Deloitte

Deloitte

March 05, 2010 08:00 ET

Deloitte Tax Specialists Offer Reaction to Federal Budget

Deloitte outlines budget's strengths and weaknesses on creating a business climate that propels corporate growth and furthers Canada's international competitiveness

OTTAWA, ONTARIO--(Marketwire - March 5, 2010) - In reaction to the 2010 Canadian federal budget announcement, Deloitte's senior tax leaders today commented on a number of measures as they relate to Canada's revenue generation and international competitiveness, and offered considerations for strategic tax measures to improve Canada's business climate. Though it was largely predicted to be a "stay-the-course budget", a number of key items tabled today will impact many Canadian businesses in the year ahead.

Debt, the deficit and GDP

"The minister announced a lower-than-forecast, but still recession-fuelled, $53.8 billion deficit, which pales in contrast to the deficits in the United States. and the United Kingdom," explains Andrew Dunn, national Tax leader, Deloitte. "This brings the federal debt-to-GDP ratio to just under 34% — a multi-year high and well-above the government's own 25% target. The budget outlines continued, but declining, deficits over the next five years, starting with a still very high 2011 deficit of $49.2 billion."

"Although short on details, the minister resisted the temptation to defer scheduled corporate tax reductions over the next two years and laid out a credible multi-year roadmap to deficit reductions over the next few years," explains Dunn.

While there is no denying that the global economic outlook has improved since January 2009, when the last budget was introduced, there still appears to be a bumpy road ahead. The minister predicts real growth in the economy of 2.6% in the 2010 calendar year and 3.2% in 2011.

"As Canadians, we should still be concerned about the global economy, as several countries around the world now face an inability to meet their debt repayment terms," explains John Hutson, national Tax marketplace leader, Deloitte. "Large deficits in the US and UK are also a concern as they will have a significant impact on the global economic recovery, and by extension on Canada's economy."

Personal income taxes

"Personal tax rate reductions were modest and centered on programs aimed at lower-income Canadians," says Dunn. "However, to ensure Canada's long-term financial health, we believe the focus should be on making Canada's personal tax regime globally competitive so that Canada can retain and attract globally mobile talent. With an aging Canadian workforce and looming talent and revenue gaps, being able to attract the best talent to Canada is critical."

Scientific Research and Experimental Development (SR&ED) tax credits overlooked

"We were disappointed not to see an expansion of the SR&ED tax credit regime and wider access to refundable credits," says Hutson. "While Canada has long prided itself on its R&D environment, many other countries have introduced increasingly generous programs in this fiercely competitive and very significant area. Minister Flaherty proposed further study and more support for academic research, but nothing specific for private sector activity — which we believe is an oversight."

Unemployment and the job rate

Although the budget predicts small reductions in unemployment over the next two years, unemployment is also expected to remain higher than short-term historical averages. "With 50% of Canadian government revenue coming from the collection of personal income taxes, unemployment is the most significant challenge to tax revenue targets," explains Hutson.

Summary of 2010 federal budget highlights

BUSINESS MEASURES

  1. Open Canada's doors to venture capital and foreign investment

By amending the definition of "taxable Canadian property" to exclude shares of certain Canadian private companies, the government has significantly reduced administrative and, in some cases, economic barriers to foreign investment in Canadian-based innovation and technology. This change puts Canada at the top of the list of places to invest globally. For further information on this topic see the Deloitte press release posted on Marketwire at 16:59 EST and Deloitte.ca on March 4, 2010.

"The changes in tax legislation announced in today's budget are among the most significant changes to capital gains taxation since the introduction of taxation of capital gains in 1972," explains John Ruffolo, global Tax leader for the Technology, Media & Telecommunications industry group. "The Canadian government has listened to the financing community, understood the severity of the problem and removed the major tax barriers that have prevented critically needed international investment capital from crossing our borders."

  1. Closing another door on income trusts

Income trusts will be taxed like regular corporations starting January 1, 2011. In recent months many trusts have used tax losses as part of their conversion strategy. The budget proposes to impose restrictions on the use of tax losses in these situations.

