Golombek: A look at four tax proposals floated for the federal election

Among the many tax policies announced, both the Liberals and Conservatives vowed to keep the 50 per cent inclusion rate for capital gains, while the NDP promised to reintroduce the controversial capital gains inclusion rate increase that the Liberals cancelled, writes Jamie Golombek. Photo by Associated Press/Canadian Press/Postmedia files

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With the party leaders’ debates now behind us, and the federal election just days away, what better time to take a brief look at a few of the more interesting tax policies announced by three of the major parties.

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Lowest tax bracket

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Both the Liberal Party of Canada and the Conservative Party of Canada have pledged to drop the tax rate for the lowest tax bracket. For 2025, that federal bracket is income below $57,375. The Liberals plan to reduce that rate by one percentage point, to 14 per cent from the current rate of 15 per cent, while the Conservatives have promised to drop the rate for that bracket to 12.75 per cent.

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The Liberal cut would take effect on July 1, 2025, and, according to the party, would save dual-income families $825 annually. The Conservative tax cut promises to deliver the average Canadian worker who has $57,000 of earnings $900 in tax savings, with two-income families saving $1,800 annually.

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But some experts have questioned whether those numbers are accurate, absent further tax changes not yet announced. In a memo published last week entitled Missing Detail: Tax Savings Lower than Advertised, authors Alexandre Laurin and Nick Dahir of the C.D. Howe Institute calculated that, on average, taxpayers would save only $180 per year under the Liberals’ 14 per cent rate, and $405 per year under the Conservatives’ 12.75 per cent rate.

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The reason for the reduced tax savings is as a result of the way in which most of our federal non-refundable credits are calculated. As a reminder, income taxes are determined by first multiplying taxable income by the various applicable graduated tax rates, and then subtracting from that result the value of various non-refundable tax credits such as the basic personal credit, age credit, pension income credit, and medical expense credit (among many others).

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The Income Tax Act establishes the method for calculating these non-refundable tax credits by applying an “appropriate percentage” to eligible amounts. That appropriate percentage is defined as the lowest rate of the tax bracket schedule. What that means is that lowering the lowest tax rate would indeed reduce tax, but would also reduce the value of most non-refundable credits.

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If the new government decides to lower the rate applicable to the lowest federal bracket, and wants Canadians to realize the full tax savings promised in their campaigns, it will need to either change the way most of the non-refundable credits are calculated under the Tax Act, or perhaps increase the basic personal amount (BPA) to compensate for the value of the reduced credits.

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Basic personal amount

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The New Democratic Party has pledged to raise the BPA to $19,500, but only for lower-income earners. Currently, the BPA for 2025 is $16,129 meaning an individual can earn up to this amount in 2025 before paying any federal income tax. But higher-income earners don’t get the full BPA, as there is an income test. The enhancement to the BPA, introduced back in 2020, is gradually reduced, on a straight-line basis, for taxpayers with net incomes above $177,882 (the bottom of the fourth tax bracket for 2025) until it has been fully phased out once a taxpayer’s income is over $253,414 (the threshold for the top tax bracket in 2025). Taxpayers in that top bracket who lose the enhancement currently still get the “old” BPA, indexed to inflation, which is $14,538 for 2025.