2006 Canadian Federal Budget

Yesterday, May 2nd, 2006, the Conservative Canadian Federal Government brought down it’s first budget since they were elected. This budget contains quite a number of tax changes, both corporate and personal.

An interesting wrinkle is that many of these changes combine tax changes enacted by the previous Liberal government. Many of these changes came into effect on January 1st and, for the most part, the new government’s changes come into effect as of July 1st. Rather than give you all the gory details, we will summarize the total tax changes for 2006. If you wish more detail, you can contact us at info@marsh-assoc.com or go to the Federal government’s Department of Finance (yes, this is a link) web site for the full budget.

Here are a few highlights:

Goods and Services Tax (GST)

Effective July, 1, 2006, the GST will be reduced from 7% to 6%. For people wanting to make major purchases like homes or vehicles, you can receive the 1% discount now if you contract to receive the home or vehicle but not take possession until July 1st.

Child Care

Effective July 2006, families will receive as Universal Child Care Benefit of $100 per month for each child under the age of 6 years. This amount is taxable in the hands of the lower income spouse.

Personal Income Tax

• The current personal tax exemption will be increased through a blended formula to an average of $8,869 for the 2006 taxation year. For 2005, the exemption was $8,648. By 2008, the government plans to increase the exemption to $10,000.

• Taxation of dividends will decrease by approximately 5% for the highest tax brackets.

• The Child Disability Benefit will increase from $2,044 to $2,300 as of July 1, 2006.

• Student bursaries, fellowships and scholarships will not be taxable for the 2006 taxation year. Students will also receive a Textbook Tax Credit of $65 a month for full time student and $20 a month for part time students. This credit is non-refundable like tuition fees.

• Tradespeople will receive a new $500 deduction on tolls pruchased of over $1,000.

• Parents can receive a physical fitness tax credit of up to $500 for enrolling their child under 16 years of age in a program of physical activity.

• The pension income tax credit is increased from $1,00 to $2,000.

• A new Employment Tax Credit will begin this year, giving employed taxpayers a credit on the first $500 of Employment income, effective July 1, 2006. This credit will be increased to $1,000 for 2007 and subsequent years.

• A new credit will be available for people using public transit

• Donations of publicly traded securities to charitable organizations and ecologically-sensitive land will be no longer attract any capital gains tax.

Business and Corporate Tax

Incorporated businesses in Canada are taxed at two different levels. Businesses classified as Small Business are taxed at a lower rate on their Active Business Income (ABI). A small business must be a Canadian Controlled private corporation with ABI of $300,00 or less. ABI is income from actively operating a business and does not include income from investments and rent of property (among other things).

Here are some of the changes to corporate income tax:

• Effective January 1, 2007, the threshold for small busines sis increased from $300,000 to $400,000.

• The small business tax rate will decrease from 12% or 11.5% on January, 2008 and to 11% on January 2009.

• The 4% corporate surtax will be eliminated as of January 1, 2008

• The Federal Capital Tax is eliminated as of January 1, 2006.

• Tax rates for larger corporation are also reduced to 20.5% on January 1, 2008, 20% on January 1, 2009 and 19% on January 1, 2010.

• The carry forward period for non-capital tax losses and Investment Tax Credits will be increased to 20 years for losses and credits earned in taxation years that end after 2005.

• The government has created a new Apprentice Job Creation Tax Credit that gives a business a non-refundable tax credit of 10% of salary paid to a maximum of $2,000 per apprentice.

Please keep in mind that this is the budget of a minority government. If the budget is defeated and the government falls, the budget is toast and we go back to the polls. Also, what we are presenting here is not intended to be a full analysis of the budget, but only a few highlight that many of our clients and readers might find helpful and informative.