Department of Finance
Symbol of the Government of Canada
Untitled Document
Table of Contents - Previous - Next
Archived - Chapter 3 - Economic Leadership
Strengthening Canada's Tax Advantage
This Web page has been archived on the Web.

The Government took decisive and timely action in the October 2007 Economic Statement to boost confidence and investment by announcing a bold package of tax reductions for individuals, families and businesses of $60 billion over this and the next five years. Combined with previous tax relief introduced by the Government, total tax relief over the same period approaches $200 billion.

Budget 2008 builds on these actions by:

  • Helping Canadians save with a new Tax-Free Savings Account, a flexible savings vehicle that allows Canadians to contribute up to $5,000 a year to the account. Investment income, including capital gains, earned within the account will not be taxed and withdrawals will be tax-free.
  • Providing further assistance for Canada’s manufacturing and processing sector by extending accelerated capital cost allowance (CCA) treatment for investment in machinery and equipment for three years. Specifically, the 50-per-cent straight-line accelerated CCA treatment will apply for one additional year, and the accelerated treatment will then be provided on a declining basis over a two-year period.
  • Supporting small and medium-sized businesses by improving the scientific research and experimental development tax incentive program and easing the tax compliance burden by reducing the record-keeping requirements for automobile expense deductions and taxable benefits.
  • Enhancing the cross-border business and investment environment by streamlining cross-border tax-withholding and return-filing rules.

The Government has reduced taxes in every way that it collects revenues, and is ensuring that Canadian families, students, workers, seniors, and businesses large and small will continue to keep more of their hard-earned money. In the October 2007 Economic Statement, the Government took decisive and timely action to boost confidence and investment by announcing $60 billion in tax reductions for individuals, families and businesses over this and the next five fiscal years. Combined with previous tax relief introduced by the Government, total tax relief over the same period approaches $200 billion.

Budget 2008 continues to make progress towards achieving the kind of tax system that Canada needs—establishing a Tax Advantage that rewards Canadians for their hard work, improves standards of living, fuels economic growth and encourages investment. The actions in Budget 2008 are affordable, sustainable, and focused on key priorities—helping Canadians save for their future, extending temporary assistance for Canada’s manufacturing sector, and enhancing support for small and medium-sized businesses.

An overview of tax relief to date, including key measures that are establishing a Tax Advantage for Canada, is provided later in this section. Going forward, as resources permit, the Government intends to implement further broad-based tax relief—with a particular emphasis on personal income tax.

Helping Canadians Save for Their Future

Tax-Free Savings Account—A Savings Plan for All Canadians

The Government has implemented an ambitious agenda to reduce taxes and to create a Canadian Tax Advantage. Cuts to corporate taxes, personal income taxes and the Goods and Services Tax (GST) have improved competitiveness and Canadians’ standard of living. As noted in Advantage Canada, reducing taxes on savings promotes investment, jobs and economic growth and is one of the key remaining areas for action.

Savings provide a means by which Canadians can invest in the future and improve their standard of living. For individual Canadians and their families, the accumulation of personal savings brings the security and peace of mind that come with the knowledge that funds will be available in the event of an emergency or for individuals to achieve their goals, such as starting a small business, purchasing a new home or a new car, or taking a vacation. In these ways, savings contribute to a higher standard of living for Canadians.

In support of the economic agenda set out in Advantage Canada, and to improve incentives for Canadians to save, the Government proposes to reduce the taxation of savings through the introduction of a Tax-Free Savings Account (TFSA)—a flexible, registered general-purpose account that will allow Canadians to earn tax-free investment income.

How the Tax-Free Savings Account Will Work
  • Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
  • Contributions will not be deductible.
  • Capital gains and other investment income earned in a TFSA will not be taxed.
  • Withdrawals will be tax-free.
  • Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
  • Withdrawals will create contribution room for future savings.
  • Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
  • Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
  • The $5,000 annual contribution limit will be indexed to inflation in $500 increments.
The Benefits of Saving in a TFSA

Because capital gains and other investment income earned within a TFSA will not be taxed, an individual contributing $200 a month to a TFSA for 20 years will accumulate about $11,045 more in savings than if the investment had been made in a taxable savings vehicle (unregistered account).

Chart 3.5 - Returns From Saving in a TFSA Compared to Taxable Savings

A Flexible Account for Savings Over Canadians’ Lifetimes

The TFSA will provide a flexible savings vehicle for Canadians. Since not everyone is able to save each year, individuals who are unable to contribute $5,000 in a year will be able to carry forward unused contribution room to future years. In addition, in recognition of the fact that most people are likely to have multiple savings objectives at the various stages of their lives—e.g. to purchase a car, home or cottage—the full amount of withdrawals may be re-contributed to a TFSA in the future, to ensure that there is no loss in a person’s total savings room. In recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room.

