It is a rare event that we are blessed with two federal budgets in one year and that usually means one thing…..politics! The Conservative government called a mini-budget in October, likely to throw some vote-getting bones to Canadian taxpayers. To avoid confusion, the mini-budget is actually termed an “economic statement”.

The GST rate has been dropped for the second time, now from 6% to 5%, effective January 1, 2008. It is ironic to think back to how controversial GST was when it was first proposed. Now we see economists, who are typically fans of consumption as opposed to income taxes, arguing against drops to the “Gouge-and Screw” tax.

Individuals

There is a retroactive drop of 1/2 of 1% to the lowest personal tax bracket, which benefits all taxpayers. Please see the revised personal tax rate structure.

There is also an early, and second, increase to the basic exemptions. These already were indexed for 2007, but they will get a second increase for the year to $9,600 from $8,929 which is intended to cover the indexation for 2008 as well.

Corporations

The corporate rates are scheduled to move down based upon previous long term promises. These changes have been accelerated and enhanced with the mini-budget. The corporate surtax will be cancelled, as promised previously, effective January 1, 2008. The 1/2 of 1% reduction in the general rate, promised January 1, 2008, will be superceded by a new 1 1/2% reduction, with more promised in 2009-2012. This brings the general rate to 19.5% from 22.12%. Small businesses also will enjoy the withdrawal of the 1.12% surtax in 2008, as well as a 1% general drop, for a 2008 rate of 11% instead of 13.12%.

As always with corporate tax changes, these rate changes are prorated as company year-ends roll through the 2008 year. In other words, the full effects described here are first relevant for a company with a December 31, 2008 year-end.

Lastly, the high profile of “integration”, resulting from Flaherty’s unit trust attack almost a year ago to the day, now leads to more active fiddling by the Finance Minister to make sure that the dividend “system” does not drift out of whack when corporate tax rates are changed. In other words, the mini-budget indicated that the new-and-improved enhanced grossup-and-credit system may get tweaked (downwards) as well. It seems likely that the government was seeking to promote some “goodies” right now, so it was the wrong time to deliver a “bad”.

Article originally published : Nov 2007