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Weekly tax highlights - October 13, 2011

October 13, 2011

How does the Canadian R&D tax regime compare?

Canada’s Scientific Research & Experimental Development (SR&ED) program has long been considered one of the world’s most generous, currently ranking third among Organisation for Economic Co-operation & Development (OECD) countries — after France and Ireland. However, the global competition for research & development (R&D) investments is intensifying. In fact, in 1996, only 12 OECD countries had R&D tax incentives; today, more than 30 countries offer them. In addition, several countries are contemplating the introduction of an R&D tax regime and others are currently reviewing and upgrading the incentives that they offer. At home, the Review of Federal Support to Research and Development (commonly called the Jenkins committee) will release its final report on October 17, 2011. Deloitte will provide analysis and commentary of the report soon after. With this rapidly changing environment, Deloitte’s recent Global Survey of R&D Tax Incentives offers a summary and comparison of the R&D tax incentives provided in 27 countries conducive to business R&D. Read more in Deloitte’s latest issue of R&D tax update.

Entry into force of the TIEA between Canada and St. Vincent and the Grenadines

The Tax Information Exchange Agreement (TIEA) previously concluded between Canada and St. Vincent and the Grenadines entered into force on October 4, 2011.

TIEAs provide for the mutual exchange of tax information with a view to better administering and enforcing taxation laws and preventing international fiscal evasion. As well, readers may recall that the Income Tax Regulations (Regulations) were amended in 2008 to extend to countries with which Canada has a TIEA certain favourable corporate tax provisions that had previously only been available to countries with which Canada has concluded a tax treaty. These incentives provide that, if a jurisdiction enters into a TIEA with Canada, active business income earned by a foreign affiliate of a Canadian corporation that is resident in that jurisdiction and carrying on business there will be included in “exempt surplus” and, consequently, dividends paid to the Canadian corporation from the affiliate will not be subject to Canadian tax. Exempt surplus treatment is also available for a foreign affiliate that is resident in another country with which Canada has a tax treaty or TIEA if it is carrying on an active business through a permanent establishment located in a TIEA jurisdiction. If a foreign affiliate is resident in a jurisdiction which has not entered into a tax treaty or TIEA with Canada, such a dividend from the affiliate to its Canadian parent company is subject to full taxation in Canada, subject to relief for any foreign taxes paid.

The Regulations provide that a foreign affiliate of a Canadian company that is resident in a country which has entered into a TIEA with Canada can earn exempt surplus in respect of active business income for its taxation year that includes the effective date of the particular TIEA, retroactive to the beginning of the taxation year. Thus, a foreign affiliate in St. Vincent and the Grenadines that has a taxation year based on the calendar year will be eligible to earn exempt surplus for its entire 2011 taxation year.

For more information on Canada’s TIEAs, please see our previous Alert. For a list of jurisdictions with which Canada has entered into a TIEA or with which negotiations are ongoing, please see the Department of Finance website.

Reminder from the CRA: mandatory e-filing for prescribed corporations

On October 11, 2011, the Canada Revenue Agency (CRA) announced that changes have been proposed to the Income Tax Regulations to specify the types of corporations that must comply with mandatory electronic filing requirements of their T2 income tax returns. This measure was announced in Budget 2009 and applies in respect of corporate income tax returns for taxation years that end after 2009. Corporations that must comply are “prescribed corporations” and are defined, in the proposed regulations, to include corporations with gross revenues over $1 million, with the exception of insurance corporations, non-resident corporations, corporations reporting in functional currency and corporations exempt from tax payable under section 149 of the Income Tax Act. More information can be found in the Regulatory Impact Analysis Statement published in the Canada Gazette. The penalty for non-compliance (failure to comply with the mandatory electronic filing requirements) is $1,000 effective for taxation years that end after 2010. However, the CRA has indicated its intention to apply the penalty on a gradual basis and no penalty would be applied for taxation years ending before 2012. For taxation years ending in 2012 the penalty for non-compliance would be $500, whereas for taxation years ending after 2012 the penalty for non-compliance would be $1,000.

The CRA exceeds its service standards in processing SR&ED claims

The CRA has service standards in place for the time required to process Scientific Research and Experimental Development (SR&ED) claims. In 2009-2010, the CRA exceeded its established targets for the SR&ED-related service standards, as noted in the Performance Report Card on page 125 of the CRA’s Annual Report to Parliament 2009-2010. Recently, the CRA reported on its success rate for the six months ended September 30, 2011; this is depicted in the table below:

Type of claim / service standard (days) The CRA’s reported success rate in meeting its own standard Average days within the CRA’s control Average days outside the CRA’s control Total average time (days)*
Refundable claims / 120 days 97% 34 27 61
Refundable claimant-adjusted claims / 240 days 95% 90 46 137
Non-refundable claims / 365 days 98% 83 91 175
Non-refundable claimant-adjusted claims / 365 days 95% 132 105 237
All claims 97% 61 46 107

* Rounding may affect results.



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