The Conservative government is not throwing out Liberal proposals to cut personal income tax rates and increase the basic personal amount that individuals can earn before being taxed. Instead, Tuesday’s federal budget is a compromise.
The new government is lowering the amount taxpayers in the lowest personal income tax bracket will pay to 15.25% from 16%, instead of 15% as proposed by the Liberals in their last budget. It will cut the basic personal amount as of July 1, the same time that it implements the 1% GST cut.
For the first half of 2006, the rate levied will be 15%. Effective July 1, the rate will be 15.5%, the government’s targeted level. Averaged out, the full rate for 2006 will be 15.25%. It will remain at 15.25% for the 2007 taxation year and go to 15.5% in subsequent taxation years.
For the 2005 taxation year, the 15% rate applies to taxable incomes of up to $35,595. For the 2006 taxation year, the 15.25% rate will apply to taxable incomes of up to $36,378.
Rates for the middle and upper brackets remain unchanged: 22% on income up to $72,756; 26% up to $118,285; and 29% for $118,285 and over.
Similarly the Conservatives are compromising on changes to the basic personal amount. As the Liberals proposed, the amount will be increased by $500 to $8,648 for the 2005 taxation year. For the first half of 2006, it will then be increased by indexation, plus a further $200, for a total of $9,039.
However, the basic personal amount will be reduced by $400 to $8,639 on July 1, 2006, at the same time as the GST rate is reduced. For the purpose of calculating personal income taxes for the 2006 taxation year, these two half-year amounts will be applied as an annual average of $8,839.
For 2007, the $8,639 amount will be increased by indexation plus an additional $100. For 2008, it will be increased by indexation plus an additional $200. For 2009, it will be increased by indexation, plus the greater of $600 and the amount required to raise the basic personal amount to $10,000.
Personal amounts in respect to a spouse, common-law partner or wholly dependant relative will also be adjusted. Specifically, for the 2005 taxation year, these amounts will be increased by $425 to $7,344.
For the first half of 2006 they will then be increased by indexation, plus a further $170, for a total of $7,675. The amount will be reduced by $340 to $7,335 on July 1, 2006, at the same time as the GST rate is reduced. For the purpose of calculating personal income taxes for the 2006 taxation year, these two half-year amounts will be applied as an annual average of $7,505.
For 2007, the $7,335 amount will be increased by indexation, plus an additional $85. For 2008, it will be increased by indexation, plus an additional $170. For 2009, it will be increased by indexation, plus the greater of $510 and the amount required to raise these amounts to $8,500.