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Goldfarb, Shulman, Patel & Co. LLP

 

 

 

                                                     chartered accountants

                              A member of: urbach hacker young international

 

                                                           Telephone (416) 226-6800

 

 

 

 

                     2000 FEDERAL ECONOMIC STATEMENT AND BUDGET UPDATE

 

 

MINI-BUDGET HIGHLIGHTS

 

Finance Minister Paul Martin delivered his Economic Statement and Budget Update (otherwise known as the “mini-budget”) on October 18, 2000.  Due to strong economic growth, Canada’s current account is in the largest surplus position in its history and the unemployment rate is approaching its lowest level in 24 years.  Not surprisingly, the mini-budget highlights these encouraging facts and builds on the February 2000 Budget initiatives.

 

The mini-budget forecasts large planning budget surpluses for each of the next six fiscal years.  The forecasted planning surplus for the 2000-2001 fiscal year is $12.2 billion, after adjusting for the Contingency Reserve and prudence, and after deducting the recently announced spending initiatives related to health care and early childhood development.  The mini-budget sets out the Government’s four-part long-term plan to address the appropriate uses for the forecasted planning surpluses.  Firstly, the plan includes investing in social programs such as delivering the promised $23.4 billion in federal health care funding as announced in September.  Secondly, the plan focuses on strengthening education, research and innovation by increasing funding to support universities, research facilities and early childhood development, and by doubling the education tax credit available to students, effective January 1, 2001.  Thirdly, the plan provides for the continued pay-down of the accumulated deficit, including a pay-down of a minimum of $10 billion in debt in the 2000-2001 fiscal year.  And, finally, the plan includes accelerating and enhancing the tax cuts set out in the Five-Year Tax Reduction Plan which was announced in the February 2000 Budget.

 

 

The highlights of the income tax measures are summarized as follows:

Budget changes effective immediately:

·       The capital gains inclusion rate will be cut from two-thirds to one-half.

·       The mini-budget proposes to allow individuals to defer limited amounts of capital gains on the disposition of eligible small business investments to the extent the proceeds are reinvested in another eligible small business.  The maximum investment that will be eligible for the rollover will now be increased to $2,000,000 (previously $500,000) of capital.  The size of business eligible for the rollover will be increased to $50 million from $10 million.

Budget changes effective January 1, 2001:

·       The 17 percent federal personal income tax rate will be reduced to 16 percent.  Consequently, the rate that applies to non-refundable tax credits as well as to the alternative minimum tax (AMT) will also be reduced to 16%.

·       The 24 percent federal personal tax rate will be reduced to 22 percent.

·       The 29 percent federal personal tax rate will be reduced to 26 percent on income between approximately $60,000 and $100,000.

·       The top federal personal tax rate of 29 percent will now apply only to income in excess of $100,000.

·       The federal personal surtax will be eliminated.

·       The disability tax credit amount will be raised to $6,000 from $4,293.

·       Credit amounts for caregivers of dependent relatives who are elderly, infirm or disabled will be raised to $3,500 from $2,386.

·       Self-employed individuals will be allowed to deduct the portion of Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) contributions that represents the employer’s share.

·       The general federal corporate income tax rate remains unchanged at 27% effective January 1, 2001.  However, the previously announced rate reductions in respect of later years will be accelerated.  Specifically, the rate will drop to 25% effective January 1, 2002 and a further 2% in each of the following two years to 21%.

 

The following sections summarize the major income tax initiatives.

 

PERSONAL TAX MEASURES

 

Reduction in Personal Income Tax Rates

The mini-budget reduces the lowest federal tax rate to 16% from 17% on taxable income up to $30,754.  The next federal tax rate will decline 2% to 22% on taxable income between $30,755 and $61,509.  The 29% federal tax rate will be reduced to 26% on taxable income between $61,510 and $100,000.  The top federal tax rate of 29% will remain intact for taxable income in excess of $100,000. The thresholds for these tax rates will be subject to full indexation.

 

Maximum Combined Federal and Ontario Personal Tax Rates

 

The maximum combined federal and Ontario personal tax rates(1) for 2000 and 2001 will be reduced as follows:

 

 

 

 

2000

 

2001

Interest/Salary

47.86%

46.41%

Capital Gains  –   pre Feb 28, 2000

35.90%

 

                       –   post Feb 27, 2000

                            and pre Oct 18, 2000

 

31.91%

 

                       –   post Oct 17, 2000

 

26.83%

 

25.29%

 

Canadian dividends

32.31%

31.34%

 

(1)     Assumes the February 2000 federal budget, the May 2000 Ontario budget and the October 2000 federal mini-budget tax rates are enacted as announced.  The tax rates shown include all applicable taxes and surtaxes.

 

Combined Federal and Ontario Personal Tax Brackets - 2001

 

The following tax rates(1) will apply to Ontario resident individuals for the 2001 taxation year:

 

 

 

 

 

 

Taxable Income Bracket(2)

Tax Rate(3)

 

 

 

 

 

 

 

$0

to

$7,411

0.00%

 

$7,412

to

$30,754

22.20%

 

$30,755

to

$52,601

31.24%

 

$52,602

to

$61,509

33.09%

 

$61,510

to

$62,262

39.39%

 

$62,263

to

$100,000

43.41%

 
 Over $100,000

46.41%

 

 

 

 

 

 

 

 

(1)     Assumes that the February 2000 federal budget, the May 2000 Ontario budget and the October 2000 federal mini-budget tax rates are enacted as announced.

