CORPORATE INCOME TAX MEASURES

Small Business Deduction

The Budget proposes to increase the business limit for the small business deduction to $300,000 for that part of a Canadian-controlled private corporation's taxation year that ends after December 31, 2004. This accelerates the change that was to have occurred after 2005.

Scientific Research & Experimental Development (SR&ED)

The Budget proposes that certain otherwise associated corporations will not be associated for purposes of determining eligibility for the 35% investment tax credit rate for SR&ED. The associated corporation rules provide that any two or more shareholders that own shares in two corporations constitute a group that may control, and therefore associate, the corporations. This would be the case even if each group contains one or more different minority shareholders. For taxation years ending after March 22, 2004, if there is at least one shareholder that does not own shares in both corporations, this definition of group control will not apply for purposes of determining the $2 million SR&ED expenditure limit. An anti-avoidance provision will prevent taxpayers from artificially structuring companies to benefit from this change.

Carryforward Periods

Effective for losses incurred in taxation years ending after March 22, 2004, the time period for applying non-capital losses against future income will be extended from seven years to ten years. A similar extension to ten years will be provided where non-capital losses are applied to reduce Part IV tax, for unapplied business foreign tax credits and for certain losses of life insurers.

Capital Cost Allowance (CCA)

The CCA rate for computer equipment acquired after March 22, 2004 will increase from 30% to 45%. In addition, the CCA rate for data network infrastructure equipment will increase from 20% to 30%.

Currently, computer equipment is eligible for a separate class election which allows a terminal loss to be claimed when the computer is disposed of. This election will be eliminated. However, taxpayers may elect to include computer equipment purchased in the period March 23, 2004 to December 31, 2004 in a separate 30% class rather than combining all such equipment in the higher 45% class.

Fines and Penalties

It is proposed that any fine or penalty imposed, after March 22, 2004, by law, whether by a government, government agency, regulator, court or other tribunal, or any other person with statutory authority to levy fines and penalties, will no longer be deductible for income tax purposes. This will include fines and penalties under the laws of foreign countries. If the law does not classify the amount paid as a fine or penalty, it may be deductible if it is otherwise incurred for the purpose of earning income. Pending further review, penalties under the Excise Act, the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act will continue to be deductible. The change will also not apply to penalties or damages under a private contract.

Affiliated Persons

Many rules that prevent or defer the realization of losses are based on whether the parties to a transaction are affiliated persons. The Budget proposes to expand the affiliated person rules to determine when a person is affiliated with a trust. A person, referred to as a "majority interest beneficiary," who is entitled to more than 50% of the trust income or more than 50% of the capital of the trust, is affiliated with the trust. When determining the entitlement to either income or capital, a discretionary beneficiary will be considered entitled to the maximum discretionary allocation. Two trusts will be affiliated if a person who lends or transfers property to one trust, in other than an arm's length commercial transaction, is affiliated with a person who lends or transfers property to the other trust and if the majority interest beneficiaries of each trust are also affiliated. In determining the affiliation of trusts, the position of trustee is no longer relevant.

Donation Trading

The acquisition of control rules will be expanded to provide that any unclaimed charitable donations of a corporation cannot be claimed after an acquisition of control. In addition, if property is acquired by a corporation before the acquisition of control with the intention that it will be donated after the acquisition of control, the donation will not be deductible to the corporation.

General Anti-Avoidance Rule (GAAR)

The Budget clarifies that GAAR applies not only to the Income Tax Act but also to the Income Tax Regulations, the Income Tax Application Rules, including any amendments to them, and Canada's tax treaties.

Patronage Dividends

Only co-operatives and credit unions will be entitled to deduct patronage dividends paid after March 22, 2004 to non-arm's length persons.