In these times of economic turmoil, yesterday's Federal Budget (the "Budget") tax proposals are measured and modest. The Budget's focus is at home and on individuals, with only modest and targeted measures benefiting corporations (especially, Canadian-owned corporations). From a tax policy perspective, the Budget (hopefully) signals that the recommendations of the Advisory Panel on Canada's System of International Taxation (the "International Review Panel") will be considered seriously by repealing the new double-dip rules and by accepting to revisit the Non-Resident Trusts ("NRTs") and Foreign Investment Entities ("FIEs") proposals.

Following are the most significant announcements from yesterday's Budget relating to corporate taxation.

Small Business Deduction

Currently the Small Business Deduction ("SBD") reduces the federal corporate tax rate on the first $400,000 of income of a corporation for a year of certain Canadian controlled private corporations ("CCPCs") to 11%. This reduced rate of tax is phased out as the taxable capital employed in Canada of a corporation increases from $10-million to $15-million.

The Budget proposes to increase the annual income of a CCPC that can qualify for the SBD to $500,000. This increase will be applicable as of January 1, 2009 and will be prorated for years that do not coincide with the calendar year.

Consequential changes will also be made. For example, CCPCs are entitled to earn enhanced investment tax credits of 35% on qualifying scientific research and experimental development expenditures of up to $3-million per year, but this $3-million limit for a year is reduced as a corporation's income increases above $400,000 up to $700,000 in the prior tax year. This phase out of eligibility for the enhanced credits will be increased to begin at income of $500,000 for the prior year and completely eliminate such eligibility when income hits $800,000.

Accelerated CCA for M&P Equipment

Generally manufacturing and processing equipment qualifies for capital cost allowance ("CCA") deductions at a rate of 30% on a declining balance basis. The 2007 Budget introduced a temporary increase in that rate to 50% on a straight-line basis for property acquired before 2009. The 2008 Budget proposed to extend the 50% straight-line rate to property acquired before 2010 and a 50% rate on a declining balance basis for property acquired before 2012. The Budget proposes to change the rate for property acquired in 2010 and 2011 to 50% on a straight-line basis. The so-called "half-year rule" would apply to the properties that are subject to this measure.

Accelerated CCA for Computers

The CCA rate for computers was increased to 55% on a declining balance basis in the 2007 Budget. The Budget proposes to increase this to 100% for computers and qualifying software acquired after January 27, 2009 and before February of 2010. Moreover, such property will not be subject to the half-year rule and, therefore, a taxpayer will be able to fully write-off such property in the year of acquisition.

Mineral Exploration Tax Credit

The so-called "flow-though share rules" provide, in general, that companies may renounce certain expenditures on Canadian exploration activities to investors. In addition, pursuant to the mineral exploration tax credit rules investors may be entitled to a tax credit of 15% of such renounced expenses provided that the related flow-through share agreement was entered into before April of 2009. The Budget proposes to extend this credit by one year to expenditures made in respect of flow-through share agreements entered into before April of 2010.

Advisory Panel on Canada's System of International Taxation

The Budget refers to the Report of the International Review Panel and indicates that the Government is studying the Report, released in December of 2008, and will provide a response in due course, on which consultations will be held.

Anti-Double Dip Rules

Notwithstanding the general comments in respect of the Report of the International Review Panel, the recommendations of the Report did prompt one response in the Budget, being the proposed repeal of section 18.2 of the Income Tax Act (Canada) (the "ITA"). Section 18.2 was enacted in response to certain perceived abuses in the financing and structuring of foreign subsidiaries of Canadian corporations and is often referred to as an "anti-double dipping" provision. This provision, which would have resulted in the denial of interest deductions for Canadian parent corporations where the related borrowed money was used to finance foreign subsidiaries in certain circumstances, was not to be effective until 2012. We have previously commented that we felt that this provision was ill-conceived and not good tax policy. Its repeal is a welcome measure.

NRT and FIE Proposals

Proposals in respect of non-resident trusts and foreign investment entities were first announced in the 1999 Budget. These proposals have been the subject of much discussion and debate through out the almost ten year period since. In fact, they were the subject of continuing criticism even as they came very close to be enacted last year, stalling in the Senate just before the last election.

The Budget indicates that the Government continues to support the fundamental policy behind these proposals, but will review them in light of further submissions in respect of them, including recommendations of the International Review Panel. No indication is given as to what the timing for this review may be nor whether this will impact on the proposed coming-into-force for these rules (the bill that died before the last election provided, in general, for a coming-into-force of January 1, 2008). It may be that the answer to these questions will depend on the extent of the changes to these rules, if any.

2004 Foreign Affiliate Proposals

The International Review Panel Report included recommendations in respect of proposals originally announced in 2004 in respect of a number of aspects of the taxation of foreign affiliates. These proposals have also been the subject of a number of other submissions. The Budget indicates that the Government will consider these recommendations and submissions before proceeding further with these proposals.

Timing of Acquisition of Control

The ITA contains a number of rules applicable upon the acquisition of control of a corporation. These rules include a deemed year-end for tax purposes for the corporation as well as the "streaming", write-down or expiration of a number of tax accounts of the corporation.

In general an acquisition of control is deemed to occur at the earliest moment of the day on which control of the corporation was acquired. However, in the 2006 Federal Court of Appeal decision in Survivance (La) c. R., 2007 D.T.C. 5096 the court held that this timing rule applies only for the purposes of the acquisition. This can adversely impact other matters, such as the status of the corporation as a CCPC for the purposes of the capital gains exemption.

It is proposed that the deeming rule with respect to these timing issues be amended to ensure that it does not affect the status of the corporation as a CCPC at the time of the transaction. Elective provisions will be available to permit these amendments to apply to acquisitions of control that occurred after 2005 and before January 28, 2009.


In summary, notwithstanding the fact that the Budget was a dramatic departure from recent Budgets in terms of the magnitude of Government spending and deficits not seen in over a decade, the corporate tax provisions in the Budget were, as mentioned, measured and modest.