Budget 2006
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Archived - Chapter 3 - Building a Better Canada:
Opportunity

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Highlights

  • As a result, about 655,000 low-income Canadians will be removed from the tax rolls altogether.
  • The new Canada Employment Credit—a tax credit on employment income of up to $500, effective July 1, 2006, to help working Canadians. The eligible amount will double to $1,000 as of January 1, 2007.
  • A permanent legislated reduction in the lowest tax rate to 15.5 per cent from 16 per cent as of July 1, 2006. The budget also confirms that the lowest tax rate will be 15 per cent from January 1, 2005 until June 30, 2006.
  • Increases in the basic personal amount—the amount that all Canadians can earn without paying federal income tax—above its currently legislated level for 2005, 2006 and 2007.
  • As a result of these personal income tax and GST reductions, families earning between $15,000 and $30,000 a year will be better off by almost $300 in 2007. Families earning between $45,000 and $60,000 will save almost $650.
  • Reducing the general corporate income tax rate to 19 per cent from 21 per cent by 2010.
  • Eliminating the corporate surtax for all corporations as of January 1, 2008.
  • Eliminating the federal capital tax as of January 1, 2006, two years ahead of schedule.
  • Increase the amount of small business income eligible for the 12-per-cent tax rate to $400,000 from $300,000 as of January 1, 2007.
  • Reduce the 12-per-cent tax rate applying to qualifying small business income to 11.5 per cent in 2008 and 11 per cent in 2009.
  • A new tax credit of up to $2,000 for employers who hire apprentices.
  • A new $1,000 grant for first- and second-year apprentices.
  • A new $500 tax deduction for tradespeople for costs in excess of $1,000 for tools they must acquire as a condition of employment. Also, the $200 limit on the cost of tools eligible for the 100-per-cent capital cost allowance will be increased to $500.
  • A new tax credit for the cost of textbooks, which will provide a tax reduction of about $80 per year for a typical full-time post-secondary student.
  • The elimination of the current $3,000 limit on the amount of scholarship, bursary and fellowship income a post-secondary student can receive without paying federal income tax.
  • Confirming up to $1 billion to provinces and territories to support urgent investments in post-secondary education infrastructure.
  • Expanded eligibility for Canada Student Loans through a reduction in the expected parental contribution, starting in August 2007.
  • $1.5 billion will be provided this year. This includes $500 million for farm support, plus a one-time investment of $1 billion to assist farmers in the transition to more effective programming for farm income stabilization and disaster relief.

Introduction

Canada has long been a destination for people from all over the world in search of a better life for themselves and their families. In recent years, however, Canadians have been increasingly concerned that our children and grandchildren may not enjoy the same opportunities that we have had.

Canada’s new government believes in creating new opportunities for Canadians wherever they live. That is why Budget 2006 takes action to help families and individuals as well as businesses by lowering taxes, rewarding effort and making Canada a better place in which to do business.

A first priority is to return money to Canadians by reducing the GST and to propose other significant tax relief and investments that will create jobs and boost Canada’s economy by improving incentives to work, save and invest.

This approach will increase disposable incomes and create new opportunities for all Canadians. It sets Canada on a new course toward further actions in the future.

Details on all tax measures are set out in Annex 3.

Core Priority: Tax Relief for All Canadians

This government believes that Canadians pay too much tax. It believes they should have greater opportunity to reap the rewards of joining the workforce and, once in the labour market, to keep more of their hard-earned tax dollars, so that they can invest in the things that matter most to them and their families.

Budget 2006 proposals will leave significantly more money in the pockets of Canadians. It delivers greater benefits, especially for middle-income families, than anticipated under tax measures proposed in 2005. With these measures, the Government is not only keeping its word to Canadians on the GST, but also going much further in delivering immediate, real, and continuing results for people across the country. This budget provides almost $20 billion in tax relief for individuals over the next two years—more than the last four budgets combined. The tax measures in this budget will remove some 655,000 people from the income tax rolls.

The Government’s tax plan includes:

In total, this budget will provide more than $26 billion in tax relief over the period 2005–06 to 2007–08. Of this, over 90 per cent will go to individuals

Chart 3.2 - Distribution of Tax Relief, 2005-07 to 2007-08

Table 3.3
Tax Relief Provided by Budget 2006


2005–06 2006–07 2007–08 Total

(billions of dollars) (per cent)
GST1 3.5 5.2 8.7 33
Personal tax2 5.0 5.3 5.2 15.5 59
Business tax3 1.1 0.9 2.0 8

Total 5.0 9.9 11.3 26.2 100

1 Includes the adjustment to tobacco and alcohol excise levies.
2 Includes Right of Permanent Residence Fee and the repeal of the excise tax on jewellery.
3 Includes measures to support Canadian vintners and small brewers.

Reducing the GST Rate to 6 per cent

Budget 2006 proposes to reduce the rate of the GST to 6 per cent from 7 per cent effective July 1, 2006. The 1-point rate reduction will also apply to the federal portion of the harmonized sales tax (HST) in New Brunswick, Nova Scotia, and Newfoundland and Labrador.

This measure delivers on a key commitment of Canada’s new government. It will put money in the pockets of Canadians every time they buy something for themselves, their families or their home. It will especially benefit younger families who are buying and furnishing their first new home.

