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Annex 3 - Tax Measures: Supplementary Information and Notices of Ways and Means Motions:
Tax Measures: Supplementary Information

Overview

This annex provides detailed information on each of the tax measures proposed in the budget.

Table A3.1 lists these measures and provides estimates of their budgetary impact.

The annex also provides Notices of Ways and Means Motions to amend the Excise Tax Act, the Excise Act, 2001, the Excise Act, the Air Travellers Security Charge Act and the Income Tax Act.

Table A3.1
Cost of Proposed Measures¹

Sales and Excise Tax Measures

Reducing the GST to 6 per cent

The goods and services tax/harmonized sales tax (GST/HST) is a consumption tax that applies to the majority of goods and services consumed in Canada. GST/HST is imposed under the Excise Tax Act at the rate of 7 per cent, and in the harmonized provinces (Nova Scotia, New Brunswick and Newfoundland and Labrador), as the 7 per cent federal component of the combined 15 per cent federal-provincial HST. Subsequent references to the GST should be read as also referring to the federal component of the HST.

Budget 2006 proposes to reduce the GST rate by one percentage point, from 7 to 6 per cent, effective July 1, 2006. Budget 2006 also proposes to maintain the GST credit at current levels for low- and modest-income Canadians and to retain the existing GST rebate rates for new housing and purchases made by public service bodies.

To facilitate the transition to the lower rate, Budget 2006 proposes transitional rules for determining the GST rate applicable to transactions that straddle the July 1, 2006 implementation date. These rules, which are outlined below, will provide certainty for suppliers and consumers and are intended to minimize the compliance and administrative costs of changing to the new 6 per cent rate. Other proposed changes associated with the rate reduction are also outlined below.

The Minister of Finance will propose amendments to the Excise Tax Act and related regulations at the earliest opportunity in order to implement the change to a 6 per cent rate of GST.

Transitional Rules

The general transitional rule, which will be based upon the time at which the GST in respect of a transaction becomes payable, is outlined below:

• If GST becomes payable, or is paid without having become payable, before July 1, 2006, the rate of 7 per cent will apply.

• If GST becomes payable on or after July 1, 2006, without having been paid before that day, the rate of 6 per cent will apply.

• If GST is paid on or after July 1, 2006, without having become payable before that day, the rate of 6 per cent will apply.

The Excise Tax Act has a number of existing provisions that will be relevant in determining when GST becomes payable.

In addition to the application of the general transitional rule described above, certain types of transactions will have specific transitional rules described below.

(a) Sales of Real Property

Under the proposed measures, the following specific transitional rules will apply in respect of sales of real property.

Ownership or Possession Transferred before July 1, 2006: The 7 per cent rate will apply to all of the consideration for a supply by way of sale of real property if ownership of the property, or possession of it under the agreement of purchase and sale, is transferred to the buyer before July 1, 2006.

Ownership and Possession Transferred on or after July 1, 2006: The 6 per cent rate will apply to all of the consideration for a supply by way of sale of real property if under an agreement of purchase and sale entered into after May 2, 2006, both ownership of the property, and possession of it under the agreement, are transferred to the buyer on or after July 1, 2006.

Written Agreement Entered Into on or before May 2, 2006: For sales of houses, apartment buildings and other residential complexes, made pursuant to a written agreement entered into on or before May 2, 2006, GST will apply at the rate of 7 per cent, even if ownership and possession of the real property are both transferred on or after July 1, 2006. In these circumstances, where transfer of ownership and possession both take place on or after July 1, 2006, the purchaser will be entitled to file a claim with the Canada Revenue Agency to be paid a Transitional Adjustment that reflects the GST rate reduction to 6 per cent net of any corresponding rebate adjustment.

Table A3.2
Application of Transitional Rules to New Housing

(b) Deemed Supplies

The Excise Tax Act provides for deemed supplies in a number of circumstances. Under the proposed rules, the rate of 6 per cent will generally be used to determine GST that is deemed under the Excise Tax Act to be paid, or collected, on or after July 1, 2006. For example, a landlord who is deemed to have paid and collected GST on or after July 1, 2006 on the fair market value of a newly constructed apartment building would calculate the GST on the fair market value at the rate of 6 per cent.

(c) Imported Goods and Imported Taxable Services and Intangibles

Under the proposed measures, specific transitional rules will also apply in respect of imported goods and imported taxable services and intangibles.

Imported Goods: GST at the rate of 6 per cent will apply to goods that are either imported on or after July 1, 2006, or released from Customs’ control on or after July 1, 2006.

Imported Taxable Services and Intangibles: GST on imported taxable services and intangibles is usually payable the earlier of the day the consideration is paid and the day that consideration becomes due. The general transitional rule outlined above will determine the rate of tax to be applied in these circumstances.

Financial Institutions: Under a proposed measure announced on November 17, 2005, financial institutions will be required to self-assess GST on certain cross-border transactions using a special set of rules. GST on these transactions will be determined on an annual basis and in general, will become payable six months after the end of the financial institution’s taxation year.

If a financial institution’s taxation year begins before July 1, 2006, and ends on or after that day, the financial institution will be required to apportion the total amount of qualifying consideration for the taxation year on which it is required to self-assess GST under the proposed measure. The apportionment will be based upon the ratio of the number of days in the taxation year that occur before July 1, 2006, to the total days in the taxation year. GST on the amount allocated to the period before July 1, 2006, will be calculated at the rate of 7 per cent and GST on the remaining amount of qualifying consideration will apply at the rate of 6 per cent.

(d) Taxable Benefits; Passenger Vehicles and Aircraft; and Employee/Partner Rebates

In certain circumstances, a tax, credit or rebate in respect of the GST is calculated based on amounts determined for income tax purposes and in reference to the calendar year or a person’s taxation year. Specifically, this is the case in the determination of the GST on certain taxable benefits for employees and shareholders, certain input tax credits in respect of passenger vehicles and aircraft not being used exclusively in commercial activities, and rebates of GST to employees or partners with respect to certain expenses.

In these cases, the GST, the input tax credit or the GST rebate is calculated by multiplying the amount determined for income tax purposes by a factor specified in the Excise Tax Act or a rate prescribed in the related regulations. These factors and rates will be adjusted to reflect the July 1, 2006, GST rate reduction. In particular, the prescribed rate for calculating the GST on the automobile operating expense benefit, which is currently 5 per cent, will be 4.5 per cent for the 2006 taxation year and 4 per cent thereafter, and for calculating the HST, the prescribed rate, which is currently 11 per cent, will be 10.5 per cent and 10 per cent respectively.

(e) Anti-Avoidance Provision

Budget 2006 also proposes that rules be implemented to maintain the integrity of the GST system through the transition period. These rules are intended to prevent inappropriate tax savings in cases where transactions are undertaken between non-arm’s length parties to obtain the benefit of the rate reduction, rather than primarily for commercial purposes.

Other Measures

A number of consequential amendments are proposed as a result of the GST rate reduction.

Housing Rebates: Individuals who purchase or construct a new home, or substantially renovate an existing home, for use as their primary place of residence are generally entitled to a rebate of part of the GST that they pay in the course of the purchase, construction or substantial renovation. The maximum amount of the rebate is equal to the lesser of 36 per cent of the GST paid and $8,750. For homes that cost more than $350,000, the rebate is phased out so that no rebate is available for homes valued at more than $450,000. The rebate was introduced to reduce the GST rate on new homes to approximately 4.5 per cent, which was consistent with the effective tax rate under the predecessor of the GST, the Federal Sales Tax.

The rebate percentage of 36 per cent, and the lower and upper phase-out thresholds of $350,000 and $450,000 respectively, will not change as a result of the rate reduction; however, the maximum dollar value of the rebate, which is currently set at $8,750, will be adjusted to $7,560 (i.e. 36 per cent of the GST paid at the 6 per cent rate on a $350,000 home). The maximum dollar amount will be also adjusted for other similarly structured housing rebate provisions in the Excise Tax Act.

The GST-included upper and lower phase-out values of the "Rebate for Purchasers of Shares in a Cooperative Housing Corporation" and the "New Housing Rebate for Building Only" will be adjusted to reflect the lower rate of GST.

Table A3.3 below provides examples of how new homebuyers will benefit from the GST rate reduction.

