Annex 1
Tax Measures: Supplementary Information and Notices of Ways and Means Motions

Overview

This annex provides detailed information on each of the tax measures proposed in this Economic Statement.

The following table lists these measures and provides estimates of their fiscal impact.

Notices of Ways and Means Motions are also provided to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001 and the Air Travellers Security Charge Act.

Table A.1
Cost of Proposed Measures¹

Business Income Tax Measures

Reducing the General Federal Corporate Income Tax Rate

This Economic Statement proposes to reduce the general corporate income tax rate (after the 10-per-cent abatement for income earned in a province) to 19.5 per cent effective January 1, 2008, to 19 per cent effective January 1, 2009, to 18 per cent effective January 1, 2010, to 16.5 per cent effective January 1, 2011 and to 15 per cent effective January 1, 2012. The rate will be pro-rated for taxation years that include any of those dates.

The rate reductions will apply to income that is taxed at the general corporate income tax rate. This income does not include small business income that is already eligible for the small business deduction; investment income of Canadian-controlled private corporations (CCPCs), which income is eligible for a special refundable tax; the income of credit unions eligible for the corporate tax rate reduction under section 137 of the Income Tax Act; and the income of mutual fund corporations, mortgage investment corporations, most deposit insurance corporations and investment corporations (as defined in the Income Tax Act), which income already qualifies for special tax treatment.

The rate reductions will also apply to the new distribution tax, which is generally applicable beginning in 2011, on publicly-traded income trusts and partnerships.

Table A.2
General Federal Corporate Income Tax Rate Reduction

Budget 2006 legislated an enhanced dividend tax credit (DTC) to ensure that the combined corporate and personal income tax rate on dividends from large corporations is comparable to that on other forms of income. The enhanced DTC measure was established with reference to the total average 2010 federal-provincial corporate tax rate expected at the time. As a consequence of the corporate income tax rate reductions announced in this Economic Statement, consideration will be given to adjustments to the enhanced DTC to ensure the appropriate tax treatment of dividend income, as well as adjustments to other rules in the Income Tax Act that assume a specific underlying corporate income tax rate.

Accelerating the Tax Reduction for Small Business

The small business deduction currently reduces the federal corporate income tax rate applying to qualifying active business income of a Canadian-controlled private corporation (CCPC) to 12 per cent (13.12 per cent including surtax).

Budget 2006 increased the annual amount of active business income eligible for the reduced tax rate—generally referred to as the "small business limit"—to $400,000 from $300,000, as of January 1, 2007. Budget 2006 also put in place a schedule to reduce the small business tax rate by 0.5 percentage points in 2008 and a further 0.5 percentage points in 2009 to reach 11 per cent.

In order to help small businesses, this Economic Statement proposes to accelerate to 2008 the 0.5 percentage point reduction in the small business tax rate currently scheduled for 2009. The small business tax rate would fall to 11 per cent effective January 1, 2008.

The reduction in the small business rate will be pro-rated for corporations with taxation years that do not coincide with the calendar year. In addition, the small business deduction will continue to be phased out on a straight-line basis for CCPCs having between $10 million and $15 million of taxable capital employed in Canada.

Table A.3
Tax Rate on Qualifying Small Business Income

Sales and Excise Tax Measures

Cutting the GST to 5 per cent

The goods and services tax/harmonized sales tax (GST/HST) is a consumption tax that applies to the majority of goods and services consumed in Canada. GST is imposed under the Excise Tax Act at the rate of 6 per cent, and in the harmonized provinces (Nova Scotia, New Brunswick and Newfoundland and Labrador), as the 6 per cent federal component of the combined 14 per cent federal-provincial HST. Subsequent references to the GST should be read as also referring to the federal component of the HST.

This Economic Statement proposes to reduce the GST rate by one percentage point, from 6 to 5 per cent, effective January 1, 2008. This Economic Statement also proposes to maintain the GST credit at current levels for low- and modest-income Canadians and to retain the existing GST rebate rates for new housing and purchases made by public service bodies.

To facilitate the transition to the lower rate, this Economic Statement proposes transitional rules for determining the GST rate applicable to transactions that straddle the January 1, 2008 implementation date. These rules, which are outlined below, will provide certainty for suppliers and consumers and are intended to minimize the compliance and administrative costs of changing to the new 5 per cent rate. Other proposed changes associated with the rate reduction are also outlined below. In general, they are the same as those implemented when the GST was reduced from 7 to 6 per cent on July 1, 2006.

Amendments to the relevant GST/HST regulations, in order to implement the change to a 5 per cent rate of GST, will be proposed following Royal Assent of the rate change.

