Federal and Provincial Budgets

On March 29, 2012, the Federal Minister of Finance, Jim Flaherty, presented the majority government’s budget. The budget does not change corporate or personal tax rates. This Tax memo discusses the tax initiatives proposed in the budget.
 

Our Instant Reactions: Tax and Other Highlights

• Gov’t will eliminate 12,000 jobs over 3 years, total workforce reduction to be about 19,200
• OAS eligibility rises from 65 to 67, won’t affect those currently receiving benefits and people aged 54 and over as of March 31 2012
  Starting on April 1, 2023 the age of eligibility for OAS and GIS will be gradually increased from 65 to 67, with full implementation by January 2029.
• SR&ED stays intact, except capital expenses no longer eligible and rate drops to 15%
  Changes to the SR&ED program not as broad as expected, proposals include:
  Simplify the program by removing capital from the expenditure base; Two design improvements that affect the calculation of overhead expenditures and of arm’s length contract payments.
  Budget 2012 includes a reduction in the general SR&ED tax credit rate from 20% to 15%; There will be a review of contingency fees charged by preparers of SR&ED claims.
• More clean and bioenergy equipment assets will now qualify for tax deductions
  Budget 2012 calls for the expansion to the eligibility for the accelerated capital cost allowance for clean energy generation equipment to include the following:
  Waste-fuelled thermal energy equipment used for space and water heating applications; Equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment; Equipment that uses residue of plants to create electricity and heat.
• Temporary small biz hiring credit extended for another year; Gov’t says this will reduce 2012 payroll costs by $205 million
  The Federal Government will extend the temporary Hiring Credit for Small Business to make it more attractive to hire new workers. A credit of up to $1,000 against a small employer’s increase in its 2012 Employment Insurance premiums over those paid in 2011 will be provided.
• The Royal Canadian Mint will be penniless by Fall 2012; however consumers can continue to use pennies indefinitely
• Gov’t says new EI pilot project will provide claimants with more incentive to accept new jobs and keep higher proportion of their earnings
  Budget 2012 invests $74 million to introduce a new, national EI pilot project that will provide benefits to EI claimants who accept work by allowing them to keep more of what they earn while they are on EI.
• Budget 2012 cites PwC study on ease of paying taxes, announces new actions to reduce the tax admin and compliance burden for businesses
  PwC’s report Paying Taxes 2012, an international study on the ease of paying taxes is referenced in this year’s Federal Budget and describes how Canada ranks higher than any other G-7 country based on the overall ease of complying with tax obligations.
  The government has proposed or announced the following actions in Budget 2012:
  • Simplified administration for partnerships
  • Improvements to the rules for paying eligible dividends
  • Administrative improvements to enhance the predictability of the SR&ED program
  • Written responses to business enquiries
  • Expansion of web forms for information returns
  • Enhancements to the CRA’s secure “My Business Account” portal
  • An improved business section on the CRA’s website
• Gov’t looks to foreign trade opportunities with China, EU, India, Asia-Pac, Trans-Pacific Partnership, “Mercosur” and Africa
• Budget commits $1.1 billion over 5 years to R&D and $500 million to VC’s; enough for future innovation?
  The Government in Budget 2012 highlights what it calls its commitment to a new approach to supporting innovation which will focus resources on private sector, university and other leading institution needs. This includes:
  • $500 million over five years, starting in 2014-2015 to the Canada Foundation for innovation to support advanced research infrastructure
  • $400 million to help increase private sector investments in early stage risk capital, and to support the creation of large-scale venture capital funds by the private sector
  • $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program
  • $37 million annually starting this year to the granting councils to enhance their support for industry-academic research partnerships
  • $105 million over two years to support forestry innovation and market development
  • $100 million to the Business Development Bank of Canada to support its venture capital activities
• Companies will benefit from the Government’s “one project – one review”: modernizing the review process for major Canadian economic projects
  The Government is proposing legislation to streamline the review process for major economic projects. The aim is to modernize the federal regulatory system to establish clear timelines, reduce duplication and regulatory burdens within projects and focus resources on large projects where the potential environmental impacts are the greatest.
• 15% Mineral Exploration Tax Credit for flow-through share investors extended until March 2013
  The Federal Government plans to extend the temporary 15% Mineral Exploration Tax Credit for flow-through share investors for an additional year. This credit helps junior exploration companies raise capital by providing an incentive to individuals who invest in flow-through shares issued to finance mineral exploration.
• Gov’t plans to state its jurisdiction over the banking sector in the Bank Act; clarifies rules against banks offering insurance services
  The Government will introduce a preamble into the bank Act to clarify the intent that all banking activities throughout Canada be governed exclusively by the Federal Government, to avoid creation of local and potentially inconsistent rules to those of the federal banking regulatory framework.
  As previously announced, the Government will propose a legislative amendment to clarify the prohibition against banks offering life annuities or products of a similar nature.
• Foreign investment restrictions lifted for telecom companies that hold less than a 10% share of the Canadian telecoms market
  The Government plans to introduce improvements to the foreign ownership review process and introduce legislative amendments to lift foreign investment restrictions in the telecoms sector for companies that hold less than a 10% share of the total Canadian telecoms market.
• Seniors will be able to defer receipt of OAS pension for up to 5 years and receive a higher OAS amount in the future
• Gov’t further limits ability of multinationals to increase interest deductions in Canada by buying foreign affiliates
  The Government is restricting the ability of foreign-based multinational corporations to transfer, or “dump”, foreign affiliates into their Canadian subsidiaries with a view to creating tax-deductible interest or distributing cash free of withholding tax.
  It is also making changes to Canada’s thin capitalization rules, which seek to prevent Canadian corporate profits from being distributed to certain non-resident shareholders free of Canadian income tax by way of interest payments on excessive debt.
• Phased out: 10% Mineral Exploration and Development Tax Credit & Atlantic Investment Tax Credit for oil & gas mining assets acquired after 2015