Table A3.3
Application of Transitional Rules to New Housing

Public Service Bodies: The existing rebate percentages used to calculate rebates of the otherwise unrecoverable GST claimed by charities, qualifying non-profit organizations and selected public service bodies (including municipalities, universities, public colleges, schools and hospitals) will not change.

Budget 2006 proposes changes to the rules which apply to public service bodies that revoke an election made under section 211 of the Excise Tax Act. In these circumstances, the public service body will be deemed to have paid and collected tax equal to the basic tax content of the property, rather than tax calculated on its fair market value. Basic tax content is unrecoverable GST embedded in the cost of a property. Since the basic tax content is an amount of tax that already takes into account rebates, the deemed tax collected upon revocation of the election will no longer qualify for the public service body rebate. This change is proposed to apply in respect of elections that are revoked on or after May 2, 2006.

Streamlined Accounting Methods: Small businesses, as well as eligible public service bodies, can use a Quick or Special Quick Method of Accounting to simplify compliance. Under these methods, taxpayers multiply eligible GST/HST-included sales by a reduced percentage and remit that amount to the government in lieu of tracking and claiming input tax credits for most of the tax they pay. The percentages used are specified in the Streamlined Accounting (GST/HST) Regulations.

As a result of the proposed rate reduction, the specified percentages will change to those shown in the tables below. The new percentages will apply to reporting periods that begin on or after July 1, 2006. For reporting periods that straddle July 1, 2006, the existing percentages will apply to consideration that becomes due, or is paid without having become being due, before July 1, 2006, and the new percentages will apply to the remaining consideration.

The following tables illustrate the effect of the proposed measures. ("Participating provinces" means the provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador where the GST/HST will apply at a combined rate of 14 per cent.)

Table A3.4
Remittance Rates for Business Registrants Using the Quick Method of Accounting That Mainly Purchase Goods for Resale

Table A3.5
Remittance Rates for Business Registrants Using the Quick Method of Accounting that Mainly Provide Services

Table A3.6
Remittance Rates for Registrants Acting in Their Capacity as a University or Public College (if Supplies Through Vending Machines Account for at Least 25% of Total Supplies)

Table A3.7
Remittance Rates for Registrants Acting in Their Capacity as a University or Public College (if Supplies Through Vending Machines Account for Less Than 25% of Total Supplies)

Table A3.8
Remittance Rates for Registrants Acting in Their Capacity as a Specified Facility Operator, Qualifying Non-Profit Organization or Designated Charity

Table A3.9
Remittance Rates for Registrants Acting in Their Capacity as a School Authority

Table A3.10
Remittance Rates for Registrants Acting in Their Capacity as a Municipality

Table A3.11
Remittance Rates for Registrants Acting in Their Capacity as a Hospital Authority, External Supplier or Facility Operator

Tobacco Excise Levies

The federal government taxes tobacco products both through a targeted excise duty and the broad-based GST. The excise duty is imposed on the manufacture or importation of tobacco products. The GST is a multi-stage tax that is ultimately levied on an ad valorem basis on the final selling price. These taxes affect the price of tobacco products, and price is one of the key factors influencing tobacco consumption, affecting both the decision to smoke and the frequency of use by continuing smokers.

In line with the Government’s promotion of health and wellness, Budget 2006 proposes to increase tobacco excise duties to offset the impact of the GST rate reduction. The following table shows the federal excise duty increases that will apply beginning July 1, 2006, concurrent with the effective date of the 1 percentage-point reduction of the GST.

Table A3.12
Tobacco Excise Duty Rate Structure

Inventory Tax

Excise duty is imposed on tobacco products manufactured in Canada at the time manufacturers package them and on imported tobacco products at the time of importation. The new excise duty rates apply only to tobacco products that are packaged or imported on or after July 1, 2006. This means that, in the absence of a special provision, inventories held by a taxpayer on July 1, 2006 would be subject to the old lower rates of excise duty and to the new lower GST rate.

To ensure that the increases are applied in a consistent manner to all tobacco products at different trade levels, as well as to prevent tax avoidance through inventory build-ups, the proposed excise duty increases will also be applied to inventories.

It is proposed that inventories of cigarettes, tobacco sticks, fine-cut tobacco products and cigars held by manufacturers, importers, wholesalers and retailers at the end of June 30, 2006 be subject to per unit taxes of 0.2799 cents, 0.2517 cents, 0.1919 cents, and 0.1814 cents respectively—where a unit is a cigarette, a tobacco stick, a gram of fine cut tobacco or a cigar. Taxpayers may use any reasonable method for establishing their inventories of these products, including a physical count.

In order to simplify compliance, this inventory tax will not apply to retailers holding 30,000 or fewer units (equivalent to 150 cartons of cigarettes) at the end of the day on June 30, 2006. A threshold at this level largely ensures that the tax on inventories will only apply to manufacturers, importers, wholesalers, and relatively large retailers. In addition, the tax will not apply to tobacco products held in vending machines. An extended period will be provided for remittance of the tax, allowing taxpayers until August 31, 2006 to file returns and pay the tax. Interest will apply after that date on late or deficient payments.

Alcohol Excise Levies

As with tobacco products, the federal government taxes alcohol products both through a targeted excise duty and the broad-based GST.

Budget 2006 proposes to increase alcohol excise duties to offset the impact of the GST rate reduction. The following federal excise duty increases are to be effective July 1, 2006, concurrent with the effective date of the 1 percentage-point reduction in the GST:

Table A3.13
Alcohol Excise Duty Rate Structure

Air Travellers Security Charge (ATSC) Rates

ATSC rates are structured to include, where applicable, the goods and services tax or the federal portion of the harmonized sales tax (GST/HST). As a result of the GST/HST rate reduction, certain technical adjustments to ATSC rates are required in order to ensure that consumers receive the full benefit of the rate reduction. The proposed rates are shown in Table A3.14, below. The ATSC rate for other international air travel is not subject to the GST/HST and will remain unchanged.

The new rates will apply to tickets purchased on or after July 1, 2006.

Table A3.14
ATSC Rate Structure*

GST/HST Treatment of Debt Collection Services

Budget 2006 confirms that debt collection services that are generally provided by collection agents to financial institutions are not financial services for GST/HST purposes and are therefore taxable.

Excise Tax on Jewellery

An excise tax is imposed under the Excise Tax Act on jewellery manufactured and sold in, or imported into, Canada. The tax is payable by manufacturers on the sale price of domestically produced jewellery at the time of delivery to the purchaser, and by importers on the duty-paid value of imported jewellery in accordance with the provisions of the Customs Act. Jewellery exported from Canada is exempt from the tax. In addition to jewellery, whether real or imitation, the tax also applies to clocks (with a value greater than $50) and articles made of semi-precious stones.

The proposed repeal of the excise tax applies to deliveries or importation of jewellery, clocks and articles made of semi-precious stones, on or after May 2, 2006, in accordance with the provisions of the Excise Tax Act that govern by whom and when the tax is payable.

Vintners and Small Brewers

Budget 2006 proposes to support vintners and small- and medium-sized brewers by reducing the excise duties on certain wines and beer.

Excise Duty on Wine

Excise duty is imposed under the Excise Act, 2001 on wine produced in Canada. The duty is imposed on the product at the time of packaging. Exports are exempt. In the case of imported wine, the duty is levied under the Customs Tariff at the time of importation. All producers and importers are required to hold a licence under the Act. Payment of the duty is deferred if the wine is placed in the producer’s excise warehouse or delivered to the excise warehouse of a provincial liquor board.

Budget 2006 proposes to exempt from duty the first 500,000 litres of wine produced and packaged by a wine licensee per year made from 100 per cent Canadian-grown agricultural products.

The proposed relief will apply to all goods falling within the definition of wine in the Act (including ciders, wine coolers, fruit wines and sake) made from 100 per cent Canadian-grown agricultural products. The relief will be available to wine licensees operating in Canada.

The 500,000-litre threshold will be based on the quantity a licensee produces and packages during their particular fiscal year, for fiscal years that begin on or after July 1, 2006. If a licensee’s current fiscal year commenced before July 1, 2006, the licensee will be eligible for relief in their current fiscal year in respect of their first 500,000 litres times the number of whole months remaining in the fiscal year divided by 12. For example, a vintner with a fiscal year beginning April 1, 2006 would be eligible for relief on the first 375,000 litres (500,000 litres times 9 divided by 12) in that fiscal year.

