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Annex 4
Detailed Descriptions of Tax Measures

Overview

This annex provides detailed information on the new tax reduction plan and other tax measures proposed in this Update.

The table below lists these measures and provides estimates of their fiscal impact.

Table A4.1
Fiscal Impact of Proposed Tax Measures


  2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Total

  (millions of dollars)
Personal Income Tax Measures              
Accelerate basic personal amount increases 1,880 1,800 1,620 790 125 130 6,345
Reduce 16% rate to 15% (Jan. 1, 2005)1 3,225 2,670 2,705 2,780 2,835 2,890 17,105
Reduce 22% rate to 21% (Jan. 1, 2010) - - - - 390 1,575 1,965
Reduce 26% rate to 25% (Jan. 1, 2010) - - - - 110 450 560
Raise top bracket   to $200,000  
(Jan. 1, 2010)
- - - - 180 730 910
Introduce a Working Income Tax Benefit 
(Jan. 1, 2008)
- - 125 500 625 1,000 2,250
Increase Child Disability Benefit   10 10 10 10 10 50
Increase refundable medical expense supplement 5 10 10 10 15 15 65

Total 5,110 4,490 4,470 4,090 4,290 6,800 29,250
Corporate Tax  Measures              
Accelerate elimination
of the federal capital  tax
225 570 225 - - - 1,020
Extend carry-forward
periods
- - - - - - -
Accelerate capital cost allowance for forestry bioenergy 5 10 20 25 25 25 110

Total 230 580 245 25 25 25 1,130
Total 5,340 5,070 4,715 4,115 4,315 6,825 30,380

1 Includes impact on non-refundable tax credits.

Note: Totals may not add due to rounding.

Acceleration of Budget 2005 Increases
to the Basic Personal Amounts

The income tax system includes personal credits to allow individuals to receive a basic amount of income without paying federal income tax.

Budget 2005 proposed that, by 2009, the amount of income all Canadians can earn without paying federal income tax ($8,148 for 2005) would grow to at least $10,000 as a result of progressive increases in the basic personal amount (BPA). The proposed tax plan will accelerate the scheduled increases set out under Budget 2005, as described in the table below.

Table A4.2
Scheduled Increases to the Basic Personal Amount:
Budget 2005 and Update 2005


  2005 2006 2007 2008 20091

  (dollars)
Budget 2005 schedule
 of increases
- 100 100 400 600
Proposed new schedule
 of increases
500 200 100 100 300

1 The greater of the defined amount or an amount that brings the basic personal amount to $10,000.

The income tax system also includes a personal amount (up to $6,919 for 2005) in respect of a spouse or common-law partner or a wholly dependent relative. These amounts were also scheduled to increase in Budget 2005; the proposed tax plan will accelerate the scheduled increases set out under Budget 2005, as described in the table below.

Table A4.3
Scheduled Increases to the Spouse or Common-Law Partner Amount and the Amount for an Eligible Dependant:
Budget 2005 and Update 2005


  2005 2006 2007 2008 20091

  (dollars)
Budget 2005 schedule
 of increases
- 85 85 340 510
Proposed new schedule
 of increases
425 170 85 85 255

1 The greater of the defined amount or an amount that brings the amount to $8,500.

These proposed increases to the amounts will be in addition to increases that take effect due to indexation of the tax system. The amount upon which the spouse or common-law partner amount (including the equivalent amount that a single individual can claim for a wholly dependent relative) is based, is reduced on a dollar-for-dollar basis by the dependant's net income over a threshold. This threshold is intended to ensure that small amounts of a dependant's income will not affect the calculation of these credits. This threshold will be adjusted to reflect the increases described above.

Under proposed legislation, where there is an unanticipated surplus at the time of the closing of the books for a fiscal year, and subject to the Minister of Finance's agreement that it is fiscally prudent, an amount equal to one-third of the surplus will be allocated to ongoing relief in the form of increases to the basic personal amount (with consequential changes to the personal amount in respect of a spouse or common-law partner or a wholly dependent relative).

Reducing Personal Income Taxes Through
Tax Rate and Threshold Changes

The new tax plan proposes that federal personal income tax rates be reduced as follows:

  • The lowest 16-per-cent rate be reduced to 15 per cent, effective January 1, 2005.
  • The 22-per-cent rate be reduced to 21 per cent, effective January 1, 2010.
  • The 26-per-cent rate be reduced to 25 per cent, effective January 1, 2010.
  • The taxable income threshold at which the top 29-per-cent rate begins to apply be increased to $200,000, effective January 1, 2010.

All bracket thresholds, including the new threshold for the top tax rate, would rise automatically over time as a result of indexation.

