Crunch Time – 2008 Tax Rates

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Federal tax rates for 2008 are:

• 15% on the first $37,885 of taxable income, +
• 22% on the next $37,884 of taxable income (on the portion of taxable income between $37,885 and $75,769), +
• 26% on the next $47,415 of taxable income (on the portion of taxable income between $75,769 and $123,184), +
• 29% of taxable income over $123,184.

The chart below reproduces the first calculation that has to be made on Page 2 of Schedule 1 of the tax package to calculate net federal tax. Page 1 is used to calculate federal non-refundable tax credits.

Federal tax on taxable income manual calculation chart

	Use this column if your taxable income is $37,885 or less	Use this column if your taxable income is more than $37,885, but not more than $75,769	Use this column if your taxable income is more than $75,769, but not more than $123,184	Use this column if your taxable income is more than $123,184
Enter your taxable income from line 260 of your return					1
Base amount	−        0	−     37,885	−    75,769	−  123,184	2
Line 1 minus line 2 (this amount cannot be negative)	=	=	=	=	3
Federal tax rate	×    15%	×      22%	×      26%	×      29%	4
Multiply the amount on line 3 by the tax rate on line 4	=	=	=	=	5
Tax on the amount from line 2	+       0	+      5,683	+    14,017	+    26,345	6
Add lines 5 and 6	=	=	=	=	7

Provincial/Territorial tax rates for 2008

Under the current tax on income method, tax for all provinces (except Quebec) and territories is calculated the same way as federal tax.

Form 428 is used to calculate this provincial or territorial tax. Provincial or territorial specific non-refundable tax credits are also calculated on Form 428.

For complete details, see the Provincial or Territorial information and forms in your 2008 tax package.

Provincial / Territorial tax rates (combined chart)

Provinces / Territories	Rate(s)
Newfoundland and Labrador	8.2% on the first $30,215 of taxable income, + 13.3% on the next $30,214, + 16% on the amount over $60,429
Prince Edward Island	9.8% on the first $31,984 of taxable income, + 13.8% on the next $31,985, + 16.7% on the amount over $63,969
Nova Scotia	8.79% on the first $29,590 of taxable income, + 14.95% on the next $29,590, + 16.67% on the next $33,820 + 17.5% on the amount over $93,000
New Brunswick	10.12% on the first $34,836 of taxable income, + 15.48% on the next $34,837, + 16.8% on the next $43,600, + 17.95% on the amount over $113,273
Ontario	6.05% on the first $36,020 of taxable income, + 9.15% on the next $36,021, + 11.16% on the amount over $72,041
Manitoba	10.9% on the first $30,544 of taxable income, + 12.75% on the next $35,456, + 17.4% on the amount over $66,000
Saskatchewan	11% on the first $39,135 of taxable income, + 13% on the next $72,679, + 15% on the amount over $111,814
Alberta	10% of taxable income
British Columbia	5.06% on the first $35,016 of taxable income, + 7.7% on the next $35,017, + 10.5% on the next $10,373, + 12.29% on the next $17,230, + 14.7% on the amount over $97,636
Yukon	7.04% on the first $37,885 of taxable income, + 9.68% on the next $37,884, + 11.44% on the next $47,415, + 12.76% on the amount over $123,184
Northwest Territories	5.9% on the first $35,986 of taxable income, + 8.6% on the next $35,987, + 12.2% on the next $45,038, + 14.05% on the amount over $117,011
Nunavut	4% on the first $37,885 of taxable income, + 7% on the next $37,884, + 9% on the next $47,415, + 11.5% on the amount over $123,184

Looking Forward – 2009 Tax Rates

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Federal tax rates for 2009 are:

• 15% on the first $38,832 of taxable income, +
• 22% on the next $38,832 of taxable income (on the portion of taxable income between $38,832 and $77,664), +
• 26% on the next $48,600 of taxable income (on the portion of taxable income between $77,664 and $126,264), +
• 29% of taxable income over $126,264.

Note
For 2009, the federal budget proposes to increase the upper taxable income thresholds of the 15% and 22% tax brackets. For more information about these proposed changes, see the questions and answers in CRA 2009 Budget News.

