6

Building Canada

for the 21st Century –

General Tax Relief for Canadians

Highlights

▪	The amount of income that low-income Canadians can receive on a tax-free basis will be increased by $500, taking 400,000 Canadians off the tax rolls.

▪	The 3-per-cent general surtax will be eliminated for almost 13 million taxpayers with incomes up to about $50,000, and reduced for an additional one million taxpayers.

Introduction

The tax system plays a fundamental role in the social and economic fabric of a nation. Taxes provide the revenue needed to finance the services that government provides to Canadians.

With the federal government's books in balance, one of the government's goals is to reduce Canadians' taxes. This reduction in taxes is part of an overall strategy to achieve the nation's social and economic objectives.

The government's tax policy is an essential element of its overall social and economic policies, described in previous chapters, which have the following components:

▪	debt reduction, with the objective of lowering the stock of debt in absolute terms and in relation to the gross domestic product;

▪	strategic investments for job creation, economic growth and a secure society; and

▪	tax relief.

The government is determined to maintain balance in these three components of its strategy to simultaneously achieve a stronger economy and a secure society. To this end, tax relief has been, and will continue to be, provided on the following basis.

First, certain critical economic and social priorities cannot wait, as postponing action on them would impose net costs on Canadians. In such cases, targeted tax reductions generate a pay-off to the country that far exceeds any revenue loss.

Second, general tax relief will be provided only when fiscal resources permit. The size of such tax relief, and who gets it, will depend critically on the size of the fiscal dividend.

Third, the tax system must be fair. This implies that Canadians should pay taxes consistent with their ability to pay and that all taxes owed are indeed paid.

Consistent with this framework, all four of the government's previous budgets undertook targeted tax reductions to achieve social and economic objectives by providing assistance to education, children, charities and the disabled. These budgets also improved tax fairness. This budget builds on this approach. A number of strategic initiatives to provide enhanced opportunities and a secure society are described in Chapters 4 and 5. A comprehensive list of all the associated tax measures put forward in this and previous budgets can be found in Annex 7.

This budget also proposes some general personal income tax relief. The efforts of all Canadians in the past four years has now ensured that the task of balancing the budget is at hand. This has created room for some tax relief. In keeping with the nation's priorities, this implies first reducing taxes on those who can least afford to pay them, that is low- and middle-income Canadians.

Personal Income Tax Relief:

the First Steps

The 1998 budget begins a process of general tax relief. Relief in personal income taxes is directed at Canadians with low and modest incomes. The budget proposes two measures to deliver this relief:

▪	increasing by $500 the amount of income that low-income Canadians can receive on a tax-free basis; and

▪	eliminating the general federal surtax for Canadians earning up to about $50,000, and reducing it for Canadians earning between $50,000 and $65,000.

Increase in tax-free income for low-income Canadians

Effective July 1, 1998, the amount of income that low-income Canadians can receive on a tax-free basis will be raised by $500 through a supplement to the basic personal and spousal amounts. The $500 supplement to the personal amounts will be phased out at a rate of 4 per cent of income over $6,956 in order to focus tax relief initially on individuals with incomes up to $20,000.

By 1999, this measure will eliminate federal tax payable for almost 400,000 very low-income Canadians, and reduce federal taxes for an additional 4.6 million Canadians.

This measure will cost $170 million in 1998-99 and $270 million in 1999-2000.

General surtax eliminated for most taxpayers

The general surtax, first introduced in 1986 as a temporary measure to reduce the deficit, is currently set at a rate of 3 per cent of basic federal tax. Effective July 1, 1998, the budget proposes to eliminate the 3-per-cent general surtax for filers earning up to about $50,000. Surtax relief will reach a maximum of $250 per individual when fully in place in 1999. In order to focus surtax relief at low- to middle-income taxpayers, the surtax reduction will be phased out at a rate of 6 per cent of basic federal tax over $8,333. This measure will cost $710 million in 1998-99 and $1,175 million in 1999-2000.

When fully mature in the 1999 tax year, almost 13 million taxpayers (83 per cent of all taxable individuals) will no longer pay any federal surtax, and another one million taxpayers will see a significant reduction in their surtax liability.

Table 1 shows the number of taxpayers receiving tax reductions under these measures, while Table 2 shows the cost impact on federal revenues, which grow from $880 million in 1998-1999, to $1,445 million in 1999-2000, and to $1,680 million in 2000-2001.

Tables 3 and 4 show that the surtax reduction, combined with the $500 supplement to the basic personal and spousal amounts for low-income taxfilers, result in a progressive distribution of tax relief, with the degree of tax relief declining with income. For example, a one-earner family making $30,000 will receive $145 in tax relief corresponding to a 31-per-cent reduction of its current federal income tax burden. Relief for a one-earner family earning $50,000 will reach $238 or 3.3 per cent of its current federal income tax burden. Typical single individuals at $30,000 will receive $112 in tax relief, equivalent to 3 per cent of their current federal tax, while individuals at $50,000 will see a tax reduction of $219, or 2.4 per cent of their current federal tax.