This is by far the single largest initiative in this budget. For consumers, savings from the GST reduction will amount to approximately $3.5 billion in 2006–07 and about $5.2 billion in 2007–08. To provide relief to low- and modest-income Canadians, Budget 2006 proposes to maintain the GST credit at current levels even though the GST rate will be reduced. It also proposes to retain the existing GST/HST rebate rates for new housing and purchases made by public sector bodies. This will ensure that a new home or residential rental property purchase, and purchases by public sector entities, will continue to benefit from the same level of GST relief as is currently available.

Reducing the GST to 6 per cent—Examples of Tax Savings
  • A family purchasing a new $200,000 home will save $1,280 in GST.
  • A family buying $20,000 in new furnishings for that new home will save $200 in GST.
  • A family spending $30,000 on a new car will save $300 in GST.

Note: The GST saving of $1,280, resulting from the GST rate reduction to 6 per cent, takes into account the GST New Housing Rebate, which is equal to 36 per cent of the gross GST payable on the price of a new home valued at less than $350,000.

The July 1, 2006, implementation date was chosen to ease the administrative transition for Canadian businesses. It will provide businesses with sufficient advance notice to modify their cash registers and other systems, and the date coincides with GST filing periods, not only for monthly filers but also smaller businesses that file quarterly.


More Money in Canadians’ Pockets

Budget 2006 will leave significantly more money in families’ pockets—money they can save, put towards a new home or invest in things that matter to them.

On average, families earning between $15,000 and $30,000 per year will be almost $300 better off in 2007, while families earning between $45,000 and $60,000 per year will be almost $650 better off. These families will benefit from:

Broad-Based Tax Relief for Individuals, by Family Income Group1


Income

2006

2007


(dollars)

Less than 15,000

-51

-96

15,000 – 30,000

-199

-298

30,000 – 45,000

-367

-509

45,000 – 60,000

-459

-643

60,000 – 80,000

-562

-797

80,000 –100,000

-682

-990

100,000 – 150,000

-795

-1,228

Over 150,000

-1,151

-1,987


1 Tax savings beyond measures already legislated in the Income Tax Act.

Individuals may also qualify for additional relief from targeted tax relief measures proposed in this budget, such as an increased pension income tax credit, a new tools deduction for tradespeople, and a new credit for Canadians from all walks of life who are regular users of public transit.

This relief is not some distant promise. The measures will start in 2006, will reach full effect by the start of 2007, and will be ongoing.


To assist taxpayers in the transition to the new, lower GST rate, specific rules have been developed for transactions that occur close to, or straddle, the July 1, 2006, implementation date. These rules will provide clarity and certainty to consumers, businesses and administrative agencies such as the Canada Revenue Agency and the Canada Border Services Agency. The rules will cover, for example, purchases of new homes that straddle the July 1, 2006, implementation date. Further details on the application of these rules are set out in Annex 3.

Budget 2006 proposes to adjust federal excise levies on tobacco and alcohol products to substantially maintain the overall current federal tax burden on these products. These adjustments will take effect July 1, 2006, and will apply to inventories of tobacco products held at the end of June 30, 2006.

Going forward, the Government remains committed to reducing the GST by a further point in a future budget. In addition, the Government is committed to working with remaining provinces that want to enhance their economic competitiveness and productivity by harmonizing their retail sales taxes with the GST.

Competitiveness and Efficiency of the Canadian Economic Union: Furthering Provincial Sales Tax Harmonization

Harmonized sales taxes are now in place in Newfoundland and Labrador, Nova Scotia and New Brunswick. Quebec administers a provincial value-added tax, as well as collecting the GST on behalf of the federal government. However, separate provincial retail sales taxes continue to be collected in five provinces. The existence of provincial retail sales taxes substantially increases the effective tax rate on investment by taxing business capital goods and intermediate materials, thereby impairing the competitiveness of our tax system. Having to comply with different sales tax systems also greatly increases the complexity and the cost of doing business. The Government invites all provinces that have not yet done so to engage in discussions on the harmonization of their provincial retail sales taxes with the federal GST.

Delivering Broad-Based Personal Income Tax Relief

Raising the Basic Personal Amount and Reducing the Bottom Personal Tax Rate

Reducing the GST will deliver tax relief to all Canadians, including those who do not earn enough to pay personal income tax. Budget 2006 proposes legislative amendments that will provide additional tax relief for individuals by:

Together, these measures will provide personal income tax relief of almost $2.8 billion in 2006–07 and $1.9 billion in 2007–08.

Introducing the Canada Employment Credit

Working Canadians are the foundation of Canada’s economic growth. However, choosing to work also means additional costs—costs for everything from uniforms and safety gear, to home computers and various supplies.

For some, particularly low-income Canadians, these additional costs may impose a barrier to joining the workforce. For others, work-related employment expenses are another factor that limits the rewards of their hard work.

In recognition of this, Budget 2006 proposes to introduce the Canada Employment Credit, a new employment expense tax credit for employees’ work expenses. A credit on employment income of up to $500 will be provided, effective July 1, 2006. The amount of employment income eligible for the credit will rise to $1,000 effective January 1, 2007.

