Canada, tax, TaxBreaks, June 2006 newsletter

TaxBreaks, June 2006
06-3

Overview of 2006 budgets
Federal
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
New Brunswick
Nova Scotia
Prince Edward Island
Newfoundland and Labrador
Yukon
Northwest Territories
Nunavut

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Overview of 2006 budgets
In this issue of TaxBreaks, you will find a brief summary of the principal tax measures affecting individuals and businesses in the country’s 2006 budgets, starting with the main features announced in Ottawa, followed by the essential aspects of the provinces’ and territories’ measures, going from west to east. Tables of income tax rates for individuals and businesses will allow you to compare federal, provincial and territorial rates easily.

For federal, provincial and territorial tax rates, see the tables published in Quick Tax Facts 2006 (PDF file below).

For more information on tax measures announced by Ottawa, British Columbia, Saskatchewan, Ontario and Quebec, please go to our web site and consult our budget highlights.

Federal budget (May 2, 2006)
The Minister of Finance confirmed that by 2009, individuals’ basic personal exemptions will rise to $10,000 and the spousal credit will increase to $8,500. The lowest personal income tax rate will be 15.25% for 2006 and 15.5% for 2007 and subsequent years. A new employment credit to offset work-related expenses will provide a tax credit on up to $250 of employment income in 2006, increasing to $1,000 for 2007. The budget also proposes the Universal Child Care Benefit to provide all families with $100 per month for each child under the age of six years, and a tax credit for the cost of public transit passes, both to come into effect in July 2006.

The changes first announced on November 23, 2005, regarding dividend taxation were confirmed. The gross-up of eligible dividend income will increase from 25% to 45%, while the tax credit for eligible dividends will increase from 13.33% of the grossed-up dividend to 19% as of January 1, 2006.

The corporate surtax is scheduled to be eliminated on January 1, 2008, and the general corporate income tax rate is to be reduced over three years: to 20.5% as of January 1, 2008, to 20% as of January 1, 2009, and to 19% as of January 1, 2010. In addition, the small business income ceiling will rise to $400,000 as of January 1, 2007, and the small business tax rate will decrease to 11.5% for 2008 and to 11% as of January 1, 2009. Moreover, the carry-forward periods for business losses and investment tax credits will be extended to 20 years for losses incurred and credits earned after 2005. The elimination of capital tax was announced as effective January 1, 2006. The federal capital tax on financial institutions will be applied at a rate of 1.25% on taxable capital in excess of $1 billion for taxation years ending after June 30, 2006.

Effective July 1, 2006, the goods and services tax (GST) rate will decrease to 6% and the harmonized sales tax rate will decrease to 14%; however, the GST credit will be maintained at current levels for low- and modest-income Canadians. Transitional rules have been provided for those transactions that straddle the July 1, 2006, implementation date.

British Columbia (February 21, 2006)
No changes were brought to personal or corporate income tax rates. For individuals, the maximum annual medical expenses amount that can be claimed for a dependant rose to $10,000 for 2005 and subsequent years. To harmonize with new federal measures, the province has proposed a dividend tax credit for income subject to the 45% gross-up to take effect January 1, 2006. Details about this credit will be finalized when the federal changes are fully revealed.

The 2005 Budget Update (September 14, 2005) announced a decrease in the general corporate income tax rate from 13.5% to 12%, effective July 1, 2005.

Alberta (March 22, 2006)
The personal income tax system will continue to be indexed to inflation in 2006, with a resulting increase in tax credits by 1.9% for that year. The basic credit will therefore rise to $14,899. The government stated that it will decide whether or not to adopt similar dividend tax credit changes after details of the federal amendments become available. The general corporate income tax rate drops to 10% from 11.5%, effective April 1, 2006.

