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Ottawa, November 8, 2001
2001-101

Protecting Canadians From Inflation Under the Five-Year Tax Reduction Plan: Indexing Factor of 3 Per Cent for 2002

Related document:

• Backgrounder.

Finance Minister Paul Martin today stated that the Government’s initiative to protect Canadians from automatic tax increases caused by inflation is working.

As part of the federal government’s five-year tax reduction plan, all indexed amounts of the personal income tax system will be adjusted by 3 per cent for 2002 to ensure that inflation does not cause people to pay more income tax or erode the value of benefits they receive.

"Our tax reduction plan continues to unfold, providing timely relief to Canadians," said Minister Martin. "Indexation of the personal income tax system benefits all Canadian tax filers – but it benefits low- and middle-income Canadians the most."

Full indexation of the personal income tax system was announced in the 2000 budget and took effect as of January 1, 2000. It applies on an ongoing basis to tax bracket thresholds, benefits and non-refundable credits. As a result, these amounts are adjusted every year to ensure that Canadians receive permanent relief from the effects of inflation.

Indexation protects all Canadians from automatic tax increases that would otherwise occur when their incomes rise because of inflation. Indexation also preserves the real value of benefits people receive, such as the Canada Child Tax Benefit (CCTB) and the goods and services tax/harmonized sales tax (GST/HST) credit.

For example, a one-earner family of four that earned $35,000 in 1999, and whose income has grown with inflation, will benefit by about $675 in 2002 as a result of indexation. This includes about $275 in tax savings combined with $400 more in benefits through the GST/HST credit and the CCTB.

People with disabilities and the elderly also benefit from the indexing of the disability tax credit and the age credit respectively.

For example, a senior who had an income of $25,000 in 1999, and whose income has grown with inflation, will benefit by about $205 in 2002. This includes $65 in additional GST/HST credit plus about $140 in tax savings, of which almost half is due to the indexation of the age credit.

In addition to full indexation of the personal income tax system, the Government’s five-year tax reduction plan included other significant tax reduction measures, such as lower tax rates at all income levels and substantial CCTB increases. Under this plan, personal income taxes are being reduced by 21 per cent on average. Families with children are saving even more, with an average personal income tax reduction of 27 per cent.

A backgrounder containing further information on full indexation of the personal income tax system is attached. A list of tax reduction measures is also provided.

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On January 1, 2002, all indexed personal income tax amounts, including bracket thresholds and amounts used to calculate non-refundable credits, will rise by 3 per cent as a result of restoring full indexation to the personal income tax system in Budget 2000. This will ensure that cost-of-living increases are taken into account in determining tax brackets.

Permanent inflation protection also applies to benefits such as the Canada Child Tax Benefit (CCTB) and the goods and services tax/harmonized sales tax (GST/HST) credit. The indexing factor is applied to these benefits as of July 1 every year to ensure that the true value of benefits that people receive through these programs is fully preserved rather than eroded by inflation.

The 3-per-cent increase for 2002 is on top of previous years’ increases: 2.5 per cent for 2001 and 1.4 per cent for 2000. The attached table shows the new bracket thresholds, benefit amounts and values for other key parameters of the personal income tax system.

How Indexation Benefits Taxpayers

The following example illustrates how indexation protects taxpayers from "bracket creep," or automatic increases in tax caused by inflation.

An individual with income of about $30,000 in 1999 would have almost all of their income subject to the lowest rate of tax. Cost-of-living increases bring their income to more than $32,000 in 2002.

• Without indexation, their income in excess of about $29,590 would have been subject to the middle tax rate, or 22 per cent for 2002.

• With indexation, this income remains subject to the lowest rate of tax – which was reduced from 17 per cent to 16 per cent as of January 2001.

Dollar Savings for Individuals

The following examples illustrate dollar savings for individuals as a result of indexation alone. In all cases, it is assumed that income keeps pace with inflation every year.

• A single parent with one child, and who earned $25,000 in 1999, will save about $560 in 2002 relative to what they would have paid had the system not been indexed starting in January 2000. This includes about $150 in lower taxes, plus $410 more through the GST/HST credit and CCTB.

• A one-earner family of four that earned $35,000 in 1999 will save about $675 in 2002 relative to what they would have paid had the system not been indexed. This includes about $275 in lower taxes, plus $400 more through the GST/HST credit and the CCTB.

• A senior who had an income of $25,000 in 1999 will benefit by about $205 in 2002. This includes $65 in additional GST/HST credit plus about $140 in tax savings, of which almost half is due to the indexation of the age credit.

How the Indexing Factor Is Calculated

The indexing factor for a given taxation year beginning January 1 is the percentage increase in the average consumer price index (CPI) for Canada as determined by Statistics Canada for the 12-month period ending on September 30 of the previous year relative to the average CPI for the 12-month period ending on September 30 of the year earlier. Thus, the 3-per-cent factor effective January 2002 is the percentage increase in the average level of the CPI from October 2000 to September 2001, relative to the average level of the CPI from October 1999 to September 2000.

Indexed Personal Income Tax Parameters

List of Measures Included in the Five-Year Tax Reduction Plan

• Full indexation has been restored to the personal income tax system to protect taxpayers against automatic tax increases caused by inflation and to preserve the real value of benefits such as the CCTB and the GST/HST credit.
• Personal income tax rates have been reduced for all taxpayers, and the 5-per-cent deficit reduction surtax has been eliminated.
• The CCTB for families with children has been substantially increased.
• The amounts on which the education tax credit is based have doubled.
• The amounts on which the disability tax credit, caregiver tax credit and infirm dependant tax credit are based have all increased.
• The 28-per-cent general corporate tax rate has already been reduced to 27 per cent, and has been legislated to fall to 21 per cent by 2004.
• As of January 2001, the 28-per-cent general corporate tax rate was reduced to 21 per cent on small business income between $200,000 and $300,000.
• The capital gains inclusion rate was reduced from two-thirds to one-half as of October 18, 2000. It had been previously been reduced from three-quarters to two-thirds as of February 28, 2000.
• A tax-free rollover has been introduced to allow individuals to defer the tax on capital gains from eligible small business investments that are reinvested in another eligible small business.
• As of January 2001, self-employed individuals may deduct the portion of the Canada Pension Plan and Quebec Pension Plan contributions that represents the employer’s share.