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MEASURES AFFECTING INDIVIDUALS

Personal Income Tax Rates

The previously implemented reduction in the lowest personal income tax rate to 15% from 16% effective January 1, 2005 will be retained. The rate will increase to 15.5% effective July 1, 2006. Accordingly, the full-year rate will be 15.25% for 2006 and 15.5% for 2007 and subsequent taxation years. For the 2005 taxation year the 15% rate applied to taxable incomes of up to $35,595. For the 2006 taxation year the 15.25% rate will apply to taxable incomes of up to $36,378. The basic personal amount and the spousal amount will be increased slightly for the years 2006 to 2009.

Canada Employment Credit

This new credit will take effect July 1, 2006, and will provide tax relief on the lesser of $500 and the individual’s employment income for the year. The maximum amount on which the credit is calculated will be $250 for the 2006 taxation year. For the 2007 and subsequent taxation years, the maximum amount on which the credit is calculated will be increased to $1,000.

Universal Child Care Benefit

The Government proposes to introduce, effective July 2006, the Universal Child Care Benefit (UCCB), to provide all families with $100 per month for each child under the age of 6 years. Amounts received under the UCCB will be taxable in the hands of the lower-income spouse or common-law partner. With the introduction of the UCCB, the Canada Child Tax Benefit enhancement to the base benefit will be eliminated, generally as of July 1, 2006.

Mineral Exploration Tax Credit

The Government proposes to reintroduce the mineral exploration tax credit for flow-through share investors, effective for flow-through share agreements entered into on or after May 2, 2006 and on or before March 31, 2007.

Tradespeople’s Tool Expenses

The Government proposes that the total cost of eligible new tools acquired by an employed tradesperson in a taxation year in excess of $1,000 be deductible up to a maximum of $500 for that year. For the cost of tools to qualify for the deduction the employer will have to certify that the employee is required to acquire those tools as a condition of, and for use in, the employment. This measure will apply to new tools acquired after May 1, 2006.

The employee will also be eligible for a rebate of the goods and services tax/harmonized sales tax paid on the portion of the purchase price of the new tools that is deducted in computing employment income.

Textbook Tax Credit

The budget introduces, effective the 2006 taxation year, a non-refundable textbook tax credit. The textbook tax credit will be in addition to the education tax credit. The amount on which the textbook tax credit is calculated will be:

• $65 for each month for which the student qualifies for the full-time education tax credit amount; and
• $20 for each month the student qualifies for the part-time education tax credit amount.
  
  

Scholarship and Bursary Income

The Government proposes to fully exempt scholarship, fellowship or bursary income from tax. The full exemption will apply only to amounts received by a student in connection with the student’s enrolment in a program that entitles the student to claim the education tax credit. This measure will apply to the 2006 and subsequent taxation years.

Children’s Fitness Tax Credit

The Government proposes to allow parents to claim a non-refundable tax credit in respect of up to $500 in eligible fees for the enrolment of a child under the age of 16 in an eligible program of physical activity. The measure will apply to the 2007 and subsequent taxation years. To be eligible for the credit, fees must be paid in respect of eligible expenses in an eligible program of physical activity.

Eligible expenses will include those for the operation and administration of the program, instruction, renting facilities, equipment used in common (e.g. team jerseys provided for the season), referees and judges, and incidental supplies (e.g., trophies). Expenses that will not be eligible include the purchase or rental of equipment for exclusive personal use, travel, meals and accommodation.

Pension Income Credit

The maximum amount of eligible pension income that can be used in calculating the pension income credit will be doubled to $2,000. This measure will apply to the 2006 and subsequent taxation years.

Child Disability Benefit (CDB)

The Government proposes to increase the maximum annual CDB to $2,300 from $2,044, starting in July 2006. The benefit will continue to be indexed for inflation thereafter. The Government also proposes to extend the CDB to more families caring for a child eligible for the DTC by reducing the rates at which the CDB is reduced as family income rises.

