As expected, the Tories’ just-released Recession-fighting budget delivers tax relief to lower- and middle-income Canadians by bumping up the thresholds on the lowest tax brackets. Added to an increase to the basic personal amount that is exempt from taxation, and various measures directed at home owners and home renovators, Budget 2009 has some tax relief for everyone.
In part, that’s because even higher-income earners benefit when more income is taxed at the lowest rate of 15%, or more income is taxed at 22% rather than 26%. Budget 2009 increases the basic personal amount to $10,320, moves the threshold for the 15% lowest-tax bracket to $40,726 of income, and moves the upper limit of the second tax bracket to $81,452. Keep in mind we’re talking only the federal rate of tax here: Tax rates are considerably higher when you add in provincial income taxes.
While the bump-ups in the federal tax thresholds may look impressive, they translate into only $300 in tax savings for the average Canadian in the 2009 tax year, says Heather O’Hagan, associate tax partner for KPMG. That’s how much someone making $81,000 would save because of this “reverse bracket creep.” Spread over 26 paycheques, that would result in $12 less in taxes taken off by employers “at source.”
The budget documents make the tax savings appear more dramatic but some of the increases in thresholds were going to happen anyway because of the automatic annual indexation to inflation, Ms. O’Hagan says. So the increase in the basic personal amount is rising only from $10,100 to $10,320, generating just $33 in net tax savings. While the budget says the previous amount in 2008 was $9,600, that had already been indexed up to $10,100 in 2009. Thus the real tax savings is the $220 difference multiplied by the 15% lowest tax rate, which is $33.
A similar dynamic is at work in the increases in thresholds to the two bottom tax brackets. The budget says the upper limit for the bottom tax bracket of 15% is rising to $40,726 in 2009, up from the previous $38,832. That’s a $1,894 difference in gross dollars but you have to multiply it by 7% — the difference between the 22% tax rate that previously applied to the higher amount included and the earlier 15%. Under that math 7% of $1,894 is just $132.58.
The same logic applies to the increases to the second tax bracket of 22% that now applies to $81,452 of income. The gross increase in the amount of income in that tax band is $3,788, up from the previous threshold of $77,664. But that just means $3,788 is being taxed at 22% instead of 26%. Ms. O’Hagan says 4% of $3,788 is just $151.52 in absolute tax savings because of that measure.
So all three measures provides net tax relief of $33 plus $132.58 plus $151.52, or roughly $317 in 2009. That amount of new tax relief is by definition also available to those in still higher tax brackets: while no changes were introduced to federal thresholds for the 26% and 29% rate, they do benefit from changes to the two bottom rates. The top combined federal-provincial tax rate for Ontario residents is 46.4%, which continues to kick in at $123,185.