Canada Budget Cuts Affect Scientific R&D and Overseas Employment Tax Credits, Income Tax Act
(Sunnyvale, CA) – A conservative budget plan for 2012 in Canada proposes to gradually phase out the
Overseas Employment Tax Credit (OETC) from the 2013 tax year onwards and reduces the Scientific
Research and Experimental Development Program (SR&ED) investment tax credit from 20% to 15%.
While the 2012 budget presented by Finance Minister, Jim Flaherty, on March 29, 2012 had no effect on
business tax rates, proposals to amend the Canadian Income Tax Act could specifically affect income tax
adjustments undertaken by corporations and the taxability of dividends.
Highlights of Canada Budget 2012:
Canada Business Tax Update
No changes in tax rates.
Proposals to amend the thin capitalization rules by way of:
-Reduction in the debt-to-equity ratio to 1.5:1 (from from 2:1),
-Disallowed interest expenses to be treated as dividends for withholding tax purposes under the
thin capitalization rules
-Extension in the scope of thin capitalization rules to cover debts of partnerships of which a
Canadian corporation is a member, etc.
Proposals for changes to the Scientific Research and Experimental Development Program
The SR&ED investment tax credit rate which applied to a qualified expenditure pool balance to
be reduced to 15% (from 20%). This will take effect from January 1, 2014.
-From 2014 onwards, capital expenditures will not be eligible for SR&ED deductions and
investment tax credits
-In case of arm's length SR&ED contracts, only 80% of contract payments will be included in
computations for investment tax credits, etc.
Budget 2012 has proposed to phase out the Overseas Employment Tax Credit (OETC) over 4
years, from the 2013 tax year onwards. Employees being Canadian residents who qualify for the
OETC are entitled to a tax credit equal to the federal income tax otherwise payable on 80% of
their qualifying foreign employment income, capped at a maximum foreign employment income
of CAD 100,000.
The Income Tax Act enables a taxable Canadian Parent Corporation which has acquired control
of a taxable Canadian subsidiary corporation to benefit from an increased cost of certain capital
assets acquired by the Parent by way of a winding up/vertical amalgamation of/with the
subsidiary (often referred to as the bump), subject to certain limitations. Since corporate
partnerships have been increasingly used to avoid the denial of the aforesaid benefit in respect
of a subsidiary's assets, it has been proposed to introduce suitable measures to ensure that
partnerships cannot be used as a vehicle to avoid the denial of the bump.
It has been proposed to amend the Income Tax Act to enable secondary adjustments to be
treated as dividends for withholding tax purposes. It is pertinent to note that Canadian
corporations which are subject to primary adjustments would also be deemed to have paid a
dividend to its non-resident participants in transactions not carried out at arms’-length price.
This would be in proportion to the amount of the primary adjustment relating to the non-
resident participant irrespective of whether the non-resident is a shareholder of the Canadian
Budget 2012 has made an attempt to clarify that non-residents are allowed to repatriate to a
Canadian corporation (subject to a primary adjustment), an amount equal to the portion of the
primary adjustment that relates to the non-resident.
It has been proposed that upon meeting certain conditions, a dividend will be deemed to have
been paid by a Canadian subsidiary to its foreign parent for any non-share consideration against
the acquisition of the shares of a foreign affiliate. The paid-up capital of any shares of the
subsidiary that are given as consideration would be disregarded for this purpose. Such deemed
dividend would attract withholding tax, which may be reduced by an applicable tax treaty.
At present there are provisions in the Income Tax Act on taxability of dividends which provide
for a partial imputation system allowing a Dividend Tax Credit (DTC) for individuals which is
proportionate to the share of income tax assumed to have been payable at the corporate level.
It has been proposed to simplify the manner in which a Canadian corporation pays and
designates eligible dividends. Proposals allow a corporation to designate any portion of the
dividend to be an eligible dividend. The portion of a taxable dividend that is designated to be an
eligible dividend will qualify for an enhanced DTC, and the remaining portion will qualify for the
It has been proposed to increase the eligibility age for Old Age Security (OAS) and Guaranteed
Income Supplement benefits to 67 (from 65) from April 2023 and is expected to get fully
implemented by January 2029. Additional proposals include:
-Introduction of a plan for supporting retirement income system by way of Pooled Registered
Pension Plans, -Making available options to defer OAS benefits against higher annual benefits,
It has been proposed that employees’ income shall include the amount of employers’
contributions to a group sickness or accident insurance plan in the year when the contributions
are made. This would only happen if the contributions are not in respect of wage-loss
replacement benefits, payable on a periodic basis.
The Medical Expense Tax Credit which provides federal income tax relief of 15% on certain
eligible medical and disability-related expenses in excess of a threshold will now enjoy more
inclusions to the list of eligible expenses.
It has been proposed that a special tax would be payable by specified employees on an "excess
Employees Profit Sharing Plans (EPSP) amount". Such amount being the portion of an
employer's EPSP contribution exceeding 20% of the specified employee's annual salary for the
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