Minister Flaherty has introduced the Government's 2006 Budget. The highlights of the tax measures are summarized below.
Business Income Tax Changes
The Budget proposes a reduction of the general corporate income tax rate, in line with the 2005 proposals, of 2 per cent over the next four years. The general corporate income tax rate will be reduced from the current 21 per cent rate to 20.5 per cent in 2008, to 20 per cent in 2009 and to 19 per cent in 2010.
Legislation has already been passed eliminating the corporate surtax, which results in an effective 1.12 per cent addition to the corporate income tax rate, for small- and medium-sized corporations as of January 1, 2008. The Budget proposes to extend this legislation to apply to all corporations.
The small business deduction limit will be increased from $300,000 to $400,000 as of January 1, 2007. The federal corporate income tax rate applicable on earnings of Canadian controlled private corporations up to the small business deduction limit will be reduced by 1 per cent over the next 3 years. The applicable rate will be reduced from the current 12 per cent to 11.5 per cent in 2008 and to 11 per cent in 2009.
Legislation has already been passed eliminating the capital tax, currently levied at a rate of 0.125 per cent on taxable capital in excess of $50 million, in 2008. The Budget proposes the elimination of the capital tax effective January 1, 2006.
Federal capital tax under Part VI of the Income Tax Act is currently levied on financial institutions at a rate of 1.0 per cent on taxable capital employed in Canada between $200 million and $300 million and 1.25 per cent on taxable capital employed in Canada in excess of $300 million. Starting July 1, 2006, the federal capital tax on financial institutions will be levied at a single rate of 1.25 per cent on taxable capital employed in Canada in excess of $1 billion. The changes will be prorated for taxation years that include July 1, 2006.
The carry-forward period for non-capital losses incurred in taxation years that end after 2005 is extended from 10 years to 20 years.
The carry-forward period for investment tax credits for scientific research & experimental development, Atlantic investment and mineral exploration earned in taxation years that end after 2005 is extended from 10 years to 20 years.
The Budget promises to explore allowing corporations which are required, for financial reporting purposes, to report in a functional currency other than the Canadian dollar, to determine income for Canadian income tax purposes in that functional currency.
Goods and Services Tax Changes
The goods and services tax (GST) rate will be reduced from 7 per cent to 6 per cent effective July 1, 2006. In Nova Scotia, New Brunswick and Newfoundland and Labrador, the harmonized sales tax (HST) rate will be reduced from 15 per cent to 14 per cent on the same date. Given that the new rate is not effective immediately (which would have been impracticable) it was necessary to provide rules for determining when the new rate will apply to transactions that straddle the July1, 2006 implementation date.
The general rule (applicable to most non-real estate transactions) is that GST applicable to a supply will only be levied at the reduced rate of 6% if that GST was not payable (and was not paid) before July 1, 2006. The GST payable on the consideration for a supply of a good or service is considered for GST purposes to be due, and thus "payable", on the first to occur of (i) the date the supplier issues an invoice for the supply (or the date appearing on that invoice, if earlier), (ii) the date the supplier would have "but for an undue delay" issued the invoice, and (iii) the date the consideration is due - although, rather curiously, the Budget papers do not mention the "undue delay" rule in (ii) above. There is a further "override" GST rule (also not mentioned in the Budget papers) that provides that the GST applicable to most sales of tangible personal property is payable no later than the end of the month following the month in which the ownership or possession of the property was transferred to the recipient. GST on a lease payment becomes payable on the earlier of the day the payment is made and the day the payment is due under the lease.
The failure of the Budget papers to refer to the "undue delay" rule and to the "override" rule may create some uncertainty as to whether parties can benefit from the reduced rate for sales that occur before July 1, 2006 by delaying the invoice date and the due date.
In the case of real estate sales, the general rule is that the GST will only be payable at the 6 per cent rate if both ownership and possession of the property are transferred to the buyer after July 1, 2006. However, where there is a sale of a house, apartment building or other residential complex made pursuant to a written agreement entered into on or before May 2, 2006, GST will apply at the 7 per cent rate even if ownership and possession of the property are both transferred on or after July 1, 2006. In these circumstances the purchaser will be entitled to file a claim with the Canada Revenue Agency to be paid a transitional adjustment that reflects the GST rate reduction to 6 per cent net of any corresponding (new housing) rebate adjustment.
GST will apply at the 6 per cent rate to goods that are either imported on or after July 1, 2006, or released from Customs' control on or after July 1, 2006.
The Budget proposes an anti-avoidance rule 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.
The rate reduction in the GST from 7 per cent to 6 per cent will require numerous consequential adjustments (not described here) to the provisions of the Excise Tax Act, some of which are described in the Budget papers.