Transitional Rules

The general transitional rule to determine whether the rate of 6 per cent or the rate of 5 per cent will apply, which will be based upon the time at which the GST in respect of a transaction becomes payable, is outlined below:

• If GST becomes payable, or is paid without having become payable, before January 1, 2008, the rate of 6 per cent will apply.

• If GST becomes payable on or after January 1, 2008, without having been paid before that day, the rate of 5 per cent will apply.

• If GST is paid on or after January 1, 2008, without having become payable before that day, the rate of 5 per cent will apply.

The Excise Tax Act has a number of existing provisions that will be relevant in determining when GST becomes payable.

Specific Transitional Rules

In addition to the application of the general transitional rule described above, certain types of transactions will have specific transitional rules described below.

(a) Sales of Real Property

Under the proposed measures, the following specific transitional rules will apply in respect of sales of real property to determine whether the rate of 6 per cent or the rate of 5 per cent will apply.

Ownership or Possession Transferred before January 1, 2008: Generally, the 6 per cent rate will apply to all of the consideration for a supply by way of sale of real property if ownership of the property, or possession of it under the agreement of purchase and sale, is transferred to the buyer before January 1, 2008.

Ownership and Possession Transferred on or after January 1, 2008: The 5 per cent rate will apply to all of the consideration for a supply by way of sale of real property if both ownership of the property and possession of it under the agreement are transferred to the buyer on or after January 1, 2008. Note the special transitional rule for new residential housing below.

• For sales of houses, apartment buildings and other residential complexes made pursuant to an agreement, evidenced in writing, entered into on or before October 30, 2007 but after May 2, 2006, the 6 per cent rate will apply to all of the consideration.

• For sales of houses, apartment buildings and other residential complexes made pursuant to an agreement, evidenced in writing, entered into on or before May 2, 2006, the 7 per cent rate will apply to all of the consideration.

• In both of these circumstances, the purchaser of the residential complex will be entitled to file a claim directly with the Canada Revenue Agency to be paid a Transitional Rebate that reflects the GST rate reduction to 5 per cent, net of any corresponding rebate adjustment. Unlike the regular GST New Housing Rebates, the builder will not be allowed to pay or credit the Transitional Rebate against tax owing by the purchaser and then claim it as a deduction from net tax.

Table A.4
Application of Transitional Rules to New Housing

(b) Deemed Supplies

The Excise Tax Act provides for deemed supplies in a number of circumstances. Under the proposed rules, the rate of 5 per cent will generally be used to determine GST that is deemed under the Excise Tax Act to be paid, or collected, on or after January 1, 2008. For example, a landlord who is deemed to have paid and collected GST on or after January 1, 2008 on the fair market value of a newly constructed apartment building would calculate the GST on the fair market value at the rate of 5 per cent.

(c) Imported Goods and Imported Taxable Services and Intangibles

Under the proposed measures, specific transitional rules will also apply in respect of imported goods and imported taxable services and intangibles.

Imported Goods: GST at the rate of 5 per cent will apply to goods that are either imported on or after January 1, 2008, or released from Customs’ control on or after January 1, 2008.

Imported Taxable Services and Intangibles: GST on imported taxable services and intangibles is usually payable the earlier of the day the consideration is paid and the day that consideration becomes due. The general transitional rule outlined above will determine the rate of tax to be applied in these circumstances.

Financial Institutions: Under draft legislative proposals released January 26, 2007, financial institutions will be required to self-assess GST on certain cross-border transactions using a special set of rules. GST on these transactions will be determined on an annual basis and in general, will become payable six months after the end of the financial institution’s taxation year.

If a financial institution’s taxation year begins before January 1, 2008, and ends on or after that day, the financial institution will be required to apportion the total amount of qualifying consideration for the taxation year on which it is required to self-assess GST under the proposed measure. The apportionment will be based upon the ratio of the number of days in the taxation year that occur before January 1, 2008, to the total number of days in the taxation year. GST on the amount allocated to the period before January 1, 2008, will be calculated at the rate of 6 per cent and GST on the remaining amount of qualifying consideration will apply at the rate of 5 per cent.

(d) Taxable Benefits

The determination of the GST remittable on certain taxable benefits for employees and shareholders is calculated based on amounts determined for income tax purposes. The GST is calculated by multiplying the amount determined for income tax purposes by a factor specified in the Excise Tax Act or a rate prescribed in related regulations. These factors and rates will be adjusted to reflect the January 1, 2008, GST rate reduction. In particular, the prescribed rate for calculating the GST on the automobile operating expense benefit, which is currently 4 per cent, will be 3 per cent for the 2008 and subsequent taxation years, and for calculating the HST, the prescribed rate, which is currently 10 per cent, will be 9 per cent for the 2008 and subsequent taxation years. Also, the factor, which currently uses 5 per cent, that is applicable to taxable benefits other than automobile operating expenses, will use 4 per cent for the 2008 and subsequent taxation years and for calculating the HST, the factor, which currently uses 13 per cent, will use 12 per cent for the 2008 and subsequent taxation years.

