Tax Tips And Traps

On May 2, 2006, the Honourable Jim Flaherty, Minister of Finance, presented his first Budget to the House of Commons.

The Minister reports an estimated surplus of $8.0 billion for fiscal period 2005/2006. This results from revenues of $220.9 billion, spending of $179.2 billion, and debt service of $33.7 billion.

The surplus for 2006/2007, after debt reduction of $3 billion, is estimated to be $.6 bil-lion.

As expected, the Goods and Services Tax (GST) is to be reduced by 1% to 6% effective July 1, 2006. Generally, the key date for determining the GST rate is the time of invoice. For new homes, the 7% rate will still apply when ownership or transfer takes place be-fore July 1, 2006.

The Budget also proposes a new Universal Child Care Benefit of $100per child per month which will be included in income by the lowest income spouse but will not affect federal benefits that are determined according to income. This is to be effective July 1, 2006.

For other details - see below.

For the 2006 taxation year the tax rate applicable to taxable income less than $36,378 will be 15.25%. (The tax rate increases from 15% to 15.5% effective July 1, 2006.)

For 2006, the basic personal amount increases from $8,648 to $8,839. For 2007, the amount is increased by $100.

For 2006, the spouse or common-law partner amount increases from $7,344 to $7,505. For 2007, the amounts are increased by $85.

For 2006, the net income threshold for the spouse or common-law partner in-creases from $734 to $751.

For 2006, an individual will be entitled to deduct in computing tax the lesser of employment income and $250, multi-plied by the appropriate percentage for the taxation year. (The $250 increases to $1,000 for 2007 and subsequent years.)

For a disposition on or after May 2, 2006 by an individual of a fishing prop-erty, a share of the capital stock of a family fishing corporation, an interest in a family fishing partnership or a quali-fied fishing property, the provisions of the Act relating to eligible capital prop-erty gains, capital gains reserves, re-placement property rollovers, intergenerational rollovers from an indi-vidual to a child of the individual, trust rollovers from a spousal or common-law partner trust to a child of the indi-vidual and the lifetime capital gains exemption will apply to these fishing properties.

The Conservative election platform to eliminate the capital gains tax for indi-viduals on the sale of assets when pro-ceeds are reinvested within 6 months did not make it into this Budget.

MAY 2, 2006 PAGE 1 Federal Budget Commentary 2006

For flow-through share agreements made on or after May 2, 2006 and be-fore March 31, 2007, the definition "flowthrough mining expenditure" will be expanded.

For eligible tools acquired on or after May 2, 2006, there may be deducted in computing the income of an individual from employment as a tradesperson the tool costs in excess of $1,000 to a maximum of $500 for that year.

The tools must be new and certified by the employer to be required as a condi-tion of the individual’s employment. They generally cannot include an elec-tronic communication device or elec-tronic data processing equipment.

Also, the $200 limit on the cost of tools eligible for the 100% capital cost al-lowance will be increased to $500.

For the 2006 and subsequent taxation years, an individual who is entitled to the education tax credit will be entitled to claim a textbook tax credit equal to the product obtained when the appropri-ate tax rate percentage for the year is multiplied by $65 for each month in the year in which the individual was enti-tled to claim the education tax credit as a full-time student, or $20 for each month in which the individual was enti-tled to claim the education tax credit as a part-time student.

This is worth about $80 per year for a full-time student.

For the 2006 and subsequent taxation years, the total of all amounts received in the year on account of scholarships, fellowships, and bursaries be excluded from income, if these amounts are re-ceived in connection with the individ-ual’s enrolment at a designated educational institution in a program in respect of which the individual may claim the education tax credit.

The Budget proposes an expanded eli-gibility for Canada Student Loans through a reduction in the expected parental contribution, starting in 2007.

For the 2006 and subsequent taxation years, the pension income on which the pension tax credit is calculated will be increased to $2,000 from $1,000.

For benefits paid after June 2006, the Child Disability Benefit will be in-creased to $2,300 in respect of each child who is eligible for the disability tax credit. The threshold for the phase-out of this benefit will be modified in accordance with proposals described in the Budget documents.

For the 2006 and subsequent taxation years, the maximum refundable medi-cal expense supplement will be in-creased to $1,000.

For the 2006 and subsequent taxation years, an individual will be entitled to deduct an amount equal to the product obtained when the appropriate tax rate percentage for the year is multiplied by amounts paid in respect of eligible pub-lic transit passes in respect of transit on or after July 1, 2006 for the use of the individual, the spouse or common-law partner, or a child of the individual who has not before the end of the taxation year attained the age of 19 years. This includes a public transit pass that is valid for a period of at least one month of public transit.

These gifts made to a qualified donee on or after May 2, 2006 will not be sub-ject to taxable capital gain treatment.

The federal dividend gross-up will be increased to 45 per cent and the indi-vidual tax credit will be adjusted to 11/18ths of the gross-up in respect of taxable dividends ("eligible dividends") paid after 2005 by

This relates to the November 23, 2005 announced reduction in personal in-come taxes on dividends received after 2005 from public corporations.

For the 2005 and subsequent taxation years, the list of expenses eligible for the disability supports deduction will be expanded in accordance with proposals previously described in the 2005 Fed-eral Budget.

