Chapter 3
Broad-Based Tax Reductions for Canadians

Highlights

This Economic Statement proposes broad-based tax relief for individuals, families and businesses of almost $60 billion over this and the next five fiscal years. Combined with previous relief provided by this Government, total tax relief over the same period is almost $190 billion.

• To improve productivity, employment and prosperity in an uncertain world, a bold, new tax reduction initiative will reduce the general federal corporate income tax rate to 15 per cent by 2012 from its current rate of 22.1 per cent. The general corporate income tax rate will decline by 7.12 percentage points between 2007 and 2012—giving Canada the lowest overall tax rate on new business investment in the Group of Seven (G7) by 2011 and the lowest statutory tax rate in the G7 by 2012.

• The Government is seeking the collaboration of the provinces and territories to reach a 25 per cent combined federal-provincial-territorial statutory corporate income tax rate, to make Canada a country of choice for investment.

• To support small business, the reduction in the tax rate to 11% for small business, currently scheduled to be reduced in 2009, will be accelerated to January 1, 2008.

• The goods and services tax (GST) will be reduced by a further 1 percentage point as of January 1, 2008, fulfilling the Government’s commitment to reduce the GST to 5 per cent.

• The GST credit for low- and modest-income Canadians will be maintained at its current level even though the GST rate is being reduced. Maintaining the credit, while reducing the GST rate to 5 per cent from 7 per cent, translates into more than $1.1 billion in benefits annually for low- and modest-income Canadians.

• The lowest personal income tax rate will be reduced to 15 per cent from 15.5 per cent, effective January 1, 2007.

• The amount that all Canadians can earn without paying federal income tax will be increased to $9,600 for 2007 and 2008, and to $10,100 for 2009.

• Together, these two measures will reduce personal income taxes for 2007 by more than $400 for a typical two-earner family of four earning $80,000, and by almost $225 for a single worker earning $40,000.

• In order to make businesses even more competitive, it is essential that Employment Insurance rates be reduced for employers and employees. The Employment Insurance Chief Actuary’s 2008 Report forecasts the break-even rate in 2008 will decline by 10 cents per $100 of insurable earnings for employers and 7 cents for employees.

Canada needs a tax system that rewards Canadians for realizing their full potential, improves standards of living, fuels growth in the economy and encourages investment in Canada. Actions already taken by the Government will reduce taxes on individuals, families and businesses by almost $130 billion over this and the next five fiscal years.

In total, this Economic Statement will provide almost $60 billion in additional tax relief over this and the next five fiscal years. Together, actions taken since 2006 will provide almost $190 billion over this period.

As the chart below highlights, about 73 per cent of the tax relief will have been provided to individuals and 27 per cent to businesses.

Table 3.1
Tax Relief Provided by Budgets 2006 and 2007, the Tax Fairness Plan and This Economic Statement

A New Era for Business Taxation in Canada

Canada needs an internationally competitive business tax system to ensure investment and economic growth, which will lead to new and better jobs and increased living standards for Canadians. Advantage Canada included a commitment to establish the lowest overall tax rate on new business investment (METR)^[1] in the G7.

Chapter 1 notes the strength of Canada’s economy, but also notes the risks and uncertainties we are facing. Chapter 2 points to our strong fiscal situation, illustrating that we have an opportunity few other countries have—to put in place measures that will bolster confidence and encourage investment at a time of economic uncertainty. This chapter sets out the measures the Government proposes to strengthen Canada’s business tax advantage in the context of the potential downside risks to the economy.

The central element of these measures is a bold, new tax reduction initiative that will lower the general federal corporate income tax rate to 15 per cent by 2012. Broad-based business tax reductions support investment, job creation and growth in all sectors of the economy, including not only sectors with strong growth but also those facing greater challenges. Such tax reductions provide incentives for all businesses to succeed.

Broad-based tax reductions play a well-recognized role in improving productivity and economic growth, and in providing Canadians with more and better jobs and a higher standard of living.

