Canadian Tax Cuts Wiped Out By Payroll Tax Rise, Says Taxpayers' Federation

by Mike Godfrey, Tax-News.com, Washington

02 January 2009

While welcoming lower tax rates for personal income tax payers next year, the Canadian Taxpayers Federation has warned that most of the benefit of these tax cuts will be eaten up when payroll tax changes kick in on January 1, 2009.

Traditionally, Canadian Pension Plan (CPP) contribution limits have been raised each year while employment insurance (EI) rates have been lowered, making the overall increase to payroll taxes very small. In 2009, however, both EI and CPP contribution limits increase. At the maximum (incomes over CAD42,800), Canadians will pay an additional CAD188 in payroll taxes in 2009. This is the largest single hike in payroll taxes since 2002.

“How can the government justify increasing EI premiums with the massive, multi-year, multi-billion dollar surpluses in the EI fund?” asks CTF-director, Scott Hennig. “EI premiums should be falling, not rising.”

The federal basic and spousal exemptions rise in 2009 to CAD10,100. This is a CAD260 increase above the automatic annual indexation adjustment. This tax cut will save most taxpayers roughly CAD39 in 2009, according to the federation.

“This small tax cut is welcomed, but taxpayers are looking for real tax reform and a less complex tax code,” said Hennig. “Hopefully Budget 2009 will include a shift to a lower, simpler and flatter tax system.”

Arguably, the largest change in 2009 comes with the introduction of Tax-Free Savings Accounts (TFSA). TFSAs will allow Canadians 18 years and older to save up to CAD5,000 of after-tax dollars each year in an investment account. Earnings in the TFSA will not be subject to income or capital gains taxes. However, unlike a Registered Retirement Savings Account, the money invested in the TFSA is not tax deductible.

“Some economists slammed the reduction in the GST as being a ‘bad tax cut’ because it did not encourage Canadians to save and invest. TFSAs will do just that,” added Hennig. “Of course, Canadians will need to have the money before they can invest it, and a significant tax reduction and reform of our tax code would go a long way towards allowing Canadians to benefit fully from the TFSA change.”

With regards provincial tax changes, Albertans are clear winners in 2009, with the elimination of the Alberta Health Care Insurance Premium. The premium taxed individuals CAD528 and families CAD1,056 per year.

“The CTF campaigned hard for six years in Alberta for the elimination of the health care premium tax, and on January 1st, we will achieve a very significant victory, both for the organization and for Albertans,” said Hennig.

According to the federation, low-to-middle income families will benefit the most from this tax cut, as health care premiums represented a significant portion of their income, compared to very low and higher-income families.

Even those Albertans whose employers paid their premium in part or in full will benefit from lower taxes in 2009. Any payment made on an employee's behalf was considered a taxable benefit, subject to federal and provincial income taxes. An employee whose full family premium was paid for them, will still save CAD338 in 2009, the CTF said.

Saskatchewan residents were also big winners in 2008 with significant retroactive tax cuts that were announced in October. British Columbia also saw its two lowest tax rates retroactively drop last fall, unfortunately they were off-set by the introduction of a provincial carbon tax. Newfoundland and Labrador lowered all of their tax rates effective last summer. This reduction moved the province from having some of the highest income tax rates in Canada to middle of the pack – a significant improvement, says the CTF.

Manitoba, Prince Edward Island and Nova Scotia continue to be the only provinces in Canada who do not automatically index their exemptions and tax brackets each year.

“We will be watching Budget 2009 very closely to see what, if any, tax relief Canadians can expect in 2010,” concluded Hennig.

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