Federal Budget 2009

Budget 2009 proposes to repeal section 18.2 of the Income Tax Act, introduced in the 2007 Budget. This provision, scheduled to have effect after 2012, would have limited interest deductibility where borrowed funds are used by a Canadian corporation to finance a foreign affiliate if a second deduction for such interest was available in a foreign jurisdiction. This announcement removes a major impediment to so-called "double-dip" financing structures.

The Minister announced that, in light of the recommendations of the Advisory Panel, the federal government will review the non-resident trust and foreign investment entity rules first introduced in Budget 1999. However, the Minister reiterated the Government's adherence to the tax policy objective of ensuring that Canadians are not able to avoid tax through the use of offshore intermediaries.

Currently, a Canadian-controlled private corporation (CCPC) is subject to tax at a preferred rate of 11% on its first $400,000 of income earned from a qualifying active business. The preferential rate is phased out for a CCPC having between $10 million and $15 million of taxable capital employed in Canada. Budget 2009 proposes to increase the income threshold to $500,000 effective January 1, 2009, pro-rated for corporations with a noncalendar year-end.

The small business tax rate will continue to be shared among associated corporations, and will continue to be phased out for a CCPC having between $10 million and $15 million of taxable capital employed in Canada.

A CCPC can earn investment tax credits of 35% on up to $3 million of qualifying R&D expenditures. The $3 million expenditure limit for a particular year is progressively reduced once a CCPC's taxable income for the prior year exceeds $400,000 and is eliminated if the prior year's income reaches $700,000. In conjunction with the increase in the threshold for the small business tax rate from $400,000 to $500,000, the ITC expenditure limit phase-out will apply to a CCPC's prior year's income that is between $500,000 and $800,000. This change is to apply for the 2010 and subsequent taxation years.

The 2007 Budget introduced an accelerated 50% straight-line CCA rate for eligible manufacturing and processing machinery and equipment acquired before 2009. Budget 2008 extended this 50% straight-line rate to qualifying assets acquired before 2010 and provided for a reduced accelerated CCA rate for assets acquired thereafter. Budget 2009 proposes to maintain the 50% straight-line rate for assets acquired before 2012. The "half-year rule" will apply in all cases. Budget 2009 also proposes to eliminate import tariffs on a range of machinery and equipment.

Computers are generally eligible for a 55% declining-balance CCA rate, subject to the half-year rule. Budget 2009 proposes, as a temporary measure, to increase the rate to 100% for eligible computer equipment acquired after January 27, 2009 and before February 2011. In addition, the half-year rule will not apply.

Subsection 256(9) of the Income Tax Act deems an acquisition of control to have occurred at the beginning of the day on which control is acquired, regardless of the time of day the sale transaction actually occurs. In a 2006 Federal Court of Appeal case (La Survivance), a public company disposed of shares of a subsidiary to a private Canadian company at a loss. Subsection 256(9) was applied to deem the subsidiary to be a CCPC and a small business corporation from the beginning of the day on which the sale occurred. This permitted the public company to claim an allowable business investment loss (ABIL) rather than a capital loss on the sale. This result was widely regarded as being at odds with the policy applicable to ABILs and opened the door to future anomalous results for taxpayers, including a potential denial of the capital gains exemption on dispositions of shares of a qualifying small business corporation.

Budget 2009 proposes to amend the deeming rule so that it does not apply for the purposes of determining if a corporation is a small business corporation or a CCPC. The amendment is to apply to acquisitions of control occurring after 2005, other than an acquisition of control that occurs before January 28, 2009 where the taxpayer elects not to have the provision apply. The taxpayer will be deemed to have made such an election where it can reasonably be considered that the taxpayer has taken the position, in a previously-filed return, objection or appeal, that the deeming rule applied to determine whether a corporation was a small business corporation or a CCPC at the time of the share transfer that precipitated the acquisition.

Budget 2009 increases the basic personal amount as well as the two lowest income tax brackets, with effect from January 1, 2009. For an individual with taxable income over $82,000, these measures will result in tax savings ranging from $317 to $483 per year, depending on the family composition of the taxpayer.

Budget 2009 proposes to introduce a temporary Home Renovation Tax Credit. The measure will entitle an individual taxpayer to claim a 15% non-refundable tax credit on eligible expenditures between $1,000 and $10,000 incurred in respect of an eligible dwelling, resulting in a maximum credit of $1,350. This credit will be available only for the 2009 taxation year, in respect of expenditures incurred after January 27, 2009 and before February 1, 2010. The tax credit will be applied on a family basis and eligible expenditures will include most expenditures incurred in respect of the renovation or alteration of an eligible dwelling. An eligible dwelling is a residence that is owned by an individual and ordinarily inhabited by the individual, the individual's spouse or common-law partner or their children.

The maximum amount that can be withdrawn from an RRSP under the Home Buyers' Plan is increased from $20,000 to $25,000. In addition, Budget 2009 proposes to introduce a non-refundable tax credit based on an amount of $5,000 for first-time home buyers. The rate of the credit will be equal to the lowest federal personal income tax rate for the year in which the home is acquired (15% in 2009). Both measures are effective after January 27, 2009.

The 15% investment tax credit for flow-through mining expenses has been an important incentive for new investment in junior mineral exploration in Canada. First introduced in 2000, the measure has been extended by each budget annually since 2004. Budget 2009 extends it for another year. The tax credit will be available to flow-through share agreements entered into on or before March 31, 2010. Under the "look-back rule", funds raised with the benefit of the credit before April 2010 can be spent on mineral exploration up to the end of 2011.

Budget 2009 proposes measures to allow the amount of a decrease in the value of an RRSP/RRIF following the death of the RRSP/RRIF annuitant to be carried back and deducted against the income of the annuitant for the year of death. This measure is to apply to distributions to beneficiaries that occur after 2008.

The amount on which the 15% Age Credit is calculated is increased by $1,000 to $6,408, effective January 1, 2009, and is indexed thereafter. The Age Credit is available for taxpayers who are 65 years of age and older.