Saskatchewan (April 6, 2006)
A personal income tax credit to cover the cost of tools required by employees as a condition of their employment was introduced. The general corporate income tax rate, currently at 17%, will decrease to 14% as of July 1, 2006, to 13% as of July 1, 2007, and to 12% as of July 1, 2008. The threshold amount for the small business income tax rate, currently at $300,000, will rise to $400,000, effective July 1, 2006; to $450,000, effective July 1, 2007; and to $500,000, effective July 1, 2008. It was also announced that the general corporate capital tax for all corporations other than provincial Crown corporations and financial institutions will be eliminated as of July 1, 2008. The rate will drop from 0.6% to 0.3% on July 1, 2006, and be further reduced to 0.15% on July 1, 2007.

Manitoba (March 6, 2006)
As of January 1, 2007, Manitoba’s middle personal income tax rate will pass from 13.5% to 13% and the basic personal amount will rise to $7,834. Also, the eligibility age for the personal tax credit will increase from 18 to 19 years for 2006 and subsequent years. The Minister confirmed the previously announced reduction of the general corporate income tax rate from 14.5% to 14% on January 1, 2007, and announced a further rate reduction to 13%, effective July 1, 2008. The small business rate will also be reduced from 4.5% to 3% on January 1, 2007. The province plans a reduction in the general capital tax, effective July 1, 2008: the rate will decrease from 0.5% to 0.4% for corporations with taxable paid-up capital over $20 million, and from 0.3% to 0.2% for corporations with taxable paid-up capital between $10 and $20 million. The $5 million capital tax deduction will be increased to $10 million, effective for fiscal years commencing after January 1, 2007. The Manitoba dividend tax credit will be amended once details of federal changes have been confirmed.

Ontario (March 23, 2006)
This year, the government will increase the income threshold above which senior couples’ benefits under the Ontario property and sales tax credits are reduced. The new threshold will be determined to ensure that seniors who receive the guaranteed minimum level of income will continue to get the full benefit of these credits. As for the changes to the federal dividend tax credit, the province will respond with related measures once the details of federal legislation have been revealed. The Minister announced that reductions in capital tax rates, and the proposed elimination of provincial capital tax, will be accelerated by two years from the original schedule. Capital tax rates for all corporations will be reduced by 5% effective January 1, 2007. In addition, the capital tax will be eliminated in 2010 rather than 2012, should the province’s current fiscal position permit. The rate of the Ontario interactive digital media tax credit for small multimedia businesses will be increased from 20% to 30%. In addition, it was announced that eligibility for the 20% tax credit will be expanded to include corporations that exceed the current gross revenue and total asset thresholds, and fee-for-service work done in the province. The budget affirmed the previously announced extension of the increased tax credit rate of 18% for the Ontario production services tax credit to March 31, 2007. Subject to federal implementation, the province proposes to parallel the federal extension of the non-capital loss carry-forward period from 10 to 20 years.

Quebec (March 23, 2006)
For 2007 and subsequent taxation years, the maximum amount of the deduction for workers corresponding to an amount equal to 6% of the individual’s eligible earned income for a given taxation year will be doubled from $500 to $1,000. Effective January 1, 2007, the rate of the refundable tax credit for home support of elderly persons will be increased from 23% to 25%, and the annual limit in eligible expenses will be increased from $12,000 to $15,000. The budget announced that employers will be able to deduct an additional amount equal to 100% of the amount reimbursed after March 23, 2006, to an employee for the use of public transport; moreover, employees will not be required to include the value of these reimbursements in their income. As of the 2006 taxation year, the current threshold of $2,000 above which the tax credit for donations and gifts applies at a rate of 24% will be lowered from $2,000 to $200. Following the federal changes, the gross-up of eligible dividend income will be increased from 25% to 45%, and the rate of the tax credit with respect to these dividends will be increased from 10.83% to 11.9%.

