Federal budget 2007 – ‘Freedom 71’
The minority Conservative government tabled its second federal budget on March 19. As expected, the budget focused on a mix of social and environmental spending, along with tax cuts designed to benefit low and middle-income Canadians. It provided no changes to tax rates in any bracket. Investors will be disappointed, as the campaign promises that helped bring this party to power, such as the capital gain deferral, were not part of the budget. Nor did the government grant general tax relief in the form of higher tax brackets and the personal credit. It did, however, provide some respite for families with a stay-at home spouse and single parents. Here is a summary of the major changes:
• The government will introduce an annual tax credit of $2,000 per child under age 18, retroactive to January 1, 2007. The tax credit will be calculated as $2,000 per child multiplied by the lowest personal income tax rate (15.5%).
This results in a maximum benefit of $310 per child, and will be indexed for inflation. Unused credit amounts may be transferred between spouses. This will benefit mostly lower income Canadians.
The so-called “marriage penalty” has been eliminated by a proposal to increase the spousal and other amounts to provide up to $209 of tax relief for a supporting spouse or single taxpayer supporting a child or relative.
The budget intends to increase the credits for low-income spouses and dependents of single people by raising the amounts to $8,929 from the current $7,581 basic personal amount, effective January 1, 2007.
The public transit tax credit will be extended to include transit passes for five to seven days, and electronic payment cards for at least 32 one-way trips in a 31-day period when used on an ongoing basis. This has been available only to those using monthly passes.
Elimination of withholding tax on interest Canadian and US negotiators have agreed in principle to amend the Canada-US tax treaty to eliminate the current 10% tax withholding on cross-border interest payments set out in the existing treaty.
Personal tax installments – you are currently required to pay tax installments if your estimated income tax payable for the year or your actual income tax payable for either of the two preceding years exceeds $2,000. This budget increases the threshold to $3,000, starting with the 2008 taxation year.
The lifetime capital gains exemption for farmers, fishers and small business owners will increase to $750,000 from $500,000.
Manufacturing and processing businesses will be allowed to write off their capital investments in machinery and equipment acquired on or after March 19, 2007 and before 2009, using a special two-year, 50 per cent straight-line rate, instead of the current standard of seven years.
CCPC installment frequency – The budget proposes to allow small Canadian-controlled private corporations with taxable income at or below $400,000 in the current or preceding year to pay tax installments quarterly (instead of monthly), provided certain conditions are met. Quarterly installments will be determined by one of three alternative methods, for taxation years starting subsequent to 2007.
Corporate tax installment threshold – corporations are currently required to pay corporate tax installments if their income tax payable for the year or the preceding year exceeds $1,000. The budget also proposes to increase the threshold to $3,000 (from $1,000) for taxation years that begin after 2007.
• The age credit amount will be increased by $1,000 to $5,066 for those over 65. This should give approximately $155 in extra tax relief this year to low and middle-income seniors.
“Freedom 71” – The age limit for converting a registered retirement savings plan (RRSP) will increase to 71 from 69 for those Canadians who wish to continue working longer. This is a return to the situation that existed before 1997. During the 1996 budget, the Liberal government reduced the mandatory conversion age to 69. Assuming they have sufficient RRSP contribution room, in addition to making a contribution this year, those who are turning 69 will also be able to contribute in 2008 and 2009. Those who turn 70 or 71 this year will be able to make an RRSP contribution for 2007. Since the maximum annual RRSP contribution amount is now $20,000 (for those with enough earned income), this means potentially $40,000 in additional RRSP room. It also represents a longer time for investments to grow on a tax-sheltered basis.
Retirees older than 55, eligible for an un-reduced pension will be permitted to negotiate a phased retirement. They will be able to remain with their employer, earning additional pension credits based on part-time employment, and collect up to 60 per cent of the original pension benefit.
The list of qualified investments that can be held by RRSPs and other registered plans will be amended to include most investment-grade debt and publicly listed securities.
