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2007 Federal Budget and Economic Statement©

The Federal Budget 2007 was presented to Parliament on March 19, 2007. Highlights of the tax-related changes are discussed under the following headings:

Personal Income Tax

  • a new Working Income Tax Benefit will provide up to $500 per year for individuals and $1,000 for families as tax incentive to work
  • a new $2,000 child tax credit will provide up to $310 of tax relief for each child under 18
  • the annual Registered Education Savings Plan (RESP) contribution limit of $4,000 will be eliminated and the lifetime limit from $42,000 to $50,000
  • the maximum annual Canada Education Savings Grant amount will increase to $500 from $400 while the grant remains at 20% of the first $2,500 contribution each year
  • the spousal and other amounts will be increased to the same level as the basic personal amount, hence ending the "marriage penalty" of two-parent families with one parent who earns little income
  • the age limit for registered retirement savings plans (RRSP) and registered pension plans (RPP) will be increase from 69 to 71
  • the age credit amount will be increased by $1,000, providing up to about $150 of additional tax relief to low- and modest-income seniors, bringing total tax relief under the credit to as much as $800
  • overall taxes for eligible pensioners will be reduced by allowing pension income splitting

Corporate Income Tax

  • subsequent to Budget 2006 reducing the general corporate income tax rate [1] from 21% to 19% by 2010, this Budget further reduces the rate to 18.5% in 2011
  • temporary measure will allow investments in new machinery and equipment purchased on or after March 19, 2007 and before 2009 to be written off over a two-year period on average
  • the capital cost allowance (CCA) rate for buildings used in manufacturing and processing will be increased to 10% from 4% to better reflect their useful life

Budget 2007 provides new resources to the Canada Revenue Agency to detect and close down tax avoidance through offshore tax havens [2].

Economic Statement

On October 30, 2007, Finance Minister Jim Flaherty presented the Federal Government's 2007 Economic Statement. Subsequently, a Notice of Ways and Means Motion to Amend the Income Tax Act was also tabled in the House of Commons proposing to:

  • cut the goods and services tax from 6% to 5% effective January 1, 2008;
  • the GST credit for low- and modest-income Canadians will be maintained at its current level even though the GST rate is being reduced;
  • increase the basic personal amount to $9,600, retroactive to January 1, 2007 and to $10,100 for 2009;
  • reduce the lowest personal income tax rate from 15.5% to 15%, retroactive to January 1, 2007;
  • reduce the small business income tax rate to 11% in 2008, one year earlier than scheduled;
  • reduce the general corporate income tax rate to 15% by 2012 from its current rate of 22.1%, starting with a 1% reduction in the rate in 2008 beyond the already scheduled reductions.

General Federal Corporate Income Tax Rate Reductions

2007 2008 2009 2010 2011 2012
Existing rates (%) 22.12 20.5 20 19 18.5 18.5
Proposed rates (%) 22.12 19.5 19 18 16.5 15

The 2007 rate of 22.12% includes the 1.12% corporate surtax, which will be eliminated in 2008.


Federal, Provincial and Territorial Statutory General Corporate Income Tax Rates

 

Fed.

NL

PE

NS

NB

QC

ON

MB

SK

AB

BC

YT

NT

NU

Ave [3]

2000

29.1

14

16

16

17

9

14.5

17

17

15.5

16.5

15

14

14

13.8

2007

22.1

14

16

16

13

9.9

14

14

13

10

12

15

11.5

12

12.2

2012

15

14

16

16

13

11.9

14

13

12

10

12

15

11.5

12

12.6


Remarks

Budget 2007 provides minor tax cuts to both individual and corporate taxpayers. Prompted by an expectation of higher education and living costs, the Budget encourages savings in RRSP, RPP and RESP by raising the contribution limit, grant amount and age limit. The pro-family tax measure of increase in spousal and other amounts is insignificant but is heading in the correct direction in encouraging a healthier social structure. Federal general corporate income tax cuts and a more generous CCA rates are good. However, some provinces (including B.C.) still have the investment prohibitive capital tax.

Unlike the usual practice of releasing budget in February, the 2007 Economic Statement was announced at the time when the opposition Liberal Party (federal) still lacks support to win an election, rendering them nothing to gain in forcing an election by defeating the Budget. Given its minority control in the House of Commons, Harper’s Conservative government is politically astute in selecting a good timing to pass its tax agenda.

The cut in GST rate to 5% attracts criticism from some tax watchdog organizations. They believe that the public will benefit more if the income tax rates are further reduced instead. This argument stems from the belief that taxpayers have control over their GST payable on discretionary spending while they have no control (except by earning less of course) on income tax payable. However, GST rate cut is more appealing to politicians because it is a more conspicuous good deed. In many occasions, there are conflicts between good decisions and politically driven decisions. This flaw in democracy will remain a challenge to the so-called “free world” in devising a political system that compels decision makers to act to the best interests of the nation instead of their own.






[1] To encourage investment, the Federal Government is seeking the collaboration of the provinces and territories to reach a 25% combined federal-provincial-territorial statutory corporate income tax rate. At the time of writing, no agreement has been made.

           

[2] A tax haven is a place, country or jurisdiction where certain types of tax are levied at a low rate or not at all. This encourages wealthy individuals and corporations to establish themselves in these areas for tax reasons. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. The basic principle is the use of different tax laws between two or more countries to mitigate tax liabilities.

Many high tax regimes (usually industrialized countries, including Canada) have enacted legislation to counter the tax sheltering potential of tax havens. Anti-avoidance rule, blunter rules (prohibiting certain business activities if incorporated in tax havens) and forced disclosure of tax mitigation schemes to close tax law loopholes subsequently are common tools to recover tax revenue unfairly lost to tax havens.

On 25 January 2007 Senator Byron Dorgan (for himself and on behalf of Carl Levin and Russ Feingold) presented a bill to the U.S. Senate to amend the U.S. Internal Revenue Code 1986 to treat controlled foreign corporations which are established in tax havens as domestic corporations, and subject to full taxation as such within the U.S. Canada follows suit soon after.

[3] Provincial-Territorial weighted average

           

           

           

           

[This page was added on April 20, 2009.]