Controversial Budget Proposal Subject To Change

Edited by Vince Imerti

The last edition of CanadianTax @ Gowlings contained a discussion of a significant proposal from the 2007 Canadian Federal Budget which would significantly curtail the deductibility of interest on money borrowed by Canadian corporations to finance foreign affiliates. As indicated in our last edition, the proposal would eliminate the current interest deduction for borrowed money used to finance foreign affiliates, and replace it with a carry-forward that can be deducted in future years to the extent that the foreign affiliate generates non-exempt income for the corporation (in other words, income, including capital gains, other than exempt dividends received out of the "exempt surplus" of a foreign affiliate – being Canada's form of participation exemption). As announced in the Budget, this proposal is to take effect for interest payable in 2007 on debts incurred on or after March 19, 2007; for interest payable after 2008 on non-arm's-length debt outstanding