Budget 2001 - Budget Plan
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Annex 2
Update on Income Tax Relief for Canadians

Overview

In the October 2000 Economic Statement and Budget Update, the federal government announced the largest tax cut in Canadian history.

Canadians are already benefitting from the tax reduction plan. The tax cuts are providing significant stimulus to the economy today. They also contribute to building a strong economy for the future. The reductions will:

• lower the personal income tax burden by 21 per cent on average and by 27 per cent for families with children, by 2004-05; and
• promote jobs, growth, entrepreneurship and innovation by creating a Canadian advantage in the taxation of businesses and capital gains relative to the U.S.

As Table A2.1 indicates, these tax cuts will provide about $17 billion in tax relief this calendar year and $20 billion in 2002.

Table A2.1
Tax Relief in 2001 and 2002

This annex provides an overview of income tax relief in place for 2001, as well as information about further tax relief for 2002 and beyond.

Tax Relief for 2001

The Government’s tax reduction plan includes tax relief for individuals (see Table A2.4) and measures to encourage job creation, growth, entrepreneurship and innovation (see Table A2.5).

Personal Income Tax Relief

• Full indexation of the personal income tax system was restored as of January 1, 2000.
• Personal income tax rates for all taxpayers were lowered and the deficit–reduction surtax was eliminated effective January 1, 2001.
• The Canada Child Tax Benefit (CCTB) was substantially increased to help low- and middle-income families with children.
• Additional tax assistance was provided to those who need it most, including people with disabilities, and caregivers.
• Tax support for students in post-secondary education was substantially increased.

Measures for Jobs, Growth, Entrepreneurship and Innovation

• Corporate income tax rate reductions for the highest-taxed sectors, such as services, have already begun with a 1-percentage-point reduction, bringing the rate for 2001 to 27 per cent. As legislated under the tax reduction plan, this rate will be reduced further to 25 per cent in 2002, 23 per cent in 2003 and 21 per cent in 2004 and subsequent years.
• The corporate tax rate on small business income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada was reduced from 28 per cent to 21 per cent effective January 1, 2001.
• The capital gains inclusion rate for individuals and corporations was cut to one-half. As a result, capital gains are typically taxed at a lower rate in Canada than in the U.S.
• Employees May now defer the income inclusion from exercising certain employee stock options in publicly listed corporations until the shares are sold.
• Individuals May now defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares.

Tax Relief for 2002 and Beyond

The measures announced in the Government’s tax reduction plan have been legislated and will continue to deliver significant tax relief in 2002 and subsequent years.

Personal Income Tax Relief

In 2002 tax filers will continue to benefit from indexation of the tax system (see Tables A2.2, A2.3 and A2.6). The indexation factor for 2002 is 3 per cent. All indexed personal income tax parameters will be adjusted by this factor. This will reduce the tax burden for all taxpayers. It will also increase the value of benefits for low-income families and individuals provided by refundable credits such as the CCTB and the goods and services tax credit (GSTC).

Indexation will raise the income thresholds for all tax brackets in 2002. For example:

• The amount of income that all individuals can earn annually before paying federal income tax will increase by $222 as a result of the basic personal amount increasing from $7,412 in 2001 to $7,634 in 2002.
• For those with taxable income subject to the 22-per-cent rate, the threshold will be raised from $30,754 to $31,677, meaning that $923 more of their income will be taxed at the lower 16-per-cent rate.

Indexation also ensures that the value of tax assistance for seniors, people with disabilities and caregivers will rise in 2002.

Table A2.2 shows income thresholds and selected credit amounts as indexed for 2002.

Table A2.2
Selected Personal Income Tax Parameters

Indexation not only protects Canadians from automatic tax increases caused by inflation, it also means that the value of benefits for low-income families and individuals, such as the CCTB and the GSTC, will rise in 2002.

Table A2.3 shows benefit amounts and selected thresholds as indexed for 2002.

Table A2.3
Canada Child Tax Benefit and Goods and Services Tax Credit Parameters

Canadian taxpayers will benefit considerably in 2002 from the Government’s tax reduction plan. For instance, relative to what their income taxes or benefits would have been without the Government’s tax reduction plan:

• A typical two-earner family of four with a combined income of $60,000 will pay $1,262 less net federal income tax in 2002 – a savings of about 22 per cent.
• A typical one-earner family of four with $40,000 in income will pay $1,311 less net federal income tax in 2002 – a savings of about 40 per cent.
• A typical single parent with one child and $25,000 in income will receive additional net benefits of $724 in 2002.

Beyond 2002 further measures have been legislated to provide tax relief. By 2004 these measures will:

• ensure that the basic personal amount, the amount an individual can earn tax-free, is at least $8,000;
• ensure that the spousal amount is at least $6,800;
• raise the second bracket threshold to at least $35,000;
• raise the third bracket threshold to at least $70,000;
• raise the fourth bracket threshold to at least $113,804;
• raise the amount of family net income at which the National Child Benefit supplement is fully phased out and the CCTB base benefit phase-out begins to at least $35,000; and
• reduce the phase-out rate of the base benefit of the CCTB from 5 per cent to 4 per cent (from 2.5 per cent to 2 per cent for families with one child).

Table A2.4 provides a summary of tax relief measures for individuals under the Government’s tax reduction plan.

Measures for Jobs, Growth, Entrepreneurship and Innovation

Businesses will also see further tax relief in 2002 and subsequent years.