The 500,000-litre threshold calculation will include all eligible wine produced and packaged in Canada in a fiscal year, including wine that has been exempted or relieved from duty under the Act (e.g. for export, sale to duty free shops, or delivery for use as ships’ stores). The threshold includes all wine produced by a wine licensee and packaged on behalf of the licensee.

To maintain the integrity of the excise duty system, associated company and related person rules similar to those in the Income Tax Act will be applicable. Wine licensees will also be responsible for maintaining adequate books and records to substantiate any relief claimed.

This measure will apply to wine packaged on or after July 1, 2006.

Excise Duty on Beer

Excise duty is imposed under the Excise Act on beer produced in Canada. The duty is payable at the time of packaging. Exports are exempt. In the case of imported beer, the duty is levied under the Customs Tariff on the beer at the time of importation.

Budget 2006 proposes excise duty relief for beer produced by small and mid-sized brewers as set out in the following table:

Table A3.15
Excise Duty Relief for Beer Produced by Small and Mid-Sized Brewers

Reduced rates of excise duty will apply to licensed Canadian brewers who have produced and packaged no more than 300,000 hectolitres (hl) of beer in the previous calendar year and do not exceed that limit in the current calendar year. Any brewer that exceeds the threshold or otherwise does not qualify for the duty relief in any calendar year will be required to pay the full rate of excise duty on all beer produced and packaged in that calendar year. Any excise duty relief already claimed during that calendar year will be required to be repaid with interest, starting from the first day that the amount should have been paid.

The 300,000 hl threshold calculation includes all beer produced and packaged by a licensed Canadian brewer in a calendar year, including exported beer. If a beer licensee packages beer produced by a different brewer, that quantity of beer is applied against the threshold of the licensee who is ultimately responsible for paying the duty.

For 2006, licensed Canadian brewers will be eligible for relief only in respect of beer they package on or after July 1, 2006. To qualify for the reduced rates in 2006, these producers must have produced and packaged no more than 300,000 hl in 2005 and not exceed that level in all of 2006.

To maintain the integrity of the excise duty system, associated company and related person rules similar to those in the Income Tax Act will be applicable. Licensed Canadian brewers will be responsible for maintaining adequate books and records to substantiate any relief claimed. Additional compliance and administrative mechanisms will also be introduced.

The proposed excise duty relief will apply to qualifying beer packaged on or after July 1, 2006.

Personal Income Tax Measures

Personal Income Tax Rates

The lowest personal income tax rate will be reduced to 15 per cent from 16 per cent effective January 1, 2005. The rate will be 15.5 per cent effective July 1, 2006. Accordingly, the full-year rate for 2005 will be 15 per cent, for 2006, 15.25 per cent and, for the 2007 and subsequent taxation years, 15.5 per cent. For the 2005 taxation year the 15-per-cent rate applies to taxable incomes of up to $35,595. For the 2006 taxation year the 15.25-per-cent rate will apply to taxable incomes of up to $36,378. The upper limit for the application of the 15.5-per-cent rate will be indexed for taxation years after 2006. These rates will also be generally used to calculate non-refundable tax credits and the alternative minimum tax for the 2005 and subsequent taxation years.

Basic Personal Amounts

The basic personal amount—the amount that an individual can earn without paying federal personal income tax—will be increased by $500 to $8,648 for the 2005 taxation year. For the first half of 2006 it will then be increased by indexation plus a further $200, for a total of $9,039. The basic personal amount will be reduced by $400 to $8,639 on July 1, 2006 at the same time as the GST rate is reduced. For the purpose of calculating personal income taxes for the 2006 taxation year, these two half-year amounts will be applied as an annual average of $8,839. For 2007, the $8,639 amount will be increased by indexation plus an additional $100. For 2008, it will be increased by indexation plus an additional $200. For 2009, it will be increased by indexation plus the greater of $600 and the amount required to raise the basic personal amount to $10,000.

Personal amounts in respect of a spouse or common-law partner or wholly dependant relative will also be adjusted. Specifically, for the 2005 taxation year these amounts will be increased by $425 to $7,344. For the first half of 2006 they will then be increased by indexation plus a further $170, for a total of $7,675. The amount will be reduced by $340 to $7,335 on July 1, 2006 at the same time as the GST rate is reduced. For the purpose of calculating personal income taxes for the 2006 taxation year, these two half-year amounts will be applied as an annual average of $7,505. For 2007, the $7,335 amount will be increased by indexation plus an additional $85. For 2008, it will be increased by indexation plus an additional $170. For 2009, it will be increased by indexation plus the greater of $510 and the amount required to raise these amounts to $8,500.

Canada Employment Credit

Budget 2006 proposes to introduce a new Canada Employment Credit in recognition of work-related expenses incurred by employees.

The new credit will take effect July 1, 2006, and will provide tax relief on the lesser of $500 and the individual’s employment income for the year. Because this measure will take effect mid-year, the maximum amount on which the credit is calculated will be $250 for the 2006 taxation year. For the 2007 and subsequent taxation years, the maximum amount on which the credit is calculated will be increased to $1,000. The tax credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15.25 per cent for 2006 and 15.5 per cent for the 2007 and subsequent taxation years). The amount on which the credit is based will be indexed after 2007.

Universal Child Care Benefit

Budget 2006 proposes to introduce, effective July 2006, the Universal Child Care Benefit (UCCB), to provide all families with $100 per month ($1,200 per year) for each child under the age of 6 years. There will be a number of changes to the Income Tax Act consequential to the introduction of the UCCB.

Amendments to the Income Tax Act will be made to provide that amounts received under the UCCB will be taxable in the hands of the lower-income spouse or common-law partner. However, amounts received under the UCCB will not be taken into account for the purposes of calculating income-tested benefits delivered through the income tax system. In addition, the UCCB will not reduce Old Age Security or Employment Insurance benefits, and will not reduce the amount of expenses claimable under the child care expense deduction.

Amendments will, however, be made to the structure of the CCTB to reflect the introduction of the UCCB. Currently, the CCTB has three components: the CCTB base benefit, the National Child Benefit supplement, and the Child Disability Benefit. The CCTB base benefit is enhanced for children under the age of 7 years. With the introduction of the UCCB, the CCTB enhancement to the base benefit will be eliminated, generally as of July 1, 2006. However, in respect of children who attain the age of 6 years on or before June 30, 2007, the enhancement will remain in place for those months before July 2007 for which no UCCB is receivable.

The Income Tax Act will be amended to permit information sharing by the Canada Revenue Agency for the purpose of the administration of the UCCB.

Capital Gains of Fishers

When individuals sell or transfer property used in a fishing business, the property is not currently eligible for the $500,000 lifetime capital gains exemption that is available for farm property and small business shares, nor generally for the intergenerational rollovers applicable to farming property.

Budget 2006 proposes a number of income tax measures concerning dispositions by an individual of property used in a family fishing business. The measures, which are described in more detail below, will apply to dispositions of fishing property and qualified fishing property that take place on or after May 2, 2006.

Intergenerational Rollover: Transfers of Fishing Property to a Child

As a general rule, if property of an individual is transferred (either by way of an inter vivos transfer, or as a consequence of the individual’s death) to the individual’s child or grandchild, the transfer is treated as having taken place at fair market value. Any resulting gain or loss is included in computing the individual’s income.

Budget 2006 proposes to allow a tax deferral in certain circumstances where an individual’s fishing property is transferred to the individual’s child or grandchild.

For the purpose of the new measures, fishing property will be land, depreciable property and eligible capital property that is used principally in a fishing business carried on in Canada in which the individual, or the individual’s spouse or common-law partner, parent, child or grandchild, was actively engaged on a regular and continuous basis. It will also include shares of the capital stock of family fishing corporations and interests in family fishing partnerships. Definitions of these terms and related terms will parallel the existing definitions in the Income Tax Act in respect of the tax deferral (rollover) for intergenerational transfers of shares of a family farm corporation, or of an interest in a family farm partnership.

Under the intergenerational rollover, the individual’s proceeds of disposition and the child’s (or grandchild’s) cost of the property would generally be set at the individual’s cost amount of the property. In the case of eligible capital property, the individual’s proceeds and the child’s (or grandchild’s) cost of the property are determined in a manner that would result in no income, gain or loss to the individual and permit the child (or grandchild) to assume the individual’s tax position in respect of that property. In the case of depreciable property, any deferred recapture will be taken into account in computing any potential recapture on a subsequent disposition of the property by the child (or grandchild). Similar rules will apply in respect of eligible capital property.

