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August 2003

Federal Corporate Tax Rate Reductions

The Government of Canada is creating a tax advantage for investment and entrepreneurship in Canada. The average Canadian corporate tax rate, including capital taxes, is now lower than that of the U.S. By 2008 it will be more than 6 percentage points below the average U.S. rate.

Background

In Budget 2003 the Government of Canada announced measures to strengthen the Canadian tax advantage. These measures build on the Five-Year Tax Reduction Plan introduced in 2000—the largest tax cut in the country’s history. The plan reduced personal income tax rates at all income levels and introduced a number of tax measures to promote investment and entrepreneurship in Canada. (See end of document for a list of tax reduction measures.)

Tax Rate Reductions for Larger Corporations

In 2000 the Government of Canada announced that the general corporate tax rate would be reduced from 28 to 21 per cent by 2004. As of January 2003 the rate has been reduced to 23 per cent. As the table below illustrates, the rate reduction is being phased in over four years.

	2000	2001	2002	2003	2004
	(%)
General federal corporate tax rate	28	27	25	23	21

Elimination of the Federal Capital Tax

In the 2003 budget the Government announced the elimination of the federal capital tax over five years. Medium-sized businesses with less than $50 million in taxable capital will benefit from full capital tax elimination as of 2004. The table below summarizes the proposed changes to the federal capital tax rate and threshold.

	2003	2004	2005	2006	2007
Federal capital tax rate (%)	0.225	0.200	0.175	0.125	0.0625
Capital deduction threshold ($ millions)	10	50	50	50	50

Improving the Income Taxation of the Resource Sector

In the 2003 budget the Government announced that it would improve the taxation of resource income by phasing in over five years:

• a reduction of the federal statutory corporate tax rate on income from resource activities from 28 to 21 per cent;
• a deduction for income tax purposes of actual provincial and other Crown royalties and mining taxes paid, and elimination of the existing 25-per-cent resource allowance; and
• a new tax credit at a rate of 10 per cent for corporations incurring qualifying mineral exploration expenditures in Canada.

The table below shows how the new structure will be phased in:

	2003	2004	2005	2006	2007
	(%)
Corporate income tax rate for the resource sector	27	26	25	23	21
Deductible percentage of existing 25% resource allowance	90	75	65	35	0
Deductible percentage of Crown royalties and mining taxes	10	25	35	65	100
New tax credit for mineral exploration in Canada	5	7	10	10	10

For Further Information

For general information about federal tax cuts, visit the Department of Finance Canada Web site at www.fin.gc.ca. Information is also available from the Canada Customs and Revenue Agency (CCRA): visit the CCRA’s Tax Web page at http://www.ccra-adrc.gc.ca/tax/menu-e.html; or phone your local tax services office (www.ccra.gc.ca/tso) or the CCRA’s toll-free general enquiries line at 1 800 959-8281.

This is part of a series of bulletins designed to give Canadians useful information about individual elements of the federal government’s Five-Year Tax Reduction Plan introduced in 2000. Bulletins on tax measures and other publications may be viewed on the Web at www.fin.gc.ca, and copies may be obtained by calling the Department of Finance Canada Distribution Centre at (613) 995-2855.

About the Department of Finance Canada’s Tax Bulletin Series

Below is a list of the tax measures included in the plan:

• Full indexation of the personal income tax system was restored as of January 1, 2000, to protect taxpayers from inflation.
• Personal income tax rates for all taxpayers were lowered effective January 1, 2001.
• The Canada Child Tax Benefit (CCTB) was substantially increased to help low- and middle-income families with children.
• Additional tax assistance was provided to those who need it most, including persons with disabilities and caregivers.
• Tax support for students in post-secondary education was substantially increased.
• The 28-per-cent general corporate income tax rate has been reduced to 23 per cent in 2003, and will fall to 21 per cent in 2004.
• The capital gains inclusion rate was reduced to one-half as of October 18, 2000.
• Employees may defer the income inclusion from exercising certain employee stock options in publicly listed corporations until the shares are sold.
• Individuals may defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares.
• As of January 2001, self-employed individuals may deduct the portion of Canada Pension Plan and Quebec Pension Plan contributions that represents the employer’s share.
• Under the plan, further measures have been legislated that will provide tax relief in 2004. These measures will:

• increase the basic personal amount (the amount an individual can earn tax-free) to at least $8,000 (from $7,756 in 2003);
• increase the spouse or common-law partner amount to at least $6,800 (from $6,586 in 2003);
• raise the second bracket threshold to at least $35,000 (from $32,183 in 2003);
• raise the third bracket threshold to at least $70,000 (from $64,368 in 2003); and
• raise the fourth bracket threshold to at least $113,804 (from $104,648 in 2003).

In the 2003 budget the Government announced additional measures that build on the plan and the Canadian tax advantage:

• The National Child Benefit supplement of the CCTB, which provides assistance to low-income families with children, is being increased.
• A new Child Disability Benefit for low- and modest-income families with a child with a disability is being introduced.
• Tax assistance for persons with disabilities will be enhanced.
• The limits on tax-assisted savings in registered pension plans and registered retirement savings plans are being increased.
• The federal capital tax will be eliminated over five years, and will be completely eliminated for medium-sized corporations in 2004.
• The taxation of resource income will be improved by reducing the corporate tax rate of the sector to 21 per cent over the next five years while making changes to the tax structure of this key sector.
• The amount of annual income eligible for the 12-per-cent small business tax rate is being increased from $200,000 to $300,000 over four years.
• The small business capital gains rollover measure has been enhanced by removing the $2-million limits on the amount of the original investment and reinvestment that may be eligible for the deferral, and extending the length of time available to make a qualifying investment.