Budget Plan, Chapter 4: Five-Year Tax Reduction Plan

Budget Plan - Chapter 4
	Five-Year Tax Reduction Plan
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Highlights

The 2000 budget proposes a five-year tax reduction plan that includes the most important structural changes to the federal tax system in more than a decade. The Plan will:

immediately restore full indexation of the personal income tax system to protect taxpayers against automatic tax increases caused by inflation – this will benefit every Canadian; and
reduce the middle income tax rate to 23 per cent from 26 per cent, starting with a 2-point reduction to 24 per cent in July 2000 – this will cut taxes for 9 million Canadians.
Additional key personal income tax measures of the Plan will:
increase the amount that Canadians can earn tax-free to at least $8,000 and the amounts at which the middle and top tax rates apply to at least $35,000 and $70,000 respectively;
enrich the Canada Child Tax Benefit (CCTB) by $2.5 billion a year by 2004 to more than $9 billion annually – maximum benefits will reach $2,400 for a first child and $2,200 for a second child;
eliminate, as of July 1, 2000, the 5-per-cent deficit-reduction surtax on middle-income Canadians with incomes up to about $85,000, and completely eliminate it by 2004; and
raise to 25 per cent for 2000 and to 30 per cent for 2001 the permissible foreign content of investment in registered pension plans (RPPs) and registered retirement savings plans (RRSPs).

Additional measures will help Canadian businesses to become more competitive internationally by making the tax system more conducive to investment and innovation. To ensure continued growth and job creation in a global economy that is increasingly knowledge-based, the Plan will:

reduce corporate tax rates to 21 per cent from 28 per cent within five years for the highest taxed business sectors, such as high-technology, beginning with a drop to 27 per cent effective January 1, 2001;
reduce the corporate tax rate to 21 per cent from 28 per cent on small business income between $200,000 and $300,000 effective January 1, 2001;
lower capital gains taxes by reducing the amount of capital gains included in income for tax purposes from three-quarters to two-thirds;
postpone the taxation of gains on shares acquired under qualifying stock options to when shares are sold, rather than when the options are exercised; and
allow a tax-free rollover of capital gains on qualified investments from one small business to another.

The Plan, which places a special emphasis on the needs of families with children, will mean more money in the pockets of Canadians.

Taxes will be reduced by a cumulative amount of at least $58 billion over five years.
Personal income taxes will be reduced by an average of 15 per cent annually by 2004-05.
Low- and middle-income Canadians will see their personal income taxes reduced by an average of 18 per cent.
With substantially enriched benefits under the CCTB, families with children will see their personal income taxes reduced by an average of 21 per cent.

By 2004 a typical:

one-earner family of four with about $35,000 of income will pay no net personal income tax;

one-earner family of four earning $40,000 will see its net federal personal income taxes reduced by at least $1,623 a year, a reduction of 48 per cent; and

two-earner family of four with income of $60,000 will see its net personal income taxes reduced by at least $1,546 a year – a reduction of 27 per cent.

Introduction

In the fall of 1999, the Government promised Canadians in the Speech from the Throne and The Economic and Fiscal Update that it would set out a multi-year plan for further tax reductions. With significant planning surpluses now available, this budget delivers on that commitment by making the most important structural changes to the Canadian federal tax system in more than a decade.

This Plan provides real and lasting tax reductions for Canadians and ensures that all taxpayers will see their taxes reduced in a manner consistent with the Government’s main principles for cutting taxes, which are:

first, the approach to tax reductions must be fair. Tax reduction must ultimately benefit all Canadians, but first it must benefit those who need it the most – middle- and low-income earners, especially families with children;
second, broad-based tax reductions should focus initially on personal income taxes. That is where the burden is greatest – where Canadian taxes have been most out of line with other countries;
third, the business tax system must be internationally competitive to enhance economic growth, increase productivity, raise wages and create jobs; and
finally, broad-based tax reductions should not be financed with borrowed money.