  1. International tax changes — complex rules go back to the drawing board

After more than 10 years of trying to make the complex rules for foreign investment entities and non-resident trusts work, the government has listened to taxpayers and tax professionals across the country and developed a new set of proposals for public consultation — leading to revised and hopefully practical legislation. These rules are intended to simplify certain foreign income reporting for both corporations and individuals.

  1. Improving the functioning of the corporate tax system — allowing for consolidated reporting

The budget proposed to study consolidated reporting, which will remove many of the hoops corporations must jump through to ensure they do not pay tax in profitable companies and cannot access losses in other companies. Corporate taxpayers have asked for this change for many years, and Canada is one of the few countries that has not allowed consolidated tax reporting.

INDIVIDUAL MEASURES

  1. Stock option plans for employees of publicly traded companies

Under certain conditions, an employee of a publicly traded company who acquires shares under a stock option agreement may elect to defer the recognition of the employment benefit until the shares are sold. It is proposed that this deferral election (and deferred tax payment) be repealed for stock options exercised after 4:00 p.m. EST on March 4, 2010. In general where employees have already exercised their options, and elected to defer the tax, other rules have been added to ensure that the deferred tax liability will not exceed the proceeds of disposition of the optioned securities.

  1. Employee stock options — cashing out

In general, when an employee exercises a stock option and then sells the stock, they pay tax on half the gain. The company cannot claim a deduction for the benefit-difference between exercise and selling price. Certain stock option plans allowed the employee to take cash rather than shares. Special rules allowed the employee to pay tax on half of the gain, and the company could take a deduction for the full amount. The budget proposes to only allow the gain to be half taxed in the employee's hands if the corporation agrees to forgo the deduction. Despite this change in policy, no relief was provided for stock options currently outstanding, even when these options are "in the money".

  1. Softening the disbursement quota for charities

Small and rural charities that rely on tax-receipted donations are often constrained by rules that force charities to spend money due to a "must-spend percentage" of their receipted donations. Recent legislative and administrative initiatives have strengthened the Canada Revenue Agency's ability to ensure a charity's fundraising practices are appropriate. It also proposes to reform the disbursement quota to reduce the complexity and administrative burden on these charities.

"A welcome surprise is the elimination of most disbursement quotas for charitable organizations, a time-consuming exercise for most charities, allowing greater focus on the primary purpose of those organizations," explains Dunn.

OTHER MEASURES

  1. Public consultation on proposals require reporting of certain tax avoidance transactions

The budget announces that the government will further study proposals to require the reporting of certain tax avoidance transactions. The proposed regime is similar to, but less inclusive than, the reporting regimes of the US, the UK and, most recently, Quebec. A tax "avoidance transaction" entered into by or for the benefit of a taxpayer would be a reportable transaction" that must be reported to the CRA if it features at least two of the following three "hallmarks": 1) a promoter or tax advisor is entitled to fees that are attributable to the amount of, or contingent upon the obtaining of, a tax benefit; 2) a promoter or tax advisor requires "confidential protection"; 3) the taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains "contractual protection." How these mechanisms will ultimately work is unclear at this stage. These proposals, as modified to take into account consultations, would apply to avoidance transactions entered into after 2010, as well as those that are part of a series of transactions completed after 2010.

Deloitte's online budget reaction showcased on Deloitte.ca

New this year, Deloitte hosted live streaming Internet-based interviews with key tax leaders on www.thefutureoftax.ca. Partners Andrew Dunn and John Hutson offered their reactions to the measures in the budget. As well, an in-depth report outlining all key budget highlights will be available on www.deloitte.ca later this evening.

About Deloitte Canada's tax practice

With the largest tax practice in the country (over 1,500 professionals in 44 offices), Deloitte offers a full suite of tax services to clients in all industries across the country. The market leader in shaping the future of tax, Deloitte influences Canadian tax policy with the goal of creating a business climate which propels corporate growth and furthers Canada's international competitiveness. Known for its industry-leading expertise, Deloitte's tax practice sets the standard of excellence in Canada and is the only Big Four professional services firm in the country to receive a Tier 1 ranking in the prestigious International Tax Review (ITR)'s World Tax 2010 report. For further information on Deloitte's tax practice, visit www.deloitte.ca and for further information on the future of tax, visit www.thefutureoftax.ca.

About Deloitte

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