The credit will significantly increase the amount of income that Canadians can earn without paying federal income tax—to almost $10,000 by 2007. It will make work more attractive, particularly for lower-income workers. It will also put employees on a more equal footing with the self-employed, in terms of the tax recognition they receive for the expenses they incur to earn income.

This measure is expected to reduce the taxes paid by working Canadians by $890 million in 2006–07 and $1.8 billion in 2007–08.

Competitiveness and Efficiency of the Canadian Economic Union: Improving Work Incentives for Low-Income Canadians

Many low-income Canadians, particularly social assistance recipients, face significant financial barriers to paid employment and, for them, taking a job can mean being financially worse off. As illustrated in the chart below, a typical single parent who takes a low-income job can lose about 80 cents of each dollar earned to taxes and reduced income support. He or she could also lose in-kind benefits such as subsidized housing and prescription drugs, and will probably incur new work-related expenses. This situation is often referred to as the "welfare wall."

Progress has been made in lowering the welfare wall in recent years, notably for families with children, through the federal-provincial-territorial National Child Benefit initiative. However, significant work disincentives remain. Both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund have identified improving work incentives for low-income individuals as a priority for Canada. The November 2005 Economic and Fiscal Update proposed to introduce an earned income tax credit called the Working Income Tax Benefit (WITB) to improve incentives to work for low-income Canadians. This government will push this idea forward to enable more low-income Canadians to become self-reliant. Reducing barriers to paid employment is essential to fostering opportunities and economic growth. In this context, the Government of Canada will identify, in consultation with provinces and territories, potential measures to improve incentives to work for low-income Canadians, including through an earned income tax credit such as a WITB.

Chart 3.3 - Net Federal and Provincial Income Taxes Paid by Low - and Middle-Income Families (Single Parent With One Child)

Creating Jobs and Growing Canada’s Economy

Lower taxes for businesses are essential if Canada is to remain competitive. They will encourage the investment necessary to create jobs and ultimately improve the living standards of Canadians. Capital investment—for example, in new machinery and more efficient technology—makes workers more productive and, in so doing, leads to economic growth, more jobs and higher wages. In an increasingly globalized economy where investment capital is highly mobile, a competitive business tax system is crucial.

To make Canada’s tax system more competitive, Budget 2006 sets out a significant business tax relief plan that will:

These corporate tax reductions will allow Canada to regain the solid statutory tax rate advantage that it had vis-à-vis the U.S. before the 2004 U.S. tax changes. The tax reductions proposed in this budget will allow Canada to regain an advantage of 5.1 percentage points for manufacturing income in 2010, making us a more attractive destination for investment.

Chart 3.4 - Corporate Statutory Tax Rates in Canada and the U.S. - Manufacturing Income

However, a statutory tax rate advantage is not enough. Other aspects of the business tax system also affect investment decisions. The overall impact of the business tax system on investment can be measured by the marginal effective tax rate (METR). Using this measure, Canada does not currently have an advantage over the U.S. By 2010, when the measures proposed in this budget are in place, Canada’s METR will be, overall, slightly lower than that of the U.S.

Chart 3.5 - Overall Tax Burden on New Investment in 2010 with Proposed Corporate Income Tax Reduction (METRs)

Provinces also have an important role to play in improving business tax competitiveness. Recognizing this, many provinces have taken steps to reduce or eliminate their capital taxes. However, some provinces continue to impose retail sales taxes on capital expenditures. Complete elimination of capital taxes and the elimination of provincial retail sales taxes on business inputs by all provinces would significantly improve Canada’s chances in the international competition for investment, resulting in more jobs and growth. The Government invites provinces to consider accelerating the elimination of these taxes, which impair productivity in Canada.

Table 3.4
Provincial Capital Taxes
1


Alberta No capital tax
British Columbia No capital tax
Newfoundland and Labrador No capital tax
Prince Edward Island No capital tax
Saskatchewan Elimination in 2008
New Brunswick Elimination in 2009
Nova Scotia Elimination in 2009
Ontario Elimination in 20122
Manitoba Plans to reduce3
Quebec Being reduced4

1 General capital taxes only (i.e. does not include capital taxes on financial institutions).
2 Ontario announced its intention to accelerate the elimination of its capital tax to 2010 should the fiscal position of the province permit.
3 Manitoba announced its intention to reduce its capital tax if balanced budget requirements are met.
4 Quebec announced the gradual reduction of its capital tax from 0.6 per cent in 2005 to 0.29 per cent in 2009.

Even with tax reductions proposed in this budget in place, Canada will remain under pressure to improve the competitiveness of its tax system. International trends are to lower business tax rates (Chart 3.6). Many other countries—including small countries with open economies and generous social benefits systems like Finland, Sweden and the Netherlands—have more competitive corporate tax systems than Canada.

Chart 3.6 - International Trends in Statutory Corporate Income Tax Rates, 1997-2010

This trend is expected to continue, maintaining pressure on Canada to keep our tax system competitive in order to encourage investment and support a more productive economy that improves opportunity for all Canadians. Budget 2006 establishes a clear commitment to improve the international competitiveness of Canada’s corporate tax system, beginning with establishing a meaningful overall METR advantage over the United States. The measures proposed in this budget are major steps toward this goal.

