Government of Canada Eases Tax Compliance Burden for Internationally-Engaged Canadian Businesses

(Department of Finance Canada)

The Honourable Jim Flaherty, Minister of Finance, today [June 27] proposed changes to the Income Tax Act for Canadian businesses with foreign affiliates and those that report earnings in a foreign currency.

“Our government is committed to creating a corporate tax system that is both fair and internationally competitive,” said Minister Flaherty. “The proposals I am announcing today will improve the tax system and will assist Canadian businesses in complying with the tax law.”

Foreign Affiliates
Bill C-28, the second Budget 2007 implementation bill, provided substantial tax relief for Canadian businesses, including the historic corporate income tax rate reductions announced in the 2007 Economic Statement. In addition, the bill, which received Royal Assent on December 14, 2007, implemented a number of amendments to the Income Tax Act relating to foreign affiliates.

Included in the bill were provisions which allow taxpayers to elect retroactive application of some of these foreign affiliate amendments. However, in response to concerns that the deadline for filing these elections is too tight – for example, a taxpayer with a December 31, 2007 year-end must file these elections by June 30, 2008 – the Government is proposing to extend the filing deadline for these elections by 18 months. These proposals are set out in more detail in the attached annex.

Functional Currency Tax Reporting
Bill C-28 also included amendments to the Act that implemented the Budget 2006 proposal to introduce functional currency tax reporting rules. In response to representations from stakeholders concerning the amended rules, the Government is proposing several technical revisions. The revisions, which are described in detail in the attached annex, include:

• Extending the deadline to elect functional currency tax reporting to October 31, 2008;

• Amending the definition of “functional currency” to address concerns about its practical application to the situations of certain taxpayers; and

• Introducing symmetry in foreign exchange rate calculations used in the reporting of assets and debt obligations.

Minister Flaherty indicated that the Government will introduce legislation at an early opportunity to implement these proposed technical changes to the Income Tax Act. Further details can be obtained at the Dept. of Finance website.