The following is an overview of income tax changes for the 2006 taxation year. See the tax guides for more details.
Small business deduction
The small business deduction rate will be increased to 16.5%, effective January 1, 2008, and 17%, effective January 1, 2009.
Business limit
The business limit will be increased from $300,000 to $400,000, effective January 1, 2007.
General tax reduction
The general tax reduction will be increased to 7.5%, effective January 1, 2008, 8%, effective January 1, 2009, and 9%, effective January 1, 2010.
For tax years that begin after May 1, 2006, corporations will benefit from the general tax reduction only on the taxable income that is subject to the general income tax rate of 38%.
Corporate surtax
The corporate surtax will be eliminated for all corporations, effective January 1, 2008.
Investment tax credit expenditure limit
For tax years that end after 2006, the $2 million expenditure limit used to calculate a Canadian-Controlled Private Corporation's (CCPC) refundable investment tax credit (ITC) on qualifying expenditures for scientific research and experimental development (SR&ED) will begin to be reduced when the CCPC's taxable income for the previous tax year reaches $400,000 and will become nil at $600,000.
Carry forward for business losses and investment tax credits (ITCs)
The carry-forward periods for losses incurred and credits earned in tax years ending after 2005 has been extended from 10 years to 20 years for:
- non-capital losses;
- farm losses;
- restricted farm losses;
- life insurer's Canadian life investment losses;
- investment tax credits earned for scientific research and experimental development (SR&ED), Atlantic investment, and mineral exploration.
Federal capital tax
The federal capital tax (Part I.3) on the taxable capital employed in Canada by large corporations will be zero percent, effective January 1, 2006.
Filing of a return by a large corporation
For the 2006 and subsequent tax years, if the taxable capital employed in Canada by a corporation and its related corporations is over $10 million, it will be required to file the required returns or it may be subject to a penalty.
Minimum tax on financial institutions
Effective July 1, 2006, the minimum tax (Part VI) on financial institutions will apply to taxable capital employed in Canada in excess of $1 billion.
Capital cost allowance
To qualify for the 100% capital cost allowance rate provided under Class 12, the cost limit of certain property such as small tools, kitchen utensils, and medical or dental instruments acquired after May 1, 2006, will be increased from $200 to $500. Electronic communication devices and electronic data processing equipment acquired after May 1, 2006, will be excluded from this class.
Eligibility for the new 50% rate in Class 43.2 will be extended to cogeneration systems that use a type of biomass referred to as "spent pulping liquor," used in the pulp and paper industry, that were acquired on or after November 14, 2005, and that have not been used or acquired for use before that date.
Apprenticeship job creation tax credit (AJCTC)
The AJCTC provides taxpayers that employ eligible apprentices in their business with a non-refundable tax credit.
This is a new credit introduced to encourage employers to hire new apprentices in eligible trades. This measure will provide eligible employers with a non-refundable tax credit equal to 10% of the salaries and wages paid to qualifying apprentices after May 1, 2006, to a maximum credit of $2,000 per year per apprentice. Where two or more related employers employ an apprentice, only one employer will be able to claim the $2,000 limit. The unused amount of the credit will be added to the corporation's investment tax credit pool and be available to reduce taxes payable for the tax year. An unused amount may be carried back 3 years and forward 20 years.
Patronage dividends
If you receive patronage dividends, issued by an agricultural co-operative corporation in the form of tax-deferred co-operative shares, you can delay reporting them as income until their disposition (or deemed disposition).
Eligible dividends
An eligible dividend will be any dividend paid after 2005 to a resident of Canada by a Canadian corporation that is designated by that corporation to be an eligible dividend.
A corporation's capacity to pay eligible dividends will depend mostly on its status.
If a corporation is a Canadian-controlled private corporation (CCPC) or a deposit insurance corporation, it will be able to pay eligible dividends only to the extent of its taxable income that has not benefited from the small business deduction or any other special tax rate. A CCPC will be able to elect to forego the small business deduction in exchange for being able to pay eligible dividends without giving up any other benefits of CCPC status.
A corporation resident in Canada that is neither a CCPC nor a deposit insurance corporation will be able to pay eligible dividends in any amount unless it has any taxable income that benefited from the small business deduction. In this case, the corporation will have to reduce this taxable income by paying out regular dividends before it can pay an eligible dividend.
A penalty will apply (Part III.1 tax) if a corporation represents dividends as eligible dividends that exceed its capacity to pay such dividends. In the case of a CCPC, the penalty will apply to the eligible dividends that exceed its taxable income that has not benefited from the small business deduction. In the case of a non-CCPC, the penalty will apply to the eligible dividends that exceed its taxable income that has benefited from the small business deduction. The penalty will be equal to 20% of the excess eligible dividend. An increased penalty will apply in situations where it is determined that a corporation attempted to artificially manipulate the amounts associated with the dividend designation. In such a situation, the tax is imposed at a rate of 30% of the entire amount of dividend in question.
The corporation will inform the dividend recipient in writing when the dividend is paid that it is an eligible dividend.
Donations of publicly listed securities and ecologically sensitive land
For gifts of certain securities and ecologically sensitive land made after May 1, 2006, the capital gains inclusion rate will be zero.