Reducing Taxes for Small Businesses

Small businesses create jobs and are the backbone of our country’s economy. An important way that Canada’s federal income tax system supports the growth of small businesses is through a lower tax rate on the first $300,000 of qualifying income earned by a Canadian-controlled private corporation. This helps these small businesses to retain more of their earnings for reinvestment and expansion, thereby helping to create jobs and promote economic growth in Canada.

To further encourage small business growth in Canada, Budget 2006 proposes to:

It is estimated that these changes will reduce government revenues by $10 million in 2006–07 and $80 million in 2007–08.

Improving the Tax Treatment of Capital Gains for Fishers

When individual fishers sell or transfer their fishing assets, they are not currently eligible for the $500,000 lifetime capital gains exemption (LCGE) that is available for farm property and small business shares. Further, they cannot defer tax on transfers of fishing assets during their lifetime to their children or grandchildren.

Budget 2006 proposes to allow individual fishers to transfer fishing property (including fishing licences or shares of a fishing corporation) to their children without triggering a tax liability at the time of transfer. This budget also proposes to extend the $500,000 LCGE to fishers.

These measures, which will apply to dispositions occurring on or after May 2, 2006, will provide relief to fishers when they sell or transfer their property, allowing them to benefit from the same capital gains tax treatment as farmers. These measures could benefit over 40,000 Canadian fishers.

The estimated cost of these measures is $60 million in each of 2006–07 and 2007–08.

Repealing the Excise Tax On Jewellery

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

Originally conceived as a tax on luxury goods, this characterization is no longer valid. Jewellery is available at all price levels and is purchased by a wide range of Canadian households. Repeal of the excise tax will recognize this and ensure that the Canadian jewellery industry is able to compete on a fair and equitable basis with other retail and manufacturing businesses in Canada. It will also serve to reduce the compliance burden on the jewellery industry, a particular benefit to small businesses.

It is estimated that this measure will reduce federal revenues by $45 million in 2006–07 and $35 million in 2007–08.

Reducing Excise Duties for Canadian Vintners and Small Brewers

Budget 2006 proposes to support the Canadian wine industry by providing 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 help the competitiveness of small and medium-sized vintners and brewers.

To provide the time necessary for administrative transition, these measures will be effective July 1, 2006. Further details on the application of these provisions are set out in Annex 3.

It is estimated that these measures will reduce federal revenues by $15 million in 2006–07 and $20 million in 2007–08.

Eliminating the Double Taxation of Large Corporation Dividends

Income earned at the corporate level is subject to both corporate income tax and, on distribution as dividends to individuals, personal income tax. The personal income tax system provides relief from this "double taxation" through the gross-up and the dividend tax credit system. This system generally works well when corporate income tax is paid at the small business rate. When income is taxed at the large business rate, the system does not provide sufficient relief for taxes paid at the corporate level, and an element of double taxation remains.

Budget 2006 proposes to eliminate the double taxation of dividends from large corporations at the federal level. This tax reduction will encourage savings, investment and economic growth, and will make the total personal and corporate income tax on earnings distributed as dividends more comparable to the income tax paid on interest payments and income trust distributions.

The Taxation of Dividend Income

The personal income tax system, through the gross-up and dividend tax credit (DTC), currently provides recognition for corporate taxes paid based on a 20-per-cent combined federal-provincial rate, which is intended to approximate the small business tax rate. The existing gross-up is 25 per cent, and the existing federal DTC is 13 1⁄3 per cent of the grossed-up amount. Because the federal-provincial corporate income tax rate is higher than 20 per cent for large corporations, the personal and corporate income tax on earnings they distribute as dividends can be higher than that paid on interest payments and income trust distributions.

Generally, dividends paid after 2005 by large Canadian corporations will be eligible for an enhanced gross-up and DTC. Specifically, 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 that grossed-up amount, reflecting the 19-per-cent general corporate tax rate that will apply beginning in 2010.

Table 3.5
Eliminating Double Taxation of Dividends


 

Dividends paid by large corporations

Interest and
taxable distributions
of income trusts


Previous

New


(dollars)

A. Income

100

100

100

B. Corporate income tax1

32

32

0

C. Amount distributed to investor

68

68

100

D. Amount included in income

85

99

100

E. Personal income tax (46%2 of D)

39

46

46

F. Dividend tax credit

(17)

(32)3

0

G. Net personal income tax

22

14

46

H. Total tax paid (B + G)

54

46

46


1 The combined average federal-provincial corporate income tax rate in 2010.
2 The average top federal-provincial personal income tax rate.
3 Assumes that the provinces and territories increase their dividend tax credits for eligible dividends to equal their general corporate income tax rates.

It is estimated that this change will reduce government revenues by $375 million in 2006–07 and $310 million in 2007–08.

Extending the Mineral Exploration Tax Credit for Flow-Through Share Investors

In October 2000, a 15-per-cent tax credit was introduced to help moderate the impact of a global downturn in mineral exploration on mining communities by promoting exploration. This tax incentive, available to individuals investing in flow-through shares used to finance exploration, expired on December 31, 2005.

Budget 2006 proposes to reintroduce the credit for the period from May 2, 2006 until March 31, 2007. The one-year "look-back" rule will allow funds raised with the benefit of the credit in 2007, for example, to be spent on eligible exploration activity up until the end of 2008. Although market conditions for exploration are now strong, reintroduction of the credit for a limited period will solidify recent exploration gains and help establish a strong base from which to move forward.

