PM Stephen Harper's first budget contains a number of items of interest for employers
Federal Finance Minister Jim Flaherty delivered the federal budget on May 2, 2006. The budget contains the following items that will be of interest to payroll professionals:
Personal amounts changing
The budget proposes changes to the amounts employees can claim on a federal TD1, Personal Tax Credits Return, for the basic personal amount, spousal/common-law partner amount, and the amount for an eligible dependant.
The proposals would replace those announced by the previous government in the February 2005 federal budget and the November 2005 economic statement.
Basic personal amount (line 1 on TD1)
The budget proposes the following changes:
•For 2005, the basic personal amount would be $8,648.
•For 2006, the amount is currently $9,039. The budget proposes that the amount remain at $9,039 from Jan. 1, 2006 to June 30, 2006. Beginning July 1, 2006, it would decrease to $8,639. This would result in an average $8,839 for the year.
•For 2007, the amount ($8,639) would increase by indexation, plus $100 to a minimum of $8,739.
•For 2008, the amount would go up by indexation, plus $200.
•For 2009, the amount would go up by indexation, plus the greater of $600 and the amount needed to bring the basic personal amount to $10,000.
Spousal/common-law partner and eligible dependant amounts (lines 6 and 7 on TD1)
The budget proposes the following changes:
•For 2005, the spousal/common-law partner and eligible dependant amounts would be $7,344.
•For 2006, the amounts are currently $7,675. The budget proposes that the amounts remain at $7,675 from Jan. 1, 2006 to June 30, 2006. Beginning July 1, 2006, the amounts would decrease to $7,335. This would result in an average of $7,505.
•For 2007, the amount for both credits ($7,335) would go up by indexation, plus $85.
•For 2008, the amount for both credits would go up by indexation, plus $170.
•For 2009, the amount for both credits would increase by indexation, plus the greater of $510 and the amount needed to increase the credits to $8,500.
The amounts proposed for 2009 for all three credits are the same as those proposed by the previous government in the November 2005 economic statement.
As a result of the proposals, the Canada Revenue Agency (CRA) is expected to issue updated TD1s, payroll deductions tables, and computer formulas for July 1, 2006, although this could not be confirmed at press time.
Tax rate change
The budget proposes to increase the tax rate for the lowest tax bracket from 15 per cent to 15.5 per cent, effective July 1, 2006. The lowest tax rate is the rate generally used to calculate non-refundable tax credits.
In November 2005, the previous government proposed to lower the rate from 16 per cent to 15 per cent, retroactive to 2005. The government was defeated in the House of Commons and an election was called before the rate change was passed into law; however, the CRA implemented the proposed rate change in the 2006 payroll deductions tables and computer formulas (for 2005, the change was to be incorporated when individuals filed their personal tax returns).
This budget proposes to go ahead with the tax reduction from 16 per cent to 15 per cent for the 2005 year. For 2006, it proposes that the rate remain 15 per cent until June 30, 2006. Beginning July 1, 2006, the rate would increase to 15.5 per cent, resulting in a full-year tax rate of 15.25 per cent. For 2006, the rate would apply to incomes up to $36,378. This amount would be indexed after that time.
The CRA is expected to issue revised payroll deductions tables and computer formulas for July 1, 2006 to incorporate the proposals.
GST going down
Effective July 1, 2006, the budget proposes to lower the rate for the Goods and Services Tax (GST) from seven per cent to six per cent. This would also affect the federal portion of the Harmonized Sales Tax in place in New Brunswick, Newfoundland and Labrador and Nova Scotia.
The budget proposes the following transitional measures:
•If the GST is payable or is paid without becoming payable prior to July 1, 2006, the rate would be seven per cent.
•If the GST is payable on or after July 1, 2006, without having been paid before July 1, 2006, the rate would be six per cent.
•If the GST is paid on or after July 1, 2006, without having become payable before July 1, 2006, the rate would be six per cent.
The GST proposal would also affect employer remittances for taxable benefits. For any taxable benefits other than automobile operating cost benefits, the amount of the GST the employer must remit is calculated by using a specified formula. It is expected that the formula will change as a result of the proposed GST change.
On a related matter, the prescribed rate employers use to calculate the GST on automobile operating expense benefits would decrease from five per cent to 4.5 per cent for the 2006 tax year. Beginning in 2007, it would be reduced to four per cent. For calculating the HST, the prescribed rate would be lowered from 11 per cent to 10.5 per cent for 2006 and to 10 per cent beginning in 2007.
Pension credit going up
The budget proposes to increase the pension credit employees claim on the TD1 from $1,000 to $2,000, effective for 2006 and later tax years.