Eligible investment rules will be expanded. It is proposed that the qualified investment rules will include certain investment-grade debt obligations and any security (other than a futures contract) that is listed on a designated stock exchange (a new definition that will include current prescribed exchanges as well as recognized exchanges that will qualify automatically).
A new Registered Disability Savings Plan (RDSP) will be established to help parents and others save toward the long-term financial security for those with severe disabilities. Commencing in 2008, it will be similar to a registered education savings plan, with some government contributions and untaxed withdrawals. Eligible contributors will be able to save up to a lifetime maximum of $200,000; with the last contribution during the year a beneficiary turns 59.
• Annual RDSP contributions will generate Canada Disability Savings Grants at matching rates of 100% to 300%, depending on family income and a lifetime CDSG limit of $70,000.
Canada Disability Savings Bonds of up to $1,000 per year will be provided to RDSPs created by low- or modest-income families. Grants starting in 2008 will be geared to family income, matching the first $1,000 of contributions for those with a net family income above $74,357.
For families with low income, grants would be triple the first $500 contribution and double the next $1,000 contribution. Maximum grants of $70,000 and bonds of $20,000 could be collected before the child reaches age 60. Government assistance and the income it generates would have to be repaid under some circumstances, such as the death of the child or non-eligibility for the tax credit. The parents would not pay tax on investment earnings on contributions and grants, but would not receive a tax refund for contributions.
A Working Income Tax Benefit (WITB) disability supplement is proposed for low-income working Canadians with disabilities. For employees eligible for the disability tax credit, benefits will start when the earnings of the DTC-eligible person reach $1,750. For singles, the disability supplement is reduced at a net income of $12,833 and eliminated at $14,500. For single parents and couples, the supplement is reduced at a family income of $21,167 and eliminated at $22,834 (or $24,500 where both adults are DTC eligible).
• The government has introduced the Working Income Tax Benefit (WTIB) of up to $500 for individuals and $1,000 for families on welfare to provide incentives to work. More than a million low-income Canadians will receive the benefit. This measure aims to help people “over the welfare wall” by providing a $500 benefit to individuals with earnings more than $3,000 and net income below $12,833.
Singles who earn $5,500 or more and have net income below $9,500 will receive the full $500. The $1,000 WITB will go to couples and single parents with family earnings above $3,000 and net income below $21,167. Parents who earn more than $21,167 and individuals earning more than $12,833 will not be eligible. The WITB is a refundable tax credit effective for the 2007 tax year, with payments starting in 2008. To qualify for the WITB, you must be 19 or older and not attending school full-time.
• The maximum amount that can be contributed to a Registered Education Savings Plan (RESP) per child is to be increased to $50,000 from $42,000. The $4,000 annual limit for RESP contributions has been eliminated, which means that some families may choose to shelter wind falls like inheritances into a lump sum RESP contribution. It may be worthwhile to forego future grants and lump-sum fund an RESP. The benefits of tax-deferred compounding can outweigh the benefits of the grant.
The Canada Education Savings Grant (CESG) has been boosted from the previous $400 to $500 a year. So for those without the resources to contribute a large lump sum to an RESP from the start, the best strategy may be to contribute $2,500 a year – which would generate the new maximum grant of $500. Previously, the optimum was to contribute $2,000 a year in order to get the $400 generated by the 20% grant.
If there is unused grant room because of contributions of less than the maximum in previous years, the maximum CESG for a year will increase to $1,000 from $800. The lifetime CESG limit per child remains at $7,200.
• Other changes were related to the environment and transfer payments with provinces. Moreover, the government promises more tax cuts in the future through its tax back guarantee, which will be legislated with the 2007 budget.
Also, the government states that interest savings from debt repayment will go toward further tax cuts. The latest projections estimate that Ottawa will pay down $9.2 billion of the federal debt in 2006-07.
The government surplus is expected to shrink over the next two years, falling to about $300 million for 2007-08, and to zero the following year. That is after putting aside $3 billion each year to reduce the accumulated debt. Economic growth is forecast at 2.3 per cent in 2007 and 2.9 per cent in 2008, just slightly over the rate of inflation.