In the Canadian tax system, the rate that applies generally to non-refundable credits and the alternative minimum tax (AMT) is the lowest tax rate. With the reduction in the lowest tax rate to 15 per cent, the rate applied to non-refundable credits and the AMT will consequently decline from 16 per cent to 15 per cent.

Impacts of Proposed Personal Income Tax Relief Measures on Typical Taxpayers: 2006 and 2010

Table A4.4
Single Individual-2006


Budget 2005  Update 2005
 

   
Total Income Federal Net Tax Pre-2005 Budget BPA Increase BPA Acceleration 16% Rate to 15%1 Energy Cost Benefit Tax Relief2 % Change in Tax3

(dollars) (%)
10,000 -93 -16 -97 -5 0 -118 -
20,000 1,320 -16 -97 -98 0 -211 -16
30,000 2,809 -16 -97 -191 0 -304 -11
40,000 4,888 -16 -97 -246 0 -359 -7
60,000 9,274 -16 -97 -246 0 -359 -4
75,000 12,676 -16 -97 -246 0 -359 -3
100,000 19,176 -16 -97 -246 0 -359 -2
150,000 33,141 -16 -97 -246 0 -359 -1

1 Includes impact on non-refundable tax credits.

2 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

3 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.5
Single Parent With One Child-2006


Budget 2005  Update 2005
 

   
Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 BPA Acceleration1 16% Rate to 15%2 Energy Cost Benefit Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -4,097 0 0 0 -250 -250 -
20,000 -3,836 -9 0 0 -250 -259 -
30,000 -2,111 -30 -180 -64 -250 -524 -
40,000 246 -30 -180 -140 -250 -600 -
60,000 5,655 -30 -180 -169 0 -379 -7
75,000 9,255 -30 -180 -169 0 -379 -4
100,000 16,076 -30 -180 -169 0 -379 -2
150,000 29,984 -30 -180 -169 0 -379 -1

1 Includes increases to personal credits in respect of a wholly dependent relative.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.6
One-Earner Family With Two Children-2006


Budget 2005  Update 2005
 

   
Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 BPA Acceleration1 16% Rate to 15%2 Energy Cost Benefit Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -7,243 0 0 0 -250 -250 -
20,000 -7,243 -30 -180 -21 -250 -481 -
30,000 -3,070 -30 -180 -115 -250 -575 -
40,000 828 -30 -180 -169 0 -379 -46
60,000 6,270 -30 -180 -169 0 -379 -6
75,000 10,272 -30 -180 -169 0 -379 -4
100,000 17,772 -30 -180 -169 0 -379 -2
150,000 32,014 -30 -180 -169 0 -379 -1

1 Includes increases to personal credits in respect of a spouse or common-law partner.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.7
Two-Earner Family With Two Children-2006


Budget 2005  Update 2005
 

   
Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 BPA Acceleration1 16% Rate to 15%2 Energy Cost Benefit Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -7,243 0 0 0 -250 -250 -
20,000 -7,243 0 0 0 -250 -250 -
30,000 -5,840 -31 -188 -37 -250 -506 -
40,000 -3,020 -31 -188 -107 -250 -576 -
60,000 2,514 -32 -195 -272 0 -499 -20
75,000 5,919 -32 -195 -327 0 -554 -9
100,000 11,711 -32 -195 -420 0 -647 -6
150,000 23,430 -32 -195 -492 0 -718 -3

1 Includes increases to personal credits in respect of a spouse or common-law partner.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.8
Single Individual-2010


    Budget 2005 Update 2005 Total



Total Income Federal Net Tax Pre-2005 Budget BPA Increase 16% Rate to 15%1 22% Rate to 21% 26% Rate to 25% Increase Top Threshold Tax Relief2 % Change in Tax3

(dollars) (%)
10,000 -207 -82 0 0 0 0 -82 -
20,000 1,183 -205 -85 0 0 0 -290 -25
30,000 2,672 -205 -179 0 0 0 -384 -14
40,000 4,551 -205 -262 -8 0 0 -475 -10
60,000 8,970 -205 -262 -208 0 0 -675 -8
75,000 12,270 -205 -262 -358 0 0 -825 -7
100,000 18,635 -205 -262 -392 -216 0 -1,075 -6
150,000 32,313 -205 -262 -392 -490 -904 -2,253 -7

1 Includes impact on non-refundable tax credits.

2 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

3 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.9
Single Parent With One Child-2010


    Budget 2005 Update 2005 Total



Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 16% Rate to 15%2 22% Rate to 21% 26% Rate to 25% Increase Top Threshold Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -4,434 0 0 0 0 0 0 -
20,000 -4,161 0 0 0 0 0 0 -
30,000 -2,835 -380 -40 0 0 0 -420 -
40,000 -601 -380 -117 0 0 0 -497 -
60,000 5,093 -380 -174 -138 0 0 -692 -14
75,000 8,693 -380 -174 -288 0 0 -842 -10
100,000 15,278 -380 -174 -392 -146 0 -1,092 -7
150,000 29,064 -380 -174 -392 -490 -624 -2,060 -7

