Publication
On May 2, 2006, the Conservative Government tabled its inaugural budget. The Budget follows through on a number of the Conservatives' electoral campaign promises, including the anticipated GST reduction, corporate tax rate reductions and eliminations, and a host of personal income tax measures including specific measures for employees, parents, commuters, fishers, apprentices, students and seniors.
CORPORATE INCOME TAX MEASURES
General Corporate Income Tax Rate
The Budget proposes to reduce the general corporate tax rate from 21% to 19% by 2010 as follows:- effective January 1, 2008 the rate will be reduced to 20.5%;
- effective January 1, 2009 the rate will be reduced to 20%;
- effective January 1, 2010 the rate will be 19%.
Corporate Surtax
The 4% federal surtax was already proposed to be eliminated in 2008 for small and medium sized corporations. The Budget proposes to eliminate the corporate surtax for all corporations effective January 1, 2008. This measure will be equivalent to a 1.12% reduction in the corporate tax rate.
Functional Currency Tax Reporting
The Budget indicates that the Department of Finance will release for comment a draft of legislative proposals to permit corporations that are required, for financial reporting purposes, to report in a functional currency other than the Canadian dollar, to determine their income and file their tax returns for Canadian tax purposes in the functional currency.
Small Business Limit and Tax Rate
The small business tax rate of 12% applies to the first $300,000 of qualifying active business income earned by a Canadian-controlled private corporation ("CCPC"). The Budget proposes to increase this "business limit" from $300,000 to $400,000, effective January 1, 2007. In addition, the Budget proposes to reduce the small business tax rate by 0.5% in each of 2008 and 2009. Consequential changes are to be made to the rules relating to investment tax credits for scientific research and experimental development ("SR&ED").
Carry-forward of Non-capital Losses and Investment Tax Credits
Non-capital (i.e., business) losses, as well as investment tax credits, may currently be carried back 3 years and carried forward 10 years. The Budget proposes to extend the carry-forward period to 20 years. This measure will apply to losses incurred or credits earned in taxation years that end after 2005.
Elimination of the Federal Large Corporations Tax
The federal large corporations tax (or the federal "capital tax"), which was introduced in 1989, has often been described as a disincentive for investment and job creation because the tax is imposed on capital rather than income. Previous governments had implemented a phase-out of the capital tax by 2008. The Budget proposes to accelerate the phase-out by eliminating the capital tax as of January 1, 2006, prorated for taxation years that straddle that date. In addition, corporate surtax in excess of a corporation's federal capital tax liability for a taxation year will continue to be available for deduction from the corporation's federal capital tax liability, if any, for the 3 previous tax years.
Minimum Tax on Financial Institutions
Since 1986, financial institutions have been subject to a tax on taxable capital in addition to the large corporations tax. This "financial institutions capital tax" is currently levied at the rate of 1% of taxable capital employed in Canada between $200 million and $300 million, rising to 1.25% of taxable capital employed in Canada in excess of $300 million. The Budget proposes to increase to $1 billion the threshold above which the tax begins to apply, and to apply a single rate of 1.25%. The ability of a financial institution to carry forward and back the excess of income tax over capital tax will be modified to ensure no such ability arises solely because of these changes to the financial institutions capital tax. These measures are to apply as of July 1, 2006, prorated for taxation years that straddle that date.
Accelerated Capital Cost Allowance for Forestry Bioenergy
The Budget confirms the Government's intention to extend eligibility for accelerated capital cost allowance ("CCA") under Class 43.1 (30%) and Class 43.2 (50%) of Schedule II of the Income Tax Regulations to cogeneration systems that use a type of biomass residue from the pulp and paper industry, commonly referred to as "black liquor" (or "spent pulping liquor"). The change is to apply to eligible assets acquired on or after November 14, 2005 that have not been used or acquired for use before that date.Additional Measures
Other corporate tax measures proposed in the Budget include:
- the increase in the CCA rate to 100% for tools costing less than $500. Previously the 100% CCA rate applied to tools costing less than $200; and
- the introduction of a new tax credit to encourage the hiring of apprentices in eligible trades.
Measures from 2005
The Budget confirms that changes proposed in the 2005 Budget to the CCA provisions concerning certain electricity assets, transmission pipelines and telecommunication cables will be enacted. The implementation will also enhance and extend the accelerated CCA provisions for efficient and renewable energy generation equipment.
