do not achieve the policy objective set out in the budget … of eliminating the additional deduction to improve the neutrality and fairness of the tax system."

The "technical deficiency" detected by Deloitte lies in legislation passed in June, which relates to how the "full rate taxable income" of a credit union or caisse populaire is determined for purposes of the "general rate reduction."

Under the old definition, the taxable income of these entities could be reduced by the amount of income eligible for the additional deduction. The Government's new definition stipulates that taxable income should be reduced by the amount eligible for the additional deduction before the phase-out, or the annual small business deduction.

Because the phase-out percentage is included in a separate part of the formula, Deloitte found that "income not eligible for the additional deduction due to the phase-out is also not eligible for general rate reduction."

The Finance Department told Deloitte that it was aware of the deficiency, and is intending to resolve the issue.

Flaherty's spokesperson has said that he is "committed to fix it as soon as possible and ensure no credit union is disadvantaged." The Department intends to introduce legislation to this effect in the coming months.

TAGS: Finance | tax | small business | business | budget | corporation tax | ministry of finance | legislation | tax rates | Canada | tax reform

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