Effect of Canada’s Budget Cuts on Overseas Employment Tax Credits 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. The OETC is an important tax measure initiated to better the international competitiveness of Canadian companies bidding on a few types of offshore contracts by improving their capacity to employ skilled workers. 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: Income Tax Canada Business Tax Update There is no change in the tax rates and the proposals to amend the thin capitalization rules by reducing the debt-toequity ratio to 1.5:1 (from 2:1), disallowing the interest expenses to be treated as dividends for withholding tax purposes under the thin capitalization rules, and extending the scope of thin capitalization rules to cover debts of partnerships of which a Canadian corporation is a member, etc. The other updates include
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 corporation).
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 regular DTC.
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Published on May 20, 2012
A conservative budget plan for 2012 in Canada proposes to gradually phase out the Overseas Employment Tax Credit (OETC) from the 2013 tax ye...