New Year Tax Misery In Canada

by Mike Godfrey, Tax-News.com, Washington

02 January 2012

There will be winners and losers when the new year brings in major payroll and pension tax changes in Canada, the Canadian Taxpayers Federation (CTF) has said.

In its annual New Year Tax Changes calculations, the CTF offers a breakdown of projected personal income and payroll tax changes taking effect as of January 1, 2012. It argues that while payroll tax-hikes will see every working Canadian pay more of their income towards government in 2012, different inflation rates will see those in provinces above the national average pay more in their effective tax bill. The reverse is also true for those in provinces with inflation rates below the national average.

According to the CTF, the biggest change will be Employment Insurance (EI) and Canadian Pension Plan (CPP) payroll tax hikes. Payroll taxes will increase on January 1, by a combined CAD306 (USD299) for employees and employers, the second largest hike since the CTF began tracking these taxes in 1994. There will also be an EI rate rise from CAD1.78 in every CAD100 to CAD1.83, a rise in the EI maximum insurable earnings from CAD44,200 to CAD45,900 and a hike in the CPP maximum pensionable earnings from CAD48,300 to CAD50,100, resulting in a total CAD142 in higher employee payroll taxes.

In addition, employers will pay more, as their EI rates increase from 2.46% to 2.56%. This, taken together with corresponding increases in maximum EI and CPP amounts, will mean a total CAD164 in higher employer payroll taxes. Gregory Thomas, CTF federal director, said, “Payroll taxes are going up because the federal government has yet to tackle our broken EI program. EI payroll taxes are going to go up to keep the fund financed because the program has little to do with an actual ‘insurance’ program, reflecting the risk of unemployment in premiums. If we don’t want higher, job-killing payroll taxes, then we have to redraw the EI program from the bottom-up.”

Turning to provincial taxation, the CTF notes that while the federal government and most provincial governments index their income tax rates to inflation, there are still several which do not. These include Nova Scotia, Prince Edward Island and Manitoba, which saw inflation rates of 3.6%, 2.6% and 2.5% respectively. According to CTF National Research Director Derek Fildebrandt, “By not indexing for inflation, the governments of these three provinces make themselves the taxation dinosaurs of confederation. Taxpayers in those provinces who get a mere cost of living pay increase will see themselves pay a higher tax rate 2012, even though they have the same real income."

In addition, health taxes in Ontario and British Columbia are not indexed to inflation. This means that British Columbia's Medical Services Premium (MSP) health tax will see a significant increase of 6.4% for couples and 5.8% for single individuals and those with children. CTF’s British Columbia director, Jordan Bateman noted, “The ever-increasing MSP tax is a significant concern for many British Columbians—this is the third significant jump in two years...Families and seniors are already finding it difficult to keep up with rate increases at BC Hydro, ICBC, BC Ferries and tax hikes at the gas pump. These MSP, CPP and EI increases are yet more weight added to the tax burden.”

Despite having an inflation rate below the national average at 2.6%, the CTF concludes that Quebecers will be the second biggest losers on January 1, due to hikes in their own payroll taxes. This is thanks in part to an increase in Quebec Pension Plan (QPP) rates from 4.95% to 5.025%, and rises will continue until rates reach 5.4% in 2017. Taken together with an increase of 3.7% in maximum pensionable earnings, maximum QPP contributions will go up 5.6% to CAD2,342. Quebec’s EI rate will also increase from 1.41% to 1.47%. Taken together with an increase in maximum insurable earnings, Quebecers will see their maximum EI contributions go up 8.3% to CAD675. In addition to steep payroll tax increases, a 1% increase in the Quebec Sales Tax (QST) will take place, bringing the rate to 9.5%.

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