Tax brackets growing faster than inflation: Yet lifetime RESP limits have been frozen since 1996

National Post


Welcome to 2006. The new year ushers in a new set of tax brackets and credit
amounts, which not only have been fully indexed to inflation, but, in some
cases, have increased beyond the general inflation indexing.

Last month, the Department of Finance announced that the indexing factor for
2006 would be 2.2%, meaning that all income tax bracket thresholds as well as
amounts used to calculate various non-refundable tax credits will be increasing
by at least that amount for 2006.

We didn't always have full indexation. Prior to the year 2000, the personal
income tax system was only partially indexed to changes in the Consumer Price
Index (CPI) to the extent the percentage change in the CPI exceeded 3% for the
12-months to Sept. 30 of the preceding year.

You'll recall that since for many years inflation had been below 3%, the
personal income tax system had not effectively been indexed for some time,
giving rise to what was historically referred to as "bracket creep."

The 2000 budget reinstated full indexation effective Jan. 1, 2000 for all
amounts that were previously partially indexed.

So, how did the government come up with the magical 2.2% indexing factor?

The 2006 factor was calculated based on the percentage change in the average
CPI, calculated by Statistics Canada, for the 12-month period ending on Sept.
30, 2005 relative to the average CPI for the 12-month period ending on Sept. 30,

Indexation will also apply to benefits such as the Canada Child Tax Benefit
(CCTB) and the goods and services tax credit. The increased benefit cheques only
begin on July 1, 2006.

The maximum RRSP contribution limit for 2006 has also increased to $18,000
from $16,500 -- which is obviously well beyond the 2.2% indexation factor -- but
rather is based on the changes to the RRSP limits previously announced in the
2003 federal budget.

Other limits and thresholds are simply not indexed and, indeed, have not
changed in some time.

For example, the maximum contribution to a Registered Education Savings Plan
is still static at $4,000 per year per child (although only the first $2,000
attracts the grant) and the lifetime limit has been frozen at $42,000 since

Once again, this past fall, the Investment Funds Institute of Canada, in its
annual pre-budget submission to the House of Commons Standing Committee on
Finance, called for both increased annual and lifetime RESP limits.

The $1,000 pension income credit amount has also been frozen for many years,
leading Conservative leader Stephen Harper to make this an election issue by
announcing last month that, if elected, he would immediately double the pension
income amount to $2,000, gradually increasing to $2,500 in the next five years.

As is evident by the table below, some tax amounts have been increased beyond
the 2.2% indexation factor as a result of changes announced by the government in
the 2005 federal budget last February and the Economic and Fiscal Update last

For example, the basic personal amount, which was set to be $8,148 for 2005,
was increased by $500 for 2005 and a further $200 in 2006, plus indexing.

Similarly, the spouse or common-law partner amount, formerly $6,919 in 2005,
was increased by $425 in 2005 and a further $170 in 2006, plus indexing.

These amounts are then multiplied by 15% to arrive at the actual federal tax
credits that directly reduce federal taxes payable.

Finally, the new federal tax brackets appear in the table shown.


Have you ever had a tax refund denied, have you been audited or generally
harassed by Canada Revenue Agency? If so, we would like to hear from you for a
special tax planning section.


GRAPHIC: Table: Aim Trimark Investments, National Post; CREDITS, BRACKETS
GROWING: Selected personal amounts, Federal tax brackets for 2006: (See print
copy for complete table.)