The new Conservative minority government was determined to come out of the blocks quickly with tax initiatives to define their position. Some of these items already have been passed through the legislative process in record time while others will come soon on a similar fast track. While some of the measures are Conservative positions, others validated and legislated positions taken, but not completed, by the predecessor Liberal minority.

GST

For the first time, the GST rate will drop from 7% to 6%, effective July 1, 2006. This affects both consumers, who bear the GST, and businesses who are the tax collectors. This budget piece was hurried through parliament recently and is now fully law.
There are trickle-down implications to this re, for instance, the operation of the quick method and we are still sorting this out from the legislation.

Pensioners

The long-standing tax-free pension amount will be increased for 2006 from $1,000 to $2,000.
Pensioners who discretionarily trigger this annual amount from their RRIF should consider withdrawing the extra $1,000 by the end of the year. However, bear in mind implications on GIS, GST credits and other such benefits.

Personal

Regular employees do not find many tax deductions available to them. Many years ago, there was a general employment deduction to blanket compensate them for costs incurred to go work. This was cancelled but will be reinstated. There will be a $250 employment tax credit in 2006, which will be increased to $1,000 in 2007 and beyond.

A new $500 tax deduction will appear in 2006 for trades-people who must acquire tools beyond the afore-mentioned general allowance of $1,000.

The minority Liberal government threw everyone a small bone last year by dropping the lowest federal tax bracket rate by 1% to 15% in 2005. The Conservatives have taken a middle ground here, settling on a 15.25% rate in 2006 and 15.5% in 2007.

Social issues are addressed with various new provisions:

  • First, a new $500 fitness credit will commence in 2007 for “qualifying” physical activity programs for children under age 16. We await the definition of “qualifying”. The bold and logical next step is to extend this to all Canadians.
  • Second, effective July 1st, a new public transit credit will be available for the cost of long duration (a month or longer) transit passes for a family, including spouses and dependents under age 19. Start saving those receipts!
  • Third, a new universal child care benefit will parallel the existing child tax benefit. Starting in July 2006, a maximum of $100 per month per child under age six will be paid to families. This amount, however, will be taxable to the lower-income spouse.
  • Fourth, the maximum annual child disability tax benefit will increase in July 2006 by a few hundred dollars.
  • Fifth, the maximum refundable medical expense supplement for working people who incur medical costs will increase for 2006 from $767 to $1,000.

Investors

The Budget supported the key stance taken by Liberal Minister Goodale to enhance the dividend tax system in response to the controversy brewing last year related to the relative tax preferences of stocks vs trust units.

For 2006, the gross-up will increase from 1.25 to 1.45 and the federal dividend tax credit will increase from 13.3% to 19%. This remains a half measure for the stock market until each of the provinces step forward and respond positively. So far, only Quebec has done so and, in fact, its response was negative, not positive.

On the other hand, the stock market seems to have moved on to other worries!

Business

The Conservatives have sustained the previous long term Liberal initiative to drop both the small business rate and the general corporate rate and eliminate the “temporary” surtax. However these events are set for 2008!

Entrepreneurs will enjoy an extension of the lower small business tax rate from $300,000 to $400,000, effective (and phased in) from January 1, 2007.

The carryforward period for non-capital losses and investment tax credits was changed recently from seven years to ten years. This budget increases that yet again to twenty years. While seemingly positive, it is ponderous whether a business that takes twenty years to reap a loss carryforward would even be in business by then to enjoy such a tax break.

The small-dollar limit for Class 12 treatment for small tools will increase effective May 2nd from $200 to $500.

A new and sketchy apprenticeship job creation tax credit comes into force on May 2, 2006. This will rebate 10% of wages costs, to a maximum of $2,000 per year per employee, as a non-refundable tax credit for hiring “qualifying” apprentices. While this is apparently in force immediately, the details of this new program are not yet formulated. Note that the “non-refundable” aspect therefore only applies to profitable, tax-paying businesses. Thus, business tax planning may need to be altered accordingly. Also, “carry forward” provisions may be relevant.

Students

High-achieving students will come out big winners with the new law pertaining to scholarship income. Presently, a maximum of $3,000 of such income is tax-free. Effective for 2006, such income will be tax-free without limit.

Also, a new education credit will be added in 2007 to recognize students’ significant investment in textbooks. This new education tax credit will be created of $65 per month for full-time attendees and $20 per month for part-time attendees. Note that this is an imputed credit and therefore students need not keep their textbook receipts.

Philanthropists

We wrote in the Summer 2000 and 2002 issues of Insight about the implications of the then-incentive to gift securities in kind, rather than give cash, to your favourite charity.

The law at that time created an incentive by reducing the capital gain on that gift from one-half to one quarter. This budget increased the ante by reducing the capital gain even further — to zero!

This merits attention from all charitably-minded folks.