Special rules, similar to the existing provisions applicable to the intergenerational rollovers for farm property, will apply where the individual actually receives proceeds of disposition.

Lifetime Capital Gains Exemption—Qualified Fishing Property

This budget measure proposes that an individual be allowed access to the $500,000 lifetime capital gains exemption (LCGE) in respect of capital gains arising on a disposition of qualified fishing property.

Qualified fishing property will include real property, fishing vessels and eligible capital property used principally in a fishing business carried on in Canada in which the individual, or the individual’s spouse or common-law partner, parent, child or grandchild, was actively engaged on a regular and continuous basis. It will also include shares of the capital stock of family fishing corporations and interests in family fishing partnerships, of the individual. The definitions of the terms "qualified fishing property", "share of the capital stock of a family fishing corporation" and "interest in a family fishing partnership" and related terms will generally be similar to existing definitions provided for the terms "qualified farm property", "share of the capital stock of family farm corporation" and "interest in a family farm partnership" and related terms for the purposes of the LCGE.

As a general rule, one half of gains from the disposition of eligible capital property are included in computing an individual’s business income. However, existing provisions in the Income Tax Act allow individuals to report a gain from the disposition of an eligible capital property that is a qualified farm property as a capital gain for the purposes of the determining the individual’s eligibility for the LCGE. In order to provide comparable treatment, Budget 2006 proposes measures that will extend the scope of these provisions to include eligible capital property, such as an interest in a fishing licence, that is qualified fishing property.

Reserve Allowed on Certain Dispositions of Fishing Assets

In computing a taxpayer’s capital gain for a taxation year from the disposition of a capital property, a taxpayer is permitted to claim a reasonable reserve in respect of amounts of proceeds that have not been received by the taxpayer. The maximum reserve period is generally limited to five years. However, special rules apply in respect of transfers by an individual of farm property to an individual’s child or grandchild to increase the maximum reserve period to 10 years. Budget 2006 proposes measures that will extend the scope of this measure to include fishing property as defined for the purposes of the intergenerational rollover.

Mineral Exploration Tax Credit for Flow-Through Share Investors

In the late 1990s, the mining industry experienced a period of low mineral prices and a consequential downturn in exploration activity. To promote exploration and help moderate the impact of the downturn on mining communities, a temporary mineral exploration tax credit for investors in flow-through shares was introduced effective October 2000.

Flow-through shares allow companies to renounce or 'flow through’ tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. This facilitates the raising of equity to fund exploration by enabling companies to sell their shares at a premium. The temporary credit was an additional benefit, available to individuals investing in flow-through shares, equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. Under the existing rules, the credit expired for flow-through share agreements entered into after December 31, 2005. Under a special "look-back" rule, expenses in respect of flow-through share agreements entered into in 2005 can be incurred up to the end of 2006 and still be eligible for the credit for 2005.

Driven by considerably improved market conditions and assisted by the credit, mineral exploration in Canada has strongly increased in recent years. To solidify recent exploration gains and establish a strong base from which to move forward, Budget 2006 proposes to reintroduce the mineral exploration tax credit, effective for flow-through share agreements entered into on or after May 2, 2006 and on or before March 31, 2007. Under the "look-back" rule, funds raised with the benefit of the credit in 2007, for example, can be spent on eligible exploration up to the end of 2008.

It is recognized that mineral exploration, as well as new mining and related processing activity that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.

Tradespeople’s Tool Expenses

Many employed tradespeople must provide their own tools as a condition of employment.

To provide tax recognition for these costs, Budget 2006 proposes that the total cost of eligible new tools acquired by an employed tradesperson in a taxation year, in excess of $1,000 (indexed after 2007), be deductible up to a maximum of $500 for that year. For the cost of tools to qualify for the deduction, the employer will have to certify that the employee is required to acquire those tools as a condition of, and for use in, the employment. This deduction will be in addition to the proposed new Canada Employment Credit described above.

This measure will apply to new tools acquired on or after May 2, 2006.

Apprentice vehicle mechanics will be eligible to claim the new $500 tools tax deduction in addition to the existing apprentice vehicle mechanics’ tools deduction. However, the parameters of the existing deduction will be modified to reflect the introduction of the new tools tax deduction. Currently, apprentice vehicle mechanics can deduct the total cost of new tools acquired in a taxation year that is in excess of the greater of $1,000 and 5 per cent of the individual’s apprenticeship income for the year. For the 2007 and subsequent taxation years, the $1,000 threshold will be set at the amount on which the Canada Employment Credit for the year is calculated plus $500. The 5 per cent income threshold will continue to apply on total new tools costs incurred by the apprentice.

The cost of an employee’s tools for other income tax purposes will be the acquisition cost less the deductible portion of that cost. For example, if an employee (or a non-arm’s-length person) disposes of the tools for proceeds in excess of this reduced cost, the excess amount will be included in income in the year of disposition. However, tools will be eligible for the existing rollovers that apply to transfers of property to a corporation or a partnership.

The employee will also be eligible for a rebate of the goods and services tax/harmonized sales tax paid on the portion of the purchase price of the new tools that is deducted in computing employment income.

Electronic communication devices and electronic data processing equipment will not qualify as eligible tools.

Textbook Tax Credit

To provide better tax recognition to post-secondary students for the cost of textbooks, Budget 2006 proposes to introduce a non-refundable textbook tax credit. The tax credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15.25 per cent for 2006 and 15.5 per cent for the 2007 and subsequent taxation years). The textbook tax credit will be in addition to the education tax credit. The amount on which the textbook tax credit is calculated will be:

• $65 for each month for which the student qualifies for the full-time education tax credit amount; and

• $20 for each month the student qualifies for the part-time education tax credit amount.

Unused textbook tax credit amounts will be added to unused tuition and education tax credit amounts for the purposes of the carry forward to a future year as well as the transfer of unused amounts to a spouse or common-law partner, parent, or grandparent.

This measure will apply to the 2006 and subsequent taxation years.

Scholarship and Bursary Income

Currently, the first $3,000 of scholarship, fellowship or bursary income received by a taxpayer in a taxation year with respect to post-secondary education or occupational training is not included in income.

In order to provide additional tax relief to students, Budget 2006 proposes to fully exempt such scholarship, fellowship or bursary income from tax. The full exemption will apply only to amounts received by a student in connection with the student’s enrolment in a program which entitles the student to claim the education tax credit. Generally, this includes programs at the post-secondary level and programs at educational institutions that are certified by the Minister of Human Resources and Social Development as providing skills in an occupation.

This measure will apply to the 2006 and subsequent taxation years.

Children’s Fitness Tax Credit

Budget 2006 proposes to allow parents to claim a non-refundable tax credit in respect of up to $500 in eligible fees for the enrolment of a child under the age of sixteen years in an eligible program of physical activity. The measure will apply to the 2007 and subsequent taxation years. The credit will be calculated by reference to the lowest personal income tax rate for the taxation year and can be claimed by either parent for eligible fees incurred during the calendar year.

To be eligible for the credit, fees must be paid in respect of eligible expenses in an eligible program of physical activity. Eligible expenses will include those for the operation and administration of the program, instruction, renting facilities, equipment used in common (e.g. team jerseys provided for the season), referees and judges, and incidental supplies (e.g., trophies). Expenses that will not be eligible include the purchase or rental of equipment for exclusive personal use, travel, meals and accommodation.

The government will establish a small group of experts in health and physical fitness to advise it on the definition of an "eligible program of physical activity" for the purposes of the credit. These consultations will consider among other things whether the activity should include an element of instruction or supervision, and the adaptation of the definition of an eligible program for children with disabilities.

For the purposes of the consultation, a working definition of an eligible program of physical activity is as follows: an ongoing program suitable for children in which substantially all of the activities undertaken include a significant amount of physical activity that contributes to one or more of cardio-respiratory endurance, muscular strength, muscular endurance, flexibility and balance.

Claims for the children’s fitness tax credit will need to be supported by a tax receipt that contains information sufficient for the Canada Revenue Agency to monitor compliance. Similarly, organizations will be required to keep relevant books and records.

