Canadians to Pay Less, Thanks to Lower Income Tax Bite and GST Cut

Every year the Canadian Taxpayers Federation (CTF) releases projected income and payroll tax changes that kick in on January 1. The good news is that all taxpayers will pay less tax this year. A new employment tax credit – called the Canada Employment Credit – will increase to $1,000 for the 2007 tax year, up from $250 in 2006. This credit works like the basic personal exemption, which is set at $8,929 this year, and means workers will not pay income tax on the first $9,929 of earnings.

A fourfold increase in the Canada Employment Credit permits the Conservative government to truthfully assert taxes are going down even though Canadians will pay more payroll taxes and the lowest personal income tax rate, applied to the first $37,178 of income, will rise a quarter-point to 15.5% from 15.25%. This pleasant testimonial is only strengthened by the one-point GST reduction that will save consumers approximately $4.5-billion in ’07.

Some taxpayers will benefit much more than others. Ottawa will take less from the average individual taxpayer, but the amount is a pittance – 106 dollars to be exact. (See chart for federal income and payroll tax changes.) Low-income individuals, earning less than $25,000 annually, profit the most because they benefit from the employment credit and less income is subject to the 0.25% income tax rate increase.

Employment Insurance (EI) premium rates will drop by seven cents on January 1 to $1.80 for employees (per $100 of insurable earnings) from the current rate of $1.87. (The corresponding employer rate will drop by 10 cents to $2.52 from the current rate of $2.62.) Yet this gain is mostly offset because the tax rate will be applied to more income. Ottawa is giving tax relief with one hand and taking it back with the other. The maximum insurable earnings will rise from $39,000 to $40,000. This was not an inflationary boost as the previous EI threshold increase was in 1995. Ottawa was wrong to increase the EI threshold when the program continues to amass an annual $2-billion surplus. The seesaw EI changes represent a mere $9.30 reduction from 2006 levels.

Canada Pension Plan (CPP) payroll taxes will also rise by $79.20. While the tax rate will remain unchanged, the income threshold will increase to $43,700 from the 2006 level of $42,100. The bottom line is the net payroll tax bill on workers will increase by $69.90 (and $65.40 for employers) because EI tax reductions will be gobbled up by a higher EI threshold and rising CPP payments.