By Charles Lammam,
and Hugh MacIntyre
The Fraser Institute
With tax season just behind us, many Canadians are realizing the full weight of the income taxes they paid in 2017. And some may wonder about the much-heralded middle-class tax cut promised by the governing Liberals.
In reality, very few Canadian families received an income tax cut.
It’s important to understand the exact nature of the personal income tax cut implemented by the federal government in 2016.
The second lowest federal income tax rate was cut from 22.0 per cent to 20.5 per cent, which for the 2017 tax year applied to income between $45,916 and $91,831. That means the maximum income tax reduction amounted to $689 in 2017.
However, other income tax changes were also introduced concurrent to this rate reduction.
First, the government introduced a new top rate of 33 per cent for professionals, entrepreneurs and business owners.
Second, a number of tax credits, which act to reduce a person’s income tax bill without reducing their marginal tax rates, were also eliminated. The government eliminated tax credits, including income-splitting for families with children, children’s fitness, public transit, education and the textbook tax credit.
Examination of two of these now-eliminated tax credits helps to highlight why so many middle-class families experienced a tax increase rather than the much-hyped tax cut.
Families that previously claimed the fitness tax credit, which had a maximum value of $150 per child in 2015, now incur the same costs – but with no tax relief. The elimination of this tax credit could and likely did increase taxes for individuals and families that used it before it was cancelled.
The income-splitting tax credit had an even more deleterious effect on the tax bill for those who previously claimed it. This tax credit was meant to partially mitigate the rather large difference in taxes between families with similar income but with different earning patterns. Families where one earner receives most of the income pay higher income taxes than families with the same total income but who have the earnings split more evenly between multiple earners. Families that previously used the income-splitting tax credit could experience an increase in their federal income taxes of up to $2,000.
When you put all the tax credits eliminated together, you get a very different perspective on the total income tax changes implemented by the government.
So while income taxes could have been reduced by a maximum of $689, the elimination of the income-splitting and fitness tax credits means they could have been increased by a maximum of $2,300. (This assumes a family with two kids claimed the maximum value of the income-splitting and child fitness tax credits, none of the other now-eliminated tax credits, and was not exposed to the higher income tax rate of 33 per cent.)
In fact, a recent study estimated that 81 per cent of middle-income families in Canada (with family incomes between $77,089 and $107,624) experienced a net tax increase, with families paying $840 more per year on average.
More telling, it’s basically single individuals with no children (with incomes between $45,916 and $202,800, the income level before the 33 per cent rate kicks in) that benefited from the tax cuts, while families, particularly those with children, experienced tax increases.
So while the Liberal platform of reducing middle-income tax rates is a good one, it was accompanied by other tax reforms that raised marginal tax rates on entrepreneurs, investors, professionals and business owners – as well as tax measures that in many cases totally offset the income tax rate reduction.
The result is that income taxes have been raised on most Canadians over the last two years. This will worsen on Jan. 1, 2019, as the Canada Pension Plan payroll tax increases. That means virtually all Canadian families will experience a net tax increase.
Charles Lammam, Jason Clemens and Hugh MacIntyre are economists with the Fraser Institute.
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