In last year’s Budget, the Finance Minister spent an inordinate amount of time crowing his past achievements, without doing much in the present. This year, much was promised for the future and a little done in the present. This analysis focuses on the changes that are reasonably foreseeable, i.e. in 2000 and 2001. The other promises that are forecast out as far as 2005 have been ignored.
Several budgets ago, indexation of tax brackets and various credits to changes in the cost of living was withdrawn, leading to the government boon of “bracket creep”, which allowed the federal treasury to profit
from inflation. Annual indexation has now been restored, commencing in 2000.
For instance, the basic credit increases this year by $100 and the tax rate brackets increase from $29,590 to $30,004 and from $59,180 to $60,008. A small recovery of what should be a constitutional right!
The 5% federal surtax on high earners will apply on federal tax exceeding $15,500 for 2000 and exceeding $18,500 for 2001.
DONATIONS ON DEATH
Presently, the donation tax credit is not available on death for direct beneficiary designation of life insurance or RRIF/RRSP proceeds. This causes the inequity of taxation of the deemed pension proceeds with no corresponding tax break on the donation. Effective retroactively to January 1, 1999, the donation tax credit will be permitted.
Effective in 2000, the list of qualifying impairments expands to include those requiring regular physical therapy. Also, the list of qualifying supporting relatives for credit transfer expands to include brothers,
sisters, nieces, nephews, aunts and uncles.
A new additional credit of $2,941 is available for children qualifying for the disability credit. The claim is reduced by child and attendant care in excess of $2,000.
PERSONAL TAX BRACKETS
Since the Conservatives shrunk the number of brackets to, essentially, three, the middle class has been hammered by a high marginal tax bracket and low income range. The income tax rate on income over
roughly $30,000 has been approximate 40% for years. People making over roughly $60,000 have been taxed as the highest earners in the land.
Effective in 2000, the bracket ranges increase slightly (see “Indexing”) and the middle federal bracket drops by 1% to 25%, followed by another 1% drop for 2001. The overall impact of this will depend on
how the provinces respond in their round of Budgets.
Employees of publicly-traded companies who exercise stock options now will be afforded essentially the same tax treatment as those in private companies.
For options exercised after Feb. 27, 2000, the timing of taxable benefits is deferred until the acquired shares are sold. There is a limit on access to this deferral: up to $100,000 of market value (measured at the time of date of grant) of shares vested per annum.
Effective in 2000, the child care limit increases from $7,000 to $10,000 per child if the dependent qualifies for the disability tax credit.
Education has seen various goodies throw its way in past budgets. This year, there is only one. Effective in 2000, the tax-free amount for scholarships and bursaries has increased to $3,000 per year (from $500). This higher limit only applies to such income where the recipient qualifies for the education credit.
FOREIGN CONTENT INVESTING
It took a long while, but the 20% foreign content restriction on sheltered (RRSPs and RRIFs) accounts finally has been raised. Effective in 2000, the limit is increased to 25% of book value. Effective January 1,
2001, the limit will be 30%.
Effective January 1, 2001, “segregated” mutual funds must operate on a level playing field with non-segregated funds and adhere to the same foreign content restrictions.
SMALL BUSINESS SHARES
Presently, the sale of shares in a qualifying small business corporation enjoys permanent tax avoidance with the $500,000 capital gains deduction. A new provision expands preferential treatment to this sector by offering tax deferral if the proceeds are re-invested in another small business. There are a number of requirements and catches:
- The shares sold must have been held at least six months
- Only individual shareholders qualify
- An “eligible” small business must have at least 90% of its assets, valued at market, deployed in active business
- Reinvestment must occur in the same year of disposition or within 60 or 120 days thereafter
- The value of the assets of the new company cannot exceed $2.5M before your investment nor exceed $10M after your investment
- A“tricky” formula determines how much of your capital gain can be deferred
The basic federal rate will drop by 1% effective January 1, 2001, except for small business income less than $200,000, manufacturing income or private company investment income.
Canadian-controlled private corporations will see a third tier added to their tax bracket structure. There will be a middle bracket for income between $200,000 and $300,000, taxed at 21% federal (previously 28%), also effective January 1, 2001.
However, the federal surtax remains calculated at 4% of a notional 28% federal rate.
Presently, interest received from the government related to tax assessments is taxable, but interest paid is not deductible. Starting January 1, 2000, the government will “set-off” amounts paid and received (even across tax years) and now will provide T-slip reporting, like financial institutions, to report the net taxable amount, if any.
Effective after February 27, 2000, the taxable portion of capital gains is reduced from 3/4ths to 2/3rds, where it last was in 1989. Unfortunately, capital gains in the first two months of 2000 still will be taxed at 3/4ths; therefore, time-tracking of capital transactions will be necessary on the year 2000 filings. Further one-time complexity will ensue for 2000, depending on whether net gains or net losses were experienced in the two “stub” periods for the year.
This change carries logical corollary changes to inclusion rates for:
- Allowable business investment losses
- Stock option deductions
- Tax-free capital gains deduction for qualifying small business shares and farm properties
- Charitable gift-giving of certain stocks