Canada's Flaherty Backtracks on Plan to End Corporate Tax Break

Canadian Finance Minister Jim Flaherty, pressured by companies such as Alcan Inc., backtracked on plans to scrap a corporate tax break valued at as much as C$2 billion ($1.81 billion) a year.

Flaherty told the Globe and Mail newspaper in an interview yesterday he'll narrow the scope of a pledge made in his 2007 budget to end companies' ability to deduct interest on debt that they incur to finance operations abroad.

Only companies investing through ``tax havens'' or limited- liability business structures will lose the deduction, Flaherty said, according to a transcript of the interview provided separately by the finance department. ``Most'' foreign transactions, including Thomson Corp.'s efforts to acquire Reuters Group Plc, won't be affected, he said.

``Clearly, they've addressed some important improvements,'' said Mike Murphy, executive vice president for policy at the Canadian Chamber of Commerce. The group wrote to Flaherty last month saying the tax change would cost businesses about C$2 billion annually.

Businesses said losing the right to deduct interest expenses would make it more costly to expand overseas, at a time when corporate Canada is facing a barrage of takeovers by foreign competitors. The initial proposal, part of what Flaherty says is a strategy to make corporations pay their ``fair'' share of taxes, also sparked the second clash in six months between his minority Conservative Party government and key supporters.

Overshadowed

In October, the government announced plans to tax the nation's income trusts, causing the popular, high-yield investments' value to plummet.

``This Conservative government has to make sure it doesn't convey an image that it's not pro-business,'' said Nikita Nanos, a pollster with SES Research in Ottawa. ``It undermines part of the core franchise,'' he said. ``It's going to make people question, `What's going on?'''

Flaherty, 57, also told the Globe and Mail he will extend a planned two-year grace period to five years and appoint a panel that will look at international tax issues for Canadian businesses for future budgets. Details of the plan will be released Monday in a speech to the Toronto Board of Trade.

Boost Its Fortunes

The controversy overshadowed a budget designed to boost the Conservative Party's fortunes -- ahead of a possible election later this year -- through tax breaks for families and more funding for the French-speaking province of Quebec. The party's support hasn't moved much since Flaherty released his fiscal plan on March 19, with recent polls showing Prime Minister Stephen Harper's government still wouldn't win a majority of parliamentary seats.

Opposition parties' attacks on the measure got new life this week when Alcoa Inc. said it will make a $26.9 billion takeover bid for Montreal-based Alcan, Canada's 10th-largest public company and biggest metals producer. The offer came less than two weeks after Alcan Chief Executive Officer Dick Evans told the Globe and Mail newspaper that Flaherty's tax proposal would make the company easier for foreign rivals to acquire.

The main opposition Liberal Party introduced a motion on May 10 calling on the government to repeal the tax measure.

The last significant budget reversal by a Canadian finance minister came in 2004, when Ralph Goodale repealed a decision to limit investments by pension funds in investment trusts.

To contact the reporter on this story: Theophilos Argitis in Ottawa at
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