Refundable Medical Expense Supplement (RMES)

The budget increases the maximum amount of the RMES to $1,000 from $767 for the 2006 taxation year.

Tax Credit for Public Transit Passes

The Government proposes to allow individuals to claim a non-refundable tax credit for the cost of monthly (or longer) public transit passes. Public transit will include transit by local bus, streetcar, subway, commuter train, commuter bus and local ferry. The credit will be claimable in respect of eligible transit costs of an individual, the individual’s spouse or common-law partner, and the individual’s dependent children that are under 19 years of age.

This measure will apply in respect of that portion of the cost of public transit passes that is in respect of transit on or after July 1, 2006. Individuals making claims will be required to retain their receipts or passes for verification purposes.

Donations of Publicly Listed Securities to Public Charities and Donations of Ecologically Sensitive Land

The budget proposes to reduce the capital gains inclusion rate for such donations to zero. These measures will apply to donations made after May 1, 2006.

Large Corporation Dividends

The budget confirms the Government’s intention to proceed with measures consistent with those announced in a Notice of Ways and Means Motion tabled on November 23, 2005, which would enhance the gross-up and dividend tax credit for eligible dividends. Eligible dividends will generally include dividends paid after 2005 by public corporations (and other corporations that are not Canadian-controlled private corporations (CCPCs)) that are resident in Canada and subject to the general corporate income tax rate. In addition, CCPCs will be able to pay eligible dividends to the extent that their income (other than investment income) is subject to tax at the general corporate income tax rate. Specifically, shareholders will include 145% of the eligible dividend amount in income, and the federal dividend tax credit with respect to eligible dividends will be approximately 19% of the grossed-up amount.

Consequently, the maximum combined federal/Québec tax rate applicable to dividends will decrease from 32.82% to 29.65% for an eligible dividend and increase to 36.36% for other dividends. In its recent budget, Ontario announced that it would review the relevant federal legislation when it became available and respond at that time, so it is premature to predict what the tax rate on dividend income of Ontario residents will be.

MEASURES AFFECTING BUSINESSES

General Corporate Income Tax Rate

The general corporate income tax rate will be reduced to 20.5% effective January 1, 2008, to 20% effective January 1, 2009, and to 19% effective January 1, 2010. The rate will be prorated for taxation years that include any of those dates.

Corporate Surtax

The elimination in 2008 of the 4% surtax for small and medium-sized corporations has already been legislated. The Government proposes to eliminate the corporate surtax for all remaining corporations effective January 1, 2008, prorated for taxation years that include that date.


Small Business Limit and Tax Rate

The budget proposes that the annual amount of active business income eligible for the reduced tax rate be increased as of January 1, 2007 to $400,000, and also proposes a one-percentage point reduction in the 12% tax rate. The increase to the small business limit and the rate reduction will be pro-rated for corporations with taxation years that do not coincide with the calendar year.

As a consequence of the proposal to increase the small business limit, the $2 million expenditure limit available to Canadian-controlled private corporations at an enhanced rate of 35% on scientific research and experimental development (SR&ED) will be reduced where taxable income for the previous taxation year is between $400,000 and $600,000. This change will apply to taxation years that end after 2006.

Non-Capital Losses and Investment Tax Credits

The Government will retain the proposals to extend to 20 years the carry-forward period of all taxpayers for non-capital losses incurred and investment tax credits earned in taxation years that end after 2005.

Federal Capital Tax

The Government proposes to eliminate the federal capital tax (Part I.3 tax) as of January 1, 2006. The tax rate will be pro-rated for taxation years that do not coincide with the calendar year. Corporations will continue to be able to apply corporate surtax against the federal capital tax liability.

Apprenticeship Job Creation Tax Credit

The budget introduces an Apprenticeship Job Creation Tax Credit. Eligible employers will be entitled to a non-refundable tax credit equal to 10% of the salaries and wages paid to qualifying apprentices to a maximum credit of $2,000 per apprentice per year. A qualifying apprentice will be an apprentice who is working in a qualifying trade in the first two years of his or her provincially registered apprenticeship contract with an eligible employer. The credit will be available to eligible employers in respect of salaries and wages that are paid to qualifying apprentices on or after May 2, 2006.