The chart below reproduces the first calculation that has to be made on Page 2 of Schedule 1 of the tax package to calculate net federal tax. Page 1 is used to calculate federal non-refundable tax credits.

Federal tax on taxable income manual calculation chart

	Use this column if your taxable income is $38,832 or less	Use this column if your taxable income is more than $38,832, but not more than $77,664	Use this column if your taxable income is more than $77,664, but not more than $126,264	Use this column if your taxable income is more than $126,264
Enter your taxable income from line 260 of your return					1
Base amount	−        0	−     38,832	−    77,664	−  126,264	2
Line 1 minus line 2 (this amount cannot be negative)	=	=	=	=	3
Federal tax rate	×    15%	×      22%	×      26%	×      29%	4
Multiply the amount on line 3 by the tax rate on line 4	=	=	=	=	5
Tax on the amount from line 2	+       0	+      5,825	+    14,368	+    27,004	6
Add lines 5 and 6	=	=	=	=	7

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Provincial/Territorial tax rates for 2009

Under the current tax on income method, tax for all provinces (except Quebec) and territories is calculated the same way as federal tax.

Form 428 is used to calculate this provincial or territorial tax. Provincial or territorial specific non-refundable tax credits are also calculated on Form 428.

For complete details, see the Provincial or Territorial information and forms in your 2009 tax package.

Provincial / Territorial tax rates (combined chart)

Provinces / Territories	Rate(s)
Newfoundland and Labrador	7.7% on the first $31,061 of taxable income, + 12.8% on the next $31,060, + 15.5% on the amount over $62,121
Prince Edward Island	9.8% on the first $31,984 of taxable income, + 13.8% on the next $31,985, + 16.7% on the amount over $63,969
Nova Scotia	8.79% on the first $29,590 of taxable income, + 14.95% on the next $29,590, + 16.67% on the next $33,820 + 17.5% on the amount over $93,000
New Brunswick	10.12% on the first $35,707 of taxable income, + 15.48% on the next $35,708, + 16.8% on the next $44,690, + 17.95% on the amount over $116,105
Quebec	Contact Revenu Québec
Ontario	6.05% on the first $36,848 of taxable income, + 9.15% on the next $36,850, + 11.16% on the amount over $73,698
Manitoba	10.8% on the first $31,000 of taxable income, + 12.75% on the next $36,000, + 17.4% on the amount over $67,000
Saskatchewan	11% on the first $40,113 of taxable income, + 13% on the next $74,497, + 15% on the amount over $114,610
Alberta	10% of taxable income
British Columbia	5.06% on the first $35,716 of taxable income, + 7.7% on the next $35,717, + 10.5% on the next $10,581, + 12.29% on the next $17,574, + 14.7% on the amount over $99,588
Yukon	7.04% on the first $38,832 of taxable income, + 9.68% on the next $38,832, + 11.44% on the next $48,600, + 12.76% on the amount over $126,264
Northwest Territories	5.9% on the first $36,885 of taxable income, + 8.6% on the next $36,887, + 12.2% on the next $46,164, + 14.05% on the amount over $119,936
Nunavut	4% on the first $38,832 of taxable income, + 7% on the next $38,832, + 9% on the next $48,600, + 11.5% on the amount over $126,264

Tax Deduction and Credit

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You’ll enjoy greater tax savings if you claim all your charitable donations on one spouse’s tax return, rather than having each spouse claim some.

By claiming medical expenses on the return of the lower-income spouse, you’ll increase your available credit.

If you purchase Canada Savings Bonds using your payroll purchase plan, the interest charged by your employer to participate is deductible at line 122 as a carrying charge.

Did you know that you might be entitled to a quarterly cheque from the government for the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) ? Anyone over the age of 19 is eligible for the GST credit, but you must file a tax return in order to receive it — even if you’re not taxable!

If you are responsible for the care of a child who is under 18, you might be eligible to claim the Canada Child Tax Benefit (CCTB) for that child.

Always reduce your taxable income to equal your total tax credits for the year. If you reduce your taxable income to zero, you won’t owe any taxes, but you might be wasting some deductions.