To ensure that the same expenses are not claimed under both the children’s fitness tax credit and the child care expense deduction, an individual will not be allowed to make a claim for a children’s fitness tax credit in respect of amounts for which any person has made a claim under the child care expense deduction.

Pension Income Credit

The pension income credit provides a non-refundable credit in respect of the first $1,000 of eligible pension income. For individuals aged 65 and over, eligible pension income includes lifetime annuity payments under a registered pension plan, a registered retirement savings plan or a deferred profit sharing plan and payments out of or under a registered retirement income fund. For individuals under 65 years of age, eligible pension income includes lifetime annuity payments under a registered pension plan and certain other payments received as a result of the death of the individual’s spouse or common-law partner.

Budget 2006 proposes to provide greater tax relief to pensioners by increasing to $2,000 from $1,000, the maximum amount of eligible pension income that can be used in calculating the pension income credit.

This measure will apply to the 2006 and subsequent taxation years.

Child Disability Benefit

The Canada Child Tax Benefit (CCTB) is the main federal instrument for the provision of financial assistance to families with children. The CCTB has three components: the CCTB base benefit, the National Child Benefit (NCB) supplement, and the Child Disability Benefit (CDB). The CDB is payable in respect of children, in low- and modest-income families, who meet the eligibility criteria for the disability tax credit (DTC).

Under the current rules, eligible families would receive for the 2006-07 benefit year an annual CDB entitlement of up to $2,044 per qualified child as part of their monthly CCTB issuance. The CDB begins to be phased out when family net income reaches the amount at which the NCB supplement is fully phased out ($36,378 in July 2006 for families with three or fewer children). Beyond that income level, the CDB is currently being reduced at the same rates as those applying to the NCB supplement (that is, between 12.2 per cent and 33.3 per cent of family income in excess of the point at which the NCB supplement is fully phased out, depending on the number of DTC-eligible children in the family—see table below).

Budget 2006 proposes two changes to the CDB to enhance assistance to families with children eligible for the DTC.

First, the Budget proposes to increase the maximum annual CDB to $2,300 from $2,044, starting in July 2006. The benefit will continue to be indexed for inflation thereafter.

Second, the Budget proposes to extend the CDB to more families caring for a child eligible for the DTC by reducing the rates at which the CDB is reduced as family income rises.

Effective July 2006, the CDB will be reduced at the same rates as the CCTB base benefit, that is 2 per cent of family income in excess of the amount at which the NCB supplement is fully phased out for families caring for one child eligible for the DTC, and 4 per cent of that excess for those caring for more than one child eligible for the DTC (see table below). Accordingly the CDB will be reduced to zero as net family income reaches $151,378 for a family caring for one or two children eligible for the DTC, and $208,878 for a family caring for three children eligible for the DTC. This change will significantly reduce effective marginal tax rates faced by families with incomes in the current CDB phase-out range and will extend eligibility for the CDB to nearly all families caring for children eligible for the DTC.

Table A3.16
Current and Proposed Income Thresholds of the Child Disability Benefit–July 2006

Refundable Medical Expense Supplement

The refundable medical expense supplement (RMES) improves work incentives for Canadians with disabilities by helping to offset the loss of coverage for medical and disability-related expenses when individuals move from social assistance to the paid labour force.

The RMES is equal to 25 per cent of the total of the allowable portion of expenses that can be claimed under the medical expense tax credit and the expenses claimed under the disability supports deduction, up to a maximum credit of $767 for 2006. To target assistance to those with low- and modest-incomes, the supplement is reduced by 5 per cent of net family income above an income threshold ($21,663 for 2005).

Budget 2006 proposes to increase the maximum amount of the RMES to $1,000 from $767 for the 2006 taxation year. The maximum amount will continue to be indexed for inflation thereafter.

The Budget also proposes to set the income threshold at which the RMES starts to be reduced at its level for 2005—$21,663—to ensure that the supplement continues to be targeted to low- and modest-income Canadians. The threshold will be indexed for inflation thereafter. For 2006, it will be $22,140.

Tax Credit for Public Transit Passes

Budget 2006 proposes to allow individuals to claim a non-refundable tax credit for the cost of monthly public transit passes or those passes of a longer duration (e.g., annual passes). Public transit will include transit by local bus, streetcar, subway, commuter train, commuter bus and local ferry. The credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15.25 per cent for 2006 and 15.5 per cent for the 2007 and subsequent taxation years). It will be claimable by the individual or the individual’s spouse or common-law partner in respect of eligible transit costs of the individual, the individual’s spouse or common-law partner, and the individual’s dependent children that are under 19 years of age.

Individuals making claims will be required to retain their receipts or passes for verification purposes. Consultations will take place with transit authorities to develop appropriate receipting practices.

This measure will apply in respect of that portion of the cost of public transit passes that is in respect of transit on or after July 1, 2006.

Donations of Publicly-Listed Securities to Public Charities

Donations to registered Canadian charities are eligible for a charitable donations credit (if the donor is an individual) or a deduction (if the donor is a corporation). For individuals, the credit for the first $200 in total annual donations in a taxation year is calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15.25 per cent for 2006 and 15.5 per cent for the 2007 and subsequent taxation years), and the credit for donations above that $200 threshold is calculated by reference to the highest personal income tax rate for the taxation year. Provincial governments also provide tax assistance for charitable donations.

Since 1997, donations of publicly-listed securities to charitable organizations and public foundations have been eligible for additional tax assistance. When a taxpayer donates to an eligible charity securities listed on a prescribed stock exchange (or certain other securities such as units in mutual funds), the capital gain that has accrued on the securities is included in income at only one-half the standard capital gains inclusion rate. Currently, the standard capital gains inclusion rate is 50 per cent, and therefore the inclusion rate for charitable donations of listed publicly-traded securities to eligible charities is 25 per cent.

To encourage additional donations of listed publicly-traded securities to charitable organizations and public foundations, Budget 2006 proposes to reduce the capital gains inclusion rate for such donations to zero.

Since 2000, an individual who makes a qualifying charitable donation of listed publicly-traded securities that were acquired with employee stock options has also been eligible for a special deduction that has the effect of taxing the associated employment benefit at the reduced capital gains inclusion rate. Budget 2006 also proposes to reduce the effective inclusion rate for such donations to zero per cent.

These measures will apply to donations of eligible securities made on or after May 2, 2006.

Donations of Ecologically-Sensitive Land

The Ecological Gifts Program provides a way for Canadians with ecologically-sensitive land to protect natural areas and leave a legacy for future generations. Since 2000, donations to approved conservation charities of ecologically-sensitive land, or easements, covenants and servitudes on such land, have been eligible for special tax assistance. Under the Ecological Gifts Program, Environment Canada certifies that the land in question is ecologically sensitive, and an expert panel certifies the value of the donation. Under the Ecological Gifts Program, in addition to the charitable donations tax credit (for individuals) and the charitable donations deduction (for corporations) available to a donor in respect of a donation of ecologically-sensitive land to a conservation charity, the capital gain that has accrued on the land is included in calculating the donor’s income at only one-half the standard capital gains inclusion rate. Currently, the standard capital gains inclusion rate is 50 per cent, and therefore the capital gains inclusion rate for donations of ecologically-sensitive land to a conservation charity is 25 per cent.

In order to help Canada’s landowners and conservation groups in their efforts to preserve Canada’s natural heritage, Budget 2006 proposes to reduce the capital gains inclusion rate for such donations to zero.

This measure will apply to donations of ecologically-sensitive land made on or after May 2, 2006.

Large Corporation Dividends

Income earned by corporations is subject to corporate income tax and, on distribution as dividends to individuals, personal income tax. The personal income tax system, through the "gross-up" and dividend tax credit (DTC), currently provides recognition for corporate income taxes based on a 20 per cent combined federal-provincial rate, which is intended to approximate the small business corporate income tax rate. The existing gross-up is 25 per cent and the existing federal DTC is 131⁄3 per cent of the grossed-up amount. Because the federal-provincial general corporate income tax rate is higher than 20 per cent, the total personal and corporate income tax on earnings distributed as dividends can be higher than that paid on interest payments and income trust distributions.