On January 1, 2002, the general corporate income tax rate, which applies to the highest-taxed sectors such as services, will be cut by 2 percentage points to 25 per cent.

This cut builds on the 1-percentage-point reduction already in place for 2001, and will be followed by additional legislated 2-percentage-point cuts in each of the following two years. By 2004 the general rate will be reduced to 21 per cent. This will encourage job creation and growth, reward entrepreneurship and innovation, and improve the international competitiveness of our business environment.

Small businesses are already benefitting from the full rate reduction to 21 per cent on business income between $200,000 and $300,000.

The reduction in the general corporate tax rate applies to sectors, such as services, that were the highest taxed. Manufacturing and processing (M&P) income was already taxed at a lower rate. For this reason, the corporate tax rate for M&P income was not reduced. Similarly, the corporate tax rate that applies to resource income was not reduced as the resource sector benefits from a number of sector-specific tax measures. The Government has engaged in extensive consultations on means to extend the lower corporate tax rate to resource income while at the same time improving the tax structure. These consultations are continuing.

The combination of federal and provincial actions will result in the average general rate of corporate taxation (taking into account capital taxes) in Canada being about 5 percentage points below the U.S. average rate by 2005 (see chart below).

As the summary box below shows, corporate tax rate cuts combined with other measures in the Government’s tax reduction plan are creating a business advantage for Canada relative to the U.S.

Table A2.4
Summary of Tax Relief Measures for Individuals Under the Government’s Tax Reduction Plan

• Personal income tax rates for all taxpayers were lowered effective January 2001.
  • The 17-per-cent tax rate was reduced to 16 per cent.
  • The 24-per-cent tax rate – reduced from 26 per cent in the 2000 budget – was reduced further to 22 per cent.
  • The 29-per-cent top tax rate was reduced to 26 per cent on income between about $60,000 and $100,000.
  • The deficit-reduction surtax was eliminated.
• Support for families with children was increased.
  • Effective July 1, 2001, the CCTB was increased, with the maximum benefit for the first child rising to $2,372 in July 2001 and to more than $2,500 by 2004.
  • Effective July 1, 2001, the income threshold at which the National Child Benefit (NCB) supplement is fully phased out, and the CCTB base benefit begins to be phased out, was increased to $32,000.
• Additional assistance was provided to those who need it most.
  • Effective January 2001, the disability amount was raised from $4,293 to $6,000.
  • Effective January 2001, the caregiver amount and infirm dependant amount were raised from $2,386 to $3,500.
  • Effective January 2001, the disability amount supplement for children with severe disabilities was raised from $2,941 to $3,500.
• Tax support for post-secondary education was substantially increased.
  • Effective January 2001, the education amount was doubled from $200 per month to $400 per month for full-time students, and from $60 per month to $120 per month for part-time students.
• Due to concern about the impact of rising energy prices on home-heating costs, in early 2001 the Government provided one-time relief to low- and modest-income Canadians of $125 per individual and $250 per family.
• Full indexation of the tax system, announced in the 2000 budget and effective as of January 1, 2000, protects Canadians from the automatic tax increases that would have resulted from inflation every year if the tax system were not indexed.
• The following measures have been legislated to provide that by 2004:
  • the basic personal amount will be at least $8,000 (up from $7,412 in 2001);
  • the spousal amount will be at least $6,800 (up from $6,293 in 2001);
  • the second bracket threshold will be at least $35,000 (up from $30,754 in 2001);
  • the third bracket threshold will be at least $70,000 (up from $61,509 in 2001);
  • the fourth bracket threshold will be at least $113,804 (up from $100,000 in 2001);
  • the amount of family net income at which the NCB supplement is fully phased out and the CCTB base benefit phase-out begins will be at least $35,000 (up from $32,000 in 2001); and
  • the phase-out rate of the base benefit of the CCTB will be reduced from 5 per cent to 4 per cent (from 2.5 per cent to 2 per cent for families with one child).

Table A2.5
Summary of Measures for Jobs, Growth, Entrepreneurship and Innovation Under the Government’s Tax Reduction Plan

• A legislated timetable provides that the general corporate income tax rate will be reduced from 28 per cent to 21 per cent, with a 1-percentage-point reduction in 2001 followed by a 2-percentage-point cut in 2002, and additional 2-percentage-point cuts in each of the following two years.
• Effective January 1, 2001, the corporate income tax rate on small business income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada was reduced from 28 per cent to 21 per cent.
• Effective October 18, 2000, the capital gains inclusion rate – reduced from three-quarters to two-thirds in the 2000 budget – was cut further from two-thirds to one-half.
• Consistent with the reduction in the capital gains inclusion rate, the employee stock option deduction was increased to one-half.
  • The 2000 budget also allowed employees to defer paying tax on exercising certain qualifying employee stock options in publicly listed shares until the shares are sold.
•  The 2000 budget introduced a measure that permits individuals to defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares. The October 2000 Economic Statement and Budget Update increased the size of an eligible investment from $500,000 to $2 million and the size of business eligible for the rollover from $10 million to $50 million.
• Effective January 1, 2001, self-employed individuals can deduct in computing income the portion of Canada Pension Plan and Quebec Pension Plan contributions that represents the employer’s share.

Table A2.6
Detailed List of Indexed Personal Income Tax Parameters

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