MAY 2, 2006 PAGE 2 Federal Budget Commentary 2006

For the 2005 and subsequent taxation years, the list of expenses eligible for the medical expense tax credit has been expanded in accordance with proposals previously described in the 2005 Fed-eral Budget.

For the 2005 and subsequent taxation years, the $5,000 maximum amount eligible for the medical expense tax credit for certain dependants will be increased to $10,000 in accordance with the 2005 Federal Budget.

For the 2005 and subsequent taxation years, an adoption expense tax credit will be introduced in accordance with the 2005 Federal Budget.

This rate will be reduced to 19 per cent from 21 per cent by 2010.

The surtax imposed on corporations will be eliminated for taxation years that end after December 31, 2007, with proration for taxation years that include that date.

The small business income eligible for the 12% tax rate will be increased to $400,000 from $300,000 as of January 1, 2007.

The small business deduction rate will be reduced for taxation years that end after 2007 to 11.5% in 2008, and 11% after 2008.

The 10 taxation year carry-forward period in respect of non-capital losses, farm losses, and investment tax credits earned in taxation years that end after 2005 will be extended to 20 taxation years.

This tax will be eliminated effective January 1, 2006.

For taxation years that end on or after July 1, 2006, the minimum tax on finan-cial institutions will be modified by creating a single rate of tax of 1.25% and a single capital deduction of $1 billion, with proration for taxation years that begin before and include that date.

For the 2006 and subsequent taxation years, a taxpayer will be allowed an investment tax credit in respect of each eligible apprentice employed in the business after May 2, 2006 equal to the lesser of $2,000 and 10% of eligible salary and wages payable in respect of the employment.

An eligible apprentice is an individual who is working in a prescribed trade in the first two years of the individual’s provincially registered apprenticeship contract.

A prescribed trade is a trade that is one of the 45 Red Seal Trades or a trade prescribed to be a trade that is in Can-ada’s strategic economic interest.

The Budget also proposes a new $1,000 grant for first and second year appren-tices effective January 1, 2007.

Budget 2006 provides an additional $2 billion over two years to the farming sector.

$1.5 billion will be provided in 2006. This includes $500 million for farm support, plus a one-time investment of $1 billion to assist farmers in the transi-tion to more effective programming for farm income stabilization and disaster relief.

C. EXCISE TAX ACT

The 7% Goods and Services Tax (GST) will be cut to 6% effective July 1, 2006.

The Budget includes transitional rules for transactions occurring close to or straddling the July 1, 2006, implementa-tion date.

In general, the existing GST rules that determine when tax is payable will de-termine if the 6-per-cent rate will apply. Typically, GST is payable when an in-voice is issued. Consequently, a good or service for which you are invoiced on or after July 1, 2006, will generally be taxable at the new 6-per-cent rate.

A good or service for which you are invoiced before July 1, 2006, will gen-erally be taxable at the 7-per-cent rate.

The Budget also sets out the rules that will apply to purchases of new homes during the transition to the new 6-per-cent rate. Specifically, where the own-ership or possession transfer to the buyer before July 1, 2006, the 7-per-

MAY 2, 2006 PAGE 3 Federal Budget Commentary 2006

cent rate would apply.

Where ownership and possession trans-fer to the buyer on or after July 1, 2006, the 6-per-cent rate would apply if the agreement of purchase and sale is signed after Budget day, May 2, 2006.

Buyers who signed the purchase agree-ment on or before May 2, 2006, and whose GST is based on the 7-per-cent rate may be able to claim a transitional adjustment.

Budget 2006 proposes to repeal the excise tax on jewellery effective May 2, 2006.

Budget 2006 proposes to provide excise duty relief to wines made from 100-per-cent Canadian-grown product. Excise duty reductions for small brewers are also proposed.

These measures will be effective July 1, 2006.

Budget 2006 introduces the Universal Child Care Benefit as of July 1, 2006. This new benefit will give families $100 per month per child under age 6. This will put $2.1 billion per year into the hands of parents.

The Universal Child Care Benefit will be taxed in the hands of the spouse with the lower income but, will not reduce federal income-tested benefits.

Families who receive the Canada Child Tax Benefit (CCTB) will receive the new benefit automatically.

Families who do not receive the CCTB will be able to apply for the new benefit by submitting a completed CCTB appli-cation form to the Canada Revenue Agency.

The Budget also sets aside $250 million per year beginning in 2007–08 to sup-port the creation of new child care spaces.

The Budget proposes to introduce, ef-fective January 1, 2007, a tax credit to promote physical fitness among chil-dren. For each child under 16, the credit will be provided on up to $500 in eligi-ble fees for programs of physical activ-ity.

The Government will consult with a group of experts in health and physical fitness to determine which programs should be eligible for the credit.

In addition to setting aside $2.2 billion to address the legacy of residential schools, the Government proposes:

The Budget reduces the "Right of Per-manent Residence Fee" to $490 from $975, effective May 2, 2006.

Over the next two years it will also pro-vide $307 million to enhance immigra-tion settlement programs and services, and take steps to create a Canadian agency for assessment and recognition of foreign credentials.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tor-tious, or any other form of liability for its contents or for any consequences arising from its use.

MAY 2, 2006 PAGE 4 Federal Budget Commentary 2006