Budget 2006 confirms the government’s intention to proceed with measures consistent with those announced in a Notice of Ways and Means Motion tabled on November 23, 2005, which would enhance the gross-up and DTC for eligible dividends. Eligible dividends will generally include dividends paid after 2005 by public corporations (and other corporations that are not Canadian-controlled private corporations (CCPCs)) that are resident in Canada and subject to the general corporate income tax rate. In addition, CCPCs will be able to pay eligible dividends to the extent that their income (other than investment income) is subject to tax at the general corporate income tax rate.

Specifically, in respect of eligible dividends, shareholders will include 145 per cent of the eligible dividend amount in income (that is, a 45 per cent gross-up), and the federal DTC with respect to eligible dividends will be approximately 19 per cent of the grossed-up amount (reflecting the general corporate income tax rate that will apply beginning in 2010).

This measure will apply to eligible dividends paid after 2005.

Business Income Tax Measures

To foster investment and growth, and to create jobs, Budget 2006 proposes to eliminate the corporate surtax for all corporations in 2008 and reduce the general corporate income tax rate by 2 percentage points by 2010.

General Corporate Income Tax Rate

Budget 2006 proposes to reduce the general corporate income tax rate (after the 10-per-cent abatement for income earned in a province) to 19 per cent from 21 per cent by 2010. The general corporate income tax rate will be reduced to 20.5 per cent effective January 1, 2008, to 20 per cent effective January 1, 2009, and to 19 per cent effective January 1, 2010. The rate will be prorated for taxation years that include any of those dates.

The rate reductions will apply to income that is taxed at the general corporate income tax rate. This income does not include small business income that is already eligible for the small business deduction; investment income of Canadian-controlled private corporations (CCPCs), which income is eligible for a special refundable tax; the income of credit unions eligible for the corporate tax rate reduction under section 137 of the Income Tax Act; and the income of mutual fund corporations, mortgage investment corporations, most deposit insurance corporations and investment corporations (as defined in the Income Tax Act), which income already qualifies for special tax treatment. Consistent with these proposals, measures will be introduced for taxation years that begin on or after May 2, 2006 to clarify that full-rate taxable income does not include any taxable income of a corporation that is not subject to tax at the general corporate income tax rate applicable under section 123 of the Income Tax Act.

Corporate Surtax

The corporate surtax applies to all corporations and is calculated at a rate of 4 per cent of federal corporate income tax payable after the 10-per-cent abatement for income earned in a province, but before credits such as the small business deduction and credits for foreign taxes paid.

The elimination of the surtax for small- and medium-sized corporations in 2008 has already been legislated. Budget 2006 proposes to eliminate the corporate surtax for all remaining corporations effective January 1, 2008, prorated for taxation years that include that date. Its elimination is equivalent to a 1.12 percentage point reduction in corporate income tax rates and will simplify the tax system.

The following table presents the federal corporate income tax rates reflecting the proposed rate reductions.

Table A3.17
Federal Corporate Income Tax Rates, 2006–2010

Small Business Limit and Tax Rate

The small business deduction currently reduces the federal corporate income tax rate applied to the first $300,000 of qualifying active business income of a Canadian-controlled private corporation (CCPC) to 12 per cent.

In order to provide additional tax relief to small businesses, Budget 2006 proposes that the annual amount of active business income eligible for the reduced tax rate—generally referred to as the "small business limit"—be increased as of January 1, 2007 to $400,000.

Budget 2006 also proposes a 1-percentage point reduction in the 12 per cent tax rate. The reduction will be achieved as follows:

• for 2008, the rate will be reduced to 11.5 per cent; and

• as of January 1, 2009, the rate will be reduced to 11 per cent.

The increase to the small business limit, and the rate reductions, will be pro-rated for corporations with taxation years that do not coincide with the calendar year. In addition, there will continue to be a requirement to allocate the small-business limit among associated corporations, and access to the small business deduction will continue to be phased out on a straight-line basis for CCPCs having between $10 million and $15 million of taxable capital employed in Canada.

CCPCs are also eligible to earn investment tax credits at an enhanced rate of 35 per cent on up to $2 million of scientific research and experimental development (SR&ED) expenditures annually. This $2 million expenditure limit is reduced as a CCPC’s taxable income for the previous taxation year increases from $300,000 to $500,000 and taxable capital of the previous year increases from $10 million to $15 million. For these smaller CCPCs all tax credits earned at the higher 35-per-cent rate on current expenditures are fully refundable, and 40 per cent of tax credits earned at the higher 35-per-cent rate on capital expenditures is refundable.

As a consequence of the proposal to increase the small business limit, the $2 million expenditure limit will be reduced where taxable income for the previous taxation year is between $400,000 and $600,000. This change will apply to taxation years that end after 2006. The phase-out based upon taxable capital will not be changed.

CCPCs that claim the small business deduction are permitted to pay any balance of corporate income tax owing at the end of the third month after the end of their taxation year—one month later than other corporations—provided their taxable income in the previous year is less than the small business limit for that year. As a consequence of increasing the small business limit, some CCPCs with taxable income above $300,000 but below the proposed new limit, will now have an additional month in which to pay any balance of tax owing.

The following table presents the small business limit and tax rate reflecting the proposed changes.

Table A3.18
Small Business Limit and Tax Rates, 2006–2010

Non-Capital Losses and Investment Tax Credits

Non-capital losses can currently be carried back up to 3 years and can also be carried forward 10 years. However, many businesses are unable to fully utilize their losses before they expire. To improve fairness and smooth out the impact of business cycles, Budget 2006 proposes to extend the non-capital loss carry-forward period of all taxpayers to 20 years.

Investment tax credits (ITCs) provide considerable support for important economic activity such as scientific research and experimental development (SR&ED). Currently, ITCs can be carried back up to 3 years and forward up to 10 years. However, some businesses, such as research-intensive companies, can realize little profit for extended periods, which means that they may be unable to fully benefit from an ITC. To increase the ability of these companies to use ITCs, Budget 2006 also proposes to extend the ITC carry-forward period to 20 years.

This measure will apply to non-capital losses, farm losses, restricted farm losses, losses applied under Part IV of the Income Tax Act, and Canadian life investment losses under Part XII.3 of the Act. It will also apply to ITCs earned for SR&ED, Atlantic investment, and mineral exploration. The measure is proposed to apply to losses incurred and credits earned in taxation years that end after 2005.

Federal Capital Tax

The federal capital tax was introduced in 1989 as Part I.3 of the Income Tax Act. The tax is currently levied at a rate of 0.125 per cent on taxable capital in excess of $50 million. A corporation’s taxable capital is generally described as the total of its shareholder’s equity, surpluses and reserves, as well as loans and advances to the corporation, less certain types of investments in other corporations. A corporation’s federal income surtax (1.12 per cent of taxable income) is deductible against the corporation’s federal capital tax liability.

Legislation has already been enacted to eliminate the federal capital tax in 2008. Budget 2006 proposes to eliminate the federal capital tax as of January 1, 2006—two years earlier than was originally scheduled. The federal capital tax rate will be pro-rated for taxation years that do not coincide with the calendar year.

The following table summarizes the phase-out of the federal capital tax under existing law and the acceleration of the elimination proposed in this budget:

Table A3.19
Proposed Acceleration of Federal Capital Tax Elimination

The corporate surtax in excess of a corporation’s federal capital tax liability for a taxation year can generally be applied against the corporation’s capital tax liability for its three previous and its seven subsequent taxation years. Corporations will continue to be able to apply the corporate surtax against the federal capital tax liability, if any, for the three previous tax years. For these purposes, the excess credits will continue to be computed by reference to a notional Part I.3 tax liability, based on the 0.225 per-cent federal capital tax rate and the $10 million capital deduction applicable immediately prior to the phasing out of the tax that began in 2004. Consequential amendments to subsection 225.1(8) and section 235 of the Act will also be made to ensure that certain rules applicable to large corporations continue to have effect after the elimination of the federal capital tax.

Minimum Tax on Financial Institutions

The federal capital tax on financial institutions, which was introduced in 1986 as Part VI of the Income Tax Act, is a minimum tax for banks, trust companies and mortgage loan companies. It was extended to life insurance companies in 1990. The tax is currently levied at a rate of 1.0 per cent on taxable capital employed in Canada between $200 million and $300 million, and at a rate of 1.25 per cent on taxable capital employed in Canada in excess of $300 million. This tax is in addition to the federal capital tax applicable to large corporations under Part I.3 of the Income Tax Act, as discussed above.

