2006 Federal Budget Impact Paper

This paper was prepared by the Compensation Sector, Accounting, Banking and Compensation Branch, Public Works and Government Services Canada (PWGSC). It should be noted that this document is not all encompassing. Employees may find this document informative from a personal perspective.

The following items, which are relative to the compensation product, were introduced in the Federal budget speech that was presented by the Honourable James Flaherty, Minister of Finance for the Government of Canada on May 2, 2006.

To review the 2006 Federal Budget documents, please visit this site:

http://www.fin.gc.ca/fin-eng.html

ITEMS AFFECTING PWGSC COMPENSATION SYSTEMS

Personal Tax Rate Changes

The government announced that it will legislate the previously proposed 15% lowest personal tax rate for 2005 and increase the rate to 15.5% as of July 1, 2006. Therefore, the full-year rate for the 2006 taxation year will be 15.25% and for the 2007 and subsequent taxation years, the rate will be 15.5%.

Impact: PWGSC compensation systems will be programmed to change the tax rate to 15.5% effective July 1, 2006.

Personal Tax Credit Changes

Effective January 1, 2006, the basic personal amount was increased to $9,039. This budget reduces this tax credit to $8,639 as of July 1, 2006. Therefore, the full-year basic personal amount for the 2006 taxation year will be $8,839. This amount will be increased annually until the rate reaches the amount of $10,000 for the 2009 taxation year.

Impact: PWGSC compensation systems will be programmed to change the basic personal amount to $8,639 effective July 1, 2006.

Effective January 1, 2006, the spouse or common-law partner amount was increased to $7,675. This budget reduces this tax credit to $7,335 as of July 1, 2006. Therefore, the full-year spouse or common-law partner amount for the 2006 taxation year will be $7,505. This amount will be increased annually until the rate reaches the amount of $8,500 for the 2009 taxation year.

Impact: PWGSC compensation systems will be programmed to change the spouse or common-law partner amount to $7,335 effective July 1, 2006.

Effective January 1, 2006, the amount for an eligible dependant was increased to $7,675. This budget reduces this tax credit to $7,335 as of July 1, 2006. Therefore, the full-year amount for an eligible dependant for the 2006 taxation year will be $7,505. This amount will be increased annually until the rate reaches the amount of $8,500 for the 2009 taxation year.

Impact: Information concerning the change to the eligible dependant amount will be communicated to employees paid through the Regional Pay System (RPS) and the Royal Canadian Mounted Police (RCMP) Pay System. This information will be communicated in an Information Notice to Employees in June 2006, and posted on the Compensation Sector Web site. As the PWGSC Annuitant System records each tax credit shown on the TD1 form separately, this system will be programmed to automatically change this tax credit to $7,335 effective July 1, 2006.

The pension income amount was increased from $1,000 to $2,000 for the 2006 taxation year.

Impact: Information concerning the change to the pension income amount will be communicated to employees paid through the RPS and the RCMP Pay System. This information will be communicated in an Information Notice to Employees in June 2006, and posted on the Compensation Sector Web site. As the PWGSC Annuitant System records each tax credit shown on the TD1 form separately, this system will be programmed to automatically change this tax credit to $2,000 effective July 1, 2006.

Canada Employment Credit

A new Canada employment credit was introduced in recognition of work-related expenses incurred by employees. The credit is to provide tax relief on up to $500 for the 2006 taxation year. Since the credit will take effect July 1, 2006, the maximum amount on which the credit is calculated will be $250 for the 2006 taxation year. For the 2007 and subsequent taxation years, the maximum amount on which the credit is calculated will be increased to $1,000. Pension income is not eligible for this credit.

Impact: PWGSC compensation systems will be programmed to include the $ 500 credit in the formula to calculate basic federal tax effective July 1, 2006.

OTHER ITEMS OF INTEREST

Textbook Tax Credit

Effective for the 2006 taxation year, post-secondary students will be able to claim a new non-refundable textbook tax credit. The credit will be calculated on an amount of $65 for each month the student qualifies for the full-time education credit and $20 for each month the student qualifies for part-time education tax credit amount.

Impact: This credit will be incorporated into the TD1 form. To claim this credit, students are to complete a new TD1 form.

Scholarship and Bursary Income

Currently, the first $3000 of scholarship, fellowship or bursary income received in a year is excluded from income for tax purposes. For the 2006 taxation year, all scholarship, fellowship or bursary income will be fully exempt from tax.

Impact: This change will be incorporated into the 2006 income tax return.

Tax Credit for Public Transit Passes

The cost of monthly, or longer duration, public transit passes will qualify for a non-refundable tax credit in respect of the portion of transit costs incurred on or after July 1, 2006.

Impact: This tax credit will be incorporated into the 2006 income tax return.

Universal Child Care Benefit (UCCB)

Effective July 2006, all families will be provided with a UCCB of $100 per month for each child under the age of six years ($1,200 per year).

Impact: This benefit will be incorporated into the 2006 income tax return.

Tradespeople's Tool Expense

A deduction (up to a maximum of $500 per year) will be allowed for the total cost of new tools acquired by an employed tradesperson in a tax year in excess of $1,000. This measure will apply to new tools acquired on or after May 2, 2006.

Impact: This deduction will be incorporated into the 2006 income tax return.

Child Disability Benefit

The maximum annual Child Disability Benefit will increase from $2,044 to $2,300 starting in July 2006, and will be indexed to inflation thereafter. Also, the child disability benefit will be extended to more families caring for a child eligible for the disability tax credit by reducing the rates at which the child disability benefit is reduced as family income rises.

Impact: This change will be incorporated into the 2006 income tax return.

Refundable Medical Expense Supplement

The maximum amount of the refundable medical expense supplement will be increased from $767 to $1,000 for the 2006 taxation year.

Impact: This change will be incorporated into the 2006 income tax return.

Goods and Services Tax (GST)

The GST rate will be reduced by one percentage point, from 7% to 6%, effective July 1, 2006.

Impact: Vendors and service providers will be required to make the necessary adjustments to reduce the GST rate accordingly.

Children's Fitness Tax Credit

The budget proposes allowing parents to claim a non-refundable children's fitness tax credit for up to $500 in eligible fees for physical fitness programs for each child under sixteen years old. The measure will apply to the 2007 and subsequent taxation years.

Impact: This credit will be incorporated into the 2007 income tax return.

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