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Tuesday, March 20, 2007

2007 Federal Budget Business Tax Updates

Business Tax Updates:
Increased Capital Cost Allowance ("CCA") for Buildings - Non-residential buildings are eligible for a CCA rate of 4% under Class I of Schedule II to the Income Tax Regulations. The Federal Budget proposes that the CCA rate for buildings used for manufacturing or processing in Canada of goods for sale or lease be increased to 10% and that the CCA rate for other non-residential buildings be increased to 6%. Eligibility requirements for either of the 2 new classes:
1.) the building must be placed into a separate class, and
2.) at least 90% of the building (measured by square footage) must be used for the designated purpose at the end of the taxation year. These new rules apply for properties acquired on or after March 19, 2007 or where the building was under construction on or after March 19, 2007.
Increased CCA Rate for Computers - Class 45 is presently eligible for a CCA rate of 45%. This rate will increase to 55% for assets acquired on or after March 19, 2007.
Increased Installment Threshold - The Federal Budget proposes to increase the minimum threshold from $1,000 (based on the prior year's corporate income tax liability) to $3,000 beginning for taxation years that commence in 2008. For Canadian Controlled Private Corporations, the Budget proposes that the installment frequency be reduced from monthly installments to quarterly installments to the extent that the taxable income of the Canadian Controlled Private Corporation for either the current or previous year does not exceed $400,000, the corporation qualifies for the small business deduction for either the current or previous year, the taxable capital employed in Canada of the corporation does not exceed $10 million in either the current or previous year and the corporation has no compliance irregularities under the Income Tax Act and the Excise Tax Act for the preceding 12 months.
GST Filing for Small Businesses - Currently, GST registrants with taxable supplies that do not exceed $500,000 in a fiscal year may elect to have reporting periods that are fiscal years which enables them to file an annual GST return and make quarterly installment payments. The Federal Budget proposes to triple the taxable supplies threshold to $1,500,000.

Budget 2007 proposes a new Vehicle Efficiency Incentive (VEI) structure that will cover the full range of passenger vehicles available today. The VEI will have three distinct components and come into effect March 20, 2007:
1. A performance-based rebate program offering up to $2,000 for the purchase of a new fuel-efficient vehicle.
2. Neutral treatment of a broad range of vehicles with average fuel efficiency that are widely purchased by Canadians.
3. A new Green Levy on fuel-inefficient vehicles. These measures, together with a new initiative to encourage Canadians to retire older, more polluting vehicles, will be broadly revenue-neutral.

New Rebate for Fuel-Efficient Vehicles Manufacturers now offer a number of vehicles that are eligible for the performance-based rebate program. Current models qualifying for the rebate will include hybrid electric vehicles, conventional fuel efficient vehicles and the most efficient of the E-85 fuel and flex fuel vehicles. The list of eligible vehicles will be established by Transport Canada by combining the city and highway fuel-efficiency ratings.The thresholds will be based on a combined 55 per cent city and 45 per cent highway rating. Initially, new automobiles with a combined fuel consumption rating of 6.5 L/100 km or less and minivans, sport utility vehicles (SUVs) and other light trucks with fuel consumption of 8.3 L/100 km or less will be eligible for a rebate. These thresholds will be reviewed periodically. The basic rebate amount will be $1,000, and an additional $500 will be added for each half litre per 100 km improvement in the combined fuel-efficiency rating of the vehicle below these thresholds. The maximum rebate value will be $2,000. Efficient E-85 fuel vehicles will be eligible for a rebate of $1,000. Eligible new vehicle purchases or leases as of March 20, 2007, will qualify for the rebate.More information on the program, including the vehicles eligible for the rebate, will be published on Transport Canada’s website (www.tc.gc.ca). The lists of eligible vehicles will be updated as information on new vehicle fuel-efficiency ratings becomes available. Consumers purchasing or leasing (long-term leasing for a period of at least 12 months) an eligible vehicle should keep a proof of purchase or a copy of the lease agreement. Consumers will be asked to show proof of registration, in Canada, of the new vehicle. While the introduction of rebates for eligible fuel-efficient vehicles is proposed to take effect March 20, 2007, the payment of rebates will be made once administration and delivery systems have been put in place. The Government is aiming to make rebate payments by fall 2007. Budget 2007 commits $160 million over the next two years to provide the performance-based rebate.
New Green Levy on Fuel-Inefficient Vehicles For new passenger vehicles (excluding trucks) with fuel-efficiency ratings of 13.0 L/100 km or more, the incentive structure will include a new Green Levy on these vehicles, payable by the manufacturer or importer when vehicles are delivered into the Canadian market. The fuel-efficiency rating will be based on the same combination of city (55 per cent) and highway (45 per cent) fuel consumption ratings used to establish the parameters for the rebate. The new Green Levy will start at $1,000 for passenger vehicles with combined fuel-efficiency ratings of at least 13.0 L/100 km but less than 14.0 L/100 km. The rate will increase in $1,000 increments for each full litre per 100 km increase in the combined fuel-efficiency rating above the 13.0 L/100 km floor, to a maximum of $4,000, for vehicles with ratings of 16.0 L/100 km or more. The levy will apply to new vehicles delivered by a manufacturer or importer to a purchaser (usually a dealer) after March 19, 2007. Inventories of vehicles held by dealerships will not be subject to the new Green Levy. Certain consumer purchase contracts entered into before March 20, 2007, will also be grandfathered. With the introduction of the new levy, the existing excise tax on heavy vehicles will be eliminated effective March 20, 2007. It is expected that this measure will increase federal revenues by $110 million in 2007/08 and $105 million in 2008/09.

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