Action to Date

The Government has already made significant progress towards making Canada’s business tax environment more competitive through broad-based tax reductions:

• The federal capital tax was eliminated in 2006.

• The corporate surtax for all corporations will be eliminated in 2008.

• The general corporate income tax rate is being reduced, from 21 per cent in 2007 (22.12 per cent including the corporate surtax) to 18.5 per cent by 2011.

• The Government also established a financial incentive to encourage provinces to eliminate their capital taxes as soon as possible, and some provinces have acted to take advantage of this incentive. Since that initiative was introduced, Ontario and Quebec have legislated the elimination of their capital taxes by 2011, and Manitoba has announced plans to do so subject to budget balancing requirements.

Collectively, these actions will, by 2011, increase Canada’s statutory corporate income tax rate advantage over the U.S. to 8.8 percentage points, and will allow Canada to achieve a meaningful METR advantage over the U.S. of 6.7 percentage points. Based on tax changes to date, by 2011, Canada’s METR will fall to the second lowest in the G7 from the third highest.

Canada is close to achieving the Government’s Advantage Canada target of the lowest METR in the G7. However, Canada’s METR is still high relative to other Organisation for Economic Co-operation and Development (OECD) countries and small developed countries, and varies substantially by province. It is important in today’s globally competitive marketplace that Canada strengthen its business tax advantage not only vis-à-vis the U.S. but also relative to its other trading partners.

Other countries recognize that competitive business taxes are key to economic growth and improved living standards, and they have been reducing their tax rates. We can expect that many of the countries that Canada competes with for investment will continue reducing business taxes in the years to come. That is why it is crucial that we take the bold actions needed to ensure Canada’s business tax competitiveness.

Reducing the General Federal Corporate
Income Tax Rate

To strengthen Canada’s business tax advantage, the Government is putting forward a bold, new tax reduction initiative that will lower the general corporate income tax rate to 15 per cent by 2012, starting with a 1 percentage point rate reduction in 2008 beyond already-scheduled reductions, to bring the rate to 19.5 per cent in that year. With these reductions, the general federal corporate income tax rate will decline by 7.12 percentage points between 2007 and 2012, a decline of one-third, and Canada’s corporate tax rate will be the lowest in the G7. In addition, we will achieve our goal of having the lowest METR in the G7 by 2011 and will have a substantial business tax advantage over the U.S.—a statutory tax rate advantage of 12.3 percentage points and a METR advantage of 9.1 percentage points in 2012.

It is estimated that the reduction in the general corporate income tax rate to 15 per cent will reduce government revenues by $14.1 billion over this and the next five fiscal years.

Table 3.2
General Federal Corporate Income Tax Rate Reductions

To build on these significant actions and make Canada a country of choice for investment, the Government is seeking the collaboration of provinces and territories to reach a 25 per cent combined federal-provincial-territorial statutory corporate income tax rate.

Table 3.3
Statutory General Corporate Income Tax Rates¹
in G7 Countries, 2012

Accelerating the Tax Reduction for Small Business

Small businesses are an important source of economic growth and job creation. To support the growth of small businesses, the federal income tax system provides a special lower tax rate of 12 per cent on qualifying income earned by a Canadian-controlled private corporation. Budget 2006 increased the annual amount of active business income qualifying for the reduced tax rate to $400,000 from $300,000, as of January 1, 2007. Budget 2006 also put in place a schedule to reduce the small business tax rate by 0.5 percentage points in 2008 and a further 0.5 percentage points in 2009 to reach 11 per cent.

To further support small business, this Economic Statement proposes to accelerate to 2008 the 0.5 percentage point reduction in the income tax rate applying to qualifying small business income currently scheduled for 2009. As a result, the tax rate will be reduced to 11 per cent in 2008 from 13.12 per cent in 2007 (including the effect of the previously announced elimination of the corporate surtax).

