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April 16, 2024

Tax Tips

Halloween Tricks 'n Treats - The Federal Economic Statement
Subject: Federal Statement
Number: 07-11
Date: 11/2/2007
Proper planning can result in benefits to both sides

On October 30, 2007, Federal Finance Minister Jim Flaherty released an Economic Statement along with a Notice of Ways and Means Motion that contained the proposed legislative changes involving taxation matters. Almost a year ago to the day, on October 31, 2006, Mr. Flaherty introduced changes to the taxation of income trusts (tricks). The October 30, 2007 Economic Statement contained many treats with respect to income tax rate reductions. Here are some of the highlights:

  1. Increase of Basic Personal Amount

    The basic personal amount for 2007 for individuals will increase to $9,600 for 2007 (from $8,839 in 2006) and 2008 and $10,100 for the 2009 taxation year. Other personal tax credits such as the spousal amount and the eligible dependent amount will also be increased to the previously mentioned amounts.

  2. Reduction in Personal Income Tax Rates

    For 2007 forward, the lowest federal income tax bracket (for 2007, income of $37,178 or less) will be reduced from 15.5% to 15.0%.

  3. Corporate Rate Reductions

    Previous announcements by the Department of Finance reduced the highest corporate income tax rate on taxable income earned by corporations that it is not subject to the small business deduction or is not investment income. However, the Economic Statement proposes to further aggressively reduce such rates as follows:

    General Federal Corporate Income Tax Rate Reductions
    (per cent)
    Existing Rates22.1220.520.019.0.518.5
    Proposed Rates22.1219.519.018.016.515.0

  4. Tax Reduction for Small Businesses

    While the Economic Statement did not propose to increase the business limit from the current $400,000, it did propose to accelerate the previously announced tax rate reduction as follows:

    Tax Rate on Qualifying Small Business Income
    (per cent)
    Existing Rates13.1211.511.0
    Proposed Rates13.1211.011.0

    The Small Business Deduction will continue to be phased out on a straight-line basis for Canadian Controlled Private Corporations having between $10-$15 million of taxable capital employed in Canada.

  5. Reduction of GST

    The Economic Statement proposes to reduce the GST rate from the current 6% to 5% on January 1, 2008. The Notice of Ways and Means Motion that was released in conjunction with the Economic Statement contains numerous proposed rules to deal with the transition from the rate of 6% to 5%.

  6. While no specific tax changes were included in the Notice of Ways and Means Motion with respect to eligible dividends, the Department of Finance did announce that it was considering adjusting the dividend tax credit applicable to eligible dividends to ensure the appropriate tax treatment of dividend income. Accordingly, tax practitioners will be keeping a close eye for further announcements with respect to this issue.

  7. Possible Other Adjustments to Tax Credits

    The Department of Finance announced that they would consider adjusting other rules in the Income Tax Act that assume a specific corporate income tax rate. Tax practitioners can therefore speculate that adjustments to the refundable dividend tax on hand mechanism and foreign tax credits may also be adjusted into the future.

  8. Combined Federal-Provincial Corporate Tax Rates

    The Economic Statement contained the following message:

    "the current variance in provincial tax rates can divert investment from its most productive uses and also creates incentives for inter-provincial tax planning — issues that concern all governments.

    For these reasons, the government is seeking a collaboration of provinces and territories in reaching a 25% combined Federal-Provincial-Territorial statutory tax rate."

    This statement is interesting given the wide variance in provincial tax rates that exist amongst the various provinces and territories in Canada. Significant inter-provincial tax rate shopping by taxpayers has been done both at a corporate and personal level in order to achieve overall reduced levels of taxation. Such a statement and effort by the federal government seems to suggest that it is taking inter-provincial tax rate shopping seriously and intends to reduce such activity. Tax practitioners will pay close attention to such matters into the future.

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    The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.