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Canada

16 March 2009

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Budget for 2009 – business tax measures

On 27 January 2009, the Minister of Finance tabled the Budget for 2009. Highlights of the business tax measures are as follows:

(a) Small business deduction limit. The small business deduction reduces the federal corporate income tax rate applied to income below the threshold, of qualifying active business income of a Canadian-controlled private corporation (CCPC) to 11%. The small business deduction is phased out on a straight-line basis for CCPCs having between CAD 10 million and CAD 15 million of taxable capital employed in Canada. The Budget proposes to increase the threshold from CAD 400,000 to CAD 500,000.

(b) Scientific Research and experimental development expenditures. CCPCs are eligible to earn investment tax credits at an enhanced rate of 35% on up to CAD 3 million of scientific research and experimental development (SR&ED) expenditures annually. This limit is reduced as a CCPC's taxable income for the previous year increases from CAD 400,000 to CAD 700,000 and taxable capital of the previous year increases from CAD 10 million to CAD 50 million. Tax credits earned at the higher 35% rate on current expenditures are fully refundable, and 40% of tax credits earned at the higher 35% rate on capital expenditures is refundable. Budget 2009 proposes to increase the phase out range by CAD 100,000 to between CAD 500,000 and CAD 800,000. This change will apply where the previous taxation year ends after 2008. The reduction of the expenditure limit based upon taxable capital will not be changed.

(c) Manufacturing and processing. Budget 2008 proposed to extend accelerated CCA treatment for investment in the manufacturing and processing sector for 3 additional years. This included a 1-year extension of the 50% straight-line accelerated CCA rate for eligible assets acquired after 18 March 2007 and before 2010 (instead of before 2009) followed by accelerated CCA treatment on a declining basis for eligible assets acquired in 2010 and 2011. Budget 2009 proposes that, in lieu of the accelerated CCA on a declining basis for eligible assets acquired in 2010 and 2011, the 50% straight-line accelerated CCA treatment will apply.

(d) Capital cost allowance on computers. In general, computers acquired after 18 March 2007 are included in Class 50 of Schedule II to the Income Tax Regulations and are eligible for a 55% declining-balance capital cost allowance (CCA) rate. Budget 2009 proposes a temporary 100% CCA rate for eligible computers and software acquired after 27 January 2009 and before February 2011.

Budget for 2009 – internationaltax measures

On 27 January 2009, the Minister of Finance tabled the Budget for 2009. With respect to international taxation, although the government has yet to fully consider the final report of the Advisory Panel on Canada's System of International Taxation, which it received in December 2008, the Budget comments on various proposals that require immediate response. These include, inter alia, the following:

(a) Interest deductibility. A new income tax provision is scheduled to come into force in 2012 that limits the deductibility of interest in situations where a Canadian corporation uses borrowed funds to finance a foreign affiliate and a further deduction for that interest is available in the foreign jurisdiction. The Panel was concerned about the potential effects of the provision on foreign investment by Canadian multinational firms, particularly in the context of the current global financial environment. The Budget therefore proposes to repeal the provision.

(b) Non-resident trusts and foreign investment entities. Proposals for non-resident trusts and foreign investment entities, first introduced in the 1999 Budget, are still outstanding. The proposals apply in respect of arrangements under which Canadian residents seek to avoid Canadian tax through the use of foreign intermediaries under circumstances designed to circumvent the application of existing anti-avoidance rules. The government has received submissions, including the Panel's recommendations, on these proposals and will review the existing proposals in light of these submissions before proceeding with measures in this area.

(c) 2004 Foreign affiliate proposals. The government has decided to consider the Panel's recommendations relating to foreign affiliates before proceeding with the remaining foreign affiliate measures announced in February 2004, as modified to take into account consultations and deliberations since their release.

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