Donations of Publicly-Listed Securities and Ecologically- Sensitive Land
The Budget proposes to eliminate taxation of capital gains realized by an individual when publicly-listed securities (and certain other securities such as mutual fund units) are donated to registered Canadian charities or public foundations. Where the individual acquired the donated securities under an employee stock option and qualified to have the associated employment benefit taxed at the capital gains rate, the Budget proposes that the employment benefit be entirely exempt from taxation. Capital gains realized by individuals and corporations on donations to approved conservation charities of land or interests in land certified by Environment Canada as ecologically sensitive will also be exempt from tax. These measures will generally apply to donations made on or after May 2, 2006.
The Budget proposes to proceed with the enhanced gross-up and dividend tax credit measures announced in November by the previous government. Eligible dividends paid after 2005 by public corporations (and other non-Canadian-controlled private corporations) resident in Canada will be grossed up by 45% and the federal dividend tax credit will be increased to 19% of the grossed up amount. A CCPC may pay eligible dividends from non-investment income that is not eligible for the small business tax rate. Corporations not otherwise qualified to pay an eligible dividend will be able to pay eligible dividends to the extent of eligible dividends received. A corporation qualified to pay eligible dividends that has itself received ineligible dividends will be considered to have first paid ineligible dividends to the extent of ineligible dividends received.
Other Personal Tax Changes
The Budget proposes to raise the lowest personal tax rate from 15% to 15.25% for 2006 and 15.5% for 2007 and subsequent years. The threshold after which the lowest rate ceases to apply will increase from $35,595 to $36,378 in 2006, and be indexed in subsequent years. The Budget also proposes to increase the basic personal amount to $8,648 for 2005 and proposes annual increases to the basic personal amount so that by 2009 it will be $10,000 (including any increases attributable to indexation). Changes will also be made to the amounts on which credits are based for a spouse, common-law partner or wholly-dependent relative. The amount eligible for the pension income credit is increased from $1,000 to $2,000 effective in 2006. The Budget proposes the introduction of an annual employment tax credit for the first $250 of employment income after June 2006 ($1,000 in 2007 and subsequent years, subject to indexing) and a non-refundable tax credit for certain public transit passes in respect of transit after June 2006.
The Budget proposes to reintroduce the mineral exploration tax credit effective for flow-through share agreements entered into on or after May 2, 2006 and before March 31, 2007 for eligible expenditures incurred before 2009.
The Budget proposes a number of initiatives relevant to families with children. The Universal Child Care Benefit (UCCB) of $100 per month for every child under 6 years is proposed to be effective in July 2006. UCCB payments will be included in income of the lower-income spouse or common-law partner but will not reduce Old Age Security or employment insurance benefits or the expenses that may be claimed for purposes of the child care deduction. The existing child care tax benefit enhancement for children under the age of 7 will be eliminated generally effective July1, 2006 but enhancements will be made to the child disability credit. The Budget also includes proposals for a non-refundable tax credit of up to $500 effective in 2007 for enrolment fees paid for an "eligible program of physical activity" for children under the age of 16.
For students entitled to the education tax credit, the Budget proposes a non-refundable textbook tax credit and an exemption from tax for all scholarships, fellowships and bursaries received in connection with the education program that entitles the student to the education tax credit.
The Budget contains a number of initiatives intended to treat individuals in the fishing industry on a basis equivalent to those involved in farming. To that end, the Budget proposes rollover treatment where fishing property (land, depreciable property and eligible capital property used principally in a fishing business), shares of family fishing corporations and interests in family fishing partnerships are transferred to children or grandchildren, a $500,000 lifetime capital gains exemption for capital gains realized on dispositions of "qualified fishing property" and to extend from five to ten years the capital gains reserve period for proceeds not received in respect of the disposition of fishing property to a child or grandchild. These proposals are generally proposed to be effective for dispositions on or after May 2, 2006.
2005 Budget Measures
Certain measures originally announced in the 2005 Budget will be proceeded with, including:
- expand and clarify certain expenses eligible for the medical expense tax credit
- introduce a non-refundable tax credit for eligible adoption expenses
- changes to the eligibility criteria for the disability tax credit, expansion of the disability support deduction and the eligibility of home renovation and construction expenses
- doubling the disability-related medical expenses that can be claimed by a caregiver
- increasing the rate of capital cost allowance for investment in specified equipment, including transmission pipelines for petroleum, natural gas and certain other hydro carbons and related equipment, combustion turbines that generate electricity, electricity transmission and distribution equipment and certain wire and cable used for telecommunications infrastructure
- fuel efficient and renewable energy generation systems will be eligible for an increased capital cost allowance rate of 50 per cent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.