ARCHIVED - Net federal tax (Schedule 1)

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• Minimum tax

• Net federal tax (lines 409 to 433)
  • Recapture of investment tax credit
  • Federal logging tax credit
  • Lines 409 and 410 - Federal political contribution tax credit
  • Line 412 - Investment tax credit
    • How to claim
  • Lines 413 and 414 - Labour-sponsored funds tax credit
  • Line 418 - Additional tax on RESP accumulated income payments
  • Line 421 - CPP contributions payable on self-employment and other earnings
  • Line 422 - Social benefits repayment
  • Line 424 - Federal tax on split income
  • Line 425 - Federal dividend tax credit
  • Line 426 - Overseas employment tax credit
  • Line 427 - Minimum tax carry-over
  • Line 428 - Provincial or territorial tax
  • Lines 431 and 433 - Federal foreign tax credit
    • How to claim

Minimum tax

Minimum tax limits the tax advantage you can receive in a year from certain incentives. You have to pay minimum tax if it is more than the federal tax you calculate in the usual manner. When calculating your taxable income for this tax, which does not apply to a person who died in 2006, you are allowed a basic exempt amount of $40,000.

Generally, to find out if you have to pay this tax, add the amounts in section B below and 60% of the amount on line 127 of your return. If the total is $40,000 or less, you probably do not have to pay minimum tax. If the total is more than $40,000, you may have to pay it.

To calculate if you have to pay it, use Form T691, Alternative Minimum Tax. You also have to calculate your additional provincial or territorial tax for minimum tax purposes by completing Form 428.

Below are the most common reasons why you may have to pay minimum tax:

A. You reported a taxable capital gain on line 127.

B. You claimed any of the following:

• a loss (including your share of a partnership loss) resulting from, or increased by, claiming capital cost allowance on rental properties;
• a loss from a limited partnership;
• most carrying charges (line 221) on certain investments;
• a loss from resource properties resulting from, or increased by, claiming a depletion allowance, exploration expenses, development expenses, or Canadian oil and gas property expenses;
• a deduction on line 248 for an employee home relocation loan; or
• a deduction on line 249 for security options.

C. You claimed any of the following tax credits on Schedule 1:

• a federal political contribution tax credit on lines 409 and 410;
• an investment tax credit on line 412;
• a labour-sponsored funds tax credit on line 414; or
• an overseas employment tax credit on line 426.

Tax Tip
You may be able to claim a credit against your taxes for 2006 if you paid minimum tax on any of your returns for 1999 to 2005 (see line 427).

Net federal tax (lines 409 to 433)

There are no lines on the return for the recapture of investment tax credit or for the federal logging tax credit. If these amounts apply, use them to calculate your net federal tax on Schedule 1. If the result of these adjustments is negative, and you do not have to pay minimum tax, enter "0" on line 48 of Schedule 1 or line 51 for residents of Quebec.

Recapture of investment tax credit

If you have to repay an investment tax credit you received previously for scientific research and experimental development, calculate on Form T2038(IND), Investment Tax Credit (Individuals), the amount you have to repay. Write "recapture of investment tax credit" and the amount below line 43 on Schedule 1 or line 46 for residents of Quebec. Add it to the amount on line 43 or line 46.

Federal logging tax credit

If you paid logging tax to a province for logging operations you performed in the province, you may be able to claim a logging tax credit. To calculate your credit, use whichever of the following two amounts is less for each province in which you had a logging operation:

• 66.6667% of the logging tax paid for the year to the province; or
• 6.6667% of your net logging income for the year in the province.

Your allowable credit is the total of the credits for the year for all provinces, up to 6.6667% of your taxable income (line 260) not including any amounts on lines 208, 209, 214, 215, 219, and 220. Write "federal logging tax credit" and the allowable amount below line 43 on Schedule 1 or line 46 for residents of Quebec. Subtract it from the total of the amount on line 43 or line 46 and the amount of any applicable recapture of investment tax credits.

Lines 409 and 410 - Federal political contribution tax credit

Enter on line 409 the total you and your spouse or common-law partner contributed during 2006 to a registered federal political party or a candidate for election to the House of Commons.

Under proposed legislation, the amount of your contribution is the amount in excess of any advantage that you received or will receive for making the contribution. An advantage includes the value of certain property, service, compensation, or other benefit. This applies to all contributions made after December 20, 2002.

Complete the chart for line 410 on the Federal Worksheet in the forms book to calculate your credit. However, if your total political contributions are $1,275 or more, enter $650 on line 410.

Receipts - If you are filing a paper return, attach your official receipts to your tax return unless your contributions are shown as follows:

• box 14 of your T5003A slips, Statement of tax shelter information
• box 36 plus the Details area of your 2004 version of the T5013, Statement of Partnership Income slip
• box 105 of your 2006 version of the T5013, Statement of Partnership Income slip or T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resources Expenses slip,
  or
• on financial statements showing an amount the partnership allocated to you.

