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OTTAWA — The minority Conservatives' 2007 budget directed tax breaks to specific groups such as manufacturers, small business and farmers, without broad-based change to corporate tax rates or capital gains rules.
The budget is disappointing for business, said Michael Tinkler, vice-chair of the Certified Management Accountants of Canada. He said there is a total lack of new measures for big business over and above those announced previously.
For the first time in three budgets, Ottawa offered no big cuts to corporate income tax rates. But the government is providing incentives to the provinces to eliminate their capital taxes by 2011.
The Conservatives failed to follow through on their election promise to eliminate capital gains that are reinvested within six months, but they are doling out higher capital gains exemptions to farmers, fishers and small-business owners.
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The ailing manufacturing industry was handed a break, while the oil sands will lose its prized accelerated write-off for general investments. A new allowance will be phased in to promote green technologies.
The general corporate income tax rate will fall from 21 per cent to 18.5 per cent by 2011, as announced by Finance Minister Jim Flaherty on Hallowe'en, when he attempted to soften the blow of new taxes on income trust distributions.
But Ottawa will now offer a financial incentive to the provinces to encourage them to eliminate, or accelerate the elimination of, their capital taxes by 2011. Beginning yesterday, the incentive would be available to provinces that enact legislation to eliminate their capital taxes before Jan. 1, 2011. The amount of the incentive would equal the average expected federal corporate income tax gain from the elimination of the provincial capital taxes. (Provincial capital taxes are deductible for federal income tax purposes).
Meanwhile, Canada's beleaguered manufacturers, who saw their real output drop by 2.8 per cent between December, 2005, and December, 2006, will be allowed to write off their capital investments in machinery and equipment using a 50-per-cent straight-line rate for goods. However, the measure – which aims to encourage investment – will be temporary, applying to machinery and equipment acquired between yesterday and the end of 2008. It will allow that machinery and equipment to be written off over a two-year period, on average.
It currently takes six years to write down 85 per cent of those assets. Manufacturers had pleaded for this change. It was also recommended in February by the standing committee on industry.
In his speech, Finance Minister Jim Flaherty described the temporary move as “a shot of adrenaline” for manufacturers. The finance department had hinted at the change weeks ago. The sector has been hammered by the strong Canadian dollar, slowing U.S. economy, floundering Big Three auto makers and foreign competition.
The accelerated capital cost allowance for manufacturers is expected to cost Ottawa $170-million in fiscal 2007-2008 and $565-million in 2008-2009. (The “capital cost allowance” rate determines the portion of the cost of an asset that can be deducted for tax purposes each year to recognize the depreciation of the asset.) The budget also proposes increasing the capital cost allowance rate for Canadian buildings used for manufacturing or processing goods, to 10 per cent from four per cent.
Beyond manufacturing, the CCA rate for other non-residential buildings will rise to six per cent, from four per cent, while the rate for computers rises to 55 per cent from 45 per cent. Natural gas distribution pipelines and liquefied natural gas facilities will also be eligible for faster write offs.
As far as capital gains go, the budget would increase the lifetime capital gains exemption for farmers, fishermen and fisherwomen, and small business owners, from $500,000 to $750,000. That's the first time the exemption has been raised since 1988.
But the targeted measure, to groups which already had a lifetime capital gains exemption, is a far cry from the Tories' election promise to broadly eliminate capital gains that are reinvested within six months. That promise had been expected to cost the government at least $1-billion a year. The targeted measure is expected to reduce federal revenues by $5-million in 2006-2007 and $85-million in 2007-2008.
The budget is also proposing that interest expense on debts incurred to buy the shares of a foreign affiliate will no longer be deductible, unless and until the shares generate income that Canada actually taxes. The budget said that multinational companies have been taking advantage of Canadian tax laws by borrowing in Canada to fund business operations abroad, then using the resulting interest deductions to offset Canadian-source income. In other words, Canadian taxpayers have been indirectly subsidizing the international operations of multinationals, the budget said, and that was making it more attractive for even Canadian-owned companies to locate new income-earning operations in a foreign country.