Given the growth in the financial sector since the tax was first introduced, Budget 2006 proposes to increase the threshold above which the tax begins to apply to $1 billion and to adopt a single tax rate of 1.25 per cent on taxable capital employed in Canada over that threshold.

A financial institution can reduce its capital tax payable by the amount of income tax it pays. Where income tax exceeds its capital tax payable for a taxation year, a financial institution can carry the excess income tax credits forward seven years and back three years. For the purposes of calculating amounts that can be carried back from taxation years that end on or after July 1, 2006 to taxation years that end before that date, such excess income tax credits will continue to be calculated as if the structure of the capital tax on financial institutions had not been changed. This will limit the ability of financial institutions to carry back to those years unused income tax credits that arise solely because of the reduction of the federal capital tax on financial institutions.

These changes will apply starting July 1, 2006, prorated for financial institutions with taxation years that include that date.

Apprenticeship Job Creation Tax Credit

Budget 2006 proposes to introduce an Apprenticeship Job Creation Tax Credit in order to encourage employers to hire new apprentices in eligible trades. This measure will provide eligible employers with a non-refundable tax credit equal to 10 per cent of the salaries and wages paid to qualifying apprentices to a maximum credit of $2,000 per year per apprentice (i.e., the credit would be available on up to $20,000 of an apprentice’s salaries and wages). Eligible employers will be businesses that incur salaries and wages in respect of qualifying apprentices. Special rules will apply where an apprentice works for two or more related employers in a year so that the maximum tax credit in the year in respect of that apprentice that those employers can claim does not exceed $2,000.

A qualifying apprentice will be an apprentice who is working in a qualifying trade in the first two years of his or her provincially registered apprenticeship contract with an eligible employer. The qualifying trades will be prescribed and will include the 45 trades currently included in the Red Seal trades. The Red Seal allows a journeyperson to engage in their trade—without having to write further examinations—in any province or territory in Canada where the trade is recognized.

In addition, the Minister of Finance may, in consultation with the Minister of Human Resources and Social Development, put forth regulations to prescribe other trades, which are economically strategic, to be an eligible trade. The Minister of Human Resources and Social Development will consult with the provinces and territories with a view to determining those trades that should be recommended to the Minister of Finance for prescription.

As proposed above, unused credits may be carried back 3 years and forward 20 years by the employer to reduce federal income taxes otherwise payable in those years.

The Apprenticeship Job Creation Tax Credit will be available to eligible employers in respect of salaries and wages that are paid to qualifying apprentices on or after May 2, 2006.

Capital Cost Allowance for Tools

A portion of the capital cost of depreciable property is deductible as capital cost allowance (CCA) each year, with the maximum CCA rate for each type of property set out in the Income Tax Regulations.

Currently, tools that cost less than $200 are eligible for a 100-per-cent CCA rate under paragraph (h) of Class 12 of Schedule II to the Income Tax Regulations. Tools that cost $200 or more are generally eligible for a 20-per-cent CCA rate under Class 8 of Schedule II to the Income Tax Regulations.

Budget 2006 proposes that the cost limit for access to the 100-per-cent Class 12 treatment be increased to $500 from $200 for such tools acquired on or after May 2, 2006.

The budget also proposes to clarify the description of tools eligible under paragraph (h) of that class by specifically excluding electronic communication devices and electronic data processing equipment.

Consequential to the increase in the cost limit for tools, Budget 2006 also proposes that the cost limit for kitchen utensils under paragraph (c) of Class 12 and medical or dental instruments under paragraph (e) of Class 12 be increased to $500 from $200 for such utensils and instruments acquired on or after May 2, 2006.

Accelerated Capital Cost Allowance for Forestry Bioenergy

Budget 2006 confirms the Government’s intention to proceed with proposed measures to extend eligibility for accelerated capital cost allowance under Class 43.1 (30 per cent rate) and Class 43.2 (50 per cent rate) of Schedule II to the Income Tax Regulations to cogeneration systems that use a type of biomass, commonly referred to as "black liquor" (or "spent pulping liquor") used in the pulp and paper industry. This change will apply to eligible assets acquired on or after November 14, 2005, that have not been used or acquired for use before that date.

Other Measures

Administrative Provisions (Standardized Accounting)

The Government has, for a number of years, been working on an initiative referred to as "Standardized Accounting", which aims to simplify tax compliance, primarily for business persons, by harmonizing various administrative, interest and penalty provisions across federal tax statutes. The goal of this initiative is an integrated set of rules for the payment of tax, calculation of interest, and penalties that simplifies the tax system for both tax filers and government administration and ultimately leads to increased efficiency and cost savings.

The first series of Standardized Accounting measures, which harmonized a number of administrative and enforcement provisions under the Excise Tax Act (non-GST), the Excise Act, 2001, and the Income Tax Act, were announced in Budget 2003.

Budget 2006 proposes measures that harmonize a number of other administrative, interest and penalty provisions, primarily as they relate to the Excise Tax Act (GST), but also affecting the Excise Tax Act (non-GST), Excise Act, 2001, Income Tax Act, and the Air Travellers Security Charge Act. These measures will apply based on an implementation date that is the later of April 1, 2007 and the date that legislation to give effect to the standardized accounting proposals receives Royal Assent. Specific coming-into-force provisions for the measures are described below.

(a) Changes to the Excise Tax Act (GST and non-GST), the Income Tax Act, the Excise Act, 2001 and the Air Travellers Security Charge Act

Withholding of Refunds/Rebates: Currently, the Excise Tax Act (GST), the Excise Act, 2001, and the Air Travellers Security Charge Act each restrict the payment of refunds until all returns required to be filed under each Act, and in some cases, under the other statutes as well, have been filed. The Excise Tax Act (non-GST) and the Income Tax Act are silent on this requirement. Budget 2006 proposes to restrict the payment or offset of a credit, other than the Child Tax Benefit, to a person until all returns, of which the Minister of National Revenue has knowledge, that the person is required to file under all the Acts have been filed. This measure will apply to amounts that are payable by the Minister on or after the implementation date.

De Minimis Amounts: Currently, the threshold below which amounts are neither payable by a person or the Crown varies across the statutes. Furthermore, rather than deeming these amounts to be nil, in some statutes the Minister of National Revenue is required to write off the amounts. Budget 2006 proposes that where the total of all amounts payable by a person is $2 or less, the amount be deemed to be nil. In addition, if the total of all amounts owing by the Crown to a person is $2 or less, the amount may be offset against another liability of the person or, where no other liability exists, the amount will be deemed to be nil. This measure will apply to amounts owing on or after the implementation date.

Interest on Fees for Dishonoured Instruments: Currently, if a fee is imposed on a person in respect of a dishonoured financial instrument used by the person to pay an amount under one of the Acts, the Crown is required to calculate interest on the charge pursuant to the Financial Administration Act. Budget 2006 proposes that the fee structure under the Financial Administration Act be incorporated into each of the relevant tax statutes, in order to have the interest rates under these statutes (and the date at which that interest begins to accrue) apply to the fee. This measure will come into force in respect of instruments dishonoured on or after the implementation date.

(b) Changes to the Excise Tax Act (GST), the Income Tax Act, the Excise Act, 2001 and the Air Travellers Security Charge Act

Effect on Penalties and Interest When Due Dates are Extended: While currently each of these statutes allows the Minister of National Revenue to extend the deadline for filing a return, and most statutes permit extensions for remitting amounts, the treatment of penalties and interest when an extension is given varies across the Acts. Budget 2006 proposes that when the Minister extends, under any of the Acts, the deadline to file a return or remit an amount, late-filing penalties and interest will not apply in respect of the return or amount until after the extension expires. In addition, late-filing penalties and interest will apply only in respect of the period after the extension. This measure will apply to returns that are required to be filed on or after the implementation date.

(c) Changes to the Excise Tax Act (GST and non-GST), the Excise Act, 2001 and the Air Travellers Security Charge Act

Ten-Year Limitation Period for Exercises of Ministerial Discretion: Currently, the Minister of National Revenue is authorized to waive or cancel any interest, and in some cases late-remittance penalties, that were imposed on a person. Budget 2006 proposes that the Minister may waive or cancel any interest and late-filing penalties that became payable in any of the ten preceding calendar years. This measure will apply in respect of requests made to the Minister on or after the implementation date.

