Major Tax Cuts Announced in Federal Mini-Budget
November 2005
Release No: 05-04
With threats from the opposition to bring down the minority Liberal government in the very near future, Finance Minister Ralph Goodale has delivered his highly publicized mini-budget. Today's update was initially scheduled as the government's usual annual economic statement, while significant budgetary measures were expected to come in next February's budget as a run up to an election to be called after the second and final report is tabled by Justice John Gomery on the sponsorship scandal. However, likely fearing that they would not get a chance to table the February 2006 budget, the minority Liberal government has used today's forum to announce significant tax cuts and other spending measures.
On the budgetary front, there was good news - due to higher than expected business profits and employment growth and lower than expected interest rates, the government now expects a budget surplus for 2005-06 of $8.2 billion (up from $4 billion as announced in the February 2005 budget, before reserves). Surpluses for 2006-07 to 2010-11 will vary from about $8 to $11 billion. New initiatives were announced for post-secondary education, infrastructure and immigration.
In addition to the personal tax cuts and the reinstatement of the corporate tax cuts first announced in the February 2005 budget as predicted in media reports, several other changes were announced.
The following is a summary of the more important items of interest to our clients.
Changes Affecting Individuals
Personal Income Tax Cuts
In today's update, the government has proposed tax rate reductions for all individuals. Effective January 1, 2005, the tax rate that applies to the lowest taxable income threshold will be decreased to 15% from 16%. This lower rate of 15% will also apply when determining non-refundable tax credits and alternative minimum tax.
Effective January 1, 2010, the rate that applies to the second taxable income threshold will decrease to 21% from 22%, and the rate that applies to the third taxable income threshold will decrease to 25% from 26%.
For 2005, the top taxable income threshold is $115,739 and will increase over time due to indexation of the tax system. For taxable income above this threshold, a tax rate of 29% applies. The government has proposed that this top threshold be increased to $200,000 effective January 1, 2010. All taxable income thresholds will continue to be indexed to take into account inflation.
Personal Credits Increased
In the 2005 budget, the Finance Minister announced increases over the next five years to the basic personal credit and the spousal/common-law partner/wholly dependent relative credit. These increases were in addition to the annual inflation adjustment to ensure the credit amounts would be at least $10,000 and $8,500 respectively for the 2009 taxation year. The tax plan announced today accelerates those annual increases over the next five years. The total increase proposed will remain the same; however, annual increases will be implemented earlier (beginning in 2005) and will be higher in the earlier years. The proposed increases (not including annual inflation increases) are set out below:
The actual federal tax credit is obtained by multiplying the credit amount by 15% (a proposed reduction from 16%). The spousal/partner/dependant credit is subject to a reduction when the spouse/partner/dependant's income exceeds a threshold. This threshold will be adjusted to reflect the above increases.
The government previously announced that if there is an unanticipated surplus at the end of a fiscal year, an amount equal to one-third of such surplus will be used to further increase the credits noted above, where the Minister agrees it is fiscally prudent to do so.
Refundable Medical Expense Supplement Increased
The refundable medical expense supplement provides assistance for above-average medical and disability-related expenses to low-income working Canadians. The February 2005 budget increased the maximum supplement from $571 to $750 in 2005. This update proposes to further increase the maximum supplement to $1,000 for the 2006 taxation year. This amount will continue to be indexed.
The supplement is reduced by 5% of net family income above an income threshold. This threshold is $21,663 for 2005. Today's update proposes to set the income threshold at its current level of $21,663 and this threshold will be indexed for inflation in subsequent years.
Child Disability Benefit Increased
The February 2005 budget increased the maximum annual Child Disability Benefit beginning in July 2005 to $2,000 from $1,681. Today's update proposes to further increase the maximum annual benefit to $2,300, beginning in July 2006.
Working Income Tax Benefit Introduced
The Minister announced his intention to work with the provinces and territories to develop a new working Income Tax Benefit, which would help eliminate the so-called "welfare wall".
Changes Affecting Business
Corporate Tax Cuts
In the federal budget earlier this year, the Finance Minister announced two corporate tax rate measures - to eliminate the corporate surtax (which has an effective tax rate of 1.12% on income) beginning on January 1, 2008 and to reduce the general federal corporate tax rate from 21% to 20.5% on January 1, 2008, to 20% on January 1, 2009 and to 19% on January 1, 2010.
These proposed changes were originally included in Bill C-43. However, the general rate cuts and the elimination of the surtax for large corporations were deferred when the minority Liberal government reached a deal with the NDP in the spring on certain spending measures in return for support on confidence votes, which kept the minority Liberal government from falling at that time.
The government reconfirmed today its intention to implement the remaining corporate tax cuts on the same schedule as originally set out. These cuts combined with the surtax elimination will result in the following federal tax rates (rates must be pro-rated for non-calendar year ends):
|
Current |
Proposed Rates |
|
(%) |
(%) |
|
2008 |
2008 |
2009 |
2010 |
Small business rate |
13.12 |
12 |
12 |
12 |
General rate |
22.12 |
20.5 |
20 |
19 |
Investment Income |
35.79 |
34.67 |
34.67 |
34.67 |
Elimination of the Federal Capital Tax
Currently, the federal capital tax (also known as the large corporations tax) is levied annually at a rate of 0.175% of a corporation's taxable capital employed in Canada in excess of $50 million. A corporation's federal surtax (1.12% of taxable income) is deductible against the corporation's capital tax liability. In order to promote investment, the 2003 budget announced the elimination of the federal capital tax for all corporations by 2008. The Minister proposes accelerating the schedule to eliminate this tax as of January 1, 2006. Corporations will be able to continue to apply the corporate surtax against the federal capital tax liability, if any, for the three prior tax years.
Carry-Forward Periods for Business Losses and Investment Tax Credits
The Canadian tax system allows taxpayers to apply business losses and other amounts to other tax years. Currently, non-capital losses can be carried back 3 years and forward 10 years. To provide further support to Canadian businesses, the government's tax plan proposes to extend the carryforward period for all taxpayers to 20 years. This will apply to general non-capital losses, farm losses, restricted farm losses and taxable Canadian life investment losses incurred in taxation years ending after 2005. Similarly, the carryforward period for Investment Tax Credits (ITCs) will be expanded to 20 years. This will apply to ITCs for scientific research and experimental development, Atlantic investment and mineral exploration for credits earned in taxation years ending after 2005.
Capital Cost Allowance (CCA) - Forestry Bioenergy Equipment
In the February 2005 budget, the government introduced CCA rate increases for renewable energy generation equipment and specified high-efficiency cogeneration equipment in order to encourage investment in green technology. Today's tax plan proposes extending the eligibility for the increased CCA rate to cogeneration systems that use a type of biomass used in the pulp and paper industry called "black liquor". This increased CCA rate would apply to eligible cogeneration systems using black liquor acquired on or after November 14, 2005.
Please note: this material is general in nature and should not be relied upon to replace the requirement for specific professional advice. © November 2005, BDO Dunwoody LLP
