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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).
| 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. | ||||
growth, Canadian incomes have grown faster than
in any other G-7 country
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:
- 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 Working Income Tax Benefit, introduced in Budget 2007, has been effectively doubled. This enhancement lowers the "welfare wall" by further strengthening work incentives for low-income Canadians already in the workforce and encouraging other low-income Canadians to enter the workforce. Canadians have been able to receive enhanced benefits since filing their 2009 income tax returns.
- The level at which the National Child Benefit supplement for low-income families is fully phased out and the level at which the Canada Child Tax Benefit begins to be phased out have been raised, providing a benefit of up to $438 in 2010 for a family with two children. Additional monthly benefits under these programs began to be paid to families with children in July 2009.
- The Age Credit amount was increased by $1,000 in 2009 to provide tax relief to low- and middle-income seniors. With indexation, this means additional tax savings of up to $151 for low-income seniors in 2010.
- To assist first-time home buyers, Canada's Economic Action Plan provided a tax credit of up to $750 as well as additional access to their Registered Retirement Savings Plan savings to purchase or build a home.
- An estimated 4.6 million Canadian families benefited from up to $1,350 in tax relief from the temporary Home Renovation Tax Credit on eligible renovation projects. Canadians were able to claim the credit when they filed their 2009 income tax returns.
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:
- All Canadians—even those who do not earn enough to pay personal income tax—are benefiting from the 2-percentage-point reduction in the Goods and Services Tax (GST) rate. Maintaining the GST Credit level while reducing the GST rate by 2 percentage points translates into more than $1.1 billion in GST Credit benefits annually for low- and modest-income Canadians, making purchases more affordable for these Canadians.
- All taxpayers are benefiting from the reduction in the lowest personal income tax rate to 15 per cent from 16 per cent.
- The Tax-Free Savings Account, introduced in Budget 2008, is improving incentives to save through a flexible, registered general-purpose account that allows Canadians to earn tax-free investment income.
- The Government has also introduced relief measures targeted to help families, students, seniors and pensioners, workers, persons with disabilities, and communities.
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.
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:
- To help businesses adopt newer technology at a faster pace, a temporary 100-per-cent capital cost allowance (CCA) rate was introduced for computers acquired after January 27, 2009 and before February 1, 2011.
- To help businesses in manufacturing and processing industries restructure and retool to position themselves for long-term success, the temporary 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 were already benefiting from this measure, which was first introduced in Budget 2007 and extended in Budget 2008.
- To support small businesses, 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, the temporary Mineral Exploration Tax Credit was extended to March 31, 2010.
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:
- 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 the reduction in the federal general corporate income tax rate to 18 per cent as of January 1, 2010 and 16.5 per cent as of January 1, 2011.
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
- 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, a particularly damaging tax for business investment, 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 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.
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.
- 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 leads the G-7 with the lowest 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.
Canada's tax competitiveness
| 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.