Capital Cost Allowance for Tools

The budget proposes that the cost limit for access to 100% Class 12 treatment be increased to $500 from $200 for tools, kitchen utensils and medical or dental instruments acquired after May 1, 2006.

SALES AND EXCISE TAXES

Reducing the GST to 6%

The Government proposes to reduce the GST rate by one percentage point, from 7 to 6% (from 15% to 14% for HST), effective July 1, 2006. It also proposes to maintain the GST credit at current levels for low- and modest-income Canadians and to retain the existing GST rebate rates for new housing and purchases made by public service bodies.

Transitional Rules

The general transitional rule, based upon the time at which the GST in respect of a transaction becomes payable, is outlined below:

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

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

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

(b) Deemed Supplies

The Excise Tax Act provides for deemed supplies in a number of circumstances. Under the proposed rules, the rate of 6% per cent will generally be used to determine GST that is deemed under the Excise Tax Act to be paid, or collected, on or after July 1, 2006.

(c) Imported Goods and Imported Taxable Services and Intangibles

Imported Goods: GST at the rate of 6% per cent will apply to goods that are either imported on or after July 1, 2006, or released from Customs’ control on or after July 1, 2006.

Imported Taxable Services and Intangibles: The general transitional rule outlined above will determine the rate of tax to be applied in these circumstances.

(d) Taxable Benefits; Passenger Vehicles and Aircraft; and Employee/Partner Rebates

The prescribed rate for calculating the GST on the automobile operating expense benefit, which is currently 5% per cent, will be 4.5% for the 2006 taxation year and 4% thereafter, and for calculating the HST, the prescribed rate, which is currently 11%, will be 10.5% and 10% respectively.

(e) Anti-Avoidance Provision

The Government proposes that rules be implemented to maintain the integrity of the GST system through the transition period. These rules are intended to prevent inappropriate tax savings in cases where transactions are undertaken between non-arm’s length parties to obtain the benefit of the rate reduction, rather than primarily for commercial purposes.

Other measures

Housing Rebates: The rebate percentage of 36%, and the lower and upper phase-out thresholds of $350,000 and $450,000 respectively, will not change as a result of the rate reduction. However, the maximum dollar value of the rebate, which is currently set at $8,750, will be adjusted to $7,560 (i.e. 36% of the GST paid at the 6% rate on a $350,000 home).

Public Service Bodies: The existing rebate percentages used to calculate rebates of the otherwise unrecoverable GST claimed by charities, qualifying non-profit organizations and selected public service bodies (including municipalities, universities, public colleges, schools and hospitals) will not change.

Streamlined Accounting Methods: As a result of the proposed rate reduction, the specified percentages will change. The new percentages will apply to reporting periods that begin on or after July 1, 2006.

Excise Levies

The Government proposes to increase tobacco and alcohol excise duties to offset the impact of the GST rate reduction.

The budget repeals the excise tax on jewellery, clocks and articles made of semi-precious stones, effective immediately.

OTHER MEASURES

Measures Announced in the 2005 Budget

The Government confirms its intention to proceed with measures that would, for the 2005 and subsequent taxation years :

• introduce a new tax credit for adoption expenses,
• respond to recommendations of the Technical Advisory Committee on Tax Measures for Persons with Disabilities concerning the eligibility criteria for the disability tax credit and the expenses eligible for the disability supports deduction,
• expand the list of expenses eligible for the medical expenses tax credit, and clarify the eligibility of home renovation and construction expenses, and
• double the amount of disability-related and medical expenses that can be claimed by a caregiver.
  

The Government also confirms its intention to enact regulations to implement the changes to the capital cost allowance (CCA) provisions proposed in the 2005 budget.