If you are filing electronically, keep all of your documents in case we ask to see them.

Line 412 - Investment tax credit

You may be eligible for this credit if any of the following applies. You:

• bought certain new buildings, machinery, or equipment and they were used in certain areas of Canada in qualifying activities such as farming, fishing, logging, manufacturing, or processing;
• have unclaimed credits from the purchase of qualified property after 1995;
• have an amount in box 41 of your T3 slip;
• have an amount in box 107 or 128 of your T5013 or T5013A slip;
• have an amount in box 128 of your T101 slip;
• have a partnership statement that allocates to you an amount that qualifies for this credit; or
• have an investment in a mining operation that allocates certain exploration expenditures to you.

The deadline to claim a tax credit for renounced Canadian exploration expenses has been extended. See Form T2038(IND), Investment Tax Credit (Individuals), for more information.

Under proposed legislation, an apprentice job creation tax credit is available if you are a self-employed individual who employs an eligible apprentice in your business. See Form T2038(IND) for more information.

For investment tax credits earned in a year ending after 2005, the carry forward period has been extended to 20 years.

How to claim

Attach to your paper return a completed copy of Form T2038(IND), Investment Tax Credit (Individuals). For more information on the investment tax credit, see the information sheet attached to Form T2038(IND).

The time to submit Form T2038(IND) for a qualifying expenditure is limited. To be able to claim a credit for such an expenditure, you have to send the form to us no later than 12 months after the due date of your return for the year the expenditure arises.

Tax Tip
You may be able to claim a refund of your unused investment tax credit (see line 454).

Lines 413 and 414 - Labour-sponsored funds tax credit

You may be able to claim a credit if you became the first registered holder to acquire, or irrevocably subscribe to and pay for, an approved share of the capital stock of a prescribed labour-sponsored venture capital corporation (LSVCC) from January 1, 2006, to March 1, 2007.

Under proposed legislation, if you bought shares after 2003 of a provincial or territorial registered LSVCC (that is not a federally registered LSVCC), you can only claim the federal labour-sponsored funds tax credit in respect of those shares if a provincial or territorial income tax credit is also available to be claimed for them.

If you became the first registered holder of an approved share from January 1, 2006, to March 1, 2006, and did not claim the whole credit for it on your 2005 return, you can claim the unused part on your 2006 return. If you became the first registered holder of an approved share from January 1, 2007, to March 1, 2007, you can claim any part of the credit for that share on your return for 2006 and the unused part on your return for 2007.

Enter your net cost on line 413. Net cost is the amount you paid for your shares, minus any government assistance (other than federal or provincial tax credits) on the shares. Enter the amount of the credit on line 414. The allowable credit cannot be more than 15% of the net cost, to a maximum of $750.

Note
If the first registered holder of the share is an RRSP for spouse or common-law partner, either the RRSP contributor or the annuitant may claim this credit for that share.

Receipts - If you are filing a paper return, include your T5006 slip, Statement of Registered Labour-Sponsored Venture Capital Corporation Class A Shares, or official provincial or territorial slips. If you are filing electronically, keep them in case we ask to see them.

Tax Tip
Your province or territory may offer a similar tax credit. For details, see the provincial or territorial forms in the forms book, unless you were a resident of Quebec on December 31, 2006. In that case, see the guide for your provincial income tax return for Quebec.

Line 418 - Additional tax on RESP accumulated income payments

You may have received an accumulated income payment from a registered education savings plan (RESP) in 2006. If so, you may have to pay an additional tax on all or part of the amount in box 40 of your T4A slip. Enter the amount from line 10, 13, or 16 (whichever applies) on Form T1172, Additional Tax on Accumulated Income Payments from RESPs. For more details, get information document RC4092, Registered Education Savings Plans (RESPs).

Line 421 - CPP contributions payable on self-employment and other earnings

See this section.

Line 422 - Social benefits repayment

See this section.

Line 424 - Federal tax on split income

Certain income of a child who was born in 1989 or later is treated differently (see "Split income of a child under 18"). If this tax applies, calculate it on Form T1206, Tax on Split Income, and enter the amount from line 5 on line 424 on Schedule 1.

Line 425 - Federal dividend tax credit

If you reported dividends on line 120, enter on line 425 of Schedule 1 the total of the dividend tax credits from taxable Canadian corporations shown on your information slips.

Under proposed legislation, if you received eligible dividends, the federal dividend tax credit will be 18.9655% of your taxable amount of eligible dividends included on line 120.

If you received dividends (other than eligible), the federal dividend tax credit is 13.3333% of your taxable amount of dividends reported on line 180.