(2)     The tax brackets shown above reflect all applicable taxes and surtaxes, and assume that only the federal and Ontario basic personal tax credits have been claimed.  The tax brackets also assume that the yet-to-be- determined index factor for 2001 will be 2.5%.

(3)     The tax rates shown reflect the combined federal and Ontario tax rate applicable to the corresponding band of taxable income specified.

Capital Gain Rollover for Investment in Small Business

The February 2000 budget proposed a deferral of tax on a rollover of capital gains, resulting from the disposition of a small business investment, to the extent that the proceeds were invested in another eligible small business.  The mini-budget proposes two changes to enhance this option.  First, the $500,000 investment limit will be increased to $2,000,000.  Second, the size of the eligible small business will be increased from $10,000,000 to include corporations with up to $50,000,000 in assets immediately after the investment.  In addition, there will no longer be a restriction with respect to the initial carrying value of the assets.  For more details regarding qualifying eligible small business investment, please refer to our February 2000 budget commentary.

Canada Pension Plan and Quebec Pension Plan Deduction for Self-Employed Individuals

Self-employed individuals will now be able to deduct 100% of the employer’s portion of the contributions to the Canada Pension Plan and Quebec Pension Plan.  The tax credit for that portion of the contribution that represents the employee’s share remains unchanged.

Education Amount

Under the mini-budget proposals, the education amount will increase to $400 per month from the current $200 effective January 1st, 2001.  As well, the education amount for part-time students will increase from $60 to $120 per month.

Enhancing the Disability Tax Credit (DTC)

The DTC provides tax assistance to people with prolonged disabilities.  The mini-budget proposes to increase the tax credit amount from $4,293 to $6,000 in 2001.  As a result of the increase of the DTC amount, the income threshold will increase to about $19,705 from $17,663 after adjustment for indexation.

Enhanced Tax Assistance for Caregivers

The mini-budget proposes to increase the caregiver tax credit amount from $2,386 to $3,500, for 2001.  In addition, the infirm dependent tax credit amount and the supplement to the DTC for children with severe disabilities will also increase to $3,500 in 2001. These credits will increase with indexation.

National Child Benefit (NCB)

The mini-budget proposes to increase the NCB by $100 per child effective July 1st, 2001 to $300 per child.

 

Corporate Tax Measures

Acceleration of Corporate Tax Rate Reduction

The initial reduction of the general federal corporate income tax rate to 27% effective January 1st, 2001 and prorated for taxation years that include January 1st, 2001, remains unchanged.  The mini-budget proposes to reduce this rate by 2% per year commencing January 1st, 2002 and continuing until January 1st, 2004, at which time the federal corporate income tax rate will have been reduced to 21%. The combined general federal and Ontario corporate tax rate for the 2001 taxation year remains unchanged at 42.12%.

 

Other Specific Tax Measures

Capital Gains Inclusion Rate

The mini-budget proposes to reduce the capital gains inclusion rate from 66 2/3% to 50% for capital gains and losses realized after October 17, 2000. This change will apply to all taxpayers. For federal tax purposes, taxpayers will be required to report three separate sets of capital gains and losses for 2000:  those realized before February 28 (at a 75% inclusion rate), those realized after February 27 and before October 18 (at 66 2/3%) and those realized after October 17 (at 50%).  A complicated set of rules will apply in the determination of the overall net taxable capital gain or allowable capital loss where taxpayers have realized gains and losses in different periods.

Changes that are consequential to the reduction in the capital gains inclusion rate include the reduction in the capital gains inclusion rate in relation to charitable gifts of certain publicly traded securities and ecologically sensitive land which is capital property (i.e., one-half the otherwise applicable inclusion rate), and an increase in the qualifying stock option deduction to 50% for options exercised after October 17, 2000.

Eligible Capital Property (ECP)

Gains from the sale of ECP, other than in respect of recaptured deductions, will also reduce to 50% for taxation years ending after October 17, 2000.  Corresponding changes will be made to the calculation of the capital dividend account.  Seventy-five percent of the cost of ECP acquired remains subject to amortization at 7% on a declining balance basis.

Corporate Reorganizations - Foreign Spin-offs

The mini-budget proposes to allow a Canadian resident shareholder to elect to defer income tax in certain situations where a foreign corporation makes a qualified distribution of spin-off shares.  The proposal will apply only to common shares of a widely held and actively traded U.S. public corporation and to yet-to-be-prescribed spin-offs occurring in other countries with which Canada has an income treaty. The transaction must also be eligible for tax deferral in the local jurisdiction.  It is proposed that this change will be given retroactive effect to distributions which occurred after 1997.

 

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To discuss the impact of the mini-budget on your business, please contact your partner at Goldfarb, Shulman, Patel & Co. LLP.