1 Includes increases to personal credits in respect of a wholly dependent relative.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero

Table A4.10
One-Earner Family With Two Children-2010


    Budget 2005 Update 2005 Total



Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 16% Rate to 15%2 22% Rate to 21% 26% Rate to 25% Increase Top Threshold Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -7,839 0 0 0 0 0 0 -
20,000 -7,486 -353 0 0 0 0 -353 -
30,000 -4,259 -380 -91 0 0 0 -471 -
40,000 -86 -380 -174 -8 0 0 -562 -
60,000 5,521 -380 -174 -208 0 0 -762 -14
75,000 9,421 -380 -174 -358 0 0 -912 -10
100,000 16,787 -380 -174 -392 -216 0 -1,162 -7
150,000 31,094 -380 -174 -392 -490 -904 -2,340 -8

1 Includes increases to personal credits in respect of a spouse or common-law partner.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Table A4.11
Two-Earner Family With Two Children-2010


    Budget 2005 Update 2005 Total



Total Income Federal Net Tax Pre-2005 Budget BPA Increase1 16% Rate to 15%2 22% Rate to 21% 26% Rate to 25% Increase Top Threshold Tax Relief3 % Change in Tax4

(dollars) (%)
10,000 -7,839 0 0 0 0 0 0 -
20,000 -7,839 0 0 0 0 0 0 -
30,000 -6,961 -397 -13 0 0 0 -410 -
40,000 -4,197 -397 -83 0 0 0 -480 -
60,000 1,966 -410 -247 0 0 0 -657 -33
75,000 5,174 -410 -330 -58 0 0 -798 -15
100,000 10,967 -410 -423 -208 0 0 -1,041 -9
150,000 22,585 -410 -523 -490 -116 0 -1,539 -7

1 Includes increases to personal credits in respect of a spouse or common-law partner.

2 Includes impact on non-refundable tax credits.

3 Negative values indicate a reduction in net personal income tax paid to the federal government or an increase in federal refundable credits (i.e. the Canada Child Tax Benefit and the Goods and Services Tax Credit).

4 Where individuals and families receive more in federal refundable credits than they pay in federal personal income tax, they pay no net federal personal income tax. A dash indicates that percentage tax relief cannot be calculated because the initial taxes paid are less than or equal to zero.

Tax Fairness for Persons With Disabilities

Increasing the Child Disability Benefit

The Child Disability Benefit (CDB) is a supplement of the Canada Child Tax Benefit payable in respect of children, in low- and modest-income families, who meet the eligibility criteria for the disability tax credit (DTC).

The 2005 budget increased the maximum annual CDB to $2,000 from $1,681 per child beginning in July 2005.

The new tax plan proposes to further increase the maximum annual CDB to $2,300 starting in July 2006. The benefit will continue to be indexed thereafter. The full $2,300 CDB will be provided for each eligible child to families with net income below the amount at which the National Child Benefit (NCB) supplement is fully phased out ($36,378 in July 2006 for families having three or fewer children). Beyond that income level, the CDB will continue to be reduced based on family income at the same rates as the NCB supplement (see table below).

Table A4.12
Proposed Parameters of the Child Disability Benefit-July 2006


Number of
DTC-Eligible
Children
Net Family Income at Which Phase-Out Begins Net Family Income at Which
 Phase-Out Ends
Phase-Out Rate

  (dollars) (dollars) (per cent)
1 36,378 55,230 12.2
2 36,378 56,378 23.0
3 36,378 57,099 33.3

Increasing the Refundable Medical Expense Supplement

For Canadians with disabilities and others with above-average medical or disability-related expenses, the potential loss of benefits under provincial social assistance programs can be an important barrier to participation in the labour force.

The refundable medical expense supplement (RMES) helps offset the loss of these benefits by providing assistance for above-average medical and disability-related expenses to low-income working Canadians. The supplement 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 of $750 for 2005 (increased from $571 in Budget 2005). To target assistance to those with low incomes, the supplement is reduced by 5 per cent of net family income above an income threshold ($21,663 for 2005).

The tax plan proposes to further increase the maximum amount of the RMES to $1,000 for the 2006 taxation year. The maximum amount will continue to be indexed.

The tax plan also proposes to set the income threshold at which the RMES starts being reduced at its current level of $21,663. This threshold will be indexed for inflation in subsequent years. This change will ensure that the supplement continues to be targeted to low- and modest-income Canadians.

Encouraging Investment and Jobs:
Maintaining Canada's Corporate Tax Advantage

The competition for new business investments and the jobs they produce is increasingly intense, and decision makers pay particular attention to the relative tax burden in different jurisdictions.

