Tax Quarry

All Canadians were able to get a handout from the new government in the form of a tax relief.  In an earlier press release dated October 31, 2006, that included Canada’s Tax Fairness Plan the government attempted to build on the tax cuts announced in the budget by proposing significant positive measures to help Canadian seniors by:

Increasing the age credit amount by $1,000 retroactive to January 1, 2006.

Introducing income splitting for pensioners to increase the rewards from retirement saving effective as of the 2007 taxation year.

Following the October announcement, on November 23, the Advantage Canada: Building a Strong Economy for Canadians strategy was released. According to the release, a key element of the strategy is to provide a tax back guarantee to Canadians by dedicating all interest savings from reducing the federal debt to personal income tax reductions.  Minister Flaherty stated that “as debt reduction continues and interest savings accumulate, so too will the tax reductions for Canadian families and taxpayers-less debt means less interest means less taxes”.  For example, debt reduction in 2005-06 will result in ongoing interest savings of $660 million per year and, combined with interest savings from planned $3-billion annual debt reduction, will climb to $800 million in 2007-08 and $1.4 billion per year by 2011-12, resulting in significant personal income tax reductions.

In addition to these strategic benefits that will allow seniors to keep more of their hard earned money invested for retirement, all personal income tax amounts will be adjusted by 2.2 per cent, effective January 1, 2007, to ensure that inflation does not cause people to pay more income tax. 

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With the changing of the guard in Government comes the expectation of tax changes that sometimes are favorable to the average Canadian and other times are quite unfavorable.  This past year as a pleasant surprise, the 2006 Budget boasted many favorable changes that will allow Canadian families, students, workers and seniors to keep more of their hard-earned money in 2006 and 2007. In a recent press release the government provided a summary of the substantial and immediate tax relief measures that were made.

Budget 2006 personal tax relief measures which will have an immediate impact on Canadians, include:

ü     A 1-percentage-point reduction in the goods and services tax (GST) beginning on July 1, 2006. This benefits all Canadians, including those who do not earn enough to pay personal income tax.

ü     Increasing the basic personal amount-the amount that an individual can earn without paying federal personal income tax-so that it grows each and every year and remains above previously legislated levels in 2006 and 2007. The basic personal amount will be $8,929 in 2007 and will continue to increase incrementally, reaching at least $10,000 in 2009.

ü     Permanently reducing the lowest personal income tax rate from 16 per cent to 15.5 per cent effective July 1, 2006.

ü     Providing all Canadians a break on work-related expenses under the new Canada Employment Credit. This measure took effect July 1, 2006, and recognizes the cost of work-related expenditures such as home computers, uniforms and supplies.

ü     Creating a Children’s Fitness Tax Credit to cover eligible fees up to $500 for enrolment in a physical activity program, effective January 1, 2007.

ü     Providing students with a new textbook tax credit, effective January 1, 2006, to provide better tax recognition for the cost of textbooks for students.

Minister Flaherty’s contends that while he feels great strides have been made Canadians still pay too much tax, and our government will continue to look at new ways to ease the tax burden and create a real Canadian tax advantage.

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As we close out the 2006 taxation year and prepare to file our tax returns and plan for fiscal 2007, there are a number of significant changes to the tax laws that may give you a jump start on tax savings and planning.  These changes may affect the amount of money you will receive from the Government or the amount that you are required to pay.  In Budget 2006, the Conservative government announced corporate tax measures to help businesses grow and succeed and to encourage employers to hire new apprentices.  The proposed changes that were included in the tax laws are:

A new Apprenticeship Job Creation Tax Credit, effective May 2, 2006, that gives eligible employers a tax credit equal to 10 per cent of the wages paid to qualifying apprentices in the first two years of their contract, to a maximum credit of $2,000 per apprentice per year.

An increasing to the annual amount of active business income eligible for the small business limit to $400,000 from $300,000 as of January 1, 2007.

According to a recent press release and consistent with the new government’s goal of establishing the lowest tax rate on new business investment in the Group of Seven (G7), the changes are “part of the government’s strategy to create a tax advantage for Canada, one of five key advantages that will help our country become a world economic leader”.  As a supplement the changes already announced, the government has also introduced significant corporate tax relief measures that will improve competitiveness and support small business growth, scheduled to take effect beyond 2007, including:

Reducing the 12 per cent income tax rate applying to qualifying small business income to 11 per cent by 2009.

Reducing the general corporate income tax rate to 18.5 per cent from 21 per cent by 2011, starting in 2008.

Eliminating the corporate surtax for corporations as of January 1, 2008.

For more information on these tax changes please consult a tax professional or call the Canada Revenue Agency for details on how these measures may affect you.

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The main legislation governing Professional Corporations (PCs) are sections 3.1 to 3.4 of the Ontario Business Corporations Act (OBCA).  The OBCA defines a PC as “a corporation incorporated under this Act that holds a valid certificate of authorization or other authorizing document issued under an Act governing a profession”.  Accordingly, depending on the profession in which you practice direct reference must be made to the governing body legislation and regulations.  For example, lawyers should refer to the Law Society of Upper Canada and the Law Society Act.

For income tax purposes, section 248 of the Income Tax Act (1995 Amendment) defines a professional corporation as “a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor”.  Further, Interpretation Bulletin 189R2 entitled “Corporations Used by Practicing Members of Profession” provides CRA’s policy on when to recognize a professional as carrying on business through a PC.

A professional corporation must satisfy the following conditions before being incorporated under the OBCA:

1.         All of the issued and outstanding shares of the corporation shall be legally and beneficially owned, directly or indirectly by one or more members of the same profession.

2.         All of the officers and directors of the corporation shall be shareholders of the corporation

3.         The name of the corporation shall include the words “Professional Corporation” or “Societe professionelle” and shall comply with the rules respecting the names of professional corporations set out in the OBCA regulation.  Name must also comply with rules of the governing body.

4.              The corporation cannot be a numbered company

5.         The articles of incorporation of the professional corporation must be worded to prevent the corporation from carrying on business other than the practice of the profession.  Certain activities that are “related to or ancillary” to practices are permitted.  For example, investment of surplus funds earned by the corporation, or holding real estate.

However, with respect to medical professionals, the requirement that all shareholders must be members of the same profession has been relaxed.  Effective January 2006, the Ontario government amended the legislation for the medical profession to permit family members of physicians to become non-voting shareholders of the professional corporation.  Trust for minor children can also hold shares in the corporation.  These changes have not been made for lawyers or accountants.