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Canada's Economic Action Plan: A Sixth Report to Canadians

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Chapter 2
Progress Achieved to Date

Reducing the Tax Burden for Canadians

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 Action Plan build on previous reductions and reinforce the Government's ambitious agenda of tax relief aimed at creating a tax system that improves standards of living and fuels job creation and investment in Canada.

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

Actions taken by the Government since 2006, including those 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. Tax relief for Canadian families and individuals (not including housing-related tax relief) provided under the Economic Action Plan from 2008–09 to 2010–11 totals $6.9 billion (Table 2.1.1).

Table 2.1.1
Reducing the Tax Burden for Canadians
  2008–09 2009–10 2010–11 Total
(millions of dollars)
Personal income tax relief for all taxpayers 470 1,885 1,950 4,305
Increases to the National Child Benefit
 supplement and Canada Child Tax Benefit
230 310 540
Enhancing the Working Income Tax Benefit 145 580 580 1,305
Targeted relief for seniors 80 325 340 745
 
Total—Reducing the Tax Burden
 for Canadians
695 3,020 3,180 6,895
Note: Totals may not add due to rounding. The Canada Child Tax Benefit and the National Child Benefit supplement are considered expenditures for budgetary purposes and thus should not be included in calculations of total tax relief.
As a result of tax reductions and strong economic
growth, Canadian incomes have grown faster than
in any other G-7 country

Chart 2.1.1 - Growth in Real Per Capita Personal Disposable Income from 2006 to 2009

Tax Relief for Individuals and Families

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

Tax relief for individuals and families announced in Canada's Economic Action Plan is now fully implemented, and Canadians are realizing its benefits.

Actions the Government has taken since 2006 are providing important stimulus to the economy and creating jobs, with almost $160 billion in tax relief for individuals and families over 2008–09 and the following five fiscal years. Key actions include:

Canada's Economic Action Plan
Tax Relief for Canadians

Measures introduced since 2006, including the Working Income Tax Benefit (WITB), have lowered the welfare wall, so that low-income individuals may keep more of their earnings. In 2010, 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.

Chart 2.1.2 - Average Effective Marginal Tax Rates

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. Economic Action Plan measures include:

All of the business tax measures in the Economic Action Plan have been fully implemented.

The Government has introduced significant tax relief for Canadian businesses since 2006, 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:

The economic cost of giving up the three-point reduction in the federal corporate income tax rate planned by 2013 would be a long-run loss of $47 billion in capital investment and 233,000 jobs.

— Duanjie Chen and Jack Mintz report
"Canada's Tax Competitiveness After a Decade of Reforms: Still an
Unfinished Plan," May 2010

Early actions taken by the Government as well as 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. An innovative and growth-oriented small business sector can play an important role in this recovery. Recognizing this, the federal government is helping small businesses introduce and invest in their innovations.

Supporting Small Businesses

The tax system provides considerable support to small businesses through lower corporate income tax rates, incentives for investors, enriched financial support for research and development (R&D), and simplified compliance.

Since 2006, the Government has introduced a large number of tax measures to support investment, innovation and growth by small businesses, including:

  • To help small businesses retain more of their earnings for investment, expansion and job creation, the lower small business tax rate was reduced to 11 per cent from 12 per cent in 2008. The amount of income eligible for this lower rate was increased from $300,000 to $400,000 in 2007, and then to $500,000 in 2009.
  • To spur investment in small businesses, Budget 2007 increased the Lifetime Capital Gains Exemption on qualified small business shares to $750,000 from $500,000, the first increase in the exemption since 1988.
  • Support for R&D through the Scientific Research and Experimental Development Tax Incentive Program was enhanced in Budget 2008. The amount of expenditures eligible for the higher, refundable tax credit was increased to $3 million and eligibility was extended to medium-sized companies by increasing the taxable capital and income limits.
  • To allow small business owners more time to devote to growing their firms, the Government fulfilled its Budget 2007 commitment to reduce the paperwork burden on Canadian businesses by 20 per cent.
Budget 2010 included several measures that help Canadian small and medium-sized companies grow their businesses, including:
  • Elimination of tax reporting under section 116 of the Income Tax Act for investments such as those by non-resident venture capital funds in a typical Canadian high-technology firm.
  • A new Red Tape Reduction Commission to review federal regulations and reduce the cost of compliance for small businesses.
  • A new private sector Advisory Committee on Small Business and Entrepreneurship to provide advice on how to further improve business access to federal programs and information.
  • A new Small and Medium-sized Enterprise Innovation Commercialization Program, which will provide $40 million to help federal departments demonstrate new products developed by small and medium-sized companies.

As a result of federal and provincial business tax changes, Canada has an overall tax rate on new business investment[1] that is substantially lower than any other Group of Seven (G-7) country (Chart 2.1.3).

Canada's Economic Action Plan:
Canada leads the G-7 with the lowest tax rate
on new business investment

Chart 2.1.3 - Tax Rate on New Business Investment

These tax changes have reduced the cost of capital and increased the expected rate of return on investment, and will therefore encourage firms to invest more. For example, a recent Department of Finance study examined the impact of federal corporate income tax rate reductions and found a strong relationship between taxation and investment.[2] This finding is consistent with a number of other studies that have examined the impact of taxes on investment.

Based on the study, the reduction in the cost of capital from federal and provincial business tax changes between 2006 and 2012 would be expected to significantly increase the capital stock in the long run by almost 4 per cent. The capital stock represents the productive physical assets available to businesses and is a key driver of economic growth and job creation.

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 also taken action to enhance Canada's business tax advantage. These actions are helping Canada build a strong foundation for future economic growth, job creation and higher living standards for Canadians.

Provinces are collaborating to improve
Canada's tax competitiveness

Chart 2.1.4 - Impact of Federal and Provincial Commitments Since Budget 2006 on the Tax Rate on New Business Investment

 

Table 2.1.2
Reducing the Tax Burden for Canadians
  2009–10 2010–11
 

Dollars
Spent1
Stimulus
Value
Stimulus
Committed
(millions of dollars)
Personal income tax relief for all taxpayers 1,885 1,950 1,950
Increases to the National Child Benefit supplement
 and Canada Child Tax Benefit
230 310 310
Enhancing the Working Income Tax Benefit 580 580 580
Targeted relief for seniors 325 340 340
 
Total: Reducing the Tax Burden for Canadians 3,020 3,180 3,180

Reference:
Tax Measures to Support Housing
 and Business
Home Renovation Tax Credit 3,000
Increasing withdrawal limits under the Home
 Buyers' Plan
15 15 15
First-Time Home Buyers' Tax Credit 175 180 180
Extending the Mineral Exploration Tax Credit 70 -15 -15
Increase in the income limit for the small business
 tax rate
45 80 80
Temporary 100-per-cent capital cost allowance rate
 for computers
340 355 355
Temporary accelerated capital cost allowance
 rate for manufacturing or processing machinery
 and equipment
1 Includes estimated values for tax reduction measures.

[1] The marginal effective tax rate (METR) on new business investment takes into account federal, provincial and territorial 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).

[2] Department of Finance, "Corporate Income Taxes and Investment: Evidence From the 2001–2004 Rate Reductions." Tax Expenditures and Evaluations (2007), pp. 41-56.

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