The net fiscal cost of this extension is estimated at $65 million over the next two fiscal years.

Modifying the Minimum Tax on Financial Institutions

The federal government currently levies a capital tax on financial institutions at a rate of 1 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 a minimum tax and, as such, a financial institution can reduce its federal capital tax payable by the amount of federal income tax it pays.

In addition to accelerating the elimination of the federal capital tax, the Government is proposing to modify the minimum tax on financial institutions to reflect the growth of financial institutions since the tax was introduced. This budget proposes that, effective July 1, 2006, a single tax rate of 1.25 per cent apply on taxable capital employed in Canada over $1 billion.

It is estimated that this change will reduce government revenues by $15 million in 2006–07 and $30 million in 2007–08.

Extending the Carry-Forward Period for Non-Capital Losses and Investment Tax Credits

The income tax system allows firms to carry over losses in order to reduce the impact of fluctuations in income from year to year on tax liability. Similarly, unused investment tax credits (ITCs) can be carried over to other years so as to preserve the incentive effect of the credits for businesses that are not profitable. Currently, firms can carry their non-capital losses and ITCs backward up to three years and forward up to 10 years. However, in some cases businesses are not able to use up these losses and ITCs within the current carry-over period—this is particularly true for start-ups and research-intensive firms.

Budget 2006 proposes to extend the carry-forward period for non-capital losses and unused ITCs to 20 years, increasing the likelihood that firms will be able to apply these losses and ITCs against future tax liabilities. The measure is proposed to apply to losses incurred and credits earned in taxation years that end after 2005.

This measure will have no fiscal impact in 2006–07 or 2007–08.

Promoting Education, Training and Research

In today’s knowledge-based economy, a more educated and skilled labour force is key to Canada’s competitiveness in the world. Government investments in education and training are therefore critical to productivity and economic growth. Budget 2006 proposes that federal support for education and training be increased significantly.

Introducing a New Apprenticeship Job Creation Tax Credit

The difficulty Canadian employers have in finding skilled tradespeople is becoming an impediment to economic growth. Meanwhile, many young Canadians find themselves stuck in low-paying work, and are either not encouraged to consider the trades or unable to do so because of financial barriers.

To encourage employers to hire new apprentices, Budget 2006 proposes a new Apprenticeship Job Creation Tax Credit, effective May 2, 2006. As a result, eligible employers will receive a tax credit equal to 10 per cent of the wages paid to qualifying apprentices in the first two years of their contract, to a maximum credit of $2,000 per apprentice per year.

It is estimated that this measure will reduce federal revenues by $190 million in 2006–07 and $200 million in 2007–08.

Introducing a New $1,000 Apprenticeship Grant

In addition to current federal support provided to apprentices through the Employment Insurance program, a new Apprenticeship Incentive Grant program will be established effective January 1, 2007. The program will provide a cash grant of $1,000 per year to apprentices in the first two years of an apprenticeship program in one of the Red Seal trades and other economically strategic apprenticeship programs. This grant will be included in computing the income of the recipient for tax purposes.

The Government of Canada will be consulting with provinces and territories, employers and unions to best determine which other apprenticeship programs will be included in the program. Their views will also be sought concerning how to deliver the grant. This grant for apprentices, together with the proposed tax credit for employers, will provide a strong incentive for more young Canadians to pursue apprenticeships and hence meet the future need for skilled tradespeople that is crucial to the sustained growth of the economy. The cost of this new Apprenticeship Incentive Grant program, under the auspices of the Minister of Human Resources and Social Development, is estimated to be $125 million over 2006–07 and 2007–08.

It is estimated that about 100,000 apprentices will benefit as a result of the new grant and tax credit.

Recognizing Tradespeople’s Tool Expenses

Many employed tradespeople must provide their own tools as a condition of employment. The lack of tax recognition for the cost of these tools may contribute to the difficulties employers experience in finding skilled tradespeople.

The new Canada Employment Credit will provide relief on the first $1,000 of employment income, in recognition of expenses incurred by employees. Budget 2006 proposes a new deduction of up to $500 to tradespeople for the cost of tools in excess of $1,000 that they must acquire as a condition of employment.

Example 

A tradesperson earning $60,000 with $1,500 in tools expenses in 2007 will be able to claim the new Canada Employment Credit on $1,000 and deduct $500 under the new tools deduction. The two measures will reduce federal income taxes by $265.

The tools deduction and the Canada Employment Credit together will provide tax relief to about 700,000 employed tradespeople.

Budget 2006 also proposes to increase to $500 from $200 the limit on the cost of tools eligible for the 100-per-cent capital cost deduction. This measure will provide tax relief and reduce red tape for self-employed tradespeople and small businesses.

These measures will be effective for tools acquired on or after May 2, 2006. It is estimated that these measures will reduce federal revenues by $75 million in 2006–07 and $80 million in 2007–08.

Introducing a New Textbook Tax Credit

A new non-refundable tax credit will be put in place effective for 2006 and subsequent taxation years to provide better tax recognition for the cost of textbooks for students. The textbook tax credit amount will be $65 for each month of full-time post-secondary study and $20 for each month of part-time post-secondary study. A full-time student enrolled for eight months will qualify for a textbook tax credit amount of $520 for the year—representing a tax reduction of about $80. The measure will provide benefits to about 1.9 million post-secondary students. Eligibility rules will be the same as those for the education tax credit.