The Plan in this budget will improve living standards for Canadians. It means more money in the pockets of Canadians, stronger economic growth and enhanced job creation.

Five-Year Tax Reduction Plan

Table 4.1 summarizes the Five-Year Tax Reduction Plan and indicates the amount of tax relief associated with each element of the Plan. By 2004-05, the Government will deliver an annual reduction in taxes of $17.6 billion.

The Plan will reduce taxes by a cumulative amount of at least $58 billion over the next five years.

Table 4.1 – Overview
Five-Year Tax Reduction Plan

Areas for action	Actions proposed to be implemented over the next five years	Amount of annual tax relief in 2004-05

		(millions of dollars)

Eliminate automatic increases in the tax burden due to inflation	Immediately restore full indexation of the tax system effective January 1, 2000	See below
	Increase the amount of income Canadians can earn tax-free to at least $8,000 for the basic personal amount and at least $6,800 for the spousal/equivalent-to-spouse amount	2,760¹
Reduce the high tax burden at the middle-income level	Reduce to 23 per cent the 26-per-cent middle tax rate	3,600
	Increase the level of income at which the middle tax rate begins to apply from $29,590 to at least $35,000	2,940¹
	Increase the level of income at which the top tax rate begins to apply from $59,180 to at least $70,000	730¹
	Eliminate the 5-per-cent surtax	865
Increase support for children	Increase support for children under the Canada Child Tax Benefit over the course of the next five years, with maximum benefits rising to $2,400 for the first child	2,5251
Make the Canadian economy more internationally competitive	Reduce the corporate income tax rate by 7 percentage points to 21 per cent from 28 per cent on business income not currently eligible for special tax treatment	2,995
	Reduce the capital gains inclusion rate from three-quarters to two-thirds	295
	Postpone taxation of gains on shares acquired under qualifying stock options to when shares are sold rather than when options are exercised	75
	Allow tax-free rollover of capital gains on qualified investments from one small business to another	75
Other	Technical measures including other indexation	780¹
Total		17,640
Of which indexation contributes		6,215

¹ Amounts include indexation, based on an assumed annual inflation rate of 1.8 per cent.

	2000-2001	2001-2002	2002-2003	2003-2004	2004-2005	Cumulative
Minimum $58 billion Cumulative Tax Reduction Under the Five-Year Tax Reduction Plan Size of Tax Relief (billions of dollars)


Personal income tax	3.3	5.6	7.2	8.7	14.7	39.5
Corporate income tax	-0.1	0.3	0.5	0.5	2.9	4.0
Employment insurance (EI)	1.4	2.2	3.0	3.8	4.4	14.8
Total tax and EI relief	4.6	8.1	10.6	13.0	22.1	58.3

The $58 billion in tax relief is an absolute minimum, given the way this estimate is constructed. While an estimate of cumulative tax relief over five years, it: only includes actions legislated in the 2000 budget for the next two years; and assumes all remaining personal and corporate tax cuts take place in the fifth year. To the degree these remaining actions are taken sooner – or tax reductions exceed those set out in the Plan – the cumulative tax relief would exceed $58 billion. As an example, the size of cumulative tax relief would increase by almost $2 billion if the final point reduction of the middle tax rate were to occur earlier on July 1, 2002, rather than in the final year of the Plan. As another example, the size of cumulative tax relief would increase by almost $1.5 billion if corporate tax reductions (from the 27-per-cent rate proposed to be legislated in January 2001) to 21 per cent occurred in the last two years rather than in the final year of the Plan. Data sources: 1) Years 2000-01 to 2002-03 for personal income tax (PIT), corporate income tax (CIT) and EI: The Budget Plan 2000, Chapter 1, Table 1.4. 2) Year 2003-04 calculated as follows: PIT – cost of measures legislated in 2000 budget including indexation; CIT – same as 2002-03; EI – further assumed reduction of 10 cents in employee contribution rate. 3) Year 2004-05: PIT and CIT – Table 4.1 of this chapter; EI – further assumed reduction of 10 cents in employee contribution rate. Note: Numbers may not add due to rounding.