Canadians will also benefit by being able to use the TFSA to start saving early for a range of needs they may have in the future. Many Canadians may prefer to use a TFSA to save for pre-retirement needs given the absence of tax consequences on withdrawals and the ability to avoid the use of RRSP room for non-retirement savings needs.

The TFSA will also provide seniors with a savings vehicle to meet any ongoing savings needs, something to which they have only limited access once they are over the age of 71 and are required to begin drawing down their retirement savings. Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA.

The TFSA Addresses a Lifetime of Savings Needs

All Canadians have a reason to save to fulfill important lifetime goals and aspirations. Chart 3.6 provides an example of how a TFSA could help a Canadian, such as Lindsay, achieve these objectives.

  • As Lindsay begins to work, she is able to contribute $100 a month to her TFSA. By age 25, she has accumulated $12,000—enough to purchase her first car for $10,000.
  • Lindsay continues to save in her TFSA to finance other major purchases: a down payment on a new home, a home renovation to make it larger, a child’s wedding and then an RV to enjoy in retirement.
  • By saving regularly in a TFSA throughout her life, Lindsay will be able to finance these purchases and still accumulate about $135,000 by the time she is 80. This is about $40,000 more than she would have accumulated had she saved on an unregistered basis.
Chart 3.6 - Lifetime of Savings Needs

A Flexible Account for Savings Over Canadians’ Lifetimes

The following examples illustrate some of the uses and benefits of the TFSA.

Full Flexibility to Withdraw and Re-Contribute

Gillian saves $3,000 a year for 10 years in a TFSA. She decides to start a small business and withdraws her TFSA savings, which have accumulated to $40,000, with no tax consequences. Gillian runs her business for 10 years and then sells it. With the proceeds from the sale, Gillian decides to re-contribute to her TFSA the $40,000 she withdrew from it 10 years ago. She may do so without reducing her other available contribution room.

Saving in a TFSA to Meet Unforeseen Needs

Annette and Roger are a single-earner couple, who have been saving in their TFSAs for seven years. Annette contributes to her own TFSA and provides Roger with the funds that he contributes to his TFSA. Together, they have accumulated $59,000. They discover that extensive repairs to the foundation of their home are required that will cost $40,000. To pay for this, they withdraw $40,000 without tax consequences from their TFSAs. They will be able to re-contribute the $40,000 back into their accounts at a later date.

A Savings Account for Post-Retirement Needs

François and Evelyn are retired and have been living comfortably on François’s pension for a number of years. Evelyn also receives a small pension based on her years of work after raising their children. They would like to save Evelyn’s pension each month and use it to spend the winter in Florida. While non-registered savings would be an option, the TFSA will provide them with a tax-efficient way to save for their trip south each year. Similarly, if Evelyn were receiving income from a Registered Retirement Income Fund, it could be saved in a TFSA.

Improved Savings Opportunities for Low- and Modest-Income Canadians

Alexandre and Patricia are a modest-income couple who expect to receive the Guaranteed Income Supplement (GIS) in retirement in addition to Old Age Security and Canada Pension Plan benefits. They earn $2,000 a year in interest income from the savings they have put away in a TFSA. Neither this income, nor any withdrawals from the TFSA, will affect the GIS benefits (or any other federal income-tested benefits and credits) they receive in retirement. If this $2,000 were earned on an unregistered basis, it would reduce their GIS benefits by $1,000.

No Impact on Income-Tested Benefits

A TFSA will provide greater savings incentives for low- and modest-income individuals because neither the income earned in a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, and Old Age Security and Guaranteed Income Supplement benefits.

In the first five years, it is estimated that over three-quarters of the benefits of saving in a TFSA will go to individuals in the two lowest tax brackets.

The TFSA Complements Existing Savings Plans

As a new general-purpose savings account, the TFSA will provide an additional tax-efficient savings vehicle for Canadians that complements existing registered savings plans. Introducing the TFSA will provide Canadians access to a complete set of tax-efficient savings vehicles to meet their various savings needs.

  • Registered pension plans and RRSPs are effective vehicles for retirement savings for many Canadians, as they allow individuals to save a portion of their earnings and defer tax on these savings, as well as the associated investment income, until retirement.
  • Registered Education Savings Plans (RESPs) are effective vehicles for education saving purposes as contributions attract Canada Education Savings Grants of 20 per cent or higher, up to a $7,200 lifetime limit per beneficiary. Budgets 2007 and 2008 improve the flexibility of RESPs to make them more responsive to the changing needs of families and students.
  • Budget 2007 introduced the Registered Disability Savings Plan to help parents and others save to ensure the long-term financial security of a child with a severe disability. In addition to individual savings, the Government will contribute up to $90,000 in grants and bonds to a beneficiary’s plan.
  • TFSAs will be effective savings vehicles for other savings needs as there will be no tax consequences on withdrawals, withdrawals can be used for any purpose, and re-contributions of amounts withdrawn will be permitted.

