"Since last fall, the global economic situation has deteriorated further, and faster, than anyone predicted."
"We are taking action to protect Canadians during the global recession, to stimulate our economy, and to invest in our long-term prosperity."
The Honourable Jim Flaherty, Minister of Finance
The Honourable Jim Flaherty, Minister of Finance, tabled the Conservative minority government's much-anticipated federal budget (2009 Budget) today. It is the government's first budget since the election on October 14, 2008 and was tabled following the resumption of Parliament on January 26, 2009. Parliament had been prorogued on December 4, 2008 in the wake of the Minister's 2008 Economic and Fiscal Statement which was released on November 18, 2008. In his Budget Speech, the Minister acknowledged that the current global economic crisis has created extraordinary times calling for extraordinary measures. He emphasized the government's plan to stimulate the economy, protect Canadians during the global recession and invest in long-term growth. Planned deficits of $34 billion in 2009-2010 and $30 billion in 2010-2011 headline projected deficits that are forecasted to continue through 2012-2013. The federal debt is forecasted to increase by almost $85 billion from $457.6 billion in 2007-2008 to $542.4 billion in 2012-2013.
The 2009 Budget materials state that the stimulus package fulfils Canada's commitment at the recent G20 leaders' summit to provide stimulus to domestic demand while maintaining long-term fiscal sustainability. The 2009 Budget is estimated to inject a fiscal stimulus of almost $30 billion in 2009, or 1.9% of Canada's gross domestic product which is on target with the International Monetary Fund's suggested 2.0% target. The 2009 Budget initiatives are generally consistent with current initiatives in other industrialized nations, including the federal stimulus package currently being negotiated in the United States.
Of the few business income tax measures in the 2009 Budget, the most significant is the repeal of the much-maligned "double-dip" interest deductibility restrictions in section 18.2 of the Income Tax Act (Canada) (the Act). The 2009 Budget's tax proposals are largely confined to personal tax measures that provide tax relief for low and middle income taxpayers and time-limited incentives to stimulate consumer spending.
The 2009 Budget does not propose any new corporate income tax rate reductions. However, the Minister did reaffirm the government's commitment to work with the provinces and territories to reduce their corporate income tax rates – the goal being to achieve a combined federal-provincial-territorial tax rate of 25 per cent in all jurisdictions by 2012.
In this Budget Briefing 2009, we summarize the 2009 Budget's tax proposals.
INTERNATIONAL TAX MEASURES
Interest Deductibility – Repeal of Section 18.2
The 2009 Budget proposes to repeal section 18.2 of the Act. That section restricts the deductibility of interest expenses incurred after 2011 on certain debt used to invest in foreign affiliates. The 2009 Budget indicates that the repeal of section 18.2 responds to recent changes in the global financial environment.
The 2007 Budget had originally proposed to prohibit the deductibility of all interest and other financing charges associated with investing in foreign affiliates. (See the Osler Budget Briefing 2007 of March 19, 2007.) Following widespread public opposition, the 2007 Budget proposals were revised to only restrict the deductibility of interest expenses incurred after 2011 related to certain double dip financing structures. (See the Osler Update of May 15, 2007.) These revised rules, which were enacted as section 18.2, continued to attract significant criticism. Most recently, in December 2008, the Advisory Panel on Canada's System of International Taxation (Advisory Panel) recommended the repeal of section 18.2.
Although the Advisory Panel recommended that no additional rules be introduced to restrict the deductibility of interest expense of Canadian companies where the borrowed funds are used to invest in foreign affiliates, they also recommended the curtailment of certain tax-motivated debt-dumping transactions that could include using borrowed money to acquire related foreign corporations. The 2009 Budget indicates that the Advisory Panel's recommendations will be considered, but does not indicate whether any new measures will be introduced to restrict interest deductibility.
Pending International Tax Legislative Proposals
The proposed non-resident trust and foreign investment entity rules, first introduced in the 1999 Budget, have attracted considerable criticism for their complexity and broad application. In December 2008, the Advisory Panel recommended that these rules be reconsidered to reduce complexity and overlap with the foreign accrual property income regime. The 2009 Budget indicates that the government will review these proposals in light of the Advisory Panel's recommendation and other submissions received on these proposals before proceeding with measures in this area.
The Advisory Panel also made a number of recommendations regarding the foreign affiliate rules. They include recommendations to expand the existing exemption system applicable to active business income earned by foreign affiliates resident and carrying on the business in a treaty country, so as to cover all foreign active business income earned by foreign affiliates as well as capital gains and losses realized on the disposition of shares of foreign affiliates that derive all or substantially all of their value from active business assets. The 2009 Budget indicates that the government will consider the Advisory Panel's recommendations relating to foreign affiliates before proceeding with various pending amendments to the foreign affiliate rules that were proposed in February 2004 and have been the subject of numerous Department of Finance comfort letters.