Reducing Corporate Income Tax Rates

Budget 2005 proposed a 2-percentage-point reduction in the general corporate income tax rate by 2010 and the elimination of the corporate surtax in 2008. The elimination of the corporate surtax in 2008 has already been legislated for small and medium-sized corporations. This Update confirms the Government's commitment to the remainder of these tax reductions in order to maintain Canada's tax rate advantage in light of recent U.S. tax reductions.

Accelerating the Elimination of the Federal Capital Tax

The federal capital tax was introduced in 1989 as Part I.3 of the Income Tax Act. The rate is currently 0.175 per cent on taxable capital in excess of $50 million. A corporation's taxable capital is generally described as the total of its shareholders' 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.

Budget 2003 announced that the federal capital tax would be eliminated for smaller corporations by 2004 and would be completely eliminated by 2008. In order to further promote investment and strengthen Canada's tax advantage, the Update 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 announced in 2003 and the proposed changes to the federal capital tax rates.

Table A4.13
Proposed Acceleration of Federal Capital Tax Elimination


  2003 2004 2005 2006 2007

  Capital Tax Rates
(per cent)
Current phase-out 0.225 0.200 0.175 0.125 0.0625
Proposed phase-out 0.225 0.200 0.175 0.00 0.00

Under the current federal capital tax, the corporate surtax in excess of a corporation's federal capital tax liability for a taxation year can generally be applied against the capital tax liability for the three preceding and 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 $50-million capital deduction applicable immediately prior to the phasing out of the tax.

Extending Carry-Forward Periods for Business Losses
and Investment Tax Credits

It can sometimes take many years before businesses begin to earn profits. Since economic cycles impact different industries differently, a fair and efficient tax system should recognize both profits and losses when determining tax liability. The tax systems of Canada and most other countries allow losses to be carried over to other years. This reduces the impact of fluctuations in income from year to year on tax liability.

Non-capital losses can currently be carried back up to 3 years and can also be carried forward. The 2004 budget extended the period over which non-capital losses can be carried forward from 7 to 10 years. To provide additional support to Canadian business, particularly to the small and innovative sectors, the tax plan 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, limiting the incentive effect provided by an ITC. To increase the ability of these companies to use ITCs, the tax plan also proposes to extend the ITC carry-forward period to 20 years.

This measure will apply to general non-capital losses, farm losses, restricted farm losses, losses applied under Part IV of the Income Tax Act, and taxable 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.

Accelerating Capital Cost Allowance-Forestry Bioenergy

In general, capital cost allowance (CCA) rates are set to reflect the useful life of assets, ensuring that tax recognition of capital costs is spread over the expected life of an asset. As an exception, accelerated CCA is used to encourage firms that produce energy to invest in equipment that does so by using renewable energy sources and waste fuels, or by using fossil fuel efficiently. Class 43.1 provides a rate of 30 per cent for such assets.

Budget 2005 announced a further acceleration of the CCA rate to 50 per cent for the full range of renewable energy generation equipment in Class 43.1 and for certain high-efficiency cogeneration equipment. This increased rate applies to equipment acquired on or after February 23, 2005, and before 2012. Budget 2005 also announced that, going forward, new accelerated CCA would only be considered for investments in green technology.

Class 43.1 and the new 50-per-cent class include certain cogeneration equipment that generates energy efficiently by producing both electricity and heat simultaneously. Such equipment must meet defined thresholds in terms of efficiency in the use of fossil fuel, which can be achieved through the use of specified waste fuels such as wood waste and certain forms of biogas.

The tax plan proposes to extend eligibility for Class 43.1 and the new 50-per-cent class to cogeneration systems that use a type of biomass used in the pulp and paper industry referred to as "black liquor." Black liquor, a by-product of the chemical process of turning wood into pulp, consists of wood residue and pulping agents. It can be burned to fire a boiler, producing steam that can be used both directly in the pulp and papermaking process and to generate electricity, thus reducing the plant's need for external energy sources. This process also allows the pulping agents to be recovered and reused.

The availability of accelerated CCA will support additional investment in technology that contributes to a reduction in greenhouse gases and air pollutants and to a more diversified energy supply. The focus on cogeneration will ensure that the incentive is targeted to the most efficient technology in this area. Increasing energy self-sufficiency in the pulp and paper sector will also help improve the international competitiveness of Canadian mills, strengthening the employment base in largely rural communities.

The inclusion in Class 43.1 will apply to assets in eligible cogeneration systems using black liquor acquired on or after November 14, 2005, that have not been used or acquired for use before that date. Such assets acquired before 2012 will be eligible for the new 50-per-cent CCA rate announced in Budget 2005. In addition, qualifying start-up expenses of projects using these technologies will be eligible for treatment as Canadian Renewable and Conservation Expenses.

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