Canada, tax TaxBreaks, June 2005 newsletter

TaxBreaks, June 2005

Highlights of the 2005 budgets
Federal
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Québec
New Brunswick
Nova Scotia
Prince Edward Island
Newfoundland and Labrador

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Highlights of the 2005 budgets
In this issue of TaxBreaks, we summarize the essential points of the measures announced by the federal government and the provinces in their respective 2005 budgets. More specifically, we deal with measures generally applicable to individuals and the principal measures that will have an impact on businesses and the business world.

To begin, we provide a brief review of the federal budget and then present the main features of the provincial measures, proceeding geographically from west to east. A table of income tax rates for individuals for the year 2005, and another one for businesses until 2007, will help you compare the provincial and territories’ rates with each other as well as with the federal rate. See the PDF file attached below to view these tables.

For additional information on federal, provincial and territorial tax rates, see the tables published in Quick Tax Facts 2005 (PDF file below).

We invite our readers who wish to obtain more information on the tax measures announced by the federal government, British Columbia, Saskatchewan, Ontario and Québec to consult the “Highlights” of these budgets.

Federal
The Minister of Finance tabled the federal budget on February 23, 2005. For individuals, the basic personal amount will be gradually increased to $10,000 by 2009. The spousal amount will also be increased to $8,500 by 2009. The registered pension plan (RPP) annual contribution limit will progressively rise to $19,000 for 2006, $20,000 for 2007, $21,000 for 2008, $22,000 for 2009, and will be indexed to average wage growth beginning in 2010. Corresponding increases will be made to defined contribution RPPs and deferred profit sharing plan limits. RRSP limits will also rise from the present limit of $16,500 to $18,000 in 2006, to $19,000 in 2007, and thereafter will rise by $1,000 per year to reach $22,000 in 2010.

Effective in 2005, the budget expands the list of expenses eligible for the Medical Expense Tax Credit, and the rules regarding the eligibility of home renovation expenses have been tightened as of February 23, 2005. A new credit for eligible adoption expenses has also been created, calculated on a maximum amount of $10,000. In addition, the maximum eligible amount a caregiver may claim increased to $10,000.

The measures concerning the elimination of corporate surtax on January 1, 2008, and the reductions of the general corporate income tax rate were removed from the budget, except for the elimination of the corporate surtax for small and medium-sized businesses. In addition, the CCA rates for various telecommunication and energy-related equipment acquired after February 22, 2005, were increased.

British Columbia
The British Columbia budget was tabled on February 15, 2005. For individuals, a non-refundable personal income tax credit of up to $360 has been introduced for low- and modest-income taxpayers, effective for the 2005 taxation year. The basic credit combined with this new credit results in little or no provincial income tax on net income up to $16,000. The additional credit will be phased out for taxpayers earning more than $16,000 and is completely eliminated for taxpayers whose net income exceeds $26,000.

The maximum amount of taxable income subject to the small business corporate income tax rate of 4.5% is increased to $400,000 from $300,000 for taxation years that end after December 31, 2004.

Alberta
The Alberta budget was tabled on April 13, 2005. For individuals, Alberta maintains its 10% single tax rate. For 2005, most of the personal tax credits will be indexed at a rate of 1.3%; the basic amount will be $14,523.

No particular new measures were brought in for businesses. However, it was announced that Alberta would adopt changes similar to those announced in the federal budget with respect to the increase in capital cost allowance rates for telecommunication and energy-related equipment.

Saskatchewan
The Saskatchewan budget was tabled on March 23, 2005. There were no income tax increases or decreases in this budget for individuals.

An independent Business Tax Review committee will be set up to review, among other issues, all aspects of taxes imposed on businesses. The committee’s recommendations are to be made in time for consideration when the 2006–2007 budget is drafted.

Manitoba
The Manitoba budget was tabled on March 8, 2005. For individuals, it was announced that, for the 2006 taxation year, the rate applicable to the middle tax bracket will be reduced from 14% to 13.5% and that the basic personal amount will be increased by $100 to $7,734.

The general corporate income tax rate will be reduced, effective July 1, 2006, from 15% to 14.5% and will be further reduced to 14% on July 1, 2007. The small business rate will also decrease from 5% to 4.5% on January 1, 2006, and to 4% on January 1, 2007. Finally, the Research and Development (R&D) tax credit will increase from 15% to 20% for eligible expenditures made after March 8, 2005.

Ontario
The Ontario budget was tabled on May 11, 2005. For 2005, the government will increase the income threshold above which Ontario Property and Sales Tax Credits for Seniors are reduced. The income threshold for single seniors remains unchanged.

Subject to passage of federal legislation, the government will parallel, with necessary modifications, several tax measures as they apply to the non-refundable tax credits announced in the 2005 federal budget and other federal announcements. These include increased amounts that can be claimed for dependants under the Medical Expense Tax Credit, and a non-refundable tax credit for eligible adoption expenses, both effective for the 2005 taxation year.

For businesses, the budget announced that the Ontario Film and Television Tax Credit rate has risen from 20% to 30% for labour expenditures incurred after December 31, 2004, and before January 1, 2010. The credit for a first-time production is increased to 40% on the first $240,000 of qualifying labour expenditures incurred after December 31, 2004, and before January 1, 2010. The Ontario Production Services Tax Credit rate has also increased from 11% to 18% for labour expenditures incurred after December 31, 2004, and before April 1, 2006. In addition, the budget proposes that Ontario corporate tax liability be determined with reference to whether a corporation is resident (rather than incorporated) inside or outside Canada, effective for taxation years ending after May 11, 2005.