Employment credit introduced
The budget proposes to implement an employment credit to recognize work-related expenses that employees incur (such as uniforms, work-related supplies and home computers). The credit, called the Canada Employment Credit, would come into effect July 1, 2006.
The proposal would allow for a deduction equal to the lesser of $500 and the employee’s income for the year, multiplied by the lowest personal income tax rate for the year. Since the credit would be implemented July 1, 2006, the maximum amount on which the tax credit would be calculated for 2006 would be $250. The proposed lowest tax rate for 2006 would be 15.25 per cent.
Beginning in 2007, the maximum amount would increase to $1,000 and the lowest personal income tax rate would be 15.5 per cent.
Threshold for scholarships and bursaries eliminated
The budget proposes to fully exempt from income tax scholarships, fellowships and bursaries for post-secondary education and occupational training. Currently, the first $3,000 is tax exempt.
The exemption is limited to amounts a student receives for a scholarship, fellowship or bursary in relation to a program in which the student is enrolled for which the education tax credit applies. In general, this would apply to post-secondary programs and other programs at educational facilities that are certified by Human Resources and Social Development Canada as programs that help the individual obtain skills in an occupation.
The proposed measure would apply as of the 2006 tax year.
Deduction for tools
The budget proposes to implement a tax deduction for tradespeople who have to buy their tools as a condition of employment.
The deduction would apply to new tools that an employee purchases where the total cost is more than $1,000. The maximum deduction would be $500 for the year.
To qualify for the deduction, the employer would have to certify that the employee is required to use the tools “as a condition of, and for use in, the employment.”
The measure would apply for eligible tools acquired on or after May 2, 2006.
Textbook tax credit introduced
The budget proposes to introduce a tax credit for textbooks for individuals entitled to the education tax credit claimed on the TD1. The amount of the tax credit would be $65 for each month the student qualifies for the full-time education tax credit amount; and $20 for each month the student is eligible for the part-time education tax credit amount.
The proposal would apply to 2006 and later tax years.
Unplanned surpluses and C/QPP contributions
In the budget, the government proposes to discuss with the provinces and territories the possibility of allocating a portion of unplanned federal surpluses at fiscal year end to the Canada and Quebec Pension Plans in order to help lower future contribution rates. This would apply when the federal surplus exceeds $3 billion.
More information on these proposals can be found on the Finance Ministry’s website at www.fin.gc.ca/budtoce/2006/budliste.htm.
For the HR implications of the budget, see page five of the May 22 print issue of Canadian HR Reporter.
Personal amounts changing
The budget proposes changes to the amounts employees can claim on a federal TD1, Personal Tax Credits Return, for the basic personal amount, spousal/common-law partner amount, and the amount for an eligible dependant.
The proposals would replace those announced by the previous government in the February 2005 federal budget and the November 2005 economic statement.
Basic personal amount (line 1 on TD1)
The budget proposes the following changes:
•For 2005, the basic personal amount would be $8,648.
•For 2006, the amount is currently $9,039. The budget proposes that the amount remain at $9,039 from Jan. 1, 2006 to June 30, 2006. Beginning July 1, 2006, it would decrease to $8,639. This would result in an average $8,839 for the year.
•For 2007, the amount ($8,639) would increase by indexation, plus $100 to a minimum of $8,739.
•For 2008, the amount would go up by indexation, plus $200.
•For 2009, the amount would go up by indexation, plus the greater of $600 and the amount needed to bring the basic personal amount to $10,000.
Spousal/common-law partner and eligible dependant amounts (lines 6 and 7 on TD1)
The budget proposes the following changes:
•For 2005, the spousal/common-law partner and eligible dependant amounts would be $7,344.
•For 2006, the amounts are currently $7,675. The budget proposes that the amounts remain at $7,675 from Jan. 1, 2006 to June 30, 2006. Beginning July 1, 2006, the amounts would decrease to $7,335. This would result in an average of $7,505.
•For 2007, the amount for both credits ($7,335) would go up by indexation, plus $85.
•For 2008, the amount for both credits would go up by indexation, plus $170.
•For 2009, the amount for both credits would increase by indexation, plus the greater of $510 and the amount needed to increase the credits to $8,500.
The amounts proposed for 2009 for all three credits are the same as those proposed by the previous government in the November 2005 economic statement.
As a result of the proposals, the Canada Revenue Agency (CRA) is expected to issue updated TD1s, payroll deductions tables, and computer formulas for July 1, 2006, although this could not be confirmed at press time.
Tax rate change
The budget proposes to increase the tax rate for the lowest tax bracket from 15 per cent to 15.5 per cent, effective July 1, 2006. The lowest tax rate is the rate generally used to calculate non-refundable tax credits.
