The Minister of Finance, James M. Flaherty, presented the 2006 budget in the House of Commons this afternoon at 4:00 p.m. EDT. The following is a summary of the highlights contained in the budget.
Economic context
· The Finance Minister is reporting an expected surplus of $8 billion for 2005-06.
· Economic growth in Canada is expected to continue over the next two years. Real GDP is expected to grow by 3% in 2006 and 2.7% in 2007.
· Short-term and long-term interest rates are expected to increase in 2006 and the yield curve to flatten somewhat.
· The budget is proposing a mix of tax cuts, targeted tax credits and increased spending on families, communities, agriculture, forestry, health care and security.
· The government will initiate a review of spending with a view to finding savings of $1 billion in each of the next two years.
· The government is projecting surpluses of $3.6 billion in 2006-07 and $4.4 billion in 2007-08, with $3 billion in each year being designated for debt reduction.
· The risks to the Canadian outlook are largely external, including uncertainty about commodity prices, the risk of a sharp correction in U.S. housing prices, appreciation of the Canadian dollar in response to global imbalances, as well as potential economic impacts of an influenza pandemic.
Measures concerning businesses
· The corporate surtax will be eliminated on January 1, 2008.
· The general corporate income tax rate will be reduced to 20.5% effective January 1, 2008; 20% effective January 1, 2009; and 19% effective January 1, 2010.
· The small business limit will be increased to $400,000 as of January 1, 2007. This also impacts other provisions dependent upon the small business limit such as enhanced investment tax credits and deadlines for paying corporate taxes.
· The small business tax rate will be reduced to 11.5% for 2008 and 11% as of January 1, 2009.
· The carry-forward periods for business losses and investment tax credits will be extended to 20 years for losses incurred and credits earned after 2005.
· The federal capital tax will be eliminated as of January 1, 2006.
· The federal capital tax on financial institutions will be applied at a rate of 1.25% on taxable capital in excess of $1 billion for taxation years ending after June 30, 2006.
· A maximum credit of $2000 per year per apprentice will be available to eligible employers under the new Apprenticeship Job Creation Tax Credit.
· The cost limit for access to the 100% capital cost allowance rate under Class 12 has been increased to $500 for tools acquired after May 2, 2006.
· Accelerated capital cost allowance rates of 30% and 50% will be extended to include certain cogeneration systems used in the pulp and paper industry, for eligible assets acquired on or after November 14, 2005.
Measures concerning individuals
· The lowest personal income tax rate will be 15.25% for 2006 and 15.5% for 2007 and subsequent years.
· The basic personal amount will be increased gradually to $10,000 by 2009. The spousal credit will also be increased gradually to $8,500 by 2009.
· A Canada Employment Credit, to offset work-related expenses, will provide a tax credit on up to $250 of employment income in 2006, increased to $1,000 for 2007, indexed thereafter.
· The budget proposes the Universal Child Care Benefit (UCCB), effective July 2006, to provide all families with $100 per month for each child under the age of six years. The UCCB will be taxable in the hands of the lower-income spouse.
· A number of measures are proposed in respect of the disposition of a fishing business after May 1, 2006, including: access to the $500,000 lifetime capital gains exemption; a possible tax-deferral on the transfer of a fishing property to a child or grandchild; and an increase in the maximum reserve period to 10 years for such an intergenerational rollover.
· The mineral exploration tax credit will be reintroduced effective for flow-through share agreements entered into after May 1, 2006, and before April 1, 2007.
· The cost of eligible new tools, in excess of $1,000 (indexed after 2007), acquired after May 1, 2006, by a tradesperson will be deductible from employment income up to a maximum of $500 per year.
· Students will be able to claim a textbook tax credit, in addition to the education tax credit, beginning in 2006.
· Effective 2006, scholarship, fellowship or bursary income with respect to post-secondary or occupational training will be tax-exempt.
· A tax credit on up to $500 of certain expenditures for children’s fitness will be effective as of the 2007 taxation year.
· The pension tax credit currently allowed on the first $1,000 of pension income will be allowed on the first $2,000 of pension income.
· The maximum annual Child Disability Benefit (CDB) will be increased to $2,300 commencing July 2006. The CDB will be phased out at a rate of 2% of family income in excess of $36,378 (4% for families with more than one eligible child).
· Effective 2006, the budget increases the maximum amount of the refundable medical expense supplement to $1,000 (indexed after 2006).
· A tax credit will be introduced, effective July 2006, for the cost of monthly (or longer duration) public transit passes.
· The inclusion rate of capital gains on shares of publicly-listed securities donated to charities and public foundations after May 1, 2006, will be reduced to zero. A similar rule will apply to the donation of securities acquired with stock options.
· The inclusion rate of capital gains for donations of ecologically-sensitive land made after May 1, 2006, to approved conservation charities will be reduced to zero.
· Previously announced changes to the dividend tax credit regime will be implemented.
GST/HST measures
· Effective July 1, 2006, the GST rate will decrease to 6% and the HST rate will decrease to 14%.
· The GST credit will be maintained at current levels for low- and modest-income Canadians.
· The budget proposes to retain the existing GST rebate percentage and the lower and upper phase-out thresholds for the new housing rebate.
· Existing rebate percentages used by public services bodies will be retained.
· The budget proposes changes to the rules which apply to public service bodies that revoke an election made under section 211 on or after May 2, 2006.
· The budget proposes changes to the percentages used by taxpayers or registrants using a Streamlined Accounting Method.
· The prescribed rate or factor for calculating the GST/HST on certain taxable benefits, certain input tax credits and rebates of GST to employees or partners will be adjusted.
· The budget proposes a general transitional rule, which will be based on the earlier of the day payment is made and the day the supplier issues an invoice.
· Certain types of transactions will have specific transitional rules:
o For sales of real property, the 6% GST rate will apply to all of the consideration if, under an agreement of purchase and sale entered into after May 2, 2006, both ownership of the property, and possession of it, are transferred to the buyer after June 30, 2006. The 7% GST rate will apply to all of the consideration if ownership or possession transfers before July 1, 2006.
o For sales of residential homes pursuant to a written agreement entered into on or before May 2, even if ownership and possession transfer after June 30, 2006, the 7% GST rate must be collected. The purchaser will be entitled to file a transitional claim with the Canada Revenue Agency (CRA).
o For goods that are imported or released from Customs’ control on or after July 1, 2006, the 6% GST rate will apply.
· The budget confirms that debt collection services provided by collection agents to financial institutions are not financial services and are therefore taxable.
Other measures
· Effective July 1, 2006, the budget proposes to increase tobacco and alcohol excise duties to offset the impact of the GST rate reduction.
· Vintners and small- and medium–sized brewers will be supported by reducing the excise duties on certain wine and beer produced in Canada.
· Effective May 2, 2006, excise tax is repealed on the delivery or importation of jewellery, clocks and articles made of semi-precious stones.
· Effective July 1, 2006, the Air Travellers Security Charge Rates will be adjusted as a result of the new GST rate.
· Additional measures are proposed to harmonize a number of administrative, interest and penalty provisions across federal tax statutes.
· CRA currently must wait 90 days from the date of a notice of assessment before commencing collection of accounts by deduction or set-off against amounts owing to the person. The budget proposes to eliminate the 90-day period.
· Tax measures proposed in the 2005 budget will be implemented.
· A discussion draft will be released on reporting in other functional currencies.
Source: Deloitte & Touche LLP - Canada (English)