Late-Filing Penalties: Currently, these statutes do not contain a penalty for returns that are filed late by a person. Budget 2006 proposes that a late-filing penalty, modelled after a similar penalty under the Income Tax Act, be introduced with a rate of 1.0 per cent of the outstanding balance on the return plus an additional 0.25 per cent for each complete month the return remains outstanding, to a maximum of 12 months. This measure will apply to returns that are required to be filed on or after the implementation date. The measure will also apply to returns outstanding as of that date, but the 0.25-per-cent per month portion of the penalty will apply only in respect of the period after the implementation date. Currently, the penalties for failure to file when required under a demand vary among the statutes. Budget 2006 will set the penalty at $250 in respect of demands served on or after implementation date.

(d) Changes to the Excise Tax Act (GST), the Excise Act, 2001 and the Air Travellers Security Charge Act

Period of Interest Accrual on Cancelled Penalties and Interest: Currently, where the Minister of National Revenue receives a request for relief from a person and cancels penalties or interest previously paid by the person, interest in respect of the cancelled amount will be payable to the person. However, the date upon which interest begins to accrue on amounts to be repaid to a person varies across each statute. Budget 2006 proposes that interest payable to a person in respect of cancelled penalties and interest will begin to accrue 30 days after the day the Minister receives a request from a person, and will end on the day the amount is refunded or offset against another liability. This measure will come into force on the implementation date.

(e) Changes to the Excise Tax Act (non-GST), the Income Tax Act and the Excise Act, 2001

Collection Restrictions: Currently, the Minister of National Revenue is required to wait at least 90 days from the date of a notice of assessment before the Minister may commence collection by way of deduction or set-off against amounts owing to the person. Budget 2006 proposes to remove this 90-day collection restriction. This measure will apply in respect of amounts payable by the Minister on or after the implementation date.

(f) Changes to the Excise Tax Act (GST) and the Air Travellers Security Charge Act

Interest Calculation: Currently, interest on amounts owed by persons is based on the Government of Canada Treasury Bill rate plus an additional 6-per-cent penalty, while interest on amounts owed to persons is based on the Treasury Bill rate. Budget 2006 proposes that the rate of interest on amounts owed by persons be based on the Treasury Bill rate, rounded up to the nearest percentage point, plus 4 per cent, and that the 6-per-cent penalty be removed. Interest on amounts owed to persons will be based on the Treasury Bill rate, rounded up, plus 2 per cent. This measure will apply to all amounts payable on or after the implementation date.

(g) Changes to the Excise Tax Act (GST)

Day Credit Interest Begins to Accrue: Currently, interest on amounts owing to a person begins to accrue the later of 21 days after the date a credit return is filed or a claim is made in respect of particular rebates, while interest on amounts owing to a person for other rebates begins 60 days from the date of filing a claim. Budget 2006 proposes that the Excise Tax Act be amended to provide that interest on all amounts owing to a person begins to accrue 30 days after the person files a credit return or rebate claim. This measure will apply to reporting periods, and to claim periods in respect of specified rebates, that end, as well as to claims for other rebates that are filed, on or after the implementation date.

(h) Changes to the Income Tax Act and the Income Tax Regulations

Reallocation of Payments: The Income Tax Act currently allows the Minister of National Revenue to reallocate amounts paid by a person to the Minister, but only between specified accounts within that Act. Budget 2006 proposes that the Minister be authorized to reallocate, upon a person’s request, amounts paid by the person under the Income Tax Act to amounts payable by that person under the Excise Tax Act (GST and non-GST), the Excise Act, 2001 or the Air Travellers Security Charge Act, with the reallocation taking effect from the date the amount was paid under the first Act. The result of this amendment will be that amounts paid under any of those Acts can be applied against amounts payable under any other of those Acts. This measure will come into force in respect of reallocation requests made on or after the implementation date.

Non-Deductibility of Interest and Penalties: The Income Tax Act was amended in 2004 to provide that fines and penalties are not generally deductible. However, pending the outcome of ongoing work relating to the harmonization of administrative rules—including penalties and interest—under various tax statutes, it was proposed at that time that this prohibition on the deductibility of penalties not apply to prescribed penalty interest imposed under the Excise Act, the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act. As this harmonization exercise is now complete with the introduction of the proposals outlined above, Budget 2006 proposes that this prescription be removed in so far as it relates to the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act. In addition, interest payable under the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act will no longer be deductible for income tax purposes.

These measures will apply to taxation years that begin on or after the implementation date.

(i) Changes to the Excise Tax Act (non-GST)

Repeal of Instalment Periods for Excise Taxes: Currently, most taxpayers are required to pay instalments in respect of a fiscal month within 21 days after the end of the month. Large taxpayers must pay a first instalment in respect of a fiscal month by the end of the month and a second instalment within 15 days after the end of the month. For both types of taxpayers, the outstanding balance in respect of a fiscal month must be paid by the end of the following fiscal month. Budget 2006 proposes the repeal of the provisions requiring instalment payments, so that excise taxpayers would be required to pay tax in respect of a fiscal month by the end of the following month. This measure will come into force for fiscal months that begin on or after the implementation date.

Measures Announced in the 2005 Budget

A limited number of tax measures that were originally proposed in the 2005 budget and the Notice of Ways and Means Motion tabled on November 17, 2005 were not legislated before Parliament prorogued as a result of the election call. Budget 2006 confirms the Government’s intention to proceed with measures which would introduce a tax deferral in respect of certain dividends paid after 2005 by agricultural cooperatives, and would for the 2005 and subsequent taxation years,

• introduce a new tax credit for adoption expenses,

• respond to recommendations of the Technical Advisory Committee on Tax Measures for Persons with Disabilities concerning the eligibility criteria for the disability tax credit and the expenses eligible for the disability supports deduction,

• expand the list of expenses eligible for the medical expenses tax credit, and clarify the eligibility of home renovation and construction expenses, and

• double the amount of disability-related and medical expenses that can be claimed by a caregiver.

Budget 2006 also confirms the Government’s intention to enact regulations to implement the changes to the capital cost allowance (CCA) provisions proposed in the 2005 budget. These changes, which will be effective as of February 23, 2005, set new rates for certain electricity assets, transmission pipelines, and telecommunications cables. They also enhance and extend the accelerated CCA provisions for efficient and renewable energy generation equipment.

Functional Currency Tax Reporting

Currently, all taxpayers are required to report and determine their income for Canadian tax purposes in Canadian dollars. There are, however, certain corporations resident in Canada that are required by Canadian and international accounting rules to determine their income for financial reporting purposes in a currency (the "functional currency") other than the Canadian dollar if their business activities are conducted primarily in that currency. These corporations are concerned that the requirement to report their income for tax purpose in Canadian currency can distort their financial results and impair their international competitiveness.

Budget 2006 proposes to explore allowing corporations, required for financial reporting purposes to report in a functional currency other than the Canadian dollar, to determine their income for Canadian tax purposes in that functional currency. To this end, the Department of Finance intends to release a discussion draft of legislative proposals for comment.

Aboriginal Tax Policy Measures

Taxation is an integral part of good governance as it promotes greater accountability and self-sufficiency. Therefore, the federal government supports initiatives encouraging the exercise of taxation powers by Aboriginal governments.

To date, the federal government has entered into 20 sales tax arrangements whereby Indian Act bands and Aboriginal self-governments levy a sales tax within their reserves or their settlement lands. In addition, 11 arrangements respecting personal income taxes are in effect with Aboriginal self-governments under which they impose a personal income tax on all residents within their settlement lands. The federal government confirms its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments.

The federal government is also prepared to facilitate taxation arrangements between provinces, territories and interested Aboriginal governments. In 2004, the federal government introduced legislation to provide authority to interested Indian Act bands situated in Quebec to levy direct sales taxes harmonized with any of the sales taxes levied by the Government of Quebec. The Governments of Manitoba and of Saskatchewan have recently requested that the federal government facilitate provincial tax arrangements with Aboriginal governments in their province. The federal government will, therefore, introduce similar legislation to facilitate tax administration agreements in these two provinces. The federal government remains willing to work with any provincial or territorial government that shares an interest in concluding similar taxation arrangements with Aboriginal governments.

A technical amendment is proposed to the Yukon First Nations Self-Government Act in order to ease the transition to self-taxation.