May 2006

2006 Federal Budget

The 2006 Federal budget proposes to implement the following measures:

Corporate Tax Measures

General corporate tax rate – The general corporate tax rate will be reduced for years ending after 2007. Subject to proration for non-calendar year-ends, the general rate for Ontario-based companies will be reduced from the current 36.12% to 34.5% in 2008, 34.0% in 2009 and 33% thereafter.

Small business tax rate - For Ontario-based companies the small business rate will be reduced from the current 18.62% to 17.0% in 2008 and 16.5% in 2009 and subsequent years, again subject to proration for non-calendar year-ends. Currently, the small business rate applies to the first $ 300,000 of income federally and the first $ 400,000 provincially. The budget proposes that the federal small business limit be increased to $ 400,000 for the 2007 and subsequenttaxation years, subject to the same proration for non-calendar year-ends.

Non-capital losses and investment tax credits - Can currently be carried forward for 10 years. The budget continues a fall 2005 proposal to increase the carry-forward period to 20 years for losses incurred and tax credits earned in taxation years that end after 2005.

Federal capital tax - Will be eliminated, subject to proration for non-calendar year-ends, for all years ending after 2005. Currently, federal capital tax is imposed at a rate of 0.175% on capital in excess of $ 50 million.

"Apprenticeship Job Creation Tax Credit" - To encourage employers to hire new apprentices, the Budget proposes to provide eligible employers with a non-refundable tax credit equal to 10 per cent of the salaries and wages paid to qualifying apprentices. There is a maximum credit of $2,000 per year per apprentice (i.e., the credit would be available on up to $20,000 of an apprentice’s salaries and wages). Eligible employers will be businesses that incur salaries and wages in respect of qualifying apprentices.

Small tools - Currently, tools that cost less than $200 are eligible for a 100% CCA rate. Tools that cost $200 or more are generally eligible for a 20% CCA rate. Budget 2006 proposes that the cost limit for access to the 100% rate be increased to $500 from $200 for such tools acquired on or after May 2, 2006. The budget also proposes to clarify the description of tools by specifically excluding electronic communication devices and electronic data processing equipment.

Personal Income Tax & GST Measures

Effective July 1, 2006, the GST will be reduced by 1% to 6%. No timeline has been set for future GST cuts.

Dividends received by individuals from public corporations (or private corporations where that income was subject to the general rate of corporate tax) after 2005 will be subject to a lower rate of personal Federal tax. This proposal will reduce the highest marginal tax rate on dividends from 31% to 26%. If Ontario also adopts this proposal, the rate will be further reduced to 20%.

The election promise to defer capital gains if the proceeds were reinvested within 6 months was not addressed in the budget.

The gain on the donation of publicly listed securities to charity after May 1, 2006 will no longer be taxable.

The lowest federal personal income tax rate will be set at 15.25% for 2006 and to 15.5% for 2007 and thereafter.

A Universal Child Care Benefit will provide families with children under the age of 6 with a payment of $100 per child per month. The benefit is taxable to the lower income spouse.

Scholarship income earned by a student at postsecondary level will be fully exempt from income tax.

A personal tax credit will be provided for trades-persons for the cost of new tools in excess of $1,000, up to a maximum of $500 for the year. Savings will be $78 per year.

A personal tax credit (Canada Employment Credit) of $1,000 will be available to employees in recognition of work-related expenses. Tax savings will be a maximum of $155 per year.

A textbook tax credit of $65 and $20 will be available for each month of full-time and parttime studies, respectively. Savings will be approximately $81 per year for full-time studies.

A Children’s Fitness Tax Credit up to $500 will be available to parents who enroll their children under the age of 16 in a physical activity program. Savings will be $78 per year.

The Pension Income Credit will be increased from $1,000 to $2,000 for seniors. Savings of $155 will be available per year.

A Public Transit Pass Credit will allow individuals a tax credit for the cost of using Public transit. The taxpayer will be required to retain receipts to support their claim. Savings will be $155 on every $1,000 spent.