(e) Anti-Avoidance Provision

This Economic Statement also proposes that rules be implemented to maintain the integrity of the GST system through the transition period. These rules are intended to prevent inappropriate tax savings in cases where transactions are undertaken between non-arm’s length parties to obtain the benefit of the rate reduction, rather than primarily for commercial purposes.

Other Measures

A number of consequential amendments are proposed as a result of the GST rate reduction.

Housing Rebates: Individuals who purchase or construct a new home, or substantially renovate an existing home, for use as their primary place of residence are generally entitled to a rebate of part of the GST that they pay in the course of the purchase, construction or substantial renovation. The maximum amount of the rebate is equal to the lesser of 36 per cent of the GST paid and $7,560 (i.e., 36 per cent of the GST paid at the 6 per cent rate on a $350,000 home). For homes that cost more than $350,000, the rebate is phased out so that no rebate is available for homes valued at $450,000 or more.

The rebate rate of 36 per cent, and the lower and upper phase-out thresholds of $350,000 and $450,000 respectively, will not change as a result of the rate reduction; however, the maximum dollar value of the rebate, which is currently set at $7,560, will be adjusted to $6,300 (i.e., 36 per cent of the GST paid at the 5 per cent rate on a $350,000 home). The maximum dollar amount will also be adjusted for other similarly-structured housing rebate provisions in the Excise Tax Act.

In addition, the GST-included upper and lower phase-out values of the "Rebate for Purchasers of Shares in a Cooperative Housing Corporation" and the "New Housing Rebate for Building Only" will be adjusted to reflect the lower rate of GST.

Maintaining the rebate rate at the same level (36 per cent of the GST) while reducing the GST rate means the effective tax rate on new housing is now lower than when the GST was introduced. The 36 per cent rebate was introduced in 1991 to reduce the effective GST rate on most new homes to approximately 4.5 per cent, which was consistent with the effective tax rate under the predecessor of the GST, the Federal Sales Tax. As a result of the reduction of the GST rate from 7 per cent to 6 per cent on July 1, 2006 the effective tax rate on these new homes was reduced from 4.5 per cent to 3.84 per cent. The proposed reduction of the GST rate from 6 per cent to 5 per cent will further reduce this effective tax rate to 3.2 per cent.

The following table provides examples of how new homebuyers will benefit from the GST rate reduction.

Table A.5
GST Rate Reduction—Impact on New Housing

Public Service Bodies: The existing rebate percentages used to calculate rebates of the otherwise unrecoverable GST claimed by charities, qualifying non-profit organizations and selected public service bodies (including municipalities, universities, public colleges, schools and hospitals) will not change.

Streamlined Accounting Methods: Small businesses, as well as eligible public service bodies, can use a Quick or Special Quick Method of Accounting to simplify compliance. Under these methods, taxpayers multiply eligible GST/HST-included sales by a reduced percentage and remit that amount to the government in lieu of tracking and claiming input tax credits for most of the tax they pay. The percentages used are specified in the Streamlined Accounting (GST/HST) Regulations.

As a result of the proposed rate reduction, the specified percentages will change to those shown in the tables below ("participating provinces" means the provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador where the GST/HST will apply at a combined rate of 13 per cent).

The new percentages will apply to reporting periods that begin on or after January 1, 2008. For reporting periods that straddle January 1, 2008, the existing percentages will apply to consideration that becomes due, or is paid without having become due, before January 1, 2008, and the new percentages will apply to the remaining consideration.

Table A.6
Remittance Rates for Business Registrants Using
the Quick Method of Accounting that Mainly
Purchase Goods for Resale

Table A.7
Remittance Rates for Business Registrants Using the Quick Method of Accounting that Mainly Provide Services

Table A.8
Remittance Rates for Registrants Acting in Their Capacity
as a University or Public College (if Supplies Through Vending Machines Account for at Least 25% of Total Supplies)

Table A.9
Remittance Rates for Registrants Acting in Their Capacity
as a University or Public College (if Supplies Through Vending Machines Account for Less Than 25% of Total Supplies)

Table A.10
Remittance Rates for Registrants Acting in Their Capacity as a Specified Facility Operator, Qualifying Non-Profit Organization or Designated Charity

