As you make your final preparations to vote in Monday’s federal election, here’s a quick reminder of some of the personal and small business tax issues you could be voting on and the positions of the three leading parties.
Personal tax rates
The Conservatives have promised to reduce the tax rate from 15 per cent to 13.75 per cent on the lowest federal income bracket. That bracket currently applies to income above the basic personal amount ($12,069 in 2019) and under $47,630. The rate reduction would be phased in over five years, with the first cut to 14.5 per cent for 2021, then down to 14 per cent for 2022 and finally to 13.75 for 2023. Using 2019 brackets and ignoring any indexing, an individual with income over $47,630 would save $444 annually once the full phase-in has been completed.
While the Liberals haven’t announced any tax-rate reductions, they did announce an increase in the basic personal amount by 15 per cent (above inflationary increases) to $15,000 by 2023; however, unlike the Conservatives’ tax cut, it won’t be universal as it will be phased out for individuals with income over $147,667 (the second-highest bracket) and fully eliminated if your income is over $210,371 (the top bracket).
The NDP have announced an increase in the top marginal tax rate to 35 per cent for Canadians earning over $210,371 annually. This is up two percentage points from the current top federal rate of 33 per cent, introduced by the Liberals for 2016. Prior to 2016, the top federal rate was 29 per cent. The NDP also promised a “super-wealth tax” of one per cent that would apply to individuals with wealth over $20 million.
Capital gains inclusion rates
Currently, Canada taxes capital gains at 50 per cent of your ordinary income rate. For high-income Canadians, who typically account for most of the taxable capital gains realized in non-registered accounts, the effective combined federal/provincial capital gains tax rate works out to around 25 per cent of the gain.
Prior to 1972, Canada didn’t tax capital gains at all, but after the release of the Carter Commission report which recommended full taxation of capital gains, the law was changed to tax 50 per cent of capital gains. The inclusion rate was increased to 75 per cent in 1990 and that inclusion rate stayed constant for 10 years until February 2000, when it was dropped to 66.67 per cent and then again, reduced down to 50 per cent in October 2000, where it has remained to this day.
While the Liberals and Conservatives have not proposed changes to the taxation of capital gains, the NDP has vowed to increase the inclusion rate back up to 75 per cent “to make our tax system fairer and ensure that the wealthiest individuals are paying their fair share.”
Boutique tax credits
The Conservatives promised to reintroduce a variety of targeted tax credits: the Children’s Fitness Tax Credit, the Children’s Arts and Learning Tax Credit and the Green Public Transit Tax Credit. Often referred to as “boutique credits,” they describe government spending to promote certain activities or target certain segments of the population, such as commuters or parents.
The proposed fitness credit would allow parents of children under the age of 16 to claim a 15 per cent tax credit on up to $1,000 per child, per year, for expenses related to fitness or sports activities. This is a refundable credit, meaning lower-income Canadians who don’t pay tax are able to get back up to the $150 maximum. The arts and learning credit, also at 15 per cent and refundable, will allow parents to claim up to $500 per child, translating to a maximum credit of $75, for arts-related expenses or other extracurricular educational activities. The transit credit would be a 15 per cent tax credit for the purchase of public transit passes.
The Conservatives have also promised to bump up the age credit by $1,000, which allows individuals who are 65 or older to claim a non-refundable credit of 15 per cent on $7,494 in 2019. The additional credit would translate to an additional $150 per senior, assuming the credit isn’t clawed back. (For middle- and higher-income seniors, the age credit amount is reduced by 15 per cent of net income over $37,790 for 2019, until it is completely eliminated when income exceeds $87,750.)
The Conservatives have also proposed a two-year “Green Home Renovation Tax Credit” which would allow individuals to receive a 20 per cent refundable credit for green improvements to their homes of over $1,000 and up to $20,000. This could provide up to $3,800 in tax savings for each year.
While the Liberals have not made any pre-election announcements regarding additional tax credits, they have previously announced two new credits that would kick in for 2020. The first is the “Canada Training Credit,” aimed at providing financial support to help cover up to half of eligible tuition and fees associated with any training. Canadians aged 25 to 65 with (self-) employment income of at least $10,000 (but less than $147,667) annually will start accumulating $250 annually in a notional account that can be claimed in a particular tax year to offset 50 per cent of eligible tuition, starting next year.
The second credit is the new, non-refundable 15 per cent credit for eligible digital news subscriptions. This will allow you to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum tax credit of $75 annually, starting in 2020. It is set to expire in 2024.
The NDP have promised to make the Canada Caregiver Credit refundable. This credit is currently non-refundable and is available for those providing support to a spouse or partner, or a dependent with a physical or mental impairment. The value of the CCC depends on your relationship with the person you are supporting.
Small Business Owners
The Liberals have promised to lower the corporate tax rate from nine per cent to 4.5 per cent for small clean-tech businesses, and from 15 per cent to 7.5 per cent for larger clean-tech companies. The Conservatives would establish a “Green Patent Credit” that would reduce the general corporate tax rate from 15 per cent down to five per cent on income that is generated from green technology developed and patented in Canada. The NDP would increase the general corporate income tax rate to 18 per cent from the current rate of 15 per cent.
Finally, the Conservatives promised to reverse two of the controversial changes to the private company tax rules introduced by the Liberals a couple of years ago. First, they would exclude spouses or common-law partners from the anti-income splitting legislation, known formally as “Tax on Split Income” or TOSI, once again allowing dividends to be paid to a spouse or partner (over age 24) from a private company without negative tax implications. In addition, they would eliminate the new rule that reduces the small business tax rate when passive investment income exceeds $50,000.