It is estimated that this change will reduce government revenues by $215 million in 2008–09 and $50 million in 2009–10.

Federal-Provincial-Territorial Collaboration

Further strengthening Canada’s tax advantage to make Canada a country of choice for new investment requires collaboration between federal, provincial and territorial governments.

Overall Statutory Tax Rates

The proposed general corporate income tax rate reductions will bring the federal statutory tax rate to a level that is 14 percentage points lower than it was in 2000.

When all scheduled provincial tax changes are in place, the average provincial-territorial corporate income tax rate will be only 1.2 percentage points below its level in 2000, and actually slightly higher than its level in 2007 (see Table 3.4). In addition, the current variance in provincial tax rates can divert investment from its most productive uses and also creates incentives for interprovincial tax planning—issues that concern all governments.

For these reasons, the Government is seeking the collaboration of provinces and territories in reaching a 25 per cent combined federal-provincial-territorial statutory tax rate. With the proposed federal corporate income tax rate reductions, this goal for Canada would be reached if all provinces reduced their general corporate income tax rates to 10 per cent.

Table 3.4
Federal, Provincial and Territorial Statutory
General Corporate Income Tax Rates

Provincial Sales Tax Harmonization

An area that could substantially improve business tax competitiveness is sales tax harmonization. The following chart illustrates the detrimental impact that provincial retail sales taxes (RSTs) have on the taxation of business investment. Provinces with a value-added tax (VAT) structure (Quebec, Nova Scotia, New Brunswick and Newfoundland and Labrador) have a much lower tax rate on business investment than provinces with RSTs and the United States. RSTs harm business competitiveness because they apply to business inputs, increasing production costs and deterring investment. Recent analysis by the C.D. Howe Institute indicates that experience in the three harmonized Atlantic provinces has been very positive—annual investment in machinery and equipment in these provinces rose 12 per cent above historic trend levels in the years following the 1997 sales tax reform.^[2]

Provincial action to eliminate the remaining RSTs in favour of adopting provincial value-added taxes harmonized with the federal GST would generate a reduction in Canada’s METR of about 7 percentage points. Harmonizing with the GST is the single most important action that these provinces could take to improve their provincial and Canada’s overall tax competitiveness. The Government is willing to work with the five provinces that still have RSTs to help facilitate the transition to provincial value-added taxes harmonized with the GST. Moving forward with provinces to complete the sales tax harmonization initiative would give Canada a strong tax advantage in all provinces in attracting new investment. The following chart illustrates the clear METR advantage that would result relative to the average of OECD countries and other small developed countries.

Reducing Taxes for All Canadians

The Government has already taken actions that will reduce taxes on individuals by more than $90 billion over this and the next five fiscal years. Families with children, workers, seniors, persons with disabilities and others are benefiting from measures such as the first GST rate reduction, the Transit Pass and Children’s Fitness Credits, the Canada Employment Credit, and the Child Tax Credit. The Working Income Tax Benefit is an important step in improving the rewards to work for low-income individuals. The Tax Fairness Plan provides $1 billion annually in tax relief for seniors and pensioners to help them better ensure their retirement security.

This Economic Statement goes further, with $45 billion in new tax relief for individuals and families over this and the next five fiscal years (see Table 3.5). Taken together, the actions since 2006 will provide almost $140 billion of tax relief for individuals and families over this and the next five fiscal years.

Cutting the GST to 5 per cent

This Economic Statement proposes to reduce the rate of the GST to 5 per cent from 6 per cent effective January 1, 2008. This fulfills the Government’s commitment to cut the GST to 5 per cent. The 1 percentage point rate reduction will also apply to the federal portion of the Harmonized Sales Tax (HST) in New Brunswick, Nova Scotia, and Newfoundland and Labrador.

