We Tip our Hat to Flaherty – Personal Tax Matters
Arthur Drache, May 02, 2006
With all the speculation in the lead up to the May 2 Budget, we have to say that we remained highly sceptical that the Conservatives would deliver much more than the minimum when it came to matching election promises with budget-making reality. We never doubted that the GST cut would appear and we never doubted that the $100 a month child care payment would be a key part.
But we had serious doubts as to whether many of the more minor promises would be enacted at once, both because they were in a way peripheral and because we had serious doubts as to how they would be drafted. We were wrong in most cases, though what comes out when we see actual legislation may still create administrative problems.
A word, first on timing. The GST reduction will start as of July 1, 2006 which helps with concerns we had about the problems of implementation by businesses. The hiatus gives a couple of months to adjust and at the same time “saves” the government a bundle compared to a (say) May 2 implementation date. Those working in the business had best take a close look at the transitional rules, particularly with regard to dates of acquisition of big ticket items such as houses.
We were delighted but not surprised to see the abolition of the capital gains for all transfers of publicly traded assets to public charities. We didn’t doubt that this would happen and our only cavil is that it was not (for simplicity’s sake) made retroactive to gifts made after December 31, 2005.
We were also impressed with the fancy footwork the Finance Minister showed in dealing with the 2005 Liberal tax cuts and the personal credits. He raised the personal tax rates for 2006 slightly and made another increase for 2007
. The lowest personal income tax rate will be 15.25% for 2006 and 15.5% for 2007 and subsequent years. The question is whether anybody will notice the tax increases!
. The basic personal amount will be increased gradually to $10,000 by 2009. The spousal credit will also be increased gradually to $8,500 by 2009.
Looking at the other personal tax moves, we have the following:
. A Canada Employment Credit, to offset work-related expenses, will provide a tax credit on up to $250 of employment income in 2006, increased to $1,000 for 2007, indexed thereafter. This is a déjà vu item from the 1970’s where the employees got a deduction.
. The budget proposes the Universal Child Care Benefit (UCCB), effective July 2006, to provide all families with $100 per month for each child under the age of six years. The UCCB will be taxable in the hands of the lower-income spouse which may mean that a lot of the payments where there is a stay-at-home parent will effectively escape tax.
. Students will be able to claim a textbook tax credit, in addition to the education tax credit, beginning in 2006. This will not require any proof of purchase, we note.
. Effective 2006, scholarship, fellowship or bursary income with respect to post-secondary or occupational training will be tax-exempt. This is a huge break for many students
. A tax credit on up to $500 of certain expenditures for children’s fitness will be effective as of the 2007 taxation year. Unlike most of the proposals, this one is delayed for a year.because we suspect it will take about that long to draft the provisions and to fend off those who want other types of activity covered.
. The pension tax credit currently allowed on the first $1,000 of pension income will be allowed on the first $2,000 of pension income. Finally, something for older Canadians!
. The maximum annual Child Disability Benefit (CDB) will be increased to $2,300 commencing July 2006. The CDB will be phased out at a rate of 2% of family income in excess of $36,378 (4% for families with more than one eligible child).
. The budget increases the maximum amount of the refundable medical expense supplement to $1,000 effective for 2006 (indexed thereafter).
. A credit will be introduced, effective July 2006, for the cost of monthly (or longer duration) public transit passes. As the budget document notes, receipts will have to be kept and “consultations” will take place with public transit authorities.
Of course, there is more to a Budget than tax measures. Flaherty has returned to the notion of a two-year budget, abandoning the newly adopted Liberal approach of a five year projection.
Some of the notable items are the following, in no particular order.
. $3.3-billion to provinces for post-secondary education, housing and other issues.
. $1.6-billion on community security, border and health
. $1.5-billion for agriculture
. $1.4-billion for policing, border security and public safety
. $1.3-billion for infrastructure
. $1.12-billion in the next two years for defence for recruitment and buying equipment
. $460-million for pandemic preparedness
. $450-million for aboriginal communities
. $250-million a year toward creating 25,000 child care spaces.
. $164-million in funding for the Accountability Act
. $104-million Canadian Strategy for Cancer Control
. $100-million for armed border presence
. $490: the new immigrant landing fee, from $975, effective May 2.
The problem in assessing these expenditures is that we can’t tell whether they are increases or decreases from what had been promised by the Liberals, many of whose promises were back-end loaded.
And one other matter is niggling away as we write on Budget night. The Finance Minister made much of the fact that the 2005-6 surplus would be about $8 billion, much higher than the Liberals projected. This of course helped to fund the tax-cutting spree. But search as we might, we saw no firm estimate of the 2006-7 numbers.
We have to say that we are concerned about the long-term financing of these promises and worry that any downturn in the economy might move Canada towards a deficit situation, something Mr. Flaherty was very familiar with during his tenure in the Ontario government of Mike Harris and Ernie Eves.
We have no doubt that in the weeks and months to come we will be able to better assess the details of this Budget but for the time being, it is definitely two thumbs up.