Reductions in Employment Insurance Premiums

These income tax reductions are in addition to the decrease in the employment insurance (EI) premium rate from $2.90 to $2.70 per $100 of insurable earnings that took effect in January 1998. The 1998 premium rate reduction is the second largest drop in EI premiums since the 1970s. It will reduce premiums paid by employers and employees by an estimated $1.4 billion. For workers, it means paying up to $78 less in premiums in 1998 than in 1997. For employers, it means paying up to $109 less per employee. The reduction in EI premiums also provides a progressive relief in the burden of contributors, as workers at the lower-income end receive a proportionately larger cut than those at the higher-income end. This budget also announces a new initiative to direct further EI premium relief at youth employment (described in Chapter 4).

Tax Fairness: Tackling the Underground Economy

Tax evasion through participation in the underground economy penalizes honest taxpayers. The federal government has a comprehensive strategy for addressing this problem. This budget announces additional measures to reduce the underreporting of income.

Federal departments and agencies will begin issuing information slips for contract payments made from January 1, 1998 as will federal Crown corporations effective January 1, 1999.

The various associations involved in the construction industry have been concerned with competition from the underground economy for some time. In response to their concerns, the 1995 budget implemented a voluntary reporting system for the construction industry.

More recently, key industry associations, including the Building and Construction Trade Department of the AFL-CIO and the Interior Systems Contractor's Association of Ontario, have indicated that the reporting system to be effective needs to be made mandatory.

Effective January 1, 1999, reporting of construction contract payments to Revenue Canada will become mandatory. The federal government will consult with industry to ensure that any industry compliance costs are minimized and the system is effective.

Table 6.1

Impact on taxpayers – 1999

Number of taxpayers General tax relief Increase in tax-free income for low-income Canadians	Number with tax reductions 5,000,000	Number removed from tax rolls 400,000 General surtax	Number with surtax reductions 14,000,000	Number with surtax eliminated 12,600,000

Table 6.2

Impact on federal revenues

1998-99 1999-2000 2000-2001 ($ millions) General tax relief	Increase in tax-free income	for low-income Canadians -170 -270 -315	General surtax -710 -1,175 -1,365 Total -880 -1,445 -1,680

Table 6.3

Typical one-earner family of four – 1999

Full-year impact of proposed measures on the low-income supplement to personal amounts and surtax:

Tax relief measures

Total

income Current federal Tax1

Low-income supplement

Surtax reduction

Total tax relief As a % of federal tax2 $ $ $ $ $ 13,500 -3,705 -169 -5 -174 n.a.3 15,000 -3,458 -168 -7 -175 n.a.3 20,000 -2,637 -132 -33 -165 n.a.3 25,000 -992 -97 -57 -154 n.a.3 30,000 461 -62 -83 -145 -31.4 35,000 2,246 -27 -122 -149 -6.6 40,000 3,953 0 -160 -160 -4.0 45,000 5,542 0 -199 -199 -3.6 50,000 7,131 0 -238 -238 -3.3 55,000 8,720 0 -195 -195 -2.3 60,000 10,335 0 -116 -116 -1.1 65,000 12,078 0 -29 -29 -0.3 75,000 15,485 0 0 0 0.0 100,000 23,315 0 0 0 0.0 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and 0the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical families at and below $25,000 or so receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.

Table 6.4

Typical single – 1999

Full-year impact of proposed measures on the low-income

supplement to personal amounts and surtax:

Tax relief measures

Total income Current federal Tax1 Low income supplement

Surtax reduction

Total tax relief As a % of federal tax2 $ $ $ $ $ 7,500 -97 -84 -1 -85 n.a3 10,000 264 -66 -14 -80 -30.2 15,000 1,051 -31 -39 -70 -6.6 20,000 1,872 0 -63 -63 -3.4 25,000 2,693 0 -87 -87 -3.2 30,000 3,756 0 -112 -112 -3.0 35,000 5,141 0 -150 -150 -2.9 40,000 6,445 0 -188 -188 -2.9 45,000 7,784 0 -227 -227 -2.9 50,000 9,123 0 -219 -219 -2.4 55,000 10,462 0 -141 -141 -1.4 60,000 11,826 0 -61 -61 -0.5 65,000 13,341 0 0 0 0.0 75,000 16,473 0 0 0 0.0 100,000 24,303 0 0 0 0.0 1	Includes federal income tax, refundable Child Tax Benefit (CTB), and the goods and services tax (GST) credit. Does not include provincial income tax. Negative values indicate that refundable CTB and GST credits received are greater than income tax paid.

2	Negative values indicate a reduction in net tax paid to the federal government.

3	Typical individuals at and below this income receive more in federal refundable credits (CTB and GST credit) than they pay in federal income tax. An income tax reduction will therefore increase the net benefits they receive from the tax and transfer system.