How Can You Save Tax By Lending To Your Family

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Interest rates are at their lowest levels in decades. The current low interest rate environment provides a unique opportunity for clients to save tax by arranging family loans and income splitting with family members. For the period between January 1 and March 31, 2002, the prescribed rate of interest set by the Canada Customs and Revenue Agency is 3% for loans to family members. This rate is likely to be renewed for the next quarter, but the low rate cannot last forever.

Income splitting, in its simplest form, means shifting income that would be taxable in the hands of a high-income person to a family member whose income is significantly lower. There are two major benefits to be achieved by making a loan at the prescribed rate of 3% to a family member, such as a spouse or child. They are:

1. the income generated by the loan is not attributed to the lender, as long as the interest on the loan is paid within 30 days after the end of each year, and
2. as long as the loan is made at the prescribed rate, the rate is fixed for as long as the loan is outstanding and the interest is paid.

Consequently, it is possible for the interest earned in excess of 3% on the loaned money to be taxed at the family member’s lower tax rate. For example, if you lend $100,000 to your spouse at the current prescribed rate of 3%, and your spouse earns a 5% return on these funds, the 2% difference in interest earned ($2,000) will be taxed at your spouse’s lower tax rate.

Everyone’s financial and tax situation is different. The income-splitting strategy discussed above needs to be properly structured and documented in order to obtain the maximum benefits for the taxpayer.

You Made it? Here is $750,000 Capital Gains Deduction

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Although the $100,000 capital gains deduction was abolished in 1994, there is a $750,000 ($500,000 for dispositions occurring before March 19, 2007) capital gains deduction for capital gains on the disposal by an individual of:

 

 qualified small business corporation (SBC) shares

 

 qualified farm property, and

 

 for dispositions occurring after May 2, 2006, qualified fishing property

 

 

The maximum lifetime capital gains deduction that can be claimed by any individual was increased from $500,000 to $750,000, effective March 19, 2007, as a result of the 2007 Federal budget.  This includes deductions for small business corporation shares, farm property, fishing property, and any capital gains deductions used in 1994 or earlier.  The calculation of the deduction is done on CRA’s form T657.

 

The rules relating to the capital gains deduction are complex, and professional advice should be obtained for anyone who is hoping to take advantage of this deduction.  Long term planning is necessary to ensure you qualify.  The following information includes only some general information.

 

a.    Qualified small business corporation (SBC) shares

Income Tax Act s. 110.6(1), S. 110.6(2.1)

An individual who owns shares in a qualifying small business corporation may be able to claim a $750,000 ($500,000 for dispositions occurring before March 19, 2007) capital gains deduction when those shares are sold.  There are 2 main rules, one regarding ownership of the shares, and the second regarding the use of the assets of the corporation.

 

1.    Throughout  the 24 months immediately preceding disposition of the shares, the shares must not have been owned by anyone other than the individual or a person or partnership related to the individual.  The shares may be newly-issued shares that have not been owned for a full 24 months, but they must not have been owned by anyone else in that time.

 

2.    Throughout the 24 months immediately preceding disposition of the shares, more than 50% of the fair market value of the assets of the corporation must have been used principally in an active business carried on primarily in Canada by the corporation or a corporation related to it.  At the time of disposition of the shares, all or substantially all (90% as per CRA) of the fair market value of the assets must have been used in the active business.  Examples of assets that may not qualify as being used in an active business are stocks, bonds, and rental property.

 

If the individual dies and has a deemed disposal of the shares, at the time of death the shares may  not be qualified small business corporation shares because of the 90% rule.  In this case, the Income Tax Act provides that the shares may still qualify, if the corporation was a qualified small business corporation at any time in the 12-month period before the death of the individual.

 

See also the CRA guide T4037 Capital gains.

 

When shares in an SBC are sold to a non-resident or to a public corporation, there could be a resulting denial of the capital gains exemption.  This is because s. 256(9) of the Income Tax Act deems that where control of a corporation is acquired, it is deemed to be acquired at the commencement of the business day.  The result is that when the shares are sold, they are deemed to be under the control of the purchaser, which is not a qualifying SBC.  A taxpayer can elect to have s. 256(9) not apply, but this could cause other complications.  A Federal Court of Appeal case dealing with s. 256(9) is La Survivance v. Canada 2006 FCA 129.  CRA issued Technical Interpretation 2006-0214781E5, which deals with s. 256(9) and the capital gains deduction.  It is imperative to get advice from a tax professional before making a sale of qualified SBC shares.

