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Budget 2011: Protecting The Integrity Of The Canadian Tax System
In this week's Canadian Budget 2011, the Minister of Finance provided limited tax relief for businesses in certain sectors and emphasised the need for a stable government. Taxand Canada looks at the measures which have implications on multinationals.
Stop-Loss Rules on Redemption of Shares
Existing rules allow a Canadian corporation to deduct the amount of a dividend received from another Canadian corporation in many circumstances. The tax policy behind such "tax-free" inter-corporate dividends is to ensure that dividends are taxed only once as they are paid through a corporate chain and ultimately to individual shareholders. To prevent abuse, these rules are complemented by certain "stop-loss rules" which, in certain circumstances, reduce the amount of loss otherwise realized by a corporation on a disposition of shares by the amount of previous tax-free dividends received. Budget 2011 documents cite certain "tax avoidance arrangements" where corporations would claim a "double deduction" from the redemption of shares.
To counter the perceived tax avoidance, of "double deduction", the budget proposes to extend the application of the stop-loss rules to any dividend deemed to be received on the redemption of shares held by a corporation, except only dividends deemed to be received on the redemption of shares of the capital stock of one private corporation that are held by another private corporation (other than a financial institution). These changes would apply to redemptions that occur on or after 22 March 2011.
Mineral Exploration Tax Credit Extended Once Again
The mineral exploration tax credit, commonly known as a "super flow-through", is an added advantage in flow-through share offerings. Currently, the super flow-through is scheduled to expire at the end of March 2011. Budget 2011 extends the availability of the super flow-through for one more year, to include flow-through share agreements entered into before 31 March 2012. Under the "look back" rule, funds raised and renounced in one year can be spent on qualifying expenditures in the following year.
- Taxand's Take
The "look-back" rule means the effect of this extension is to support qualifying exploration expenditures until the end of 2013. This extension is becoming a perennial feature of federal budgets.
Proposed Amendments to withholding Tax Rules.
The proposed amendment limits the ability of a non-resident lender to avoid Canadian withholding tax on interest payments by assigning the right to receive such payments to an arm's length person.
- Taxand's Take
The proposed amendment appears to be narrow and confined largely to a specific transaction in a landmark case. In addition it does not affect the exemption from Canadian withholding tax on interest payments on non-arm's length debt under the US Treaty.