On May 2, 2006, the federal Minister of Finance Jim Flaherty presented a balanced federal budget that cuts taxes, focuses federal spending on priority areas and reduces debt in Ottawa. Only tax-related issues are discussed herein. The source of all information, except the cartoons or otherwise specified, is from the federal government. All rights reserved.
Taxes Affecting Personal Taxpayers
- This Budget introduced a new Canada Employment Credit (a tax credit on employment income of up to $500), effective July 1, 2006, to help working Canadians. The eligible amount will double to $1,000 as of January 1, 2007.
- A permanent legislated reduction in the lowest tax rate to 15.5% from 16% as of July 1, 2006. The budget also confirms that the lowest tax rate will be 15% from January 1, 2005 until June 30, 2006.
- This Budget introduced a new tax credit for the cost of textbooks, which will provide a tax reduction of about $80 per year for a typical full-time post-secondary student.
- The elimination of the current $3,000 limit (ie. there will be no limit after the elimination) on the amount of scholarship, bursary and fellowship income a post-secondary student can receive without paying federal income tax.
- Effective July 1, 2006, GST will be reduced by 1% (see Appendix 1 for GST Transition Rules)
- Expanded eligibility for Canada Student Loans through a reduction in the expected parental contribution, starting in August 2007.
- Over two years, all families will be provided with $100 of Universal Child Care Benefit (UCCB) per month for each child under age 6. The UCCB will not affect federal income-sensitive benefits and will be provided as of July 1, 2006.
- A children’s fitness tax credit for up to $500 in eligible fees for physical fitness programs for each child under age 16.
- Increased to $2,000 the maximum amount eligible for the pension income credit, effective 2006.
- Assistance for persons with disabilities will be enhanced by:
- Increasing the maximum annual Child Disability Benefit (CDB) to $2,300 from $2,044, effective July 2006.
- Extending eligibility for the CDB to middle- and higher-income families caring for a child who is eligible for the disability tax credit, effective July 2006.
- Boosting the maximum amount of the refundable medical expense supplement to $1,000 from $767, effective 2006.
- A tax credit for the purchase of monthly public transit passes, effective July 1, 2006 (to those who buy public transit passes, please ensure that you keep all pass purchase receipts).
- Exempting donations of ecologically sensitive land made under the Ecogift program and publicly listed securities to public charities from capital gains tax, effective immediately.
Taxes Affecting Small Business Corporate Taxpayers
- Reduced the general corporate income tax rate to 19% from 21% by 2010.
- Eliminated the corporate surtax for all corporations as of January 1, 2008.
- Eliminated the federal capital tax as of January 1, 2006, two years ahead of schedule.
- Increased the threshold amount of small business income eligible for the 12% tax rate to $400,000 from $300,000 as of January 1, 2007.
- Reduce the 12% tax rate applying to qualifying small business active income to 11.5 % in 2008 and 11 % in 2009.
- A new tax credit of up to $2,000 for employers who hire apprentices.
- A new $1,000 grant for first- and second-year apprentices.
- A new $500 tax deduction for tradespeople for costs in excess of $1,000 for tools they must acquire as a condition of employment. Also, the $200 limit on the cost of tools eligible for the 100-per-cent capital cost allowance will be increased to $500.
- Accelerating the capital cost allowance for forestry bioenergy.
- Effective July 1st, 100 Canadian wine produced by small vintners will be exempt from duty.
Remarks
Furthermore, the Budget reduced the $975 Right of Permanent Residence Fee to $490, effective immediately. This fee is a head tax to all new landed immigrants.
This Budget allocated no funds in settling the controversial issue of compensating Chinese head tax victims prior to the very racist Chinese Exclusion Act effective between 1923 to 1947. Although the Harper government openly speaks of such compensation and is in the process of collecting public opinions in various Canadian cities, such compensation is not possible without funding from the Budget. It will be interesting to see how this issue will be settled. Time is certainly on the government’s side as most of these victims are now deceased and those Chinese pressure groups are fragmented, have different objectives and will eventually run out of steam.
In general, this Budget gave a mild reduction in both personal and corporate income tax. Given the huge government bureaucracy and the difficulty to streamline government in a democratic setting, Prime Minister Harper has honored some pre-election commitments in this Budget, which is not unusual in the first term. The minority Conservative government will need the support of other political parties to implement its plans. Therefore, compromises are inevitable. Other pre-election commitments, such as the abortion of the ineffective and expensive Firearm Registry and the repeal of the Firearms Act, are yet awaited to be honored. They will continue to test Mr. Harper’s integrity, determination and political wisdom.
Budget 2006 includes transitional rules for transactions occurring close to or straddling the July 1, 2006, implementation date. For example:
For consumers, these situations raise the question as to whether they pay GST at the 7% rate or at the new rate of 6 per cent. In general, the existing GST rules that determine when tax is payable will determine if the 6% rate will apply. Typically, GST is payable when an invoice is issued. Consequently:
Budget 2006 sets out the rules that will apply to purchases of new homes during the transition to the new 6% rate. Specifically:
