Canadian government to close
[PoliticsWatch updated 4:30 p.m. May 14, 2007]
After two months of criticism from Bay Street, tax experts and
economists, Finance Minister Jim Flaherty Monday withdrew a
controversial budget proposal that would have prevented Canadian
companies from deducting interest on foreign investment loans.
Flaherty made the clarification in a speech before the
Toronto Board of Trade on Monday morning.
The budget had said that such interest would "no longer be
deductible," causing a great deal of panic in Canada's business
community, which argued it would have imposed a major obstacle for
Canadian companies looking to make acquisitions abroad.
However, Flaherty said he was going ahead with a plan to end
so-called "double-dipping," when a company makes two tax
deductions on one foreign investment.
Double dipping occurs when a Canadian firm borrows money to invest in a foreign affiliate located in an offshore tax haven.
The company makes two interest tax deductions on a single offshore
investment -- one in Canada and another after the foreign affiliate
transfers the funds to another Canadian affiliate in a third
Flaherty said in his speech that allowing this practice "goes
too far" and asked his audience "is it fair to ask
hard-working Canadians to subsidize multinational
The finance minister said the changes to double dipping will happen
under an Anti-Tax Haven Initiative that won't come into effect until
2012 and all additional revenue collected will be put towards
corporate tax cuts.
Flaherty also announced the government will appoint an advisory panel to examine "ways to further improve the fairness and competitiveness of Canada’s international tax system."
Liberal MP John McCallum called Flaherty's announcement
"a complete u-turn by an incompetent minister."
"Today the minister spoke of 'further clarification of the Anti-Tax Haven
Initiative from Budget 2007,'" McCallum noted in a statement.
"However this initiative is nowhere to be found in the
In question period, opposition parties accused Flaherty of
flip-flopping on the foreign investment deduction originally
proposed in the budget and compared it to the government's reversal
of its campaign promise not to tax income trusts.
The finance minister, who is one of the few Conservative cabinet
ministers who speaks regularly with the media, dodged reporters
following question period.
Flaherty's clarification that the government will continue to allow
interest from foreign investment loans to be deducted is being
greeted with relief in Canada's business sector. Business groups had
estimated the original proposal may have cost $1 billion a
Tax experts had also predicted that it would have put Canadian banks
at risk because of lost business from Canadian companies that would
have instead opted to borrow money offshore to finance foreign
NDP Leader Jack Layton accused the government of giving a
"$1-billion cheque to Bay Street today."
"Certainly there will be some celebrating on Bay Street, but
this money has to come from somewhere," Layton told reporters
after question period.
"They didn't choose to give a billion to help families to pay
for the education for their kids or help look after seniors. They
gave a billion dollars to corporate decision makers."
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