Non-deductibility of interest
For tax years beginning on or after April 1, 2007, interest charged under the Excise Tax Act (GST) and the Air Travellers Security Charge Act will no longer be deductible for income tax purposes.
Fishers
Beginning with the 2006 tax year, it is mandatory for a fisher's income to be reported on a T4 slip. If you are a self-employed fisher's designated employer (for example, the buyer of the catch) or a buyer with whom, in a calendar year, a self-employed fisher has filed Form TD3F, Fisher's Election to Have Tax Deducted at Source, you have to file a T4 information return for that year.
New codes
New codes have been created for the "Other Information" area of the T4 slip. These codes are optional for 2006, but are mandatory for 2007.
- Code 81 Placement or employment agency workers' gross earnings
- Code 82 Drivers of taxis or other passenger-carrying vehicles gross earnings
- Code 83 Barbers' or hairdressers' gross earnings
- Code 84 Public transit pass
In addition, Code 85, Employee-paid premiums for private health services plans, has been added to provide an area to report these amounts. This code is optional.
Tax credit for public transit passes
Individuals are entitled to a non-refundable tax credit for public transit passes bought for travel that occurs after June 30, 2006. An employer-paid transit pass is eligible for the non-refundable tax credit as long as the amount of the monthly (or longer duration) pass is included in the employee's income as a taxable benefit.
Trades people's tool expenses
As of May 1, 2006, employed trades people are entitled to a new deduction for the cost of eligible tools acquired for use in their employment. Employers are required to complete Form T2200, Declaration of conditions of employment to certify that the employee must acquire these tools as a condition of, and for use in, his or her employment.
Partnerships
New prescribed forms
We replaced the former prescribed partnership forms and introduced some prescribed forms required for the reporting of partnership activities:
- T5013 SCH 1, Partnership's Net Income (Loss) for Income Tax Purposes - New prescribed Form T5013 SCH 1 replaces the sample format of the Reconciliation of partnership's net income (or loss) for income tax purposes previously located in the guide. The older version is obsolete, and we will no longer accept it.
- T5013 SCH 2, Charitable Donations, Gifts, and Political Contributions - New prescribed Form T5013 SCH 2 provides additional information we need. You need to provide this information to the partners on their T5013 and T5013A information slips.
- T5013 SCH 6, Summary of Dispositions of Capital Property - New prescribed Form T5013 SCH 6 provides additional information we need. You need to provide this information to the partners on their T5013 and T5013A information slips.
- T5013 SCH 8, Partnership's Capital Cost Allowance Schedule - Replaces obsolete prescribed Form T5014, which we will no longer accept.
- T5013 SCH 10, Calculation of Deduction for Cumulative Eligible Capital of a Partnership - Replaces obsolete prescribed Form T5017.
- T5013 SCH 12, Resource-Related-Deductions - New prescribed Form T5013 SCH 12 provides additional information we need. You need to provide this information to the partners on their T5013 and T5013A information slips.
- T5013 SCH 19, Non-resident Member Information - New prescribed Form T5013 SCH 19 provides additional information we need about the non-resident partners.
- T5013 SCH 25, Investment in Foreign Affiliates - New prescribed Form T5013 SCH 25 provides additional information we need about the partnership's foreign affiliates.
- T5013 SCH 50, Reconciliation of Partner's Capital Account - Replaces obsolete prescribed Form T5015.
- T5013 SCH 52, Summary information for Partnerships that Allocated Renounced Resource Expenses to their Members - Replaces obsolete prescribed Form T5016. We removed the information for tax shelters from this form because we now include that information on the T5013 Summary.
- T5013 SCH 100, Partnership's Balance Sheet Information (2006 and later taxation years) - New prescribed Form T5013 SCH 100 replaces part of Section C of the obsolete T5013 Summary.
- T5013 SCH 125, Partnership's Income Statement Information (2006 and later taxation years) - New prescribed Form T5013 SCH 125 replaces part of Section C and Section D of the obsolete T5013 Summary.
- T5013 SCH 141, Partnership's Financial Statement Notes Checklist - New prescribed Form T5013 SCH 141 provides additional information we need.
North American Industry Classification System (NAICS) Code
Starting this year, you have to give the partnership's NAICS code on prescribed Form T5011, Application for a Partnership's Filer Identification Number, and the T5013 Summary, Partnership Information Return. For the NAICS codes list, see guide T4002, Business and Professional Income 2006.
Partnership that has a member that is a corporation or a trust
A partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file a T5013 Summary, Partnership Information Return for each fiscal period of the partnership if it is a partnership which has a member that is a corporation or a trust.
Compliance refund hold
Effective April 1, 2007, if you file a corporation income tax return showing a refund and you have an overdue return on your account or any related business number account (for example your GST/HST account), we will not refund any amount until all overdue returns have been filed.
General offset of credit amounts
Effective April 1, 2007, if you are expecting a refund and you owe an amount on the same or a related business number account (for example your GST/HST account), we will automatically apply your refund to your debt. Only the difference, if any, will be refunded to you.
