The Minister of Finance presented the new government's first federal budget on 2 May 2006. Budget 2006 contains a significant number of tax measures, including CAD 20 billion in tax relief over 2 years. Key features of the proposed Budget include the following:
Corporate income tax
(a) Federal tax rate. Budget 2006 proposes to reduce the general corporate income tax rate (after the 10% abatement for income earned in a province) to 19% from 21% by 2010. The general corporate income tax rate will be reduced to 20.5% effective 1 January 2008, to 20% effective 1 January 2009, and to 19% effective 1 January 2010. The rate will be prorated for taxation years that include any of those dates. The rate reduction will only apply to income that is taxed at the general corporate income tax rate and not to income that is already subject to reduced rates such as the small business rate.
(b) Corporate surtax. The corporate surtax applies to all corporations and is calculated at a rate of 4% of federal corporate income tax payable after the 10% abatement for income earned in a province, but before credits such as the small business deduction and credits for foreign taxes paid. The elimination of the surtax for small and medium-sized corporations in 2008 has already been legislated. Budget 2006 proposes to eliminate the corporate surtax for all remaining corporations effective 1 January 2008.
(c) Small business limit and tax rate. The small business deduction reduces the federal corporate income tax rate applied to the first CAD 300,000 of qualifying active business income of a Canadian-controlled private corporation (CCPC) to 12%. Budget 2006 proposes that the annual amount of active business income eligible for the reduced tax be increased as of 1 January 2007 to CAD 400,000. Budget 2006 also proposes a 1 percentage point reduction in the 12% tax rate. The rate will be reduced to 11.5% for 2008 and 11% effective 1 January 2009.
(d) Non-capital losses and investment tax credits. Currently, non-capital losses can be carried back 3 years and forward 10 years. Budget 2006 proposes to extend the non-capital loss carry-forward period of all taxpayers to 20 years. Budget 2006 also proposes to extend the investment tax credit carry-forward period to 20 years.
(e) Federal capital tax. The federal capital tax is currently levied at a rate of 0.125% on taxable capital in excess of CAD 50 million. Budget 2006 proposes to eliminate the federal capital tax as of 1 January 2006, 2 years earlier than was originally scheduled.
(f) Minimum tax on financial institutions. The federal capital tax on financial institutions is a minimum tax for banks, trust companies, mortgage loan companies and life insurance companies. The tax is currently levied at a rate of 1% on taxable capital employed in Canada between CAD 200 million and CAD 300 million, and at a rate of 1.25% on taxable capital employed in Canada in excess of CAD 300 million. Budget 2006 proposes to increase the threshold above which the tax begins to apply to CAD 1 billion and to adopt a single tax rate of 1.25% on taxable capital employed in Canada over that threshold.