Beginning March 24, 2006, the corporate income tax rate applicable to the business ceiling of small corporations will be reduced from 8.5% to 8%. The current five-year carry-forward period that applies to corporate gifts and donations will be extended from five to twenty years; this measure applies to donations made during a taxation year that ends after March 23, 2006. Several adjustments to R&D tax credits were announced in the budget, among them that the pre-competitive R&D tax credit will be abolished and replaced with the refundable tax credit for private partnership pre-competitive research.

Following the federal budget, the province stated that it would not increase the Quebec Sales Tax to compensate for the loss of revenues caused by the decrease in the GST. Moreover, the Universal Child Care Benefit will not affect any tax credit or other support measures in Quebec, though it will be taxable.

New Brunswick (March 28, 2006)
Personal income tax brackets and credit amounts will continue to be indexed for inflation for the 2006 taxation year. Effective January 1, 2007, provincial income tax will be eliminated for individuals with incomes of $13,750 or less, and for one-income families with incomes of $22,000 or less. The budget announced the implementation in 2007 of the tuition tax cash back credit, which will provide a rebate of up to 50% of eligible tuition costs incurred after January 1, 2005, to a maximum yearly rebate of $2,000. The general corporate income tax rate will be reduced from 13% to 12%, effective January 1, 2007. As previously scheduled in the 2005 budget, the small business income tax rate will be reduced to 1.5%, effective July 1, 2006, and to 1%, effective July 1, 2007. The income threshold for the reduced rate will increase to $475,000, effective July 1, 2006, and to $500,000, effective July 1, 2007. The large corporation capital tax will be eliminated by the end of 2009. Under the schedule set out in the budget, the tax rates will be 0.25% in 2006, 0.2% in 2007 and 0.1% in 2008.

Nova Scotia (May 9, 2006)
The basic personal amount and other non-refundable tax credits will rise over the next four years. Starting in 2007, the basic personal amount will increase by $250 per year until it reaches $8,231 in 2010. The tax credit for eligible fees paid to register a child in designated sports and recreational activities will be increased from $150 to $500 per child, effective January 1, 2006. A new graduate transitions credit will be available to students graduating from an eligible post-secondary program, starting in 2006, and provide a non-refundable credit of up to $1,000. In response to the new federal Universal Child Care Benefit, the province will introduce a non-refundable tax credit to offset provincial income taxes on benefit amounts. Effective July 1, 2006, the credit will be calculated at the lowest provincial tax rate of 8.79% on the full amount of the benefit received ($600 for 2006; $1,200 for subsequent taxation years).

With respect to federal changes to the dividend tax credit, amendments to the provincial tax credit will be introduced such that provincial income tax paid on dividends will be unaffected by the federal changes.

As previously announced in the 2005 budget, the threshold income level eligible for the reduced small business income tax rate was increased from $350,000 to $400,000 as of April 1, 2006.

The large corporation capital tax is to be eliminated by 2012. It will be reduced from the current rate of 0.275% to 0.25% as of July 1, 2006, and to 0.2%, effective July 1, 2008. Further rate reductions will follow over the next four years at an annual accelerated rate of 0.05% until the tax is eliminated by July 1, 2012.

Prince Edward Island (March 30, 2006)
No measures regarding personal income tax were announced. The budget presented a five-year plan to reduce the small business corporate income tax rate. The rate, currently at 6.5%, will be lowered by 1.1% on April 1 of each year beginning on April 1, 2006, reaching 1% in 2010.

Newfoundland and Labrador (March 30, 2006)
No changes to personal income tax or of corporate income tax were announced.

Yukon (March 30, 2006)
The Yukon mineral exploration tax credit is continued until March 31, 2007.

Northwest Territories (February 2, 2006)
Corporate income tax rate on large corporations is reduced from 14% to 11.5%, effective July 1, 2006.

Nunavut (February 22, 2006)
A new off-road fuel tax rebate program was introduced, to be effective April 1, 2006.

Michel Ostiguy, Montreal
Marielle Domercq, Montreal
John Chou, Toronto

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