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Section 18.2 of the Income Tax Act, enacted in 2007 to come into effect in 2012, will be repealed.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 environment.
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.
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