Annex 2
Building on the Five-Year Tax Reduction Plan

Overview

In the October 2000 Economic Statement and Budget Update, the Government announced a plan to reduce taxes by $100 billion over five years—the largest tax cut in Canadian history.

About three-quarters of the tax relief provided under this plan goes toward reducing the tax burden of Canadian families and individuals. By 2004–05 the Government’s tax reduction plan will have reduced federal personal income taxes by 21 per cent on average. Families with children benefit even more—with average tax savings of 27 per cent.

The Government’s Five-Year Tax Reduction Plan is also promoting economic growth and jobs by creating an advantage for investment in Canada. In particular, the 28-per-cent general corporate income tax rate has already been reduced to 23 per cent and is legislated to fall to 21 per cent in 2004. As of January 2003 Canada’s average federal/provincial corporate tax rate is below the average U.S. rate (see chart at the top of page 246). Moreover, with the reduction in the capital gains inclusion rate to one-half in October 2000, capital gains are now typically taxed at a lower rate in Canada than in the U.S. (see chart at the bottom of page 246).

The Government’s tax reduction plan provided timely and significant economic stimulus of about $17 billion in 2001 and $20 billion in 2002 (see Table A2.1), playing a key role in sustaining Canadian economic performance in the face of a global slowdown and enabling the Canadian economy to outperform the U.S. during this period.

This year and next, the Government’s tax reduction plan will continue to provide significant tax relief—about $24 billion in 2003 and more than $30 billion in 2004.

Table A2.1
Five-Year Tax Reduction Plan: 2001 to 2004 Calendar-Year Tax Relief

Most of the initiatives under the Government’s tax reduction plan have already been implemented. The remaining elements are legislated to take effect in 2004 and will mean further tax reductions for Canadians, enhanced benefits for families with children, and a more competitive climate for business in Canada.

Budget 2003 builds on the Five-Year Tax Reduction Plan, enhances support for Canadian families and communities, and contributes further to a productive and sustainable economy.

The Government’s tax reduction plan includes tax relief for individuals and measures to encourage jobs, growth, entrepreneurship and innovation.

Personal Income Tax Relief

• Full indexation of the personal income tax system was restored as of January 1, 2000. In 2003 tax filers will benefit from the indexation factor of 1.6 per cent (see Table A2.2).

• Personal income tax rates for all taxpayers were lowered effective January 1, 2001.

• The 17-per-cent tax rate was reduced to 16 per cent.

• The 24-per-cent tax rate—reduced from 26 per cent on July 1, 2000—was reduced further to 22 per cent.

• The 29-per-cent top tax rate was reduced to 26 per cent on income between about $60,000 and $100,000.

• The deficit reduction surtax was eliminated.

• The Canada Child Tax Benefit (CCTB) was substantially increased to help low- and middle-income families with children.

• Additional tax assistance was provided to those who need it most, including people with disabilities and caregivers.

• Tax support for students in post-secondary education was substantially increased.

• The general corporate income tax rate has been reduced to 23 per cent in 2003, after being reduced from 28 per cent in 2000 to 27 per cent in 2001 and 25 per cent in 2002. Canada’s average federal/provincial corporate tax rate, including capital taxes, is now below the average U.S. rate (see chart at the top of page 246). This comparison is unaffected by the recent tax changes proposed by the U.S. administration.

• The corporate tax rate on small business income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada was reduced from 28 to 21 per cent effective January 1, 2001.

• The capital gains inclusion rate was cut to one-half as of October 18, 2000. As a result, capital gains are typically taxed at a lower rate in Canada than in the U.S. (see chart at the bottom of page 246). Again, this comparison is unaffected by recent U.S. administration tax reduction proposals.

• Employees may defer the income inclusion from exercising certain employee stock options in publicly listed corporations until the shares are sold.

• Individuals may defer qualifying capital gains on small business shares to the extent that the proceeds are reinvested in other eligible small business shares.

Tax Relief in 2004

Personal Income Tax Relief

Under the plan, further measures have been legislated that will provide tax relief in 2004. These measures will:

• ensure that the basic personal amount, the amount an individual can earn tax-free, is at least $8,000 (from $7,756 in 2003);

• ensure that the spousal amount is at least $6,800 (from $6,586 in 2003);

• raise the second bracket threshold to at least $35,000 (from $32,183 in 2003);

• raise the third bracket threshold to at least $70,000 (from $64,368 in 2003);

• raise the fourth bracket threshold to at least $113,804 (from $104,648 in 2003);

• raise the amount of family net income at which the National Child Benefit supplement is fully phased out and the CCTB base benefit phase-out begins to at least $35,000 (from $33,487 in 2003); and

• reduce the phase-out rate of the base benefit of the CCTB from 5 to 4 per cent (from 2.5 to 2 per cent for families with one child).

Measures for Jobs, Growth, Entrepreneurship and Innovation

Under the Five-Year Tax Reduction Plan, businesses will also see further tax relief in 2004.

The general corporate income tax rate will be reduced from 23 to 21 per cent. This will encourage job creation and growth, reward entrepreneurship and innovation, and improve the international competitiveness of Canada’s business environment.

Corporate tax rate cuts, together with other measures in the Government’s tax reduction plan, such as the reduction in the capital gains inclusion rate, have created a tax advantage for investment in Canada relative to the U.S.

Table A2.2
Detailed List of Indexed Personal Income Tax Parameters
Including Budget 2003 Measures

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