2006 Federal Budget Highlights:

On May 2, 2006, one day after this year's income tax filing deadline, federal Minister of Finance Jim Flaherty tabled his Conservative government's first Budget. As was widely expected, the Budget follows through on several campaign promises such as reducing the GST and introducing a monthly child care allowance. However, the primary focus of the Budget is on broadly-based tax relief, with proposals including employment and apprenticeship tax credits, changes in basic personal tax credits and lower taxes for small businesses. The Budget also specifically allocates $3 billion per year to pay down the federal debt. Read on for more details of changes resulting from the Budget.

GOODS & SERVICES TAX (GST)

Rate Reduction:

By far the largest single tax-related initiative in the Budget is a reduction in the GST from 7% to 6%, effective July 1, 2006. The Budget also indicated that the rate will be reduced to 5% in a future budget. A corresponding 1% rate reduction (to 14%) will take effect in the provinces (Newfoundland, Labrador, Nova Scotia and New Brunswick) applying the Harmonized Sales Tax (HST). Notwithstanding the reduction in GST, the GST credit available to low and modest income Canadians will remain at current levels.

The general transition rules to determine the applicable rate will be as follows:

• If GST becomes payable, or is paid without becoming payable, before July 1, 2006, the 7% rate will apply.

• If GST becomes payable on or after July 1, 2006, without having been paid before that day, the 6% rate will apply.

• If GST is paid on or after July 1, 2006, without having become payable before that day, the 6% rate will apply.

A special transitional provision will be provided for new residential housing. Where ownership or possession is transferred to the buyer before July 1, 2006 the 7% rate will apply. Where ownership and possession are transferred to the buyer on or after July 1, 2006:

• The 6% rate will apply if the agreement of purchase and sale is signed after May 2, 2006.
   
• Where the purchase agreement is signed on or before May 2, 2006, and the 7% rate is applied, the purchaser will be able to claim a tax adjustment which effectively reduces the rate to 6%.

The government will increase federal excise levies on alcohol and tobacco effective July 1, 2006 to offset the effect that the rate reduction will have on the taxes applied to these commodities. The excise tax adjustments will also apply to alcohol and tobacco inventories held on June 30, 2006.

CORPORATE INCOME TAX MEASURES

Canadian-Controlled Private Corporations (CCPCs):

The "business limit" for the small business deduction will be increased from $300,000 to $400,000 effective January 1, 2007. In addition, the federal tax rate applicable to qualifying active business income of a CCPC will be reduced from the current 12% to 11.5% effective January 1, 2008 and to 11% effective January 1, 2009. These changes will be pro-rated for corporations with non-calendar taxation years.

 

General Corporate Income Tax Rate & Corporate Surtax Elimination:

The general corporate income tax rate, after the 10% provincial abatement, will be reduced from 21% to 20.5% effective January 1, 2008, to 20% effective January 1, 2009 and to 19% effective January 1, 2010. The rate will be pro-rated for non-calendar taxation years. These rate reductions do not apply to income already subject to special tax treatment such as small business income and investment income of CCPCs.

Previous legislation eliminated the 4% corporate surtax (equivalent to a 1.12% rate reduction) for small and medium-sized corporations effective January 1, 2008. The Budget proposes to extend this measure to all corporations effective January 1, 2008.

 

Non-Capital Losses and Investment Tax Credits (ITCs):

The Budget proposes to allow certain losses to be carried forward for 20 years instead of the current 10 years. The carry-forward period for ITCs will also be extended to 20 years from the current 10 years. This proposal will apply to non-capital losses, farm losses, and restricted farm losses. This measure will apply to losses incurred and credits earned in taxation years which end after 2005.

Large Corporations Tax (LCT):

The Budget proposes to accelerate the elimination of LCT to January 1, 2006 (previously January 1, 2008) subject to proration for non-calendar taxation years.

OTHER BUSINESS INCOME TAX MEASURES

Apprenticeship Job Creation Tax Credit:

The Budget introduces an Apprenticeship Job Creation tax credit which is equal to 10% of salaries paid to qualifying apprentices after May 1, 2006 to a maximum of $2,000 per apprentice per year. A qualifying apprentice must be working in a qualifying trade in the first two years of their provincially registered apprenticeship contract. Although unused credits are not refundable, they may be carried back three years and forward twenty years.

Capital Cost Allowance (CCA) Tools:

The cost limit for tools eligible for the 100% CCA rate under Class 12 increases to $500 (from $200) for tools acquired after May 1, 2006. In addition, the Budget proposes to clarify that electronic communication devices and electronic data processing equipment are not tools.

