As the result of tax reductions announced in the February budget, you should be paying a little less tax this year. The middle tax rate was reduced from 26% to 24% effective July 1, resulting in an effective tax rate of 25% for the 2000 taxation year. The tax system has also been fully indexed to inflation, which means that the tax brackets and personal amounts have been increased. From 1986 to 1999 these amounts were only indexed to the extent that inflation exceeded 3%.

The threshold at which the 5% high-income surtax is imposed was also raised from $12,500 to $18,500 of basic federal tax, effective July 1, resulting in an effective threshold of $15,500 for the 2000 taxation year. The October 18 mini-budget proposed to eliminate this surtax completely in 2001.

Relief for Heating Expenses (RHE)

If you are eligible to receive the GST/HST Credit payment for January 2001, you will receive a one-time rebate to offset the higher cost of home heating. The amount of the rebate will be:

• $125 if you are single and have no dependants; and
• $250 if you have a spouse or are a single taxpayer who can claim the equivalent-to-spouse amount.

This is a flat amount that will not be phased out gradually above a certain income threshold. If you are eligible for the GST/HST Credit will get the full amount.

Capital Gains Inclusion Rate

When you have a capital gain, only a percentage of it is included in income. Prior to February 28, the inclusion rate was 75%. However, this was reduced to 662/3% on February 28 and to 50% on October 18. Capital losses, which can be used to offset capital gains, are treated the same way. This means that you will have to make three separate records of your capital gains and losses realized in 2000.

In the event that your capital gains in one period exceed your capital losses in another period (or vice versa), the inclusion rate for the period with the greater gains or losses will apply to your net capital gain or loss. If you have capital gains or losses in all three periods, you must first determine your inclusion rate for the first two periods. If your net capital gain or loss for the first two periods is greater than your loss for third period (or your net capital loss for the first two periods is greater than your capital gain in the third period), this will be your inclusion rate for the year. Otherwise your inclusion rate will be 50%. If you have a net capital gain in the first two periods and a capital gain in the third period, a blended rate will apply.

Corresponding adjustments have been made to the calculation of allowable business investment losses and the stock option and shares deduction. For example, you will only be able to deduct 662/3% of your business investment losses incurred between February 28 and October 17 and 50% of those incurred after October 17. On the other hand, the stock option and shares deduction has increased from 25% to 331/3% to 50%.

If you had capital gains or losses in 2000, you will not be able to use the Schedule 3 that the CCRA included with the forms package they sent you in the mail. You can obtain a revised version of the Schedule 3 from any of our offices.

Taxation of Employee Stock Options

New rules allow you to defer the tax payable on the exercise of an employee stock option to the year you sell the shares. Under the old rules tax was payable in the year the option was exercised, which often forced employees to sell at least some of the shares simply so they could pay the tax.

The tax deferral provisions are only available to the extent that the value of stock options that vest in you each year does not exceed $100,000. To the extent this figure is surpassed, options will continue to be taxable at the time they are exercised.

Foreign Content Rules for RRSPs

The foreign content limitation for RRSPs and other tax-deferred plans, which has been set at 20% since 1994, has been raised to 25% for 2000 and to 30% for all subsequent taxation years.

Disability Tax Credit

Eligibility for the disability tax credit has been extended to individuals who must undergo therapy at least three times each week, for a total of at least 14 hours per week, in order to sustain their vital functions. Examples of individuals who may benefit from this extension include those with severe kidney disease requiring dialysis in order to prevent renal failure.

There is also a new $2,941 supplement to the disability amount for disabled children under the age of 18 at the end of the year. This will increase their maximum claim to $7,234. However, the supplement is reduced by child care expenses and attendant care expenses in excess of $2,000 that are claimed in respect of the child.

The list of relatives to whom the unused portion of a disability tax credit may be transferred has also been expanded to include brothers, sisters, aunts, uncles, nieces and nephews.

The maximum deduction for child care expenses has also been increased from $7,000 to $10,000 for disabled children.

Medical Expenses

Qualifying medical expenses now include costs relating to the construction of a principal place of residence where the taxpayer lacks normal physical development or has a severe and prolonged mobility impairment. The expenses must have been incurred to enable the taxpayer to gain access to or be mobile or functional within the home. Previously such expenses only qualified if they related to the renovation of an existing dwelling.

Attendant Care Deduction

The deduction for attendant care expenses has been extended to disabled taxpayers who require an attendant in order to attend school or an educational institution. Previously, the deduction was only available for taxpayers who needed an attendant to work. The deduction is limited to 2/3 of earned income plus, where the taxpayer is attending a school or educational institution, 2/3 of the lesser of:

• The taxpayer's income from other sources (to a maximum of $15,000); and
• $375 multiplied by the number of weeks in attendance at the school or educational institution.

You must complete Form T929 if you are claiming attendant care expenses.

Offsetting of Interest on Income Tax Overpayments and Underpayments

Although refund interest is included in income for tax purposes, a deduction is not allowed for arrears interest owed to the government. This inequity has been partially remedied by a new rule that makes refund interest taxable only to the extent that it exceeds any arrears interest that accrued over the same period.

Exemption for Scholarships

The exemption for the first $500 of scholarship income has been raised to $3,000. However, the $2,500 increase will only apply if you are enrolled in a program that qualifies for the education tax credit.

Investment Tax Credit for mineral exploration expenses

A temporary 15% investment tax credit has been introduced for mineral exploration expenses incurred in Canada pursuant to a flow-through share agreement. The credit may be claimed in respect of expenses incurred by a corporation after October 17, 2000 and before 2004 that are renounced in favour of an individual taxpayer pursuant to a flow-through share agreement.

Your cumulative Canadian exploration expense pool for 2001 will be reduced by any credits claimed in 2000.

Provincial Tax-On-Income (TONI)

The provinces may now base their tax rates on taxable income as opposed to a percentage of basic federal tax. British Columbia, Manitoba, New Brunswick, Nova Scotia and Ontario have switched to the tax-on-income system for the 2000 taxation year. The remaining provinces will switch in 2001 (except for Québec, which will continue to administer its own tax system). The territories will continue with the tax-on-tax system.

The new system allows the provinces to set their own tax brackets and, within certain limitations, create their own set of non-refundable tax credits. It does not necessarily mean that you will pay less tax. However, you will be able to better compare your province's tax rates with the federal tax rates and the tax rates of other provinces.