As the TFSA matures over the next 20 years, it is estimated that, in combination with existing registered plans, it will permit over 90 per cent of Canadians to hold all their financial assets in tax-efficient savings vehicles.

The Tax Relief Provided by a TFSA Will Grow in the Future

The forgone revenue costs of the TFSA will be modest in its early years. It is estimated that the introduction of TFSAs will reduce federal revenues by $5 million in 2008–09 and $50 million in 2009–10. By 2012–13, the estimated tax savings from TFSAs will be $385 million (Table 3.2). As the TFSA matures over the next 20 years, the annual tax savings will continue to grow—it is estimated that, relative to the size of today’s economy, these tax savings will grow to over $3 billion annually.


Table 3.2
Impact of TFSA
(millions of dollars)
  2008–09 2009–10 2010–11 2011–12 2012–13
Tax reductions on savings 5 50 190 290 385

To ensure that the annual contribution limit retains its real value in the future, the $5,000 annual contribution limit will be indexed to the Consumer Price Index, rounded to the nearest $500. For example, with a 2 per cent rate of inflation, the first increase to $5,500 would occur in 2012.

More details on the TFSA and its design features are provided in Annex 4.

Providing Increased Flexibility for Locked-in Pensions

Many seniors and other Canadians want increased flexibility as to when and how they can use their retirement savings to better reflect the wide range of employment and leisure choices available to them today. Increased flexibility can also be important when financial circumstances change, and an individual requires access to his or her retirement savings to help meet current financial needs. In response, Budget 2008 proposes to increase the choices available to holders of life income funds (LIFs).

LIFs hold investments stemming from federally regulated registered pension plans. LIFs provide seniors with the ability to withdraw these investments, but withdrawals are currently subject to strict annual withdrawal limits. Budget 2008 proposes to significantly enhance the flexibility to withdraw funds from LIFs through three provisions:

  • Individuals 55 or older with small holdings of up to $22,450 will be able to wind up their accounts with the option to convert to a tax-deferred savings vehicle. The threshold for small holdings will increase with the average industrial wage.
  • Individuals 55 or older will be entitled to a one-time conversion of up to 50 per cent of LIF holdings into a tax-deferred savings vehicle with no maximum withdrawal limits.
  • All individuals facing financial hardship (e.g. low income, high disability or medical-related costs) will be entitled to unlock up to $22,450. This maximum will also increase with the average industrial wage.

These provisions will ensure that LIF holders will have the flexibility they need to manage their retirement savings according to their circumstances, better reflecting the wide range of choices available to seniors today.

Extending Assistance for Canada’s Manufacturing Sector

The capital cost allowance (CCA) system determines how much of the cost of a capital asset a business may deduct each year for tax purposes. The Government’s approach has generally been to set CCA rates so that the deduction for capital costs is spread over the useful life of the asset. This ensures a neutral tax treatment for different types of assets so that investment is allocated to its most productive use.

In recognition of the exceptional circumstances facing the manufacturing sector, Budget 2007 announced a temporary two-year 50-per-cent straight-line accelerated CCA rate for investment in manufacturing or processing machinery and equipment undertaken before 2009. This temporary measure provides an incentive for manufacturing and processing businesses to accelerate or increase capital investments.

Budget 2008 proposes to extend accelerated CCA treatment for investment in machinery and equipment in the manufacturing and processing sector for three additional years. This will include a one-year extension of the 50-per-cent straight-line accelerated CCA treatment, followed by a two-year period during which the accelerated treatment will be provided on a declining basis. An extension of the support for investment made until the end of 2011 will provide businesses with more time to accelerate or increase investments. This will assist the manufacturing and processing sector in restructuring to meet current economic challenges and to increase its long-term prospects, by encouraging the retooling needed to boost productivity and move to higher value-added production.

For eligible assets acquired in 2009, a 50-per-cent straight-line rate will be provided. For assets acquired in 2010, a 50-per-cent declining balance rate will apply in the first taxation year, a 40-per-cent declining balance rate will apply in the second year, and a 30-per-cent declining balance rate will apply in subsequent years. For assets acquired in 2011, a 40-per-cent declining balance rate will apply in the first year and a 30-per-cent declining balance rate will apply in subsequent years.

The extension is expected to reduce federal revenues by $155 million in 2009–10, and by about $1 billion in total over the period 2009–10 to 2012–13.

Increasing the CCA Rate for Railway Locomotives

Both the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance have recommended an increase to the CCA rate on rail equipment. Budget 2008 proposes to increase the CCA rate for railway locomotives to 30 per cent from 15 per cent. This change will ensure that the CCA rate for railway locomