The federal budget tabled last May by the Conservative government introduced numerous income tax changes. Some of these proposals have been enacted into law and other proposals are still making their way through the parliamentary process. Furthermore, on Oct. 31, 2006, the federal finance minister made a surprise announcement that effectively will wipe out the income tax advantage enjoyed by income trusts in four years. To soften the blow of this announcement, he also announced new proposals to allow spouses to split pension income. However, it is important to note that considering the current political uncertainty in Ottawa, some of the Finance Department’s new rules may never be enacted into law. Here’s a brief summary of many of the personal tax changes included in the 2006 federal budget and October announcement.
The lowest personal income tax rate will be raised to 15.25% in 2006 and to 15.5% in 2007. In 2006, the lowest tax bracket rate of 15.25% will apply to taxable income up to the threshold of $36,378. This first tax bracket will be indexed for subsequent taxation years.
In 2006, the basic personal amount for individuals will increase to $8,839 (from $8,649). In 2007, $100 will be added to the basic personal amount as well as indexation of the amount. For 2008, $200 will be added to the 2006 basic personal amount as well as indexation of this amount. In 2009, the basic personal amount will be indexed and adjusted to allow the basic personal amount to rise to $10,000.
The budget also confirmed changes to the spouse or eligible dependant amount for the 2006 to the 2009 taxation years. The credit increases to $7,505 (from $7,344) in 2006, then will drop to $7,420 plus an amount for indexation for 2007, and increase to $7,590 plus an amount for indexation for 2008. Finally, in 2009 the credit will be indexed and adjusted so that the amount will be no less than $8,500. This credit will continue to be reduced by spouse or common-law partner income in excess of the thresholds that will also increase for 2006 and later years.
The maximum amount of pension income eligible for the pension income credit will increase to $2,000 (from $1,000) for 2006 and later years.
The new Canada employment credit, for work-related expenses incurred by employees, provides a credit on income up to $500 for 2006 and $1,000 in 2007, after which the amount will be indexed for inflation.
A new tax credit for textbooks is introduced for 2007 and later years for post-secondary students. This credit will be calculated as $65 for each month the student qualifies for the full-time education tax credit and $20 for each month for students eligible for the part-time education tax credit.
There is a new non-refundable tax credit for monthly (or longer) public transit passes available for travel starting on July 1, 2006. The credit for the eligible transit costs of an individual and his or her spouse or common-law partner and dependent children under age 19 can be claimed by the individual or his or her spouse or common-law partner.
Starting in 2007, a non-refundable tax credit — the children’s fitness tax credit — will allow parents to claim a credit on up to $500 in eligible fees for enroling a child under 16 in an eligible fitness program.
For 2006 and later years, scholarship, fellowship and bursary income will be tax-exempt. The previous provision exempted only the first $3,000 of this income.
The child disability benefit will be raised to $2,300 from $2,044 beginning July 1, 2006.
Starting July 2006, families will receive a taxable payment — the universal child care benefit — of $100 a month for each child under the age of six. The benefit will be taxable for the lower-income spouse or common-law partner.
Certain dividends in 2006 and future years will be taxed at lower rates. The budget proposals improve the dividend gross up and tax credit on eligible dividends paid to individuals. Eligible dividends are generally dividends paid by public companies.
The 2007 maximum annual employment insurance contribution will decrease from $729 to $720 and to $584 for Quebec employees. Effective Jan. 1, 2006, employers, employees and self-employed individuals in Quebec contribute to the Quebec Parental Insurance Plan up to a maximum amount of $237. The maximum amount will apply to incomes up to $57,000.
The maximum annual employer and employee Canada Pension Plan contributions for 2006 will increase to $1,989.90 (from $1,910.70). The increase will be the same for the Quebec Pension Plan.
2007 automobile deduction limit: The limit on tax-exempt allowances paid by employers to employees is $0.50/km for the first 5,000 kilometres driven and $0.44/km for each additional kilometre (no adjustment from 2006 rates). Additional amounts apply to designated northern areas such as Yukon, Nunavut and the Northwest Territories.
RRSP contribution limits will continue to increase at their previously stated rates. The maximum allowable contribution for the 2006 taxation year is 18% of earned income in 2005 or $18,000, whichever is less, $19,000 for 2007, $20,000 for 2008, $21,000 for 2009, $22,000 for 2010, and indexed after that.
The 7% goods and services tax was lowered by one percentage point on July 1, 2006, but the budget did not set out a timetable for implementing the government’s promised further reduction of the GST rate to 5%.
The small business tax rate will apply to corporate earnings of $400,000 (from $300,000) as of Jan. 1, 2007. The new limit must be prorated for non-calendar years. The small business tax rate will drop to 11.5% for 2008 (from 12%) and to 11% for 2009 and 2010. These rate changes will be prorated for small businesses with non-calendar taxation years.
The corporate tax rate will be reduced to 20.5% (from 21%) as of Jan. 1, 2008, to 20% by Jan. 1, 2009 and to 19% by 2010. The corporate surtax will be eliminated by Jan.1, 2008.
The capital gains inclusion rate will be reduced to zero (from 25%) for gains on publicly-listed securities donated to charitable organizations and public foundations on or after May 2, 2006.
A new tax on distributions from publicly-traded income trusts and limited partnerships was announced by the Department of Finance on Oct. 31, 2006. In addition to this new tax, Finance announced a one-half percentage point reduction in the general corporate income tax rate to 18.5% (from 19%) as of Jan. 1, 2011, an increase to the age credit amount to $5,066 (from $4,066) as of Jan. 1, 2006 and a proposal to allow income splitting for pensioners, starting in 2007.Web Extra: CAUT’s Income Tax Guide, prepared by Roy Williams, senior partner of the profession services firm Rheaume Williams Kalbfleisch in Ottawa, is available as a free download or by contacting the CAUT office.
The information contained in the above article and CAUT’s tax guide is of a general nature and is not intended to address the circumstances of any particular individual. Although every reasonable effort has been made to ensure the information is accurate and timely, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Accordingly, no action should be taken solely on the basis of the information provided therein. Professional advice should be obtained before embarking on any specific course of action. Although CAUT cannot pay for individual tax or advisory services, individual members seeking professional advice can contact Roy Williams at 613-236-4500 and take advantage of CAUT-negotiated client service rates.