The year 2000 was unusual in that the Finance Minister delivered two budgets; one in the Spring and one in the Fall. In the Fall issue of Insight, we chose to “reserve judgment” on the Fall mini-budget, which was delivered three days before the national election was announced. In the meantime, the Liberals returned to power and Mr Martin declared that there likely will be no Spring budget. So… it appears that last October’s words will stand, so here is more detail of what was said.
PERSONAL TAX BRACKETS
Starting in 2001, the federal rate for the lowest bracket drops from 17% to 16%. The next bracket drops from 24% to 22%. The top bracket remains at 29% but starts now at $100,000, instead of $61,509. A new third bracket bridges between $61,509 and $100,000 and is 26%.
The federal surtax is eliminated and all brackets receive an inflation adjustment from 2000.
- For self-employed business people, one half of their CPP liability can be claimed as an expense. The other half continues to be claimed as a credit at the lowest tax rate.
- Common-law same sex couples will be obliged to file jointly commencing in 2001. From 1998-2000 this treatment is optional.
- Various credits have been increased, vis, disability, attendant care, education credits.
B.C. dropped its small business corporate tax rate for the fourth time in two years. Starting January 1, 2001, the rate drops from 4.75% to 4.5%., on a phase-in basis through 2001. The combined federal/provincial tax rate for small business income under $200,000 will be 17.62% by the end of the year.
SMALL BUSINESS CAPITAL GAINS
The February Budget introduced a new provision to help small businesses. The deal defers taxation on selling your existing business if you invest like proceeds into a qualifying new business.
The downsides are, first, that it is only a deferral, and, second, you have to go out and find a new business venture very quickly, so there is little time to kick back and relax for a while after selling your old business.
Your new investment must be made by the earlier of 120 days after the sale and February 28th of the year following.
The October Budget increased the limit of gains that can be sheltered under this arrangement from $500,000 to $2,000,000.
The February Budget dropped the capital gains rate from 75% to 66 2/3%. Effective October 18, 2000, the rate was dropped further to 50%. However, the Finance Minister steadfastly refused any retroactivity to the drop in the name of simplicity.
Instead, the three different inclusion rates will all apply in 2000, depending on when the particular investment was sold.
Furthermore, some unpredictable measures were written to deal with blending inclusion rates over those periods, depending upon whether gains or losses were generated in each period and which period had the greater absolute amount.
The complexity of this is beyond explaining fully here for those who seek professional assistance doing their personal tax returns.
For the do-it-yourselfers with capital transactions, either take a year off and get some help this Spring, or else contact us for the reference material.
2001 AUTO AMOUNTS
- The expenditure limit for new passenger vehicles increased to $30,000.
- The employee reimbursement rate for business driving increased to 41 cents on the first 5,000 kms and 35 cents on the excess.
- The operating benefit for personal use of a company car increased to 16 cents.
- The monthly interest limit on car loans increased to $300.
- The monthly lease limit on car leases increased to $800.
DON’T FORGET LAST SPRING’S ITEMS
- The foreign content limit for RRSPs and RRIFs went up on January 1, 2001 to 30%.
- Tax free scholarships increased in 2000 from $500 to $3,000.
- Employees of publicly-traded companies who receive stock options may be eligible for a tax deferral. This requires a special election to be filed on a timely basis.