Québec
The Québec budget was tabled on April 21, 2005. In order to recognize the work-related expenses that individuals incur to earn their income, as of 2006, individuals will be able to deduct in the calculation of their income an amount equal to 6% of their eligible earned income for the year, up to a maximum of $500. The various measures for natural caregivers of adults will be replaced, as of the 2006 taxation year, by a refundable tax credit for natural caregivers of up to $1,000 for each person housed. For each eligible relative housed, the new tax credit will consist of a universal basic amount of $550, plus a supplement of $450 that will be reduced on the basis of the eligible relative’s income for the year in excess of a threshold of $20,000. The maximum amount of the refundable tax credit for medical expenses will be raised from $543 to $750 as of the 2005 taxation year.

As of January 1, 2006, the corporate income tax rate applicable to active income will gradually increase from 8.9% to 11.9% by 2009. Effective January 1 of each year, the rate will be: 9.9% in 2006; unchanged at 9.9% in 2007; 11.4% in 2008, and 11.9% in 2009. The corporate income tax rate applicable to the first $400,000 of income from an eligible business of Canadian-controlled private corporations (CCPCs) will fall from 8.9% to 8.5% as of January 1, 2006. The tax rate applicable to the active income of small corporations will be calculated by subtracting percentage points from the general tax rate applicable to active income. CCPCs with paid-up capital of more than $15 million will not be able to claim this deduction, since the deduction is gradually phased out for CCPCs with more than $10 million of paid-up capital. The determination of paid-up capital for this purpose will include paid-up capital of associated corporations, and the $400,000 annual business limit will have to be shared among associated corporations.

The applicable rate of capital tax will gradually be reduced from 0.6% to 0.29% in 2009. Effective January 1 of each year, the rate will be: 0.525% in 2006; 0.49% in 2007; 0.36% in 2008, and 0.29% in 2009 for corporations that are not financial institutions. For financial institutions, the rate of capital tax will gradually be reduced from 1.2% to 0.58% over the same period. Effective April 22, 2005, businesses that make a new investment in the manufacturing sector before 2008 will be a entitled to a non-refundable capital tax credit of 5% of the value of the investment in machinery and equipment. Any portion of credit that is not applied in the year may be carried forward to a subsequent year.

Effective April 22, 2005, the rate of the refundable R&D tax credit for CCPCs that are small and medium-sized enterprises will be increased, with a maximum rate of 37.5%. Effective April 22, 2005, there will be requirements that a taxpayer carry on a business in Québec and have an establishment in Québec in order to be eligible for the refundable tax credits for “R&D salary”, “university R&D” and “pre-competitive R&D”.

New Brunswick
The New Brunswick budget was tabled on March 30, 2005. For individuals, the budget announced that personal income tax brackets and credit amounts have been indexed, effective January 1, 2005. This indexation will be extended to include the Low-Income Tax Reduction, such that individuals with income up to $12,713 and families with income up to $20,324 will not be required to pay provincial income tax for 2005.

The small business tax rate will be reduced, effective July 1, 2005, from 2.5% to 2% and the income threshold will be increased from $425,000 to $450,000. The rate will again be reduced, effective July 1, 2006, to 1.5%, and the income threshold will be increased to $475,000. Finally, effective July 1, 2007, the small business corporate income tax rate will fall to 1% and the income threshold will increase to $500,000.

Nova Scotia
The Nova Scotia budget was tabled on April 26, 2005. For individuals, the budget announced a new sport and recreational activity tax credit for children. This new credit, effective July 1, 2005, will be available for amounts paid to register a child in sport or recreational activities, to a maximum of $150 per child.

The small business threshold is increased, effective April 1, 2005, from $300,000 to $350,000. As of April 1, 2006, the threshold will be increased to $400,000. The large corporations tax will be reduced from 0.3% to 0.275%, effective July 1, 2005. Over the next three years, the rate will be further reduced by 0.025% annually, bringing the rate to 0.2% as of July 1, 2008.

Prince Edward Island
The Prince Edward Island budget was tabled on April 7, 2005. No particular tax measures were announced for individuals.

Effective April 1, 2005, the corporate income tax rate for small business has been reduced from 7.5% to 6.5%. The special reduced rate for manufacturers and processors will be eliminated. However, the manufacturing and processing investment tax credit will be maintained.

Newfoundland and Labrador
The Newfoundland and Labrador budget was tabled on March 21, 2005. For individuals, the Seniors' Benefit will be indexed for inflation. For 2005, the maximum benefit is $365 per senior and $730 per senior couple and the credit will begin to be phased out for net family income above $14,608 and will be eliminated when income reaches $20,864.

For businesses, the Film and Video Industry tax credit is extended to December 31, 2008. The current maximum credit limits of $1 million per film and $2 million per corporation are replaced with a single corporation limit of $3 million. In addition, the restrictions prohibiting corporations controlled by persons outside the province and corporations with assets of greater than $25 million from claiming the credit are removed.

Marc Gravel, Montréal
Yan Boyer, Montréal

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