tax notes international - Tuck School of Business - Dartmouth College

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2007 budget allowed most such property acquired before 2009 to be written off entirely over three years under a special 50 percent straight-line CCA rate (subject to the usual half-year rule limiting the first year’s deduction). The 2008 budget then extended this deduction for an additional three years by proposing that: • for eligible property acquired in 2009, the same CCA rate announced in the 2007 budget would apply; and • for eligible property acquired in 2010 and 2011, less generous CCA rates would apply. 4 The 2009 budget would extend to eligible property acquired in 2010 or 2011 the more generous 50 percent straight-line CCA rate applicable to eligible property acquired in 2009 (the half-year rule would still apply). Another budget proposal would offer faster CCA on eligible computers and software acquired after January 27, 2009, and before February 2011. Instead of the 55 percent declining balance rate currently applicable, the CCA rate would be 100 percent and the half-year rule would not apply, meaning that the cost of the property would be written off entirely in the year it is acquired by the business. The property eligible for this faster write-off would be most general purpose electronic data processing equipment (and related systems software) that: • is located in Canada; • is acquired by the taxpayer for use in a Canadian business or to earn income from property located in Canada (or to lease to someone so using it); and • was not previously used (or acquired for use) before being acquired by the taxpayer for use in Canada. Canadian-Controlled Private Corporations A corporation that is a Canadian-controlled private corporation (CCPC) enjoys a number of advantages within the Canadian tax system. In particular, a CCPC may benefit from a low 11 percent tax rate on the first C $400,000 of qualifying active business income that it earns via a mechanism called the small-business deduction. 5 The budget would increase the maximum in- 4 In both cases the deduction in the first year was limited by the half-year rule. 5 When two or more corporations are associated, they must share the limit. To limit this tax preference to smaller businesses, the deduction begins to phase out when the CCPC has taxable capital employed in Canada of C $10 million, and is eliminated completely when the CCPC has C $15 million of taxable capital employed in Canada. HIGHLIGHTS come eligible for the deduction from C $400,000 to C $500,000 effective January 1, 2009. 6 CCPCs are also eligible to earn investment tax credits at an enhanced 35 percent rate on up to C $3 million of qualifying scientific research and experimental development. The C $3 million threshold is reduced once the CCPC’s taxable income for the previous year reaches C $400,000 and eliminated entirely once previous-year taxable income reaches C $700,000. The budget would increase the C $400,000 and C $700,000 amounts to C $500,000 and C $800,000, respectively, expanding the availability of the enhanced ITCs. Finally, the budget would correct a technical problem arising from a court decision in 2006, which affects the precise time at which control of a CCPC is acquired on the relevant day. The ruling had created anomalous results arising from determining exactly when control of the corporation had been acquired, and the CCPC had thereby lost its status as a CCPC. Administrative Matters The budget proposes to require that some taxpayers file their tax returns electronically, effective for tax years ending after 2009. Corporations with annual gross revenue over C $1 million would be required to file electronically except in situations (to be announced later) when the Canada Revenue Agency believes electronic filing would be inefficient. 7 Some minor amendments to related penalty provisions have also been proposed. The budget also proposes that in 2010 and thereafter a taxpayer that files 50 or more of any particular type of information return would be required to do so electronically. This would occur most frequently in the case of T4 reporting returns for employment income. Previously Announced Measures When Parliament was prorogued in December 2008, a number of tax measures had not yet been enacted into law and were automatically terminated. The budget confirms the government’s intention to reintroduce many of these previously announced proposals, including: • changes to the taxation of financial institutions to better align income tax laws with accounting rules; and • draft amendments relating to the rules allowing some taxpayers to report their Canadian income tax in a foreign (‘‘functional’’) currency. 6 This increase in the small-business limit would also: result in some CCPCs earning between C $400,000 and C $500,000 in taxable income having an additional month to pay any balance of tax owed; and entitle some CCPCs to be eligible to pay their taxes in quarterly installments rather than monthly. 7 Examples provided of such exceptions include nonresidents and insurance companies. TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 385 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
HIGHLIGHTS Personal Tax Measures The budget also contains a number of relatively minor personal income tax amendments, largely directed at low- and middle-income earners. These include: • the basic personal amount (the amount of income that can be earned before any tax is payable) would increase from C $9,600 for 2009 to C $10,320 for 2010 and would thereafter be indexed to inflation; • the upper limit of the two lowest tax brackets would be increased for 2009, with the 15 percent tax bracket ending at C $40,726 instead of C $37,885 and the 22 percent tax bracket ending at C $81,452 instead of C $75,769 — both brackets would be indexed to inflation thereafter; and • the tax credit for persons 65 and older would increase by C $1,000 to C $6,408. A new home renovation tax credit of up to C $1,350 would be introduced for qualifying home renovation expenditures (excluding routine repairs and furniture) of up to C $10,000 incurred between January 28, 2009, and February 1, 2010. This tax credit may not cost the government much in forgone tax revenue because much home renovation activity occurs under the table as part of the underground economy. That activity would have to come into the tax system for the credit to be claimed. The budget would also introduce a small first-time home buyer’s tax credit on qualifying homes acquired after January 27, 2009. Also, the amount of money that a first-time home buyer could withdraw from his registered retirement savings plan (RRSP, a tax-sheltered individual retirement fund analogous to a U.S. 401(k)) would increase from C $20,000 to C $25,000. The budget also proposes relief provisions to compensate for the decrease in the value of investments in an RRSP (or some similar retirement-related vehicles) following the death of the annuitant to prevent undue hardship when investments decline in value postmortem before the deceased’s property is distributed. Finally, the 15 percent mineral exploration tax credit available to individuals who invest in flow-through shares of mining exploration companies would be extended another year for flow-through share agreements entered into by March 31, 2010. ♦ Steve Suarez is a partner with Osler, Hoskin & Harcourt LLP in Toronto. Full Text Citations • Finance Minister Jim Flaherty describes Canada’s 2009 budget economic action plan. Doc 2009-1816; 2009 WTD 17-9 • Summary of 2009 budget tax relief measures. Doc 2009- 1817; 2009 WTD 17-10 • Prime Minister Stephen Harper notes home renovation tax credit. Doc 2009-1819; 2009 WTD 17-11 • Flaherty’s budget speech. Doc 2009-1823; 2009 WTD 17-12 386 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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