Business Tax Measures

Scientific Research and Experimental Development (SR&ED)

Under the current system, Canadian-controlled private corporations (CCPCs) are entitled to a tax credit or a cash refund of investment tax credits (ITCs) based on the following formula:

Eligibility for the 35% rate is phased out if the corporate group's taxable capital (as calculated for Large Corporation Tax purposes) exceeds $10 million and/or if the corporate group's taxable income exceeded $400,000 in the preceding taxation year.

The Budget proposes to increase both the expenditure limit eligible for the 35% rate and the phase-out ranges for taxation years that end on or after February 26, 2008 (subject to proration for straddle years):

Due to the increase in the expenditure limit to $3,000,000, a corporation may now receive a $1,050,000 refund versus the current maximum of $700,000.

The new phase-out limits, like the old ones, are prorated for short years.

SR&ED Carried on Outside of Canada

A taxpayer cannot currently claim an ITC for SR&ED expenditures carried on outside Canada. The Budget proposes that certain salaries or wages incurred outside of Canada (“foreign salaries”) on or after February 26, 2008, (subject to proration for straddle years) will be eligible for ITCs. More specifically:

• The taxpayer must directly undertake the activities outside of Canada solely in support of SR&ED that the taxpayer carries on in Canada.
• Foreign salary eligibility is limited to 10% of the total salaries and wages incurred.
• Foreign salaries will not include salaries and wages based on profits or bonus or salary or wages subject to tax in the foreign country.

Administrative Measures

In order to facilitate ITC claims, the CRA will:

• introduce a new SR&ED claim form and guide and eligibility-assessment tool;
• review policies and procedures to ensure they are aligned with current business practices and are applied consistently across the country, and
• invest an additional $10 million to administer the program.

Manufacturing and Processing (M&P): Accelerated Capital Cost Allowance (CCA)

Generally, qualifying M&P equipment would be included in Class 43, which is a 30% declining balance class. The 2008 Budget provided that qualifying equipment acquired before 2009 would go into Class 29, a 50% straight-line class. The Budget extends this qualifying period to assets acquired in 2009.

Eligible assets acquired in 2010 and 2011 will be included in Class 43 but the CCA rate will be subject to special transitional rules:

Assets acquired in 2010 and 2011 will be placed in separate Class 43 pools. After 2011, the separate pools will be merged.

All the above measures are subject to the half-year rule.

Clean Energy Generation: Accelerated CCA

Class 43.2 allows 50% CCA to be claimed on a declining balance basis. Eligibility for Class 43.2 has been expanded to include:

• qualifying Ground Source Heat Pump Systems;
• additional feedstocks for Biogas Production Equipment, and
• equipment used to produce heat from waste sources and equipment used to produce bio-oil.

Remittance of Source Deductions

Currently there is a penalty of 10 per cent for any late remittance of source deductions. This penalty is increased to 20 per cent when the failure to remit is made knowingly or in circumstances amounting to gross negligence. The Budget proposes to enact a graduated penalty regime for remittances due after February 26, 2008, as follows:

• 3 per cent if the remittance is one to three days late;
• 5 per cent if the remittance is four or five days late;
• 7 per cent if the remittance is six or seven days late, and
• 10 per cent if the remittance is more than seven days late.

Business Number (BN) Initiative

As part of the government's initiative to reduce the paper burden on small business, the Budget proposes the following:

• broaden the scope of the BN-related information that may be shared with BN Partners to include a range of relevant contact, identification and status information;
• expand the type of government entities that qualify as BN Partners to include other levels of government in Canada such as municipalities and Aboriginal governments, and
• allow for the publication of the BN by BN Partners in connection with programs or services provided by the BN Partner.

Publicly traded trusts

Publicly traded income trusts and partnerships (SIFTs) are generally subject to a special tax on distributions. (SIFTs that existed on October 31, 2006, are subject to grandfathering rules which eliminate this tax until 2011.) The tax is comprised of a federal element (reduced to 15% by 2012 in step with the federal corporate rate reduction) and a provincial element (currently 13%).

For 2009 and subsequent taxation years, the provincial element will be computed differently. Distributions will be allocated to the provinces in accordance with the corporate taxable income allocation formula in the regulations. The various provincial corporate rates will then be applied to such allocations to arrive at a composite rate. Distributions not allocated to a province will be taxed at 10%. Distributions allocated to Quebec will not be subject to this provincial element because Quebec imposes its own tax.