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Archived - Reducing the Tax Burden for Canadians

Highlights

• Tax relief provided by the Working Income Tax Benefit (WITB), first introduced in Budget 2007, will be effectively doubled to further reduce the welfare wall and help ensure that more low-income Canadians are financially better off as a result of getting a job. The enhanced WITB will provide up to $925 per year to single individuals and up to $1,680 per year to couples and single parents. Legislation implementing the enhanced WITB was adopted by the House of Commons on November 17, 2009 and is proceeding through the Senate.
• Tax assistance of up to $1,350 per family in support of home renovations and improvements is helping stimulate the economy and encouraging investment by Canadians in their homes. The Canada Revenue Agency has received about 3.5 million enquiries about the Home Renovation Tax Credit through its website and by telephone.
• Canadians have been seeing the benefits of income tax reductions announced in Canada's Economic Action Plan on their pay stubs since April 2009.
• Tax relief for low- and middle-income seniors has been put in place, providing up to an additional $150 in annual tax savings, to help our seniors thrive in retirement.
• Increased child benefits started to flow in July, providing up to $436 per year for a family with two children, making raising children more affordable.
• To help small businesses retain more of their earnings for reinvestment, expansion and job creation, Canada's Economic Action Plan increased the amount of small business income eligible for the reduced federal income tax rate of 11 per cent from $400,000 to $500,000. This enhanced support took effect on January 1, 2009 and can save small businesses up to $8,000 each in 2009 taxes.
• Canada's manufacturers and processors are benefiting from an extension of the temporary 50-per-cent straight-line accelerated capital cost allowance (CCA) rate on machinery and equipment purchases, and the permanent elimination of tariffs on a wide range of machinery and equipment effective January 28, 2009. These measures are helping businesses in the manufacturing and processing industries make the necessary equipment purchases and position themselves for long-term success.
• To help businesses adopt new technology at a faster pace, a two-year 100-per-cent CCA rate for investments in computers has been in effect since January 28, 2009.
• Mineral exploration activity across Canada is being supported by the one-year extension of the temporary 15-per-cent Mineral Exploration Tax Credit, which took effect April 1, 2009.
• Tax reductions are an essential part of Canada's Economic Action Plan. They support Canadians and Canadian businesses in the short term by providing stimulus, putting money in the hands of Canadians to spend as they see fit, thus encouraging job creation and helping create a long-term advantage for sustained economic growth.
• Canada's Economic Action Plan includes measures that will reduce the tax burden for Canadian families and businesses by more than $20 billion over 2008–09 and the following five fiscal years. This builds on early action taken by the Government in the October 2007 Economic Statement to offset the economic downturn with substantial and permanent tax reductions.
• In total, actions taken by this Government since 2006 will reduce taxes by $220 billion over 2008–09 and the following five fiscal years, allowing Canadian individuals, families and businesses to keep more of their money.

Introduction

In Budget 2009, the Government provided $6.9 billion over three years to stimulate the economy and support job creation by providing personal tax relief to Canadians, allowing Canadians to decide how best to spend their money. This is in addition to tax measures to support housing and business contained in the Economic Action Plan (Table 2.2).

Reducing the Tax Burden for Canadians and Canadian Business

The tax reductions in Canada's Economic Action Plan are an essential part of the Government's effort to stimulate the economy and to create or maintain jobs. Lower taxes help ease the financial pressure on individuals, families and businesses and help build a solid foundation for future economic growth. Lower taxes also stimulate individual spending, which helps to protect and create jobs. The tax reductions in the Plan reinforce the Government's ambitious agenda of tax relief aimed at creating a tax system that fuels job creation and investment in Canada, improving the standard of living of Canadians.

Canada took early significant action in the October 2007 Economic Statement, anticipating the prospect of a weaker global economy. This Government put in place broad-based permanent tax reductions that are sustainable for the future. As a result of these actions, Canada is better positioned than most countries to withstand the effects of today's global economic challenges.

Tax reductions support Canadians, Canadian businesses and jobs in the short term by providing immediate economic stimulus, which helps individuals and businesses to weather the global recession, and also create a long-term advantage for sustained economic and employment growth.

Actions taken by the Government since 2006, including those proposed in the Economic Action Plan, will reduce taxes on individuals, families and businesses by an estimated $220 billion over 2008–09 and the following five fiscal years. Of this amount, the tax relief proposed in the Economic Action Plan totals more than $20 billion.

Tax Relief for Individuals and Families

The Economic Action Plan introduced significant new personal income tax reductions that are providing immediate relief, particularly for low- and middle-income Canadians, as well as measures to help Canadians purchase and improve their homes. For example:

• The enhanced WITB, first introduced in Budget 2007, will be effectively doubled to further strengthen work incentives for low-income Canadians already in the workforce and encourage low-income Canadians to enter the workforce.
• The temporary Home Renovation Tax Credit will provide an estimated 4.6 million Canadian families with up to $1,350 in tax relief on eligible renovation projects, thereby providing needed stimulus to the economy. In addition, the First-Time Home Buyers' Tax Credit will provide relief of up to $750 to help with the purchase of a first home.
• The amount of income that Canadians can earn before paying federal income tax was further increased, and the top of the two lowest income tax brackets was increased so that Canadians can earn more income before being subject to higher tax rates.
• The Age Credit amount was increased by $1,000 to provide tax relief to low- and middle-income seniors. This means additional annual tax savings of up to $150.
• In addition, the Economic Action Plan has raised the level at which the National Child Benefit Supplement for low-income families and the Canada Child Tax Benefit are phased out, providing a benefit of up to $436 per year for a family with two children. Additional monthly benefits under these programs began to be paid to families with children in July 2009.

Tax relief for individuals and families announced in Canada's Economic Action Plan is now largely committed, and Canadians are realizing its benefits through higher take-home pay.

Legislation implementing the enhanced WITB is proceeding through Parliament. The enhanced WITB will provide up to $925 per year to single individuals and up to $1,680 per year to couples and single parents. In addition, a supplement of up to $463 per year will be available for low-income working Canadians with disabilities who are eligible for the Disability Tax Credit. Once the enhanced WITB receives Royal Assent, eligible low-income working Canadians will receive benefits when they file their 2009 tax returns.

The enhanced WITB builds on past actions to lower the welfare wall, so that low-income individuals may keep more of their earnings, as shown in Chart 2.1. In 2009, if the WITB had not been introduced, a typical low-income single parent would have only kept 25 cents of each dollar earned between $3,000 and $10,000, due to reduced benefits from federal and provincial income-tested programs and taxes. As a result of the enhanced WITB, the same family will keep about 45 cents of each dollar earned.

Canada's Economic Action Plan: Tax Relief for Canadians

The WITB significantly reduces average effective marginal tax rates on earned income between $3,000 and $10,000. The WITB increases these rates on earned income between $10,000 and $20,000, as it is being phased out. However, this increase occurs over an income range where average effective marginal tax rates are relatively low. Despite this increase, the WITB strengthens incentives to find and keep a job by increasing the net returns from work.

Tax Relief for Canadian Businesses

A competitive business tax system is essential for creating an environment that encourages new investment, growth and job creation in Canada. The Economic Action Plan builds on corporate income tax reductions to help position Canadian businesses to weather the effects of the current global economic challenges, maintain and create jobs, and emerge from the economic downturn even stronger:

• To help businesses adopt newer technology at a faster pace, a temporary two-year 100-per-cent capital cost allowance (CCA) rate for computers acquired after January 27, 2009 and before February 1, 2011 was introduced.
• To help businesses in manufacturing and processing industries to restructure and retool to position themselves for long-term success, the 50-per-cent straight-line accelerated CCA rate for investments in manufacturing or processing machinery and equipment was extended to include investments undertaken in 2010 and 2011. Manufacturers and processors are already benefiting from this measure, which was first introduced in Budget 2007 and extended in Budget 2008.
• To help small businesses retain more of their earnings for reinvestment, expansion and job creation, the amount of small business income eligible for the reduced federal income tax rate was further increased to $500,000 effective January 1, 2009, following a previous increase to $400,000 from $300,000 as of January 1, 2007.
• To support mineral exploration activity across Canada and help our mining industry grow, the temporary Mineral Exploration Tax Credit was extended for an additional year.
• Consultations on the possible extension of accelerated CCA to assets used in carbon capture and storage were held in the spring and submissions are now being analyzed.
• After reviewing the results of the consultations on the feasibility and desirability of introducing an Arrivals Duty-Free Program in Canada, there does not appear to be sufficient consensus, among those who made submissions or the provinces, to warrant further consideration of this issue at this time.

The Economic Action Plan builds on the Government's strong record of tax relief. Since 2006, the Government has introduced significant tax relief for Canadian businesses, including measures in the Economic Action Plan, that total more than $60 billion over 2008–09 and the following five fiscal years.

Key actions include:

• Substantial, broad-based tax reductions that are lowering the federal general corporate income tax rate from 22.12 per cent (including the corporate surtax) in 2007 to 15 per cent in 2012. These tax reductions include the elimination of the corporate surtax in 2008 for all corporations and a reduction in the federal general corporate income tax rate to 19 per cent as of January 1, 2009, and to 18 per cent as of January 1, 2010.
• A reduction of the federal income tax rate applying to qualifying small business income to 11 per cent in 2008.
• Alignment of CCA rates for a number of assets to better reflect their useful life—this both reduces the tax burden on investment and ensures neutral tax treatment of different capital assets, encouraging investment to flow to its most productive uses.
• Elimination in 2006 of the federal capital tax and the introduction in 2007 of a temporary financial incentive to encourage provinces to eliminate their general capital taxes and to eliminate or replace their capital taxes on financial institutions with a minimum tax. All provincial general capital taxes will be eliminated by 2012.

Early actions taken by this Government as well as the measures included in Canada's Economic Action Plan are positioning Canadian businesses to emerge stronger and better equipped to compete globally as the economy recovers. Broad-based corporate income tax reductions and other tax relief measures are building a solid foundation for future economic growth, job creation and higher living standards for Canadians.

As a result of federal and provincial business tax changes and bold tax reductions, Canada will have the lowest overall tax rate on new business investment^[1] in the Group of Seven (G7) by 2010 and the lowest statutory corporate income tax rate in the G7 by 2012. By 2012, Canada will also have an overall tax rate on new business investment that is lower than the Organisation for Economic Co-operation and Development (OECD) average (Chart 2.5). The competitiveness of our business tax system encourages new investment in Canada, including direct investment from abroad.

Canada will soon have an overall tax rate on new business investment that is the lowest in the G7 and below the OECD average

Improving the competitiveness of the Canadian tax system requires collaboration among all governments to help Canadian businesses compete globally as the economy recovers. Provinces and territories have taken action to enhance Canada's business tax advantage, building on actions taken at the federal level.

Several provinces are reducing their corporate income tax rates. Over the next few years, Ontario, British Columbia and New Brunswick will be reducing their corporate income tax rates to 10 per cent or below. Alberta is currently at 10 per cent. Together with the scheduled reductions in the federal general corporate income tax rate to 15 per cent in 2012, these provincial actions will help Canada move closer to the Government's goal of a 25-per-cent combined federal-provincial statutory corporate income tax rate.

Further reductions in provincial corporate income tax rates would do even more to improve the competitiveness of Canadian businesses across the country and further encourage investment and job creation.

^[1] The marginal effective tax rate (METR) on new business investment takes into account federal and provincial statutory corporate income tax rates, deductions and credits available in the corporate tax system and other taxes paid by corporations, including provincial capital taxes and retail sales taxes on business inputs. The methodology for calculating METRs is described in the 2005 edition of Tax Expenditures and Evaluations (Department of Finance Canada).

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