Budget 2009: Benefits for big and small businesses

Go out and buy computers. That was the Tory government’s clearest message to business owners in its 2009 budget released today in Ottawa. Included in the specifics is a 100% capital cost allowance (CCA) for computers bought between January 27 of this year and February 1, 2011.

“It’s rather exciting, especially if you have computers that you’re thinking about replacing,” says Kim Moody, CA, TEP, at Moodys LLP Tax Advisors in Calgary. And welcome news for many companies, since for many the last time many made extensive computer hardware replacements was during the run-up to Y2K.

Debbie Meloche, Canadian private company services tax leader at Price Waterhouse Coopers says that goodie was a pleasant surprise. “Those [expenditures] were the types of things companies may have been putting off,” she says. “So this may have some stimulus.”

CCA adjustments also extend to a 50% straight-line accelerated rate for equipment purchased by manufacturers during 2010 and 2011. Budget documents say the changes are designed to “provide economic stimulus and assist Canadian businesses during this challenging economic period.” In theory, the changes will benefit the manufacturing sector, notes Michael Templeton, a senior tax partner McMillan LLP, but since the sector is already hurting most firms likely have enough write-offs to see them through. It’s also limited in terms of who can qualify, he notes.

Meloche agrees. “The problem with this budget is you have to be taxable to benefit from some of this. They have to be profitable,” she says. “And as we know a lot of companies aren’t in that position. So they don’t get anything out of this, ie. no cash.”

Of more interest, though, are plans to increase the amount of small business income eligible for a reduced 11% federal tax rate from the current $400,000 to a clean half million retroactive to this January 1. Templeton notes the change is welcome, “We’re never going to complain about that,” he says.

Budget documents estimate the $100,000 shift will cost $45 million in fiscal 2009–10 and $80 million in 2010–11.

Big businesses, meanwhile, will benefit from a repeal of rules under section 18.2 of the Income Tax Act aimed at preventing double dipping on interest deductions. “There are going to be a lot of big businesses cheering on that one,” says Moody.

Rules scheduled to take effect in 2012 were designed to prevent scenarios in which a Canadian company borrowed money to fund a business venture overseas, and then took both a Canadian interest deduction and a foreign interest deduction. “The Canadian authorities looked at this practice and said it was improper,” says Templeton, “so they made an anti avoidance rule that was so broad that it would make problems for many multi-jurisdictional operations.”

Templeton notes Canadian corporations have a “tough enough time competing internationally” and it’s a good move on the part of Parliament to repeal rules that would have made it worse.

He added it’s good that they’re revisiting proposed rules surrounding investments surrounding in non resident trusts and foreign investment entities. “It’s good to see that they’re going to rethink it,” he says. “At some point they have to accept there are people who will enter into very Byzantine structures to avoid tax and the government should attack them under GAAR instead of setting up these complex rules that no-none can understand.”

Moody adds another good fix is a glitch in the rules related to the selling of a Canadian Controlled Private Corporation. The existing rules place the sale of a corporation in the beginning of the day the sale takes place, but that created timing glitch for the disposition of the company; which could put at risk utilization of the capital gains deduction.

That’s a big downside, notes Meloche, because being out of control can mean an owner’s not eligible for a $750,000 tax deduction. “It could make a very big difference for someone,” she says. “If you had two or three owners and this happens, each person is losing that. So it’s a good change.”

(01/27/09)

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