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22 April 2015

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Canadian 2015 Budget Delivered

On 21 April 2015, Canadian Finance Minister Joe Oliver delivered the 2015 Budget and Economic Action Plan. Key tax related measures are summarized as follows.

Small Business Tax Rate

The plan proposes a reduction in the small business federal tax rate from 11% to 9%. The reduced rate applies on the qualifying active business income of a Canadian-controlled private corporation (CCPC) up to CAD 500,000. For CCPCs with taxable capital exceeding CAD 10 million to 15 million, the income amount eligible for the reduced rate is proportionately reduced, while the income of CCPCs with taxable capital exceeding CAD 15 million is not eligible at all.

The proposed rate reduction would take place over four years as follows:

  • 2016 - 10.5%
  • 2017 - 10%
  • 2018 - 9.5%
  • 2019 - 9%

No other corporate tax rate changes are proposed.

Accelerated Capital Cost Allowance for Manufacturing

The plan proposes a 10-year accelerated capital allowance incentive for investment in productivity-enhancing machinery and equipment for manufacturing and processing. The inventive allows for a capital allowance rate of 50% on a declining-balance basis for qualifying machinery and equipment acquired on or after 1 January 2016 up to 31 December 2025. Such machinery and equipment acquired after that period will be eligible for a capital allowance rate of 30% on a declining-balance basis.

Income Tax Withholding for Non-Resident Employers

The plan proposes an exception to the individual income tax withholding requirements for payments by qualifying non-resident employers to qualifying non-resident employees. Currently it is generally required that employers, including non-residents, withhold income tax for employees working in Canada, although a waiver for a specific employee may be applied for.

In order to reduce the administrative burden, an exception is proposed with certain conditions for the employee and the employer. The employee conditions for the exception include that the employee:

  • Is exempt for Canadian income tax because of a tax treaty; and
  • Is not in Canada for more than 90 days within any 12 month period in which the employee payment is made

The employer conditions for the exception include that the employer:

  • Is a company resident in a country with which Canada has a tax treaty; or
  • Is a partnership where at least 90% of the partnership’s income is allocated to persons resident in a country with which Canada has a tax treaty in the fiscal period in which the employee payment is made

The exception for qualifying employees and employers would apply for payments made on or after 1 January 2016.

Anti-Avoidance Rules for Capital Gains

The plan proposes the expanded application of subsection 55(2) of the Income Tax Act, which includes an anti-avoidance rule preventing corporate shareholders from converting a capital gain on a disposal of shares into a tax-free inter-corporate dividend. The rule applies when one of the purposes of the dividend is to significantly reduce a capital gain on the share, unless the dividend can be reasonably attributed to after tax earnings, and certain other cases.

Under the proposal, the subsection 55(2) rule would be expanded to also apply to cases where one of the purposes of the dividend is to significantly reduce the fair market value of any share or a significant increase in the total cost of properties of the recipient of the dividend.

The proposed measure would be effective from 21 April 2015.

Anti-Avoidance Rules for Captive Insurance

The plan proposes stricter anti-avoidance rules for captive insurance in addition to the rules included in the 2014 Budget, which prevent Canadian resident taxpayers from shifting income from the insurance of Canadian risks to controlled foreign affiliates through insurance swaps. Under the rules, such income is considered foreign accrual property income (FAPI) and is taxable in the hands of the Canadian taxpayer on an accrual basis.

Under the proposal, similar arrangements are targeted where a foreign affiliate cedes a portfolio of Canadian risks in exchange for a portfolio of foreign risks, the difference between the fair market value and the cost of the Canadian risks will then be considered FAPI.

The proposed measure would apply for tax periods beginning on or after 21 April 2015.

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