This year's Federal Budget focuses on fiscal stimulation
with significant spending measures. It also contains a number of
noteworthy income tax proposals. The Department of Finance has
responded positively to the report of the Advisory Panel on
Canada's System of International Taxation presented in December
2008. While the Government continues to study the report, the
Budget contains three important proposals.
Section 18.2 of the Income Tax Act, enacted in 2007 to
come into effect in 2012, will be repealed. Section 18.2 was
intended to prevent certain "double-dip" financing
transactions where a Canadian corporation used borrowed funds to
finance a foreign affiliate in a manner which allowed a deduction
for interest both in Canada and in the foreign jurisdiction. The
proposed repeal reflects the potential negative effect of these
rules on the financing of foreign investments by Canadian
multi-nationals, particularly in the current financial
Complex proposals with respect to non-resident trusts and
foreign investment entities were first put forward in the 1999
Budget and have led to draft legislation, most recently in 2007.
The complexity of these provisions, combined with numerous
technical and interpretative problems, have attracted considerable
concern from tax professionals and the Advisory Panel recommended
that the proposed rules be reconsidered to ensure that they were
consistent with the Panel's recommendations and, in particular,
not impede bona fide commercial business transactions. The
Budget states that the proposals will now be reviewed in light of
the Panel's recommendations before proceeding. Separately, the
Budget similarly states that pending technical amendments to the
foreign affiliate rules released in 2004 will be reviewed in light
of the Panel's recommendations before proceeding.
Other measures in the Budget include an increase in the amount
eligible for the small business tax rate from $400,000 to $500,000
and the extension of the mineral exploration tax credit through
2010. The Budget proposes an extension of the accelerated capital
cost allowance regime for manufacturing and processing equipment
introduced in the 2007 Budget and accelerated capital cost
allowance for eligible computers and software. A number of modest
personal tax relief measures also are proposed.
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.
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