CIM Bulletin, Vol. 70, No. 781, 1977
R. D. Brown, F.C.A., Price Waterhouse & Co., Toronto, Ontario
In his March SI, 1977 budget, Finance Minister Macdonald has attempted the delicate balancing act of stimulating the economy without reinforcing the inflationary pressures which Canada is continuing to experience. Several tax changes of benefit to the mining industry, as well as measures designed to encourage oil exploration in frontier areas, are among the budget proposals.
Additional earned depletion of 66-2/3%, which may be offset against income from any source, will be available on drilling costs in excess of $5 million incurred between March 31, 1977 and April 1,1980 in connection with an exploratory well in Canada, including the continental shelf. Other changes include more favourable treatment of resource property dispositions, less restrictive rules relating to "successor corporations", increased capital-cost allowance on railway spur lines, the inclusion of certain production royalties in Canadian development expenses and the application of the lower "manufacturing and processing" tax rate to sulphur production.
To encourage business capital spending, the 5% federal investment tax credit it to be extended an additional three years to mid 1980 and broadened to include spending on scientific research and development. The rate of credit will also be selectively increased on a regional basis, to 7.5% in certain designated areas in Saskatchewan, Manitoba. Northern Ontario and Quebec, and to 10% in the Atlantic provinces and the Gaspe.
Business will also obtain some much-needed relief from the taxation of inflationary inventory profits. For fiscal years commencing after December 31, 1976, a special deduction of 3% of the opening value of inventories of tangible movable property will be allowed in computing business income. A further important change will allow taxpayers to defer tax arising on the voluntary disposition of land, buildings and goodwill used in a business provided the proceeds are reinvested in similar assets within the next taxation year.
To provide a boost to Canadian equity investment, the dividend tax credit (and gross up) available to individual shareholders on dividends from Canadian corporations is to be increased from 33-1/3% to 50% effective in 1978. With this change, the differential between the tax on capital gains and Canadian dividend income has been narrowed, and the Minister therefore proposes to relax and simplify the complex provisions designed to prevent taxpayers from extracting corporate surplus at capital-gains rates. Designated surplus and most of the rules relating to paid-up capital deficiencies are to be abolished immediately, and other provisions relating to corporate distributions and reorganizations are to be revised.
However, the evident price of this simplification is to be the termination, at the end of 1978, of the right of corporations to distribute special "tax-free" (or tax-deferred )dividends out of 1971 capital surplus and 1971 tax-paid undistributed surplus on hand. In the interim, the tax rule relating to the distribution of such surpluses are relaxed, and companies will be able to pay dividends out of 1971 surplus and the capital dividend account without having first to pay 15% tax on all of their 1971 undistributed income.
Other proposals designed to stimulate investment include adding capital gains realized on the sale of Canadian securities as qualified income for purposes of the $1,000 Canadian interest and dividend deduction, and a provision to permit taxpayers other than dealers in securities and certain financial institutions to make a lifetime election to treat all gains and losses from, Canadian securities as being of a capital nature.