It is estimated that this measure will reduce federal revenues by $135 million in 2006–07 and $125 million in 2007–08.

Exempting All Post-Secondary Education Scholarship and Bursary Income From Tax

Post-secondary students need to be supported for their hard work in pursuit of academic excellence. Currently, the first $3,000 in scholarship, fellowship and bursary income received by a post-secondary student is not taxed. Budget 2006 proposes to fully exempt these sources of income from tax, effective for the 2006 and subsequent taxation years. This measure will help foster academic excellence by providing tax relief to more than 100,000 post-secondary students.

It is estimated that this measure will reduce federal revenues by $50 million in 2006–07 and $45 million in 2007–08. 

Example

Dwight is a full-time student in Ontario, completing a Ph.D. in Electrical Engineering. He received a $15,000 scholarship and also earned an additional $10,000 in 2007 by working as a teaching assistant.

As a result of the full exemption on scholarship and bursary income, and the introduction of the new textbook tax credit, he will save $675 in federal income tax.

Investing in Post-Secondary Education Infrastructure

In order to help provinces and territories provide high-quality post-secondary education, the Government is providing a one-time payment of $1 billion, to be paid into a third-party trust, contingent on sufficient funds from the 2005–06 surplus in excess of $2 billion. The Post-Secondary Education Infrastructure Trust will support critical and urgent investments to promote innovation and accessibility, particularly investments that will enhance universities’ and colleges’ infrastructure and equipment (e.g. modernizing classrooms and laboratories; updating training equipment), as well as related institutional services (e.g. enhancing library and distance-learning technologies).

Pending confirmation in the fall of the Government of Canada’s final financial results for 2005–06, funding will be distributed on a per capita basis to provinces and territories and notionally allocated over two years. More details can be found in the section entitled "Restoring Fiscal Balance in Canada".

Improving the Canada Student Loans Program

Currently, post-secondary students from middle-income families may be eligible for full or partial Canada Student Loans, depending on their needs assessment and the number of siblings attending post-secondary education. The Government of Canada is committed to making it easier for these families to send their children to college or university. By expanding eligibility for Canada Student Loans through a reduction in the parental contribution that is expected from them, the Government will provide enhanced direct assistance where it is needed most—in the hands of students.

It is estimated that such an improvement would enable an additional 30,000 students from families with incomes in the $65,000 to $140,000 range to gain access to student assistance. It would also enable 25,000 current student borrowers to increase the amount of the loans they receive.

Design and implementation of the measure will be done in consultation with the provinces with a view to taking effect in the loan year beginning August 2007. To this end, Budget 2006 sets aside $15 million for 2007–08 and $20 million per year thereafter.

Investing in Research and Development

Scientific research and technological development are essential for higher productivity and a rising standard of living. The Government of Canada’s support through the Indirect Costs of Research program and the three federal granting councils, as well as investments in leading-edge equipment and facilities through the Canada Foundation for Innovation, contributes to the training of highly skilled graduates, as well as to new discoveries that strengthen health care and help companies seize new business opportunities. These investments are significant, with the Indirect Costs of Research program receiving $260 million per year, and core funding for the three granting councils totalling close to $1.6 billion per year. The Government has also provided $3.65 billion to date to the Canada Foundation for Innovation in support of research infrastructure.

Building on these resources, Budget 2006 provides an additional $100 million per year as follows:

Over the coming year, the Minister of Industry will be developing a science and technology strategy, in collaboration with the Minister of Finance, that will encompass the broad range of government support for research, including knowledge infrastructure. The Government will also undertake a review of the accountability and value for money of the granting councils’ activities.

Support for Opportunity in Primary Economic Sectors

Improving Farm Support Programs

Our farmers feed Canadians and the world, and in doing so provide a strong economic foundation for our rural communities. Over the past years, Canadian farmers have shown their continued resilience in facing challenges such as animal disease, bad weather and difficult market conditions, which have impaired their ability to make a decent livelihood from agriculture. In support of our farmers and farming communities, one of this government’s first actions in February 2006 was to disburse, on an accelerated basis, payments under the $755-million Grains and Oilseeds Payment Program.

This government has committed to provide an additional $500 million per year for farm support and to work with farmers and other partners towards securing a more prosperous future for this sector. This budget delivers on the commitment to new funding, but goes further and announces an additional one-time investment of $1 billion in 2006–07 to assist farmers in the transition to new programming.

The Government has committed to replace the Canadian Agricultural Income Stabilization (CAIS) program with more effective programming for farm income stabilization and disaster relief. The Government is consulting with producers and the provinces and territories to replace CAIS with new programming cost-shared on a 60:40 basis between the federal and provincial-territorial governments. In an immediate move towards more effective programming, the Government will provide one-time funding to shift the inventory valuation method under CAIS to make the program more responsive, and put in place deeper loss coverage, cost-shared with provinces and territories. In support of improved disaster coverage, the Government will also implement a Cover Crop Protection Program to help farmers deal with the damage caused by flooding of their fields.

In support of the future competitiveness and prosperity of the industry, the Government will invest in ongoing measures, including the enhancement of cash advance programming, new investments in biomass science and funding in support of a biofuels strategy, and new programming to support the agri-food industry in developing new market opportunities. In recognition of their unique challenge, the Government will also put in place measures to help low-income farm families.

