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Canadian government to close 
tax loophole

[PoliticsWatch updated 4:30 p.m. May 14, 2007]

OTTAWA  — 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 country. 

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 corporations?" 

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 budget."

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 year. 

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 investments. 

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." 

: Related Links

> Canadian PM comments on foreign takeovers 

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