Table A.11
Remittance Rates for Registrants Acting in Their Capacity
as a School Authority

Table A.12
Remittance Rates for Registrants Acting in Their Capacity
as a Municipality

Table A.13
Remittance Rates for Registrants Acting in Their Capacity
as a Hospital Authority, External Supplier or Facility Operator

Tobacco Excise Levies

The federal government taxes tobacco products both through a targeted excise duty and the broad-based GST. The excise duty is imposed on the manufacture or importation of tobacco products. The GST is a multi-stage tax that is ultimately levied on an ad valorem basis on the final selling price. These taxes affect the price of tobacco products, and price is one of the key factors influencing tobacco consumption, affecting both the decision to smoke and the frequency of use by continuing smokers.

In line with the Government’s promotion of health and wellness, this Economic Statement proposes to increase tobacco excise duties to offset the impact of the GST rate reduction. The following table shows the federal excise duty increases that will apply beginning January 1, 2008, concurrent with the effective date of the 1 percentage-point reduction of the GST.

Table A.14
Tobacco Excise Duty Rate Structure

Inventory Tax

Excise duty is imposed on tobacco products manufactured in Canada at the time manufacturers package them and on imported tobacco products at the time of importation. The new excise duty rates apply only to tobacco products that are packaged or imported on or after January 1, 2008. This means that, in the absence of a special provision, inventories held by a taxpayer on January 1, 2008 would be subject to the old lower rates of excise duty and to the new lower GST rate.

To ensure that the increases are applied in a consistent manner to all tobacco products at different trade levels, as well as to prevent tax avoidance through inventory build-ups, the proposed excise duty increases will also be applied to inventories.

It is proposed that inventories of cigarettes, tobacco sticks, fine-cut tobacco products and cigars held by manufacturers, importers, wholesalers and retailers at the end of December 31, 2007 be subject to per unit taxes of 0.295 cents, 0.275 cents, 0.195 cents, and 0.190 cents respectively—where a unit is a cigarette, a tobacco stick, a gram of fine-cut tobacco or a cigar. Taxpayers may use any reasonable method for establishing their inventories of these products, including a physical count.

In order to simplify compliance, this inventory tax will not apply to retailers holding 30,000 or fewer units (equivalent to 150 cartons of cigarettes) at the end of the day on December 31, 2007. A threshold at this level largely ensures that the tax on inventories will only apply to manufacturers, importers, wholesalers, and relatively large retailers. In addition, the tax will not apply to tobacco products held in vending machines. An extended period will be provided for remittance of the tax, allowing taxpayers until February 29, 2008 to file returns and pay the tax. Interest will apply after that date on late or deficient payments.

Air Travellers Security Charge (ATSC) Rates

ATSC rates are structured to include, where applicable, the goods and services tax or the federal portion of the harmonized sales tax (GST/HST). As a result of the GST/HST rate reduction, certain technical adjustments to ATSC rates are required in order to ensure that consumers receive the full benefit of the rate reduction. The proposed rates are shown in the following table. The ATSC rate for other international air travel is not subject to the GST/HST and will remain unchanged.

The new rates will apply to tickets purchased on or after January 1, 2008.

Table A.15
ATSC Rate Structure¹

Personal Income Tax Measures

Reducing the Lowest Personal Income Tax Rate

The Income Tax Act currently sets out a personal tax rate schedule that applies a tax on taxable income at rates of between 15.5 per cent and 29 per cent. The lowest rate of 15.5 per cent applies to taxable incomes of up to $37,178 for 2007.

The lowest personal income tax rate will be reduced to 15 per cent from 15.5 per cent effective January 1, 2007. This rate will also generally be used to calculate non-refundable tax credits and the alternative minimum tax for the 2007 and subsequent taxation years.

Raising the Basic Personal Amount

The basic personal amount—the amount that an individual can earn without paying federal personal income tax—is proposed to be increased to $9,600 for 2007 and 2008, and to $10,100 for 2009, from its current 2007 value of $8,929. Amounts in 2010 and following years will be the amount from the previous year indexed according to inflation in the manner specified in the Income Tax Act. This Economic Statement also proposes to increase the amount upon which the spouse or common-law partner and wholly dependent relative credits are calculated by the same amount as the basic personal amount, so that its value remains equivalent to the basic personal amount.

Table A.16
Proposed Personal Amounts

Table A.17
Total Personal Income Tax Savings for
Typical Individuals and Families in 2007
Single Individual

Single Parent with One Child⁴

Table A.17 (con’t)
Total Personal Income Tax Savings for
Typical Individuals and Families in 2007
One-Earner Family with Two Children⁵

Two-Earner Family with Two Children⁵