In total, Budget 2006 provides an incremental $1.5 billion for the farm sector in the current fiscal year.

Assisting the Forestry Industry

Along with firms in other natural resource sectors, companies across Canada in the forestry sector recognize that they must become more efficient and productive through restructuring and new capital investments to boost productivity. The forestry sector has faced a range of challenges in recent years, from the softwood lumber dispute with the United States to the ongoing mountain pine beetle infestation in British Columbia. In this budget, the Government is meeting its commitment to help combat the pine beetle infestation, strengthen the long-term competitiveness of the industry, and support worker adjustment, with an investment of $400 million over the next two years.

The impact of the long-running softwood lumber dispute has been felt most acutely by Canada’s forestry industry, but its negative effects have begun to cast a shadow over the broader Canada–U.S. trading relationship. Ending this dispute has therefore been a key priority of Canadian industry, provinces and this federal government. Working with the United States, this government has achieved an agreement-in-principle to bring an end to this dispute, terminate the cycle of litigation, secure U.S. market access for Canadian producers, and return stability to an industry weakened by more than 20 years of trade action.

Facilitating Labour Market Adjustment

Canada benefits from a skilled and adaptable workforce that is able to respond to changing circumstances that are a natural result of a dynamic, growing economy. In support of this adjustment, the Government of Canada focuses its labour market policies and programs on providing workers with the skills they need to adapt to these changes. However, older workers sometimes face particular challenges in adapting to changing labour market circumstances. To that end, the Government will conduct, in partnership with provinces and territories, a feasibility study to evaluate current and potential measures to address the challenges faced by displaced older workers, including the need for improved training and enhanced income support, such as early retirement benefits.

Other Actions to Support Opportunity

Assisting Communities Affected by the Mackenzie Gas Project

The Mackenzie Gas Project—a proposed $7.5-billion natural gas field and pipeline development in the Northwest Territories—is currently engaged in public hearings; a regulatory decision is expected next year and natural gas could begin to flow as early as 2011. This unique basin-opening project is already impacting the economy of the Northwest Territories and, over the next 20 years, has the potential to transform the business and employment prospects of Northerners and Aboriginal communities.

A project of this scale in the Northwest Territories will create social and economic pressures on Northern communities directly impacted by the construction and operation of the pipeline. In order to mitigate the negative socio-economic costs of the project, and in light of the significant federal royalty revenues to be generated by the project, the Government of Canada will establish a $500-million fund. Over the next 10 years, this fund will be used to support initiatives from local communities to mitigate any negative socio-economic effects arising from the Mackenzie Gas Project. Funding will be linked to project milestones and is conditional on the project moving forward.

Completing the 2006 Review of Financial Institutions Statutes

The financial sector is a key industry of the Canadian economy. It employs 600,000 people in good, well-paying jobs, many in the Greater Toronto Area, and represents 6 per cent of Canada’s gross domestic product. The Government is committed to ensuring that the regulations governing this sector are current and effective.

The Government will publish a white paper on the 2006 review of financial institutions statutes this spring, with legislation to be tabled in Parliament this fall. To provide Parliament with sufficient time to consider this important legislation, the Government will extend the sunset date for the financial institutions statutes by six months, from October 24, 2006 to April 24, 2007.

Fostering Competition in the Mortgage Insurance Market

The Government currently promotes mortgage financing through a program that provides a government guarantee for companies that insure mortgage loans. This program has contributed to a competitive mortgage insurance market and more affordable housing for Canadians.

The Government is confirming arrangements that would allow new players entering the mortgage insurance market to gain access to that facility, and is also increasing the amount of business that can be covered under the Government’s authority from $100 billion to $200 billion in order to keep pace with the increase in housing prices and the growth in the mortgage market. These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership.

Reducing the Paperwork Burden on Small Business

Small business provides much of the dynamism and entrepreneurial drive in our economy. When small business people have time and resources to devote to their firms, more jobs are created and our economy prospers. It is the responsibility of government to ensure that regulations are designed efficiently, so that the goals of regulation are met at the least cost to our entrepreneurs. According to a recent study by the Canadian Federation of Independent Business, the annual cost for business to comply with regulations is at least $33 billion. Reducing this cost is a priority. Possible options are currently being studied by the joint private sector–public sector Advisory Committee on Paperwork Burden Reduction.

One promising project is the BizPaL (Business Permits and Licences) initiative, which brings together federal, provincial-territorial and municipal governments to streamline and harmonize permit and licence requirements. In jurisdictions where BizPaL is established—such as in Kamloops, British Columbia, where it was launched in April 2006—a business person wanting, for example, to start a restaurant will be able to get a customized list of all permits and licences required from all orders of government and the sequence in which they are required. Budget 2006 provides $6 million over two years to accelerate expansion of the BizPaL initiative.

Looking Forward: A More Competitive, Productive Canada

The global economy is in the midst of a profound restructuring. The rapid emergence of China and India as major economic powers, the development of global supply chains and the continued integration of global capital markets are collectively creating both tremendous opportunities and major challenges for Canadians and Canadian business.