 

b.    Qualified farm property

Income Tax Act s. 110.6(1), S. 110.6(2)

An individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $750,000 ($500,000 for dispositions occurring before March 19, 2007) capital gains deduction when the farm property is sold.  Qualified farm property of an individual includes property owned by:

 

 the individual,

 

 the spouse or common-law partner of the individual,  or

 

 a partnership, an interest in which is an interest in a family farm partnership of the individual or his/her spouse or common-law partner.

 

 

The qualified farm property can be:

 

1.    real property or eligible capital property (such as production quotas) as long as it is used in the course of carrying on a farming business in Canada by:

        i.    the individual, or the spouse or common-law partner, parent or child of the individual,

        ii.    the beneficiary of a personal trust, or the spouse, common-law partner, parent or child of the beneficiary,

        iii.    a family farm corporation where any of the persons in i or ii above owns shares in the corporation, or

        iv.    a family farm partnership where any of the persons in i or ii above owns an interest in the partnership

 

2.    a share of the capital stock of a family farm corporation of the individual or the individual’s spouse or common-law partner, or

 

3.    an interest in a family farm partnership of the individual or the individual’s spouse or common-law partner.

 

There are rules about the period of ownership and the use of real property and eligible capital property in order to meet the qualified farm property requirements:

 

1.    throughout the 24 month period immediately preceding the disposition of the farm property, the property must have been owned by one of the persons listed in b(1) (i), (ii) or (iv) above, or by a personal trust from which the individual acquired the property, and

 

2.    one of the following requirements must also be met:

        i.    in at least 2 years while the property was owned the gross revenue earned from the farming business by one of the persons mentioned above must have exceeded the income of that person from all other sources for the year, or

        ii.    the property must have been used by a family farm corporation or partnership principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time one of the persons mentioned above was actively engaged on a regular and continuous basis in the farming business in which the property was used.

 

If the farm property is real property that was acquired prior to June 18, 1987 and does not meet the above requirements, it still may qualify for the deduction.  To qualify, it must have been used by one of the persons mentioned above, principally in the course of carrying on the business of farming in Canada in the year of disposition, or in at least 5 years during which the property was owned by any of the persons mentioned above.

 

If the farm property is also the taxpayer’s principal residence, the capital gain on disposal may be divided into principal residence and farm property.  The principal residence exemption would then be calculated for the principal residence portion, and the $500,000 capital gains deduction used for the farm property.

 

More information on qualified farm property can be found in the CRA guide T4003 Farming Income.

 

c.    Qualified fishing property

The May 2006 federal budget made the $750,000 ($500,000 for dispositions occurring before March 19, 2007) capital gains deduction available for qualified fishing property, for dispositions occurring on or after May 2, 2006.  For more information on what is qualified fishing property, see capital gains of fishers in the federal budget documents.

 

d.    Cumulative net investment loss (CNIL)

When the capital gains deduction is calculated, it is reduced by the taxpayer’s CNIL balance.  The CNIL balance is the amount by which the total of all investment expenses exceeds the total of all investment income for all tax years after 1987.  The CNIL can be calculated by filling in CRA’s form T936 for each year after 1987.

Sold Your House? Tax or No Tax

The gain on the sale of real estate is a capital gain unless the property has been purchased with the intent of reselling at a profit , or developed and sold as a business endeavor.  If it is considered a business transaction, the entire profit or loss on the sale is taxable or deductible.  If the transaction is a capital gain (principal residence, summer cottage, second home, rental home, etc.), only 50% of the gain is taxable.