COMMODITY TAX MEASURES
The federal goods and services tax ("GST") applies to most supplies of goods and services. As expected, the Budget proposes to reduce the rate of GST from 7% to 6%, effective July 1, 2006. The transition rules provide that the 6% rate will apply where the GST is paid or becomes payable on or after July 1. Generally, the GST becomes payable on the earlier of the day the payment for the supply is made or the day the supplier renders an invoice. The Budget proposes anti-avoidance rules that are to apply during the transition period.
PERSONAL INCOME TAX MEASURES
Personal Tax Rates
The Budget proposes to retain the previous government's reduction of the lowest personal tax rate from 16% to 15% for 2005. However, the Budget proposes to increase the rate to 15.5% effective July 1, 2006, such that the 2006 full-year rate will be 15.25%. This rate will apply to income up to $35,595 in 2005, and $36,378 in 2006. In addition, the "basic personal amount" (being the amount an individual can earn before paying any federal income tax) will be set at $8,648 for 2005, $8,839 for 2006, and $8,739 for 2007. The basic personal amount is to be increased to $10,000 for 2009.
Similar adjustments are to be made to the spousal credit.
Taxation of Dividends
The Budget confirms the Government's intention to proceed with measures announced in November 2005 to alter the taxation of eligible dividends in response to the proliferation of income trusts. Dividends received by an individual are currently subject to a gross-up of 25% and entitle the individual to a tax credit of 13.33%. Effective for eligible dividends paid after 2005, the gross-up will be 45% of the amount of the dividend, and the tax credit will be 19% of the grossed-up amount (reflecting the general corporate rate proposed for 2010).
Eligible dividends are generally dividends paid by public corporations (and other corporations that are not CCPCs that are resident in Canada and subject to the general corporate tax rate). Eligible dividends will also include dividends paid by a CCPC to the extent of its income (other than investment income) that is subject to the general corporate tax rate.
Charities: Donation of Publicly Listed Securities and Environmentally Sensitive Lands
A donor of publicly listed securities or ecologically sensitive lands may claim a tax credit (or, for corporate donors, a deduction). Such donors also benefit from a reduced capital gains inclusion rate if the donated securities or lands have appreciated - the normal inclusion rate of 50% is reduced to 25%. To encourage such donations, the Budget proposes to further reduce the capital gains inclusion rate in respect of such donations to nil.
Canada Employment Credit
The deductions that an employee may claim to reduce employment income are very few. The Budget proposes to introduce a tax credit in recognition of the expenses incurred by employees. The credit, computed by reference to the lowest personal tax rate (15.25% in 2006) will apply to the lesser of $500 ($1,000 for 2007 and subsequent years) and the individual's employment income for the year. As this measure is to be effective July 1, 2006, the maximum amount on which the credit will be calculated in 2006 will be $250.
Mineral Exploration Tax Credit for Flow-Through Shares
Investors in flow-through shares are able to deduct exploration expenses that the exploration company renounces to investors. Prior to 2005, investors were also entitled to a tax credit of 15% of such expenses. The Budget proposes to reintroduce the credit for flow-through share agreements entered into on or after May 2, 2006 and on or before March 31, 2007.
Universal Child Care Benefit
The Budget proposes to introduce, effective July 2006, the Universal Child Care Benefit (the "UCCB"). The UCCB is to provide an allowance of $100 per month for each child under the age of 6. The UCCB is to be taxable in the hands of the lower income spouse or common law partner. Receipt of the UCCB will not impact benefits under the Old Age Security program, employment insurance benefits or the amount that may currently be deducted for child care expenses. However, the UCCB will impact the availability of the Canada Child Tax Benefit.
Additional Measures
Other personal tax measures proposed in the Budget include:
- textbook tax credits and a tax exemption for scholarships and bursaries;
- tax credits for eligible fees related to children's fitness activities;
- a pension income tax credit; and
- tax credits for public transit passes.
Measures from 2005
The Budget clarifies that the Government intends to follow through with measures announced in 2005 with respect to (i) the disability tax credit and the disability support deduction, (ii) the expansion of the list of qualified medical expenses and the increase in the caregiver amount eligible for the medical expense tax credit, (iii) the introduction of an adoption expense tax credit.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
© Ogilvy Renault LLP 2006 - All Rights Reserved
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