Canada starts from an enviable position. It is one of the wealthiest countries in the world—a position built on the creativity and drive of Canadians, a rich natural resource base, the vision of Canadian researchers, and the dynamism of Canadian business. Canada’s current economic prospects are strong, with unemployment at its lowest rate in over 30 years, record personal income, and business profitability at an all-time high.

Yet as many Canadians know, these impressive figures mask deeper, difficult adjustments. For example, more than half of current Canadian jobs did not exist in 1997, demonstrating the degree of change constantly occurring in the economy. New immigrants, Aboriginal people and persons with disabilities remain under-represented in our workforce. Canada’s manufacturing sector is under pressure, losing more than 8 per cent of its jobs over the past 3 1⁄2 years. In fact, as markets globalize, all sectors—primary, manufacturing and services—will face increasing competitive pressures from both emerging market countries and fast-moving industrialized economies.

Another structural change that will affect Canada in coming decades is population aging. Canada has benefited over recent years from more and more of its population being in the workforce. This will not continue. From around 2010, the trend share of Canada’s population in the workforce will begin to decline as increasing numbers of baby boomers retire. And demographic change will not only affect our economic potential, but it will also exert pressures on public pension and health care expenditures.

Part of the response to these dynamics must be to increase Canadian productivity, which lags behind that of the United States and most other major economies. Improving productivity is not an end in itself. It will help all Canadians realize their full potential, lead to more and better jobs, and provide the resources to build a better Canada. Higher productivity will raise the standard of living of Canadians and will help governments to invest in the priorities of Canadians including health care, education, security and communities.

The Government highlighted this imperative in the Speech from the Throne:

"Over the course of its mandate… the Government will work diligently to build a record of results. It will promote a more competitive, more productive Canadian economy."

Speech from the Throne, April 4, 2006

This budget proposes a number of significant, initial measures to build a more competitive, productive Canada. In particular, the budget:

  • Improving accountability.
  • Restraining the growth of program spending and implementing changes necessary to ensure that programs are effective, efficient and focused on results, provide value for taxpayers’ money and are aligned with the Government’s priorities.
  • Planning for annual debt reduction of $3 billion.
  • A new $1,000 Canada Employment Credit.
  • A permanent reduction in the lowest tax rate to 15.5 per cent from 16 per cent.
  • Increases in the basic personal amount.
  • Lowering the small business income tax rate.
  • Increasing the amount of small business income eligible for the reduced federal tax rate.
  • Accelerating the elimination the federal capital tax.
  • Reducing the general corporate income tax rate.
  • Eliminating the corporate surtax.
  • Improving tax assistance for education.
  • Investing in post-secondary infrastructure.
  • Improving the Canada Student Loans Program.
  • Proposing a new tax credit and a new grant for apprentices.
  • Investing in research and development.

The Government will pursue a broad approach over the coming year—building on the targeted measures proposed in this budget—to develop a strong, results-focused agenda to promote a more competitive, productive Canada for the benefit of all Canadians.

Table 3.6
Opportunity—Tax Relief and Investments


  2005–06 2006–07 2007–08 Total

  (millions of dollars)
Tax Relief for all Canadians        
Reducing the GST rate to 6%1   3,520 5,170 8,690
Reducing the bottom personal income tax rate 3,225 1,670 1,370 6,265
Increasing the basic personal amount 1,740 1,080 500 3,320
Recognizing the employment expenses of working Canadians   890 1,815 2,705

Subtotal 4,965 7,160 8,855 20,980
Creating Jobs and Growing        
Canada’s Economy        
Accelerating the elimination of the federal capital tax   795 225 1,020
Reducing taxes for small businesses   10 80 90
Improving the tax treatment of capital gains for fishers   60 60 120
Repealing the excise tax on jewellery   45 35 80
Reducing excise duties for Canadianvintners and small brewers    15 20 35
Eliminating the double taxation of large corporation dividends    375  310  685
Extending the mineral exploration tax credit for flow-through share investors2   90  -25   

65

Modifying the minimum tax on financial institutions   15 30 45

Subtotal 1,405 735 2,140
Promoting Education, Training and Research        
Introducing a new apprenticeship job creation tax credit   190 200 390
Introducing a new $1,000 apprenticeship grant   25 100 125
Recognizing tradespeople’s tool expenses   75 80 155
Introducing a new textbook tax credit   135 125 260
Exempting all PSE scholarship and bursary income from tax    50  45 95 
Improving the Canada Student Loans program     15 15
Investing in research and development   100 100 200

Subtotal 575 665 1,240
Support for Opportunity in Primary        
 Economic Sectors        
Improving farm support programs 755 1,500 500 2,755
Assisting the forestry industry 200 200 400

Subtotal 755 1,700 700 3,155
Other Actions to Support Opportunity        
Assisting communities affected by the Mackenzie Gas Project3   60 60 120
BizPaL   3 3 6

Subtotal 63 63 126
Total 5,720 10,903 11,018 27,641

1 Includes adjustments to tobacco and alcohol excise levies.
2 Negative amounts increase government revenues.
3 Funding included in the initiatives announced before the Update and confirmed by the Government (Table 4.2). The net new cost of Opportunity measures is $10,843 million in 2006–07 and $10,958 million in 2007–08.


1 The elimination of the corporate surtax in 2008 for small and medium-sized businesses has already been legislated. [Return]

 

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