For explanations on eligible and other than eligible dividends, see line 120.

Note
Foreign dividends do not qualify for this credit.

Line 426 - Overseas employment tax credit

You may be able to claim this credit if both of the following apply for 2006:

• You were a resident or deemed resident (as defined under E in section "Which tax and benefit package should you use?") of Canada at any time in the year.
• You have employment income from certain kinds of work you did in another country.

To make your claim, use Form T626, Overseas Employment Tax Credit, and mail it with your tax return to:

International Tax Services Office
2204 Walkley Road
Ottawa, ON K1A 1A8.

For details, get Interpretation Bulletin IT-497, Overseas Employment Tax Credit, and Form T626.

Line 427 - Minimum tax carryover

If you paid minimum tax on any of your 1999 to 2005 returns, but you do not have to pay minimum tax for 2006, you may be able to claim credits against your taxes for 2006 for all or part of the minimum tax you paid in those years.

To calculate your claim, complete the parts of Form T691, Alternative Minimum Tax, that apply. Attach the form to your paper return.

Line 428 - Provincial or territorial tax

See this section.

Lines 431 and 433 - Federal foreign tax credit

This credit is for foreign income or profits taxes you paid on income you received from outside Canada and reported on your Canadian return. Tax treaties with other countries may affect whether you are eligible for this credit.

Note
You may have deducted an amount on line 256 for income that is not taxable in Canada under a tax treaty. In that case, do not include that income, or any tax withheld from it, in your foreign tax credit calculation.

If you paid tax to more than one foreign country, and the total non-business income tax you paid to all foreign countries is more than $200, you have to do a separate calculation for each country for which you claim a foreign tax credit. In that case, enter the total of your allowable federal foreign tax credit on line 42 of Schedule 1 or line 45 for residents of Quebec.

You also have to do a separate calculation for business income taxes paid to each foreign country. In that case, use Form T2209, Federal Foreign Tax Credits, to calculate your credit for both non-business income taxes and the business income taxes paid to each foreign country. For tax years ending before March 23, 2004, you can carry unclaimed foreign business income taxes back three years and forward seven years. For tax years ending after March 22, 2004, the carry forward period is 10 years.

In most cases, the foreign tax credit you can claim for each foreign country is whichever of the following two amounts is lower:

• the foreign income tax you actually paid; or
• the tax due in Canada on your net income from that country.

Note
If you paid tax on income from foreign property (other than real property), your foreign tax credit for the income from that property cannot be more than 15% of your net income from that property. However, you may be able to deduct on line 232 the part of the foreign taxes you paid over 15%.

Beginning in 2004, your contribution to a foreign public pension plan is considered as a non-business income tax for foreign tax credit purposes where the following two conditions apply:

• you are required to make the contribution under the legislation of the foreign country; and
• it is reasonable to conclude that you will not be eligible for any financial benefit from your contribution considering that the employment in the foreign country was temporary and for a short period of time.

Note
U.S. FICA payments qualify for this credit.

For details on how to calculate your claim, get Interpretation Bulletin IT-270, Foreign Tax Credit, and ITNEWS-31R2, Income Tax - Technical News, No. 31R2.

How to claim

• Complete the federal foreign tax credit area on Schedule 1.
• Do all of your calculations in Canadian dollars. See "How do you report foreign income and other amounts?".
• If you were a member of a partnership and are entitled to claim a part of the foreign taxes the partnership paid, enter the amount shown as follows:
  • in the financial statements
  • in box 33 plus the Details area of your 2004 version of the T5013 slip or
  • in boxes 81 and 82 of your 2006 version of the T5013 or T5013A slip.

Receipts - If you are filing a paper return, include your documents, such as official receipts, that show the foreign taxes you paid, and a note showing your calculations. Also include Form T2209, if you use it. If you paid taxes to the U.S., attach your W-2 information slip, U.S. 1040 return, and any other supporting documents that apply. If you are filing electronically, keep all of your documents in case we ask to see them.

Tax Tips
Your federal foreign tax credit on non-business income may be less than the tax you paid to a foreign country.

If so, and you were not a resident of Quebec on December 31, 2006, you may be able to claim a provincial or territorial foreign tax credit. To help you calculate the credit, get Form T2036, Provincial or Territorial Foreign Tax Credit. Attach a completed copy of the form to your paper return.

If you were a resident of Quebec on December 31, 2006, see the guide for your provincial income tax return for Quebec.

Also, on line 232, you may be able to deduct the amount of net foreign taxes you paid for which you have not received a federal, provincial, or territorial foreign tax credit. This does not include certain taxes you paid, such as those on amounts you could have deducted under a tax treaty on line 256. For details, get Interpretation Bulletin IT-506, Foreign Income Taxes as a Deduction From Income.

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