On January 27, 2009, the federal government tabled its much-anticipated Budget. This Bulletin summarizes the principal income tax measures contained in the Budget and highlights certain non-income tax measures. Although the Budget contains a great deal of economic stimulus for virtually every sector of the economy, the proposed income tax relief is modest.
A. INCOME TAX MEASURES
(i) International Taxation
In December 2008, the federal government received the final report of the Advisory Panel on Canada’s System of International Taxation, regarding the equity and competitiveness of Canada’s international taxation regime. In Budget 2009, the federal government announced that it is currently studying the report and that it will hold public consultations and provide its response in due course.
However, three important international tax measures were immediately addressed in Budget 2009.
- Interest Deductibility
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.
- Non-Resident Trusts and Foreign Investment Entities
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.
- Foreign Affiliates
The federal government will delay implementation of the remaining foreign affiliate measures announced in 2004 pending its review and consideration of the recommendations made by the Advisory Panel.
(ii) Domestic Corporate Taxation
- Increase in the Threshold for the Small Business Tax Rate
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.
- Increase in Expenditure Limit for Investment Tax Credits
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.
- Accelerated Capital Cost Allowance for Manufacturing and Processing
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.
- Accelerated CCA for Computers
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.
- Timing of an Acquisition of Control
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.
(iii) Personal Taxation
- Basic Personal Amount and Tax Brackets
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.
- Home Renovation Tax Credit
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.
- Home Buyers’ Plan and First-Time Home Buyers’ Tax Credit
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.
- Mineral Exploration Tax Credit
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.
- RRSP/RRIF Losses After Death
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.
- Age Credit
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.
B. PREVIOUSLY ANNOUNCED INCOME TAX MEASURES
Budget 2009 confirms the Government’s intention to proceed with the following previously-announced tax measures, as modified to take into account consultations and deliberations since their release:
- maintaining the schedule for previously-announced corporate tax rate reductions;
- reduced 2008 minimum withdrawal amounts in respect of Registered Retirement Income Funds and variable benefits under a Registered Pension Plan;
- draft amendments relating to Functional Currency Tax Reporting;
- extension of the 2008 deadline for Registered Disability Savings Plan contributions; and
- modifications to the provisions relating to amateur athletic trusts.
C. NON-INCOME TAX MEASURES
- Budget 2009 proposes a simplified GST accounting method for the direct selling industry;
- the federal government intends to introduce legislation this year to allow willing provinces and territories to participate in a national securities regulator;
- the federal government proposes to strengthen disclosure requirements on federally-regulated financial institutions that issue credit cards, to require a minimum grace period between purchases and the commencement of interest charges, to improve debt collection practices and to improve the financial literacy of consumers;
- the federal government proposes to improve pension plan member protection for federally-regulated pension plans;
- Budget 2009 announced certain measures designed to help Canadian workers such as:
- an extension of the Employment Insurance (EI) benefit entitlement period by five extra weeks, applicable for a two-year period;
- an extension of the EI benefits for Canadians participating in longer-term training; and
- the coverage of severance and termination pay under the Wage-Earner Protection Program, in addition to the guaranteed payment of wages and vacation pay currently existing (in all cases up to a maximum amount equal to four weeks of insurable earnings).