On January 23, 2006, Canadians decided to end 12 years of Liberal leadership in favor of a new Conservative regime. Although the Conservatives were only elected with a minority of the seats, they will yield sufficient power to implement the changes they had promised under their platform. The Conservative platform, entitled Stand Up For Canada, includes the following key commitments for reducing tax for all Canadians:
1. Reduction of the GST from 7% to 5% over a five-year period.
2. Elimination of capital gains taxes when reinvesting
3. Increasing the threshold and reduction of the small business tax rate
4. Implement the new apprenticeship job creation tax credit
5. Implement textbook tax deduction and raise scholarship income exemption
6. Implement the new physical fitness tax credit
7. Implement the new affordable housing tax credit
8. Implement the new transit pass tax credit
9. Eliminate capital gains tax on charitable contributions
These commitments will have a significant impact on every Canadian if implemented. Large corporations, small businesses and both low and high-income individuals will immediately benefit from a reduction in the GST. If Canadians respond to this reduction by purchasing more goods and services that are subject to the GST then, presumably, the government would be able to cover any shortfalls in the government coffers by increased spending. However, if there is no change to Canadians’ spending habits, then the forgone revenue will have to be replaced by other forms of taxation such as increases in each taxpayer’s income tax obligations. The commitment sounds promising but it’s largely based on the government’s ability to stimulate spending, which comes with no guarantees and is likely to be influenced by many non-tax factors.
Promises to eliminate capital gains taxes for reinvestments and for charitable contributions are expected to encourage Canadians to invest in property that will produce capital gains and to donate more to charitable causes. Although the goals are admirable, these commitments have a bias towards higher income taxpayers. It is unlikely that these proposals, if implemented, will benefit lower income Canadians since they are less likely to own investments that will produce meaningful capital gains and also less likely to have such property to donate to charity.
The Conservatives have also committed to providing various credits that essentially should reduce the burden of funding higher education. Depending on the income or spending qualification thresholds used, the textbook tax deductions, apprenticeship tax credit and the transit pass credits should help those pursuing higher learning to defray some of their costs. However, similar to the capital gains and charitable donation tax relief commitments, higher income students will benefit more than lower income students because they will be able to take larger deductions from their pre-tax income and apply more credits to their after-tax income. This concern can be alleviated if the government allows students to carry-back or carry-forward deductions or by making the credits refundable, otherwise the proposed commitment will be inequitable. The increase in scholarship exemption is certainly a step in the right direction for the new government and for students with limited financial means who must rely on scholarships for funding their education. These students will be able to accept scholarships fear that a portion of the money awarded for purposes of paying for their education will be taken away by the government in the form of taxes.
Small businesses will also see a reduction in their rate and increase in the threshold for each rate level. Again, if these commitments help small businesses to generate more taxable income, Canadians as a whole come out on top. However, any shortfalls will have to be offset by increasing taxes in other areas. Lets hope for the best!
For detailed financial information about the Conservative tax commitments visit http://www.conservative.ca/media/20060113-FiscalPlan.pdf.