In November 2005, the previous government proposed to lower the rate from 16 per cent to 15 per cent, retroactive to 2005. The government was defeated in the House of Commons and an election was called before the rate change was passed into law; however, the CRA implemented the proposed rate change in the 2006 payroll deductions tables and computer formulas (for 2005, the change was to be incorporated when individuals filed their personal tax returns).
This budget proposes to go ahead with the tax reduction from 16 per cent to 15 per cent for the 2005 year. For 2006, it proposes that the rate remain 15 per cent until June 30, 2006. Beginning July 1, 2006, the rate would increase to 15.5 per cent, resulting in a full-year tax rate of 15.25 per cent. For 2006, the rate would apply to incomes up to $36,378. This amount would be indexed after that time.
The CRA is expected to issue revised payroll deductions tables and computer formulas for July 1, 2006 to incorporate the proposals.
GST going down
Effective July 1, 2006, the budget proposes to lower the rate for the Goods and Services Tax (GST) from seven per cent to six per cent. This would also affect the federal portion of the Harmonized Sales Tax in place in New Brunswick, Newfoundland and Labrador and Nova Scotia.
The budget proposes the following transitional measures:
•If the GST is payable or is paid without becoming payable prior to July 1, 2006, the rate would be seven per cent.
•If the GST is payable on or after July 1, 2006, without having been paid before July 1, 2006, the rate would be six per cent.
•If the GST is paid on or after July 1, 2006, without having become payable before July 1, 2006, the rate would be six per cent.
The GST proposal would also affect employer remittances for taxable benefits. For any taxable benefits other than automobile operating cost benefits, the amount of the GST the employer must remit is calculated by using a specified formula. It is expected that the formula will change as a result of the proposed GST change.
On a related matter, the prescribed rate employers use to calculate the GST on automobile operating expense benefits would decrease from five per cent to 4.5 per cent for the 2006 tax year. Beginning in 2007, it would be reduced to four per cent. For calculating the HST, the prescribed rate would be lowered from 11 per cent to 10.5 per cent for 2006 and to 10 per cent beginning in 2007.
Pension credit going up
The budget proposes to increase the pension credit employees claim on the TD1 from $1,000 to $2,000, effective for 2006 and later tax years.
Employment credit introduced
The budget proposes to implement an employment credit to recognize work-related expenses that employees incur (such as uniforms, work-related supplies and home computers). The credit, called the Canada Employment Credit, would come into effect July 1, 2006.
The proposal would allow for a deduction equal to the lesser of $500 and the employee’s income for the year, multiplied by the lowest personal income tax rate for the year. Since the credit would be implemented July 1, 2006, the maximum amount on which the tax credit would be calculated for 2006 would be $250. The proposed lowest tax rate for 2006 would be 15.25 per cent.
Beginning in 2007, the maximum amount would increase to $1,000 and the lowest personal income tax rate would be 15.5 per cent.
Threshold for scholarships and bursaries eliminated
The budget proposes to fully exempt from income tax scholarships, fellowships and bursaries for post-secondary education and occupational training. Currently, the first $3,000 is tax exempt.
The exemption is limited to amounts a student receives for a scholarship, fellowship or bursary in relation to a program in which the student is enrolled for which the education tax credit applies. In general, this would apply to post-secondary programs and other programs at educational facilities that are certified by Human Resources and Social Development Canada as programs that help the individual obtain skills in an occupation.
The proposed measure would apply as of the 2006 tax year.
Deduction for tools
The budget proposes to implement a tax deduction for tradespeople who have to buy their tools as a condition of employment.
The deduction would apply to new tools that an employee purchases where the total cost is more than $1,000. The maximum deduction would be $500 for the year.
To qualify for the deduction, the employer would have to certify that the employee is required to use the tools “as a condition of, and for use in, the employment.”
The measure would apply for eligible tools acquired on or after May 2, 2006.
Textbook tax credit introduced
The budget proposes to introduce a tax credit for textbooks for individuals entitled to the education tax credit claimed on the TD1. The amount of the tax credit would be $65 for each month the student qualifies for the full-time education tax credit amount; and $20 for each month the student is eligible for the part-time education tax credit amount.
The proposal would apply to 2006 and later tax years.
Unplanned surpluses and C/QPP contributions
In the budget, the government proposes to discuss with the provinces and territories the possibility of allocating a portion of unplanned federal surpluses at fiscal year end to the Canada and Quebec Pension Plans in order to help lower future contribution rates. This would apply when the federal surplus exceeds $3 billion.
More information on these proposals can be found on the Finance Ministry’s website at www.fin.gc.ca/budtoce/2006/budliste.htm.
For the HR implications of the budget, see page five of the May 22 print issue of Canadian HR Reporter.