If the property is the taxpayer’s principal residence, the principal residence exemption may eliminate all or part of the capital gain.  This exemption is claimed by including form T2091(IND) with the tax return for the year the property is sold.  CRA’s policy is that the form need not be filed unless there is a taxable gain after deducting the principal residence exemption, or a capital gains election was filed in respect of the property in the taxpayer’s income tax return for 1994.  However, if there is any question as to whether the principal residence exemption applies in whole or in part, it would be wise to file the form anyway because failure to file the form could result in a disallowed principal residence exemption.

There aren’t any set rules about how often a person can buy or build a house, move into and reside in it, then sell it, without the transactions being considered business transactions.  Canada Revenue Agency (CRA) would look at the frequency and the intent (i.e., whether the houses were being purchased or built with the goal of reselling and making a profit, or because the person wanted a new house to live in).  They might even look at a single event of purchasing or building and reselling a house and decide that it was a business transaction, even if the house has been used as a principal residence.  Check out the current version of Interpretation Bulletin, IT-218, re profits on the sale of real estate, especially the first few paragraphs.

If land is purchased without a housing unit on it, that property cannot be considered the principal residence until the year that a house is built and you move into it.

CRA usually considers that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, and there would be a capital gain on the excess when the property is sold, even if the rest is the principal residence.  However, they also consider whether the property is subdividable.  Thus, if the property is 2 hectares, and is not subdividable, they may consider the whole amount of the land to be part of the principal residence.

There is a lot of information on this topic in CRA’s Interpretation Bulletin IT120, Principal Residence, including the part about building on vacant land, the 1/2 hectare rule, etc.  This bulletin also contains a link to form T2091(IND) for the principal residence exemption.

Alberta Budget Highlights

The Alberta Minister of Finance, Iris Evans, presented the 2008-09 provincial budget on April 22, 2008 at 3 p.m. The following is a summary of the highlights contained in the budget.

Highlights

• No income tax rate reductions or increases in indexed personal tax credits
• Elimination of health care premiums, effective January 1, 2009
• Introduction of new SR&ED tax credit, effective January 1, 2009
• Changes paralleling federal budget measures on CCA/TFSA
• Enhancement of Alberta Family Employment Tax Credit and caregivers/disability supplements

Economic context

• Revenue increase of 2.2% to $38.6 billion, and expenditures increase of 9.7% to $37 billion, for a surplus estimated at $1.6 billion in 2008-09.
• Tax measures will save individuals and businesses $1.3 billion in 2009.
• Economic growth expected to continue at 3% with the budget forecast based on $78/bbl.
• New royalty framework starts January 1, 2009, with royalty rates increasing from 30-35% to up to 50% and a revised rate cap at $120/bbl.
• Three-year capital expenditure plan increased by 21% to $22 billion.

Measures concerning businesses

• No changes in corporate tax rates or small business income thresholds.
• Introduction of a 10% credit on scientific research and experimental development (SR&ED) expenditures up to $4 million for a maximum credit of $400,000, refundable for all companies, for expenditures occurring after January 1,2009. It is estimated that the credit is worth $60 million annually.
• The government will introduce legislation to effectively increase the tax on income subject to the higher small business thresholds in Alberta compared to federal small business thresholds that are withdrawn under the enhanced dividend tax credit, from 3% to 10%.
• Effective January 1, 2009, businesses that pay health care premiums on behalf of their employees as part of a benefit package will benefit from the elimination of the premiums.
• Alberta will parallel the recent federal budget changes related to enhanced CCA claims.

Measures concerning individuals

• The elimination of the health care premiums, effective January 1, 2009, will benefit Albertan families by $1,056 each year, and by as much as $528 per year for single persons. The annual saving is estimated at $1 billion.
• Personal tax credits will be indexed in 2008 by 4.7%, which would, for example, increase the basic/spousal and eligible dependant credits from $15,435 to $16,161. In total, this will save $132 million in 2008.
• The Alberta Family Employment Tax Credit will be enhanced by $25 million, increasing the credit, depending on the number of children in the family, and increasing the phase-out income threshold to start at $32,633.
• The caregiver credit and infirm dependant credit will more than double, resulting in benefits of between $500 and $1,000 annually.
• Alberta will parallel the recent federal budget introduction of the tax-free savings account, which comes into effect in 2009, so that income earned in the account is not subject to Alberta tax.