A new year has begun and with it, a new set of tax brackets and rates, fully
indexed to inflation.
At the end of last month, Finance Minister Ralph Goodale announced the
indexing factor for 2005 would be 1.7%, meaning all income tax bracket
thresholds ( see table) as well as amounts used to calculate various
non-refundable tax credits will be increasing by that amount for 2005.
Readers may recall that indexing wasn't always part of our tax system. In
fact, full indexation was only reintroduced in the 2000 federal budget as part
of the government's Five-Year Tax Reduction Plan. From 1986 until 2000, the
personal income tax system was only partially indexed to changes in the consumer
Prior to the 2000 budget change, various thresholds and credits in the
personal income tax system were only adjusted each year for the percentage
change in the CPI exceeding 3% for the 12-month period ending on Sept. 30 of the
preceding year. Since for many years inflation had been below 3%, the personal
income tax system had effectively not been indexed for quite a few years, giving
rise to what was commonly called "bracket creep." The 2000 budget reinstated
full indexation effective Jan 1, 2000, for all amounts that were partially
How is the indexation factor arrived at? The indexation factor for a given
taxation year beginning Jan. 1 is the percentage change in the average CPI,
calculated by Statistics Canada, for the 12-month period ending on Sept. 30 of
the previous year relative to the average CPI for the 12-month period ending on
Sept. 30 of the year earlier. For example, the 2005 indexation factor of 1.7%
was calculated by the percentage change in the average level of the CPI from
Oct. 1, 2003, to Sept. 30, 2004, relative to the average level of the CPI from
Oct. 1, 2002, to Sept. 30, 2003.
Indexation will also apply to various benefits such as the Canada Child Tax
Benefit and the goods and services tax credit. According to the government, "the
real value of benefits that people receive through these programs is fully
preserved rather than eroded by inflation." The increased benefit cheques only
begin on July 1, 2005. Similarly, on that date low- and modest-income families
with children will benefit from a $185 increase in the National Child Benefit
supplement of the CCTB, which was announced in the government's 2003 budget.
While the maximum RRSP contribution limit for 2005 has also increased to
$16,500, other limits and thresholds are not changing.
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
Other limits which have remained frozen for many years, if not decades,
include the Alternative Minimum Tax exemption of $40,000 and the $1,000 pension
GRAPHIC: Table: AIM Trimark Investments; Federal Tax Rates 2005: (See print copy
for complete table.)