News Article

Budget fine-tunes corporate taxes

Posted: March 29, 2012
Corporations, for the most part, were left alone in the 2012 Federal Budget with only some tinkering and fine-tuning applied.
 
Capital Cost Allowance

In 1994, the federal government added class 43.1 (30% declining) to Schedule II of the Income Tax Regulations in order to allow for the depreciation of clean energy and conservation equipment. This was enhanced in 2005 with class 43.2 (50% straight line) for the same equipment that met a higher standard of efficiency.
 
Today, the budget adds to Schedule II:
  • Waste-fuelled thermal energy equipment,
  •  Equipment of a district energy system that uses thermal energy provided by eligible waste-fuelled thermal energy equipment,
  • Equipment used to distribute thermal energy primarily generated through waste-fuelled thermal energy equipment,
  • Equipment that uses the residual of plants to produce electricity and heat.
In addition, the restriction requiring thermal energy equipment be used in generating heat in an industrial process or greenhouse has been eliminated. This opens waste-fuelled equipment as an alternative to heating oil or to hot water.

In the past, costs incurred to create and develop these systems had to be added to the capital cost of the equipment. Today's budget removes this restriction and intangible project start-up costs will now be fully expensed or, alternatively, passed on to investors using follow-through shares.

Finally, in order to qualify for the accelerated depreciation of these classes, the equipment must meet the environmental laws and regulations governing the equipment.
 
Phased-Out Tax Credits

Mineral Exploration and Development Tax Credit

Budget 2012 will eliminate the current corporate 10% tax credit available for pre-production mining expenditures. The credit will remain in place for 2012, reduce to 5% for 2013 and disappear entirely in 2013.

Pre-production development expenses will also be phased out, dropping to 7% in 2014, 4% in 2015 and be eliminated in 2016.

Agreements in place as of March 29, 2012, will be applied at the 10% tax credit rate until Dec. 31, 2015.

Atlantic Investment Tax Credit (AITC)

The AITC currently offers a 10% tax credit for qualifying acquisitions of new buildings and machinery and equipment primarily used in farming, fishing, logging, mining, oil and gas, and manufacturing in the Atlantic provinces. The current rate of 10% will remain until 2014, drop to 5% in 2015 and be eliminated entirely as of Jan. 1, 2016, on qualifying equipment purchased before March 29, 2012.
 
Scientific Research and Experimental Development

Investment tax credits are available to Canadian corporations to assist in the cost of qualifying expenditures incurred to innovate and create economic opportunities for Canadian corporations.

Qualifying expenditures are eligible for an Investment Tax Credit of 20%. The credit is further enhanced for Canadian-controlled private corporations (CCPCs) to 35% up to $3 million. Effective Jan. 1, 2013 this credit will be reduced to 15% from 20% and will be pro-rated for yearends that straddle the Jan. 1, 2013 date.

The SR&D tax credit for CCPCs remains unchanged at 35% of the first $3 million.

Certain changes and limitations have also been made to the types of items that qualify as expenditures; as well, the amount of wages that can be included has been reduced. The qualified expenditure pool will be reduced to 60% of eligible expenditure from 65% in 2013, and to 55% in 2014.

Corporate partnerships tax avoidance

Budget 2012 addresses sections 88 and 100 of the Income Tax Act that deal with the General Anti-Avoidance Rules (GAR). Essentially, the budget strengthens rules against liquidating partnerships and increasing the asset value of income-producing assets and the sale to offshore or tax-exempt entities.
 
Alan Rowell, Distinguished Financial Advisor├▒Tax Services Specialist, is president of The Accounting Place in Stoney Creek, Ont.