Canadians to Pay Less, Thanks to Lower Income Tax Bite and GST Cut
Every year the Canadian Taxpayers Federation (CTF) releases projected income and payroll tax changes that kick in on January 1. The good news is that all taxpayers will pay less tax this year. A new employment tax credit - called the Canada Employment Credit - will increase to $1,000 for the 2007 tax year, up from $250 in 2006. This credit works like the basic personal exemption, which is set at $8,929 this year, and means workers will not pay income tax on the first $9,929 of earnings.
A fourfold increase in the Canada Employment Credit permits the Conservative government to truthfully assert taxes are going down even though Canadians will pay more payroll taxes and the lowest personal income tax rate, applied to the first $37,178 of income, will rise a quarter-point to 15.5% from 15.25%. This pleasant testimonial is only strengthened by the one-point GST reduction that will save consumers approximately $4.5-billion in '07.
Some taxpayers will benefit much more than others. Ottawa will take less from the average individual taxpayer, but the amount is a pittance - 106 dollars to be exact. (See chart for federal income and payroll tax changes.) Low-income individuals, earning less than $25,000 annually, profit the most because they benefit from the employment credit and less income is subject to the 0.25% income tax rate increase.
Employment Insurance (EI) premium rates will drop by seven cents on January 1 to $1.80 for employees (per $100 of insurable earnings) from the current rate of $1.87. (The corresponding employer rate will drop by 10 cents to $2.52 from the current rate of $2.62.) Yet this gain is mostly offset because the tax rate will be applied to more income. Ottawa is giving tax relief with one hand and taking it back with the other. The maximum insurable earnings will rise from $39,000 to $40,000. This was not an inflationary boost as the previous EI threshold increase was in 1995. Ottawa was wrong to increase the EI threshold when the program continues to amass an annual $2-billion surplus. The seesaw EI changes represent a mere $9.30 reduction from 2006 levels.
Canada Pension Plan (CPP) payroll taxes will also rise by $79.20. While the tax rate will remain unchanged, the income threshold will increase to $43,700 from the 2006 level of $42,100. The bottom line is the net payroll tax bill on workers will go up by $69.90 (and $65.40 for employers) because EI tax reductions will be gobbled up by a higher EI threshold and rising CPP payments.
Without a doubt the biggest winners are families with young children. They will rocket ahead thanks mostly to the monthly $100 payment for each child under age 6. Although this bonus is taxable, it nonetheless provides significant relief.
If taxpayers are looking for a break, they should have more children or consider retirement as the other group of winners is seniors. They benefit thanks to a $1,000 boost in the age credit. (This income tax credit for Canadians 65 years of age and older increased to $5,066.) The change was, in fact, made retroactive to January 1, 2006. As a result, lower and middle income seniors will recoup up to $150 of additional income tax relief for '06 and couples up to $300. (The credit starts to be phased out when net income reaches $30,270 and is fully phased-out when net income reaches $64,043.)
Even better for pensioners is Ottawa will now permit them to split income for tax purposes. All said, these two benefits will provide one billion dollars of new tax relief annually for Canadian seniors.
But should tax relief create such obvious winners and losers Those Canadians lucky enough to qualify for a tax credit will be pleased with any reduction, but many others will be left behind. Moreover, adding new tax credits, exemptions and payments, only further complicates an already complex tax code.
The government should be looking at meaningful and broad-based tax relief for all Canadians, not just those who meet specific - and to be blunt, election-friendly - criteria. According to the OECD and Canada's finance department, our personal income tax burden remains the highest of the G-7 nations. This standing has not changed in almost a decade. In other words, the federal government is still overtaxing all Canadians.
To correct all this, the CTF proposes to increase both the basic personal and spousal exemptions to $15,000 over four years. This will save taxpayers $940 a year. Such a change would remove 1.7 million low-income Canadians from the tax rolls. In addition, the top two personal income tax rates should be reduced by 3% - phased-in over three years - from 29%-to-26% and 26%-to-23%.
On the day Prime Minister Stephen Harper shuffled his cabinet he said his minority government is preparing tax cuts for its next budget. "Budget 2007 will make Canada stronger by keeping federal spending focused on results, by cutting taxes further for individuals and families and by restoring fiscal balance to our federation," he told Canadians.
Since Ottawa's books were first balanced in 1998, the federal government has amassed $81.4-billion in surpluses while ordinary taxpayers have barely gotten ahead. The surplus will likely exceed $10-billion again this year. Ottawa is still taking too much money from Canadians. The 2007 budget must address the only true fiscal imbalance that exists, the one between government and taxpayers.