PERSONAL TAX MEASURES

Personal Tax Rate Changes:

The November 2005 Economic Statement decreased the lowest rate from 16% to 15% effective January 1, 2005. The Budget proposes to increase the rate to 15.5% effective July 1, 2006. The effective rate will therefore be 15.25% for 2006 and 15.5% for future years. The following table summarizes the changes to the low personal rate of tax and confirmed changes to the basic personal amount and spouse/common-law partner tax credit amounts:

 

Universal Child Care Benefit:

As anticipated, the Budget introduced the Universal Child Care Benefit (UCCB) of $100 per month for each child under the age of six years. The UCCB will commence in July 2006. Although the UCCB will be taxable to the lower income spouse, it will not be included in income for purposes of income-tested benefits under the income tax system or for the claw-back of Old Age Security or Employment Benefits. It will also not reduce the amount of expenses claimable under the child care deduction.

The supplemental benefit under the Canadian Child Tax Benefit for children under the age of seven will generally be eliminated on July 1, 2006. However, for children who attain the age of six years before July 1, 2007, the supplemental Canadian Child Tax Benefit will continue for those months prior to July 1, 2007 for which no UCCB is received.

Dividend Tax Credit of Large Corporation Dividends:

The Budget reiterates the Conservative government's intention to introduce the new dividend gross-up and tax credit originally proposed in November 2005. Under the proposal, dividends will be grossed up by 45% when included in an individual's income. The federal dividend tax credit will be increased to approximately 19% of the grossed up amount. The intention is that an individual be indifferent to receiving a dividend from a public company or receiving a fully taxable distribution from an income trust. The increased gross-up and credit applies to dividends from Canadian public corporations, other Canadian corporations that are not CCPCs, and CCPCs to the extent that income, other than investment income, is subject to the general corporate tax rate. Some provinces have agreed to harmonize with these proposals while others, including Ontario, have adopted the "wait and see" approach. The federal personal tax on eligible dividends will be calculated as follows:

 

New Personal Tax Credits:

The Budget proposes a number of new tax credits commencing in 2006:

The Canada Employment Credit will be based on the lesser of $250 and the amount of the individual's employment income for the year. In 2007, the base for this credit will increase to $1,000.

The Textbook Tax Credit will be $65 for each month a student is eligible to claim the education credit for full-time students and $20 for each month a student is entitled to the education credit for part-time students. Unused amounts will be added to unused tuition and education credits that can be transferred to a supporting person or carried forward to future years.

The Children's Fitness Tax Credit may be claimed by either parent for up to $500 of eligible fees relating to the enrolment of a child under the age of sixteen in an eligible program of physical activity. The government will consult with experts on the definition of an "eligible program of physical activity". Parents will need to obtain a tax receipt and the organizations will have to keep books and records. The amount claimed under this tax credit will not be eligible for the child care deduction.

Effective July 1, 2006, individuals will be entitled to a non-refundable Tax Credit for Public Transit Passes for the individual, the individual's spouse or common-law partner and dependent children under the age of 19. The transit pass must be for duration of at least one month. Public transit includes a bus, streetcar, subway, commuter bus, commuter train and a local ferry.

In addition, the pension income credit will be increased from $1,000 to $2,000 effective for 2006.

OTHER DEDUCTIONS AND EXEMPTIONS

The Budget proposes to fully exempt scholarships, fellowships and bursaries received by students who are entitled to the education credit commencing in 2006. Previously, only the first $3,000 was exempt from taxation.

Tradespeople will be entitled to a deduction, to a maximum of $500, for the cost of previously unused tools in excess of $1,000 acquired after May 2, 2006 if the tradesperson's employer certifies that the tools are being acquired as a condition of employment. Adjustments will be made to the deduction currently available to apprentice mechanics to integrate this measure with the deduction already available. In addition, the employee will be entitled to a GST/HST rebate on the amount of the deduction.

Eligible tools will not include electronic communications devices or electronic data processing equipment. Rules will be introduced to reduce the cost of tools acquired by the amount of the deduction and recapture the deduction if tools are sold for more than the reduced cost. The tools will be eligible for a tax-deferred transfer to a corporation in the future.

DONATIONS OF SECURITIES AND ECOLOGICALLY SENSITIVE LAND

Effective May 2, 2006, the capital gains inclusion rate for donated securities will be reduced to zero (previously the reduced inclusion rate was 25%). The donation receipt will continue to be issued for the fair market value of the securities donated. Similar adjustments will be introduced to increase the deduction for donated securities acquired under employee stock option plans and to eliminate the income realized on the exercise of the option. The inclusion rate for the capital gain realized on the donation of ecologically-sensitive land will also be reduced to nil.

EXCISE TAX MEASURES

Excise Tax on Jewellery:

The Excise Tax applied on deliveries or importations of jewellery, clocks and articles made of semi-precious stones is repealed effective May 2, 2006.

Excise Duty Reductions for Vintners & Small and Medium Sized Brewers:

Effective July 1, 2006 the first 500,000 litres of wine produced from 100% Canadian grown agricultural products will be exempt from Excise Duty.

Effective July 1, 2006 brewers will have reduced Excise Duties applied on their first 75,000 hectolitres of beer, provided they do not produce more than 300,000 hectolitres in a calendar year.