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15 April 2008

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Budget 2008

On 26 February 2008, the Minister of Finance tabled Budget 2008. The Budget includes personal and business tax measures, including provisions to reduce the administrative burden on businesses. Some highlights of the Budget are as follows:

Accelerated depreciation for investment in manufacturing or processing machinery and equipment

Budget 2007 announced a temporary 2-year 50% straight-line accelerated CCA rate for investment in manufacturing or processing machinery and equipment undertaken before 2009. Budget 2008 proposes to extend accelerated CCA treatment for investment in machinery and equipment in the manufacturing and processing sector for 3 additional years. This will include a 1-year extension of the 50% straight-line accelerated CCA treatment, followed by a 2-year period during which the accelerated treatment will be provided on a declining basis.

Increased CCA rate for railway locomotives

Budget 2008 proposes to increase the CCA rate for railway locomotives to 30% from 15%. This change will ensure that the CCA rate for railway locomotives better reflects the useful life of these assets. It will also encourage rail operators to acquire a newer, more fuel-efficient fleet of locomotives (e.g. hybrid locomotives), which provide a more environmentally-friendly mode of transportation. This change is effective for new locomotives acquired on or after 26 February 2008, as well as for reconditioning and refurbishing costs incurred on or after 26 February 2008.

Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

An enhanced SR&ED investment tax credit (ITC) of 35% is currently available to small Canadian-controlled private corporations (CCPCs) on their first CAD 2 million of qualified expenditures. These enhanced benefits are phased out based on the taxable capital and taxable income of the corporation. Budget 2008 proposes to increase the expenditure limit from CAD 2 million to CAD 3 million and to increase the upper limit for the taxable capital phase-out range from CAD 15 million to CAD 50 million. The upper limit of the taxable income phase-out range will also be increased from CAD 600,000 to CAD 700,000. These changes will be generally applicable for taxation years that end on or after 26 February 2008.

Budget 2008 also proposes to extend the SR&ED ITC to certain activities carried on outside Canada. Eligibility will be limited to a maximum of 10% of the Canadian SR&ED labour expenditures, and will apply generally to salaries and wages paid on or after 26 February 2008.

The government will also invest an additional CAD 10 million annually to allow the CRA to implement an action plan to improve the administration of the SR&ED program by increasing the CRA's scientific capacity and improving its services to claimants.

Measures to support small and medium-sized businesses

Budget 2008 proposes a number of measures to reduce the tax compliance burden for businesses, investors, employees, and self-employed individuals. These measures relate to the government's previously announced commitment to reduce the paper burden on businesses by 20%. These measures include:

-   simplifying compliance with the motor vehicle tax provisions. To support motor vehicle expense claims and calculate taxable benefits, the Canada Revenue Agency (CRA) requires individuals to keep a detailed record (i.e. a logbook) of their business driving, including the total and business kilometres driven annually, as well as the date, destination, distance driven and purpose for each business trip. To reduce the record-keeping burden and allow small business owners more time to devote to growing their firms, Budget 2008 proposes that maintaining a logbook during a sample period of time, that is representative of how the motor vehicle is used, be sufficient to support motor vehicle expense and taxable benefit calculations. To inform the development of the proposed record-keeping requirements, the CRA will undertake consultations in 2008 with key stakeholders and will implement a revised administrative policy in 2009;
-   enhancing Canada's cross-border business and investment environment. Non-resident investors who realize capital gains on sales of taxable Canadian property are subject to Canadian tax on those gains. To ensure the vendor's tax liability is collected, Canada requires that the purchasers of these properties withhold and remit to the government a portion of the purchase price (unless the vendor has, under Sec. 116 of the Income Tax Act, obtained certification from the CRA that income or capital gains taxes have been paid). The non-resident vendor is also required to file a Canadian tax return. Budget 2008 proposes to streamline and simplify those rules by, generally: (i) exempting dispositions by non-residents of treaty-protected property from the withholding requirements, (ii) ensuring that a person who purchases property from a non-resident is not liable for the withholding tax in certain circumstances and (iii) eliminating the need for a non-resident to file a Canadian income tax return in certain circumstances where no Canadian tax is payable; and
-   extending capital gains tax relief in respect of donations of securities. Budget 2006 introduced an additional incentive for Canadians to increase their charitable giving by eliminating capital gains tax on donations of publicly-traded securities. Some securities are not publicly traded, but are exchangeable into other securities that are. Budget 2008 proposes to exempt from tax the capital gain arising on the exchange of certain exchangeable securities, where the securities acquired on the exchange are themselves eligible for a capital gains exemption and are donated to a registered charity within 30 days of the exchange. A provision will be put in place to appropriately measure the exempt capital gain where the exchangeable security is a partnership interest.

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