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Budget 2006 tax measures fully implemented — Orbitax Tax News & Alerts

On 22 February 2007, the Minister of Finance announced that Bill C-28 has received Royal Assent. Bill C-28 implements the following tax measures

Business tax

-   The elimination of the federal capital tax as of 1 January 2006;
-   A new Apprenticeship Job Creation Tax Credit;
-   An increase to CAD 500 in the limit on the cost of tools purchased by a business that are eligible for the 100% CCA rate;
-   An extension of the carry-forward period for losses and investment tax credits to 20 years from 10 years; and
-   A modification of the minimum tax on financial institutions, which replaces a dual tax rate with a single tax rate of 1.25 per cent on a new, higher taxable capital threshold of CAD 1 billion.

Share options issued in connection with corporate acquisition included in computing capital for purposes of large corporations tax

The issue in Inco Limited v. The Minister of National Revenue was whether share options issued by Inco in connection with a corporate acquisition were required to be included in computing capital for purposes of the large corporations tax (Tax Court of Canada decision of 8 January 2007). The share options were granted as part of Inco's acquisition of the shares of Diamond Fields Resources Inc. (DFR).

Prior to the acquisition, DFR had issued stock options to some of its employees and executives. Inco desired to get rid of these options before DFR was taken over in order that it could become the sole shareholder. Accordingly, option holders exchanged their DFR options for share options issued by Inco. The value of the options was included in the cost of DFR shares and a portion of the amount that related to unexercised options was included in shareholders' equity under "contingently issuable equity".

The tax authorities found the item to be "contributed surplus or other surplus", and decided the amount should be included in capital. Justice Woods rejected Inco's argument that the options were not capital solely because they were not called "surplus" or "contributed surplus" on the balance sheet. The amount clearly fitted the definition of "surplus" pursuant to accounting guidelines. As a result, Inco's appeal of the tax authorities' decision was dismissed.