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Ottawa moves to open credit flows

Globe and Mail Update

OTTAWA — Finance Minister Jim Flaherty is encouraging Canadian businesses to borrow and invest with budget measures meant to improve access to credit and provide modest tax breaks for capital expenditures.

In his budget released Tuesday, the Finance Minister also backed away from a controversial measure – announced two years ago – to limit the interest deductibility when companies borrow to finance a foreign affiliate.

He also said he would move quickly to create a national securities regulator – over the objections of Quebec and Alberta – by the tabling legislation later this year.

In his speech before Parliament, Mr. Flaherty said lack of access to credit remains one of the biggest concerns for Canadian businesses and families. He increased federal financing for credit markets by $69-billion Tuesday, bringing it to a total of $200-billion since the crisis deepened last fall.

“Well-run businesses find it harder to finance the purchase of machinery,” Mr. Flaherty said. “This shortage of financing can make a difficult economic situation much worse.”

To fill the gap left by traditional lenders, Ottawa will plow additional money into the Business Development Bank of Canada, Export Development Canada and Canada Mortgage and Housing Corp.

That effort includes $12-billion to repurchase auto-related loans from banks and other financial institutions to provide increased liquidity for the financing of auto dealers, and consumer car loans and leases.

It also includes an additional $5-billion to the EDC and BDC to provide credit at market rates for Canadian companies with viable business models whose access to credit would otherwise be restricted.

Mr. Flaherty complained consistently in the lead-up to the budget that Canadian banks were not doing enough to provide access to capital. But on Tuesday, he committed an additional $50-billion to the Insured Mortgage Purchase Program, bringing to $125-billion the amount Ottawa has allocated to buy mortgage-backed securities from banks to improve liquidity and boosting lending.

The minister moved to encourage companies to make capital investments by extending generous tax writeoffs on new machinery and equipment.

The budget promises temporary increases in the capital-cost-allowance rates for computers and software, and for machinery and equipment used in manufacturing and processing.

Mr. Flaherty also announced the government will eliminate import tariffs on a range of machinery and equipment, which should save Canadian business some $440-million over the next five years.

Finance Canada says the tax breaks will provide economic stimulus and assist Canadian businesses during this challenging period. The government expects the accelerated writeoffs for computers will cost $695-million over two years, while the two-year extension for manufacturing and processing businesses will cost nearly $1-billion between 2011-12 and 2013-14.

While Mr. Flaherty provided additional access to credit and some target tax breaks for business, he also retreated from a highly contentious plan to reduce a corporate tax break for companies that borrow to finance overseas operations.

In 2007, the minister created a storm on Bay Street when he announced that Ottawa would no longer allow companies to deduct such borrowing costs in both Canada and the jurisdiction of the foreign affiliate, a common practice among competitor countries.

In December, a committee in international taxation headed by Peter Godsoe, former chief executive officer at the Bank of Nova Scotia, recommended Ottawa scrap that plan, and on Tuesday, Mr. Flaherty accepted that recommendation.

“The change in the interest deductibility plan is a fairly major change,” said Bruce Flexman, chair of the tax policy committee for the Canadian Institute of Chartered Accountants.

“If you want a purely technical approach to tax policy, [the double deduction] is hard to justify. But if you want a Canadian tax system that is competitive, it makes sense to give Canadians to same ability to get deductions as their international competitors.”

Mr. Flaherty maintained the pace of business tax cuts, which will reduce the general corporate income tax rate to 15 per cent by 2012 from 22.12 per cent in 2007.

He also provided some added relief for medium-sized businesses by increasing the amount of income eligible for the small business tax rate to $500,000 from $400,000.

A plan for troubled times

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