February 28, 2000 

FEBRUARY 28, 2000

The February 28, 2000 Budget was one that concentrated on tax relief, both personal and corporate, the majority of which were squarely targeted at the middle class. A five year plan was laid out, based on balanced budgets or better. Although the plan talks about five years, the only portion that is in the "bank" is the first two years of the plan.

Below, we have highlighted a number of the more important budget changes:

Personal Tax Changes

• The budget proposes to immediately restore full indexation of the personal tax system to protect taxpayers against inflation. For 2000, the government expects this measure to increase the basic personal exemption to $7,231 (from $7,131) and the taxable income threshold at which the middle tax rate begins to $30,004 (from $29,590).

• The budget proposes to cut the middle tax rate to 23% (from 26%) over five years, starting with a decrease to 24% as of July 2000. As a result, the effective middle tax rate for 2000 is 25% and for 2001 is 24%.

• The government plans to phase out the 5% high income surtax by 2004. In 2000, the 5% surtax will apply to federal tax otherwise payable over $15,500 (from $12,500). In 2001, the surtax will apply at the rate of 4% on federal tax otherwise payable over $18,500 (an income level of about $85,000).

• The maximum Canada Child Tax Benefit increases to $2,056 (from $1,805) by July 1, 2000, and to $2,265 by July 1, 2001.

• The amount of foreign investments that may be held in RRSPs and registered pension plans rises to 25% for 2000 and 30% for 2001.

• The budget proposes to increase the annual exemption of scholarship, fellowship or bursary income from $500 to $3,000, beginning with the 2000 taxation year.

• The budget proposes to provide an additional disability tax credit supplement amount of $2,941 for families caring for children under age 18 with severe disabilities and to extend the eligibility for the disability tax credit to individuals who must undergo therapy several times each week totalling at least 14 hours per week in order to sustain their vital functions.

Corporate Tax Rate Changes

The general corporate tax rate drops from 28% to 27% effective January 1, 2001 and is expected to reduce to 21% over the next 3 years. This rate reduction is not applicable to corporate income that already attracts a lower rate of tax, such as manufacturing & processing, small business deductions, etc.

For a Canadian Controlled Private Corporation, there is a tax reduction on small business income between $200,000 and $300,000 effective January 1, 2001 from 28% to 21%.

Capital Gains

The budget proposes that the income inclusion rate for capital gains enjoyed by both individuals and corporations be reduced to two thirds from the current rate of three quarters for capital gains realized after February 27, 2000. This change ensures that capital gains are taxed at about the same rate as dividends received from taxable Canadian corporations by individuals.

Stock Options

There are changes to taxation of employers of public company's stock options to the time the shares are sold instead of when they are exercised, subject to an annual vesting limit of $100,000.

Rollovers of Capital Gains on Qualified Small Business Corporation shares

A new incentive for sellers of shares in Qualified Small Business Corporation shares allows them to defer the taxation of the capital gain by investing the proceeds on the sale in another Qualified Small Business Corporation within certain limitations.

This information is based upon the Budget speech and actual legislation may vary when enacted. Our comments are meant to be general in nature and we will be pleased to provide you with any further specific information you may require.