Restoring Full Protection Against Inflation in the Tax System

To fully protect taxpayers against inflation, the budget proposes to restore full indexation of the personal income tax system effective January 1, 2000 (Table 4.2). This eliminates the provision put in place in 1986, that applied indexation to the personal income tax system only for inflation above 3 per cent.

Non-indexation of the tax system has resulted in ongoing automatic increases to the net tax burden (taxes minus benefits). There are several ways in which this happened:

bracket creep, through which income is subject to higher tax rates even when real income or purchasing power does not increase; and
the decrease in the real value of benefits such as the Canada Child Tax Benefit and the goods and services tax credit. There are two sources for the decline in real benefits: first, the reduction in purchasing power because of higher prices; and second, the reduction in the dollar amount of benefits as incomes rise with inflation.

	Non-indexed	Fully indexed	Difference
Automatic Reduction in the Tax Burden From Indexation – Example 1 Sharon earns $25,000. Beyond the tax-free personal amounts, her income is subject to the lowest tax rate of 17 per cent. She also receives the goods and services tax (GST) credit and the Canada Child Tax Benefit (CCTB) for her son. Each year, Sharon receives wage increases consistent with inflation from her employer, bringing her income to $27,250 by the fifth year.¹ She has received no increase in real income. However, her real tax burden goes up automatically: Net Federal Tax Payable in the Fifth Year (dollars)


Tax	2,122	1,920	202
CCTB	1,278	1,663	385
GST credit	437	548	111
Total net tax (tax minus benefits)	407	-291	–
Net gain from indexation			698

Under the non-indexed tax system, Sharon would have paid $407 in net federal tax. Under a fully indexed tax system, she would be a net beneficiary receiving $291, effectively increasing her income by $698. ¹ An average annual rate of inflation of 1.8 per cent is used over the five-year period.

	Non-indexed	Fully indexed	Difference
Automatic Reduction in the Tax Burden From Indexation – Example 2 Dale earns $35,000. Beyond the tax-free personal amounts, part of his income is subject to the lowest tax rate of 17 per cent, and the rest to the middle rate of 26 per cent. He also receives the GST credit and the CCTB for his two children. Each year, Dale receives wage increases consistent with inflation from his employer, bringing his income to $38,150 by the fifth year.¹ He has received no increase in real income. However, his real tax burden goes up automatically: Net Federal Tax Payable in the Fifth Year (dollars)


Tax	4,631	4,190	441
CCTB	1,612	1,929	168
GST credit	0	168	317
Total net tax (tax minus benefits)	3,019	2,093	–
Net gain from indexation			926

Under the non-indexed tax system, Dale would have paid $3,019 in net federal tax. Under a fully indexed tax system, he will pay $2,093, a tax saving of $926. ¹ An average annual rate of inflation of 1.8 per cent is used over the five-year period.

Although indexation will help all Canadians, it will benefit lower-income individuals the most. For example, Canadians with incomes under $30,000, who pay about 1 per cent of all net personal income taxes, will receive almost 40 per cent of the benefit from full indexation. Canadians with incomes up to $60,000, who pay about 40 per cent of all net personal income taxes, will receive 80 per cent of the benefits of indexation.

Indexation will particularly benefit middle- and low-income Canadians because:

the effect of bracket creep stops building once a taxpayer has reached the income level at which the top tax rate begins to apply; and
low- and middle-income taxpayers generally receive the benefits under the CCTB and the GST credit.

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Budget 2000 Publications

Budget 2000 Main Page

Budget Plan - Chapter 4

Five-Year Tax Reduction Plan

Highlights

Introduction

Five-Year Tax Reduction Plan

Minimum $58 billion Cumulative Tax Reduction Under the Five-Year Tax Reduction Plan

Restoring Full Protection Against Inflation in the Tax System

Automatic Reduction in the Tax Burden From Indexation – Example 1

Automatic Reduction in the Tax Burden From Indexation – Example 2