Canada Budget Brings Personal Tax Cuts

by Mike Godfrey, Tax-News.com, Washington

30 January 2009

Budget 2009, announced by Finance Minister Jim Flaherty on Tuesday, proposes significant new personal income tax relief that will provide immediate benefits, particularly for low- to middle-income Canadians.

This year's budget proposes to increase the basic personal amount and the two lowest personal income tax brackets by 7.5% above their 2008 levels, effective January 1, 2009.

As a result of these measures:

• the basic personal amount, the spousal and common-law partner amount, and the eligible dependant amount will increase for 2009 to CAD10,320 from CAD9,600 in 2008,
• the upper limit of the first personal income tax bracket (15% income tax rate) will increase to CAD40,726 in 2009 from CAD37,885 in 2008, and
• the upper limit of the second personal income tax bracket (22% income tax rate) will increase to CAD81,452 in 2009 from CAD75,769 in 2008.

The increased amounts and bracket thresholds will be indexed to account for inflation for 2010 and subsequent years.

The 2009 budget also featured proposals to increase numerous personal income tax credits and some new innovations to help support the housing market. These include:

Working Income Tax Benefit

The 2009 budget proposes to enhance the tax relief provided by the Working Income Tax Benefit (WITB) by an additional CAD580m for the 2009 and subsequent taxation years, which is expected to double the total tax relief provided through the WITB.

Age Credit

The budget proposes to increase the Age Credit, a federal income tax credit for Canadians 65 years of age and older, for the 2009 and subsequent taxation years. For 2009, the amount on which the Age Credit is based will be increased by CAD1,000 to CAD6,408, effective January 1, 2009, and indexed thereafter. This increase will help eligible low- and middle-income seniors by providing up to CAD150 of additional federal income tax relief each year.

For 2009, the net income level at which the Age Credit begins to be phased out will remain unchanged at CAD32,312. The phase-out rate is 15%. With this enhancement of the Age Credit amount, the income level at which the Age Credit is fully phased out will increase by over CAD6,600 to CAD75,032 from CAD68,365.

Home Renovation Tax Credit

To stimulate economic growth and encourage Canadians to invest in improvements to their homes, the 2009 budget proposes to introduce a temporary Home Renovation Tax Credit (HRTC). The HRTC will provide tax relief to help Canadian homeowners make improvements to their property while promoting broad-based economic activity.

Individuals will be able to claim a 15% non-refundable tax credit for eligible expenditures made in respect of eligible dwellings. The credit will apply to expenditures in excess of CAD1,000, but not more than CAD10,000, resulting in a maximum credit of CAD1,350 (CAD9,000 x 15%). The credit will apply only to the 2009 taxation year. Expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010, will be eligible for the credit.

Eligibility for the HRTC will be family-based. For this purpose, a family will generally be considered to consist of an individual, and where applicable, the individual’s spouse or common-law partner, and their children who were, throughout 2009, under the age of 18 years. Expenditures will qualify for the HRTC if they are incurred in relation to a renovation or alteration of an eligible dwelling (including land that forms part of the eligible dwelling) provided that the renovation or alteration is of an "enduring nature" and is integral to the eligible dwelling.

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw amounts from a Registered Retirement Savings Plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal. The 2009 budget proposes to increase the HBP withdrawal limit to CAD25,000 from CAD20,000.

First-Time Home Buyers’ Tax Credit

The 2009 budget proposes to introduce a new non-refundable tax credit based on an amount of CAD5,000 for first-time home buyers who acquire a qualifying home after January 27, 2009 (i.e. the closing is after that date). The credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the year and is claimable for the taxation year in which the home is acquired.

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