Reducing the GST will deliver tax relief to all Canadians, including those who do not earn enough to pay personal income tax. It will provide savings to Canadians every time they buy items subject to GST for themselves, their families or their home. Additional savings from the GST rate reduction will amount to $34 billion over this and the next five fiscal years (see Table 3.5).

In reducing the GST rate below 7 per cent, the Government had a choice of whether to adjust the GST credit in proportion to the rate reduction or to maintain it. The Government decided to maintain the GST credit when the GST rate was reduced from 7 per cent to 6 per cent in July 2006, and it is taking the same approach now. Maintaining the GST credit level, while reducing the GST rate to 5 per cent from 6 per cent, will translate into benefits of about $555 million in 2008–09 for low- and modest-income families. In total, maintaining the GST credit level, while reducing the GST rate from 7 per cent to 5 per cent, translates into more than $1.1 billion in benefits annually.

This Economic Statement also proposes to retain the existing GST/HST rebate rates for new housing. Rebate rates for purchases made by public sector bodies will also be maintained. This will ensure that purchases of a new home and purchases by public sector entities will benefit from the GST rate reduction. Maintaining these rebate rates translates into tax relief of $290 million for people who buy new homes and $165 million for public sector bodies for 2008–09.

The January 1, 2008, implementation date will allow an orderly transition for Canadian businesses. It will provide businesses with sufficient advance notice to modify their cash registers and other systems, and the date coincides with GST filing periods, not only for monthly filers but also for smaller businesses that file quarterly and annually. It also respects the required two months advanced written notice that the Government must provide provinces that are part of the Harmonized Sales Tax (Nova Scotia, New Brunswick, and Newfoundland and Labrador).

To assist taxpayers in the transition to the new, lower GST rate, specific rules have been developed for transactions that occur close to, or straddle, the January 1, 2008, implementation date. Further details on the application of these rules are set out in the annex.

This Economic Statement also proposes to adjust federal excise duties on tobacco products to substantially maintain the overall current federal tax burden on these products, which would otherwise decline as a result of the reduction in the GST rate. These adjustments will take effect January 1, 2008. The excise duty adjustments will also apply to inventories of tobacco products held at the end of December 31, 2007.

Delivering Broad-Based
Personal Income Tax Relief

Reducing the Lowest Personal Income Tax Rate and Raising the Basic Personal Amount

This Economic Statement proposes new broad-based personal income tax relief of almost $11 billion over this and the next five fiscal years.

• Reducing the lowest personal income tax rate, on incomes up to $37,178, to 15 per cent from 15.5 per cent effective January 1, 2007.

• Increasing the basic personal amount—the amount that an individual can earn without paying federal income tax—to $9,600 for 2007 and 2008, and to $10,100 in 2009.

Together, these measures will remove some 385,000 low-income Canadians from the tax rolls at least a year earlier than under current legislation, and will reduce personal income taxes for 2007 by more than $400 for a typical two-earner family of four earning $80,000, and by almost $225 for a single worker earning $40,000.

The majority of the personal income tax relief provided by this Government goes to Canadians with incomes in the two lowest tax brackets. Almost 30 per cent of the relief goes to those with taxable incomes under $37,922, and 47 per cent of the relief goes to those with taxable incomes between $37,922 and $75,844. In total, Canadians with incomes under $75,844 receive over three-quarters of the tax relief, exceeding their share of taxes paid (47 per cent).

Table 3.5
Tax Relief in this Economic Statement

Notes:

1 The marginal effective tax rate (METR) on new business investment takes into account federal and provincial statutory corporate income tax rates, deductions and credits available in the corporate tax system and other taxes paid by corporations, including provincial capital taxes and retail sales taxes on business inputs. When measured on a province-by-province basis, METRs vary due to differences in provincial tax systems and differences in the distribution of investment across provinces. The methodology for calculating METRs is described in the 2005 edition of Tax Expenditures and Evaluations (Department of Finance). [Return]

2 C.D. Howe Institute, "Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax," July 2007. [Return]