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March 29, 2023

Tax Perspectives

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Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.

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Spring 2006
Volume 6, Number 1

The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.

Election Politics And Tax

By Michael Cadesky, FCA, TEP
Cadesky and Associates LLP (Toronto)

What a difference an election makes. Tax changes which may normally take a generation or two to come about are packaged as candy and tossed out to an eager and receptive crowd of voters. They take all they can get. Why not? Here are some samples of the flavours of the giveaways announced by either the Liberals or the Conservatives.

First, the most prized of all, and the subject of a separate article in this edition of Tax Perspectives, is the proposed reduction in the personal tax rate on dividends. Rather than levy a special tax on income trusts, former Finance Minister Goodale announced, just before Parliament was dissolved, that the tax rate on dividends would be reduced. This will put public Canadian corporations on an equal tax footing with income trusts. Along with this, however, came the need to make similar concessions to Canadian private businesses, to level the playing field. Thus for 2006, if the proposal becomes law, the top personal tax rate on dividends will fall by up to 10% depending on the province. As a separate article points out, this will have far-reaching implications for investment strategies, estate planning, remuneration of the owner-manager, and tax planning for the sale of a business. With the spectre of double taxation removed from the Canadian corporate tax system, old rules of thumb will have to be re-examined.

Private Canadian business is to receive the sweetener of an increase in the income eligible for the small business rate from $300,000 to $400,000 per year. This is welcome because, among other things, the federal rate will match more closely the provincial rate for small business.

To capture the interest (and votes) of pensioners, the amount of pension income exempted annually will double from $1,000 to $2,000.

Next comes the proposal to reduce personal tax rates for 2005 by 1% at the lowest tax bracket and increase the personal exemption. This is only a modest tax reduction. The full benefit of this proposal will not be realized until 2010, when other tax brackets drop by 1% and the income level for the top tax bracket is raised to $200,000. The Conservatives have said that they will reverse this. Who knows?

Lastly, there is the possibility of a reduction in the GST rate from 7% to 6% initially, followed by a further reduction to 5% at some point in the future.

While we may not see all of these changes become effective, we may well see the majority of them implemented. Canadians will recall, however, that many tax changes proposed in the past have never become law. For example, the Liberals promised to scrap the GST enacted by the Conservatives, but when they swept into power, there was a quick change of heart. Some will also recall the Conservative proposal to make mortgage interest on personal residences tax deductible, reversed by the Liberals.

As to what will ultimately happen, time will tell. However, in tax terms, we live in exciting times.