BUSINESS INCOME TAX MEASURES
Small Business Deduction and Refundable Investment Tax Credits
The small business deduction currently reduces the federal corporate income tax rate on the first $400,000 of qualifying active business income earned by a Canadian-controlled private corporation (CCPC) to 11 per cent. The 2009 Budget proposes an increase in the annual amount of qualifying active business income that is eligible for the small business deduction to $500,000 as of January 1, 2009 (pro-rated for a CCPC that has a taxation year that does not coincide with the calendar year).
A CCPC is currently eligible to earn investment tax credits at the enhanced 35 per cent rate on up to $3 million of scientific research and experimental development expenditures annually. This $3 million limit is reduced for a CCPC having greater than $400,000 of taxable income in its previous taxation year and eliminated for a CCPC having $700,000 or more of taxable income in its previous taxation year. In conjunction with the proposal to increase the annual amount of a CCPC's income that is eligible for the small business deduction, the 2009 Budget proposes that the taxable income thresholds for the reduction/elimination of the enhanced investment tax credit be increased to $500,000 and $800,000, respectively, for previous taxation years ending after 2008.
Capital Cost Allowance
Capital Cost Allowance Incentives for Eligible Machinery and Equipment
Machinery and equipment used in manufacturing and processing (M&P machinery and equipment) is generally eligible for a capital cost allowance (CCA) rate of 30%, computed on a declining balance basis. The 2007 Budget had proposed a temporary increase to the CCA rate for certain M&P machinery and equipment acquired before 2009. Under regulations proposed to implement this incentive, M&P machinery and equipment would generally be eligible for a 50 per cent straight-line CCA rate.
The 2008 Budget had proposed to extend accelerated CCA treatment for M&P machinery and equipment for three additional years, including a one-year extension of the 50 per cent straight-line CCA rate introduced in the 2007 Budget to eligible assets acquired in 2009, followed by accelerated CCA treatment on a declining balance basis for eligible assets acquired in 2010 and 2011.
The 2009 Budget proposes that, in lieu of the accelerated declining balance CCA rates proposed in the 2008 Budget for eligible M&P machinery and equipment acquired in 2010 and 2011, the 50 per cent straight-line CCA treatment first introduced in the 2007 Budget would apply.
Accelerated Capital Cost Allowance for Computers and Software
In general, under existing proposed legislation, computers acquired after March 18, 2007 are eligible for a CCA rate of 55%, computed on a declining balance basis. The 2009 Budget proposes a temporary 100% CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011. This 100% CCA rate would not be subject to the half-year rule and, consequently, a business would be able to fully deduct the cost of eligible computers and systems software in the first year that CCA deductions are available. Eligible computers and systems software must be situated in Canada, used to earn income in Canada, and not previously used for any purpose before acquisition by the taxpayer for use in Canada.
Clean Energy Technologies
To more actively promote investment in clean-energy technologies, the 2009 Budget proposes that the government consult with stakeholders to identify special assets used in carbon capture and storage with a view to providing accelerated CCA in respect of such assets.
Filing Requirements and Penalties
Currently, a corporation that meets certain eligibility requirements may file its income tax returns in electronic format. For taxation years that end after 2009, the 2009 Budget proposes to make electronic filing mandatory for a corporation with annual gross revenues in excess of $1 million, subject to certain possible exceptions. A corporation that files an income tax return in an incorrect format will be liable to a penalty of $250 for taxation years that end in 2011, $500 for taxation years that end in 2012, and $1,000 for taxation years that end after 2012.
Currently, a person who is required to file more than 500 information returns (e.g., T4 slips) in a calendar year must file these information returns in electronic format. For information returns required to be filed after 2009, the 2009 Budget proposes to reduce this threshold from 500 information returns to 50 information returns.
The penalty for failure to file an information return as and when required (or to comply with a duty or obligation) is currently calculated as the greater of $100 per failure and $25 times the number of days (to a maximum of 100) during which the failure continues. The 2009 Budget proposes to reduce these penalties. For any particular type of information return that is filed in the incorrect format, the 2009 Budget proposes penalties ranging from $250 (where the person is required to file more than 50 but less than 251 information returns of that type) to $2,500 (where the person is required to file more than 2,500 information returns of that type). For any particular type of information return that is filed late, the 2009 Budget proposes penalties ranging from $10 per day (where the person is required to file less than 51 returns – to a maximum of 100 days late) to $75 per day (where the person is required to file more than 10,000 returns – to a maximum of 100 days late). A registered charity would not be subject to these penalties.
Acquisitions of Control of a CCPC
The 2009 Budget proposes to amend subsection 256(9) of the Act in response to a decision of the Federal Court of Appeal in La Survivance v. The Queen (La Survivance). Subsection 256(9) provides that, unless a corporation elects for the subsection not to apply, control of the corporation is deemed to have been acquired at the beginning of the day on which control was acquired, rather than at the point in time on that day when it was actually acquired. In La Survivance, the Federal Court of Appeal held that subsection 256(9) applies for purposes of determining the status of a corporation as a CCPC or a small business corporation (SBC). The 2009 Budget notes that such an interpretation can produce anomalous results. In particular, by deeming an acquisition of control to have occurred at the beginning of the day of acquisition, rather than at the time on that day when the acquisition actually took place, current subsection 256(9) may result in a loss of the corporation's status as a CCPC prior to the actual time of sale. In some cases, this could result in a taxpayer not being eligible to claim the benefit of the lifetime capital gains exemption applicable to the sale of shares of an SBC.
The 2009 Budget proposes to amend subsection 256(9) so that it would not apply for purposes of determining if a corporation is a CCPC or SBC. Under the proposed amendment, a corporation that is an SBC or a CCPC would continue to so qualify until the actual time of acquisition.
The 2009 Budget proposes that the amendment to subsection 256(9) apply to acquisitions of control of a corporation that occur after 2005, unless the acquisition of control occurs before January 28, 2009, and the taxpayer elects, prior to its filing-due date for its 2009 taxation year, that the proposed amendment not apply in respect of that acquisition of control. A taxpayer will be deemed to have elected not to have the proposed amendment apply to an acquisition of control if it can reasonably be considered that the position taken in respect of the acquisition of control in a return of income, notice of objection or notice of appeal filed or served before January 28, 2009 relies on an interpretation of subsection 256(9) to the effect that the subsection does apply for the purposes of determining if the corporation was an SBC or a CCPC at the relevant time.
PERSONAL INCOME TAX MEASURES
The 2009 Budget announced several personal tax measures that should be welcomed by Canadian taxpayers. Personal income tax relief includes changes to personal income tax brackets and the basic personal amount, which benefit all individual taxpayers, as well as special tax credits that target certain groups of Canadians.
Personal Amounts and Income Tax Brackets
The 2009 Budget proposes to increase the two lowest personal income tax brackets for 2009. The upper limit of the first personal income tax bracket (15% tax rate) will increase to $40,726 in 2009 from $37,885 in 2008. The upper limit of the second personal income tax bracket (22% tax rate) will increase to $81,452 from $75,769 in 2008. The 2009 Budget also proposes to increase the basic personal amount, the spousal and common-law partner amount, and the eligible dependant amount to $10,320 for 2009 from $9,600 in the prior year, and that these amounts be indexed to inflation for years after 2009.
The Age Credit is a federal income tax credit currently available for Canadians 65 years of age and older. It is calculated by multiplying the lowest personal income tax rate by an amount that is indexed to inflation. The 2009 Budget proposes to increase this amount to $6,408 for 2009 from $5,408 in 2008. As the net income level at which the Age Credit begins to be phased out remains unchanged at $32,312, the income level at which the Age Credit is fully phased out will rise to $75,032.
Tax Credits for Home Buyers and Home Owners
Home Renovation Tax Credit
The 2009 Budget proposes the introduction of a new, albeit temporary, tax credit for home renovations. Under the Home Renovation Tax Credit, home owners can claim a 15 percent non-refundable tax credit for eligible expenditures over $1,000, but not more than $10,000, for a maximum credit of $1,350. This credit applies to the cost of work performed or goods acquired after January 27, 2009 and before February 1, 2010, other than an expenditure made under an agreement in place on or before January 27, 2009. The maximum credit is pooled among family members (including the individual's spouse or common-law partner and children under the age of 18). The credit is only available for a dwelling that is eligible to be the individual's principal residence, or that of one or more of the individual's family members.
Expenditures will qualify for the credit if they are incurred for renovations or alterations of an enduring nature that are integral to the dwelling. The cost of routine repairs and maintenance are examples of expenditures that would not be eligible for the credit. Expenditures will also not be eligible if the related goods or services are provided by a person not dealing at arm's length with the individual, unless that person is registered for GST or HST purposes.
Home Buyers' Plan Threshold Increased
The Home Buyers' Plan permits a first-time home buyer to withdraw amounts from his or her Registered Retirement Savings Plan (RRSP) to build or purchase a home without having to pay tax on the withdrawn amounts. Previously, home buyers could withdraw up to $20,000 on a tax-free basis. The 2009 Budget proposes to increase that amount to $25,000 in 2009. The new limit will apply to RRSP withdrawals made after January 27, 2009.
First-time Home Buyers' Credit
First-time home buyers who acquire a qualifying home after January 27, 2009 may be entitled to claim a new non-refundable tax credit worth up to $750.
To qualify for the credit, neither the individual nor his or her spouse or common-law partner can have owned and lived in another home in the calendar year of the new home purchase or in any of the four preceding calendar years. The credit can be claimed by either the purchaser or by his or her spouse or common-law partner.
RRIF/RRSP Post Mortem Losses
Effective for post-2008 final distributions, the 2009 Budget proposes to provide relief for any decrease in the value of RRSPs or Registered Retirement Income Funds (RRIFs) between the date of the annuitant's death and the date of final distribution out of the annuitant's estate. This is achieved by allowing the amount of such decrease to be carried back and deducted against the year-of-death RRSP/RRIF income inclusion of the deceased plan annuitant.
Mineral Exploration Tax Credit
The 2009 Budget proposes to extend the 15% mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2010. The credit, which is available to individuals for specified mineral exploration expenses incurred in Canada and renounced to them in respect of flow-through share investments, was otherwise scheduled to expire at the end of March 2009.
SALES AND EXCISE TAX MEASURES
Simplification of GST/HST for Direct Selling Industry
The 2009 Budget proposes to allow approved direct sellers to use a simplified GST/HST accounting method commencing in fiscal years that begin on or after January 1, 2010. Where an eligible direct seller jointly elects with all of its sales representatives to use the proposed method, the commissions and bonuses received by the sales representatives from the direct seller for arranging for the sale of the direct seller's goods will not be subject to GST/HST and will be ignored for purposes of determining whether sales representatives qualify as small suppliers for GST/HST purposes. In addition, certain supplies by direct sellers to sales representatives and hosts will not be subject to GST/HST.
Tariff Reductions on Machinery and Equipment
The 2009 Budget proposes to permanently eliminate tariffs on certain machinery and equipment used by Canadian industry and imported into Canada on or after January 28, 2009.
PREVIOUSLY ANNOUNCED MEASURES
The 2009 Budget materials confirm the government's intention to proceed with tax measures previously announced in the November 28, 2008 Notice of Ways and Means motion but as modified to reflect consultations and deliberations since their release. These measures include:
- amendments to the rules relating to the taxation of income and gains from foreign affiliates;
- changes to the taxation of financial institutions designed to better align income tax laws with accounting standards;
- measures to facilitate the conversion of specified investment flow-through entities (SIFTs) to corporations;
- extension of the carry-forward period for unused investment tax credits from 10 years to 20 years; and
- reductions for 2008 to the minimum withdrawal amounts for RRIFs.
The 2009 Budget materials also indicate that the government intends to proceed with the draft amendments relating to functional currency tax reporting which were released on November 10, 2008.
In addition, the 2009 Budget materials confirm that the government intends to proceed with measures relating to federally regulated pension plans previously announced in the November 18 Economic and Fiscal Statement. These measures include:
- extending the amortization period for the liquidation of 2008 solvency deficiencies from 5 to 10 years; and
- accelerating the government's timetable for previously announced consultations on the legislative and regulatory framework for pension plans, with a view to making permanent improvements before the end of 2009.
OTHER MATTERS: SECURITIES REGULATION
The government announced that it intends to move forward quickly with willing provinces and territories in creating a Canadian securities regulator based on the recommendations of the Expert Panel on Securities Regulation, which released its final report on January 12, 2009. The government proposes to establish and fund an office to deliver a transition plan within one year.
In addition, the government intends to table a securities act this year based on the recommendations of the Expert Panel. The securities act will include guiding principles and core objectives with requirements for performance measurement against these objectives. This act will provide for a greater investor voice in policy making, better, more coordinated enforcement and the creation of an independent adjudicative tribunal. It will also give a financial stability mandate to the Canadian securities regulator and integrate it into Canada's existing financial stability framework. If you have any questions on these initiatives, please contact any member of our Corporate Finance & Securities Practice Group.
If you have any questions or require additional analysis on the 2009 Budget tax measures, please contact any member of Osler's National Tax Department. Questions concerning the status of tax measures contemplated under the U.S. federal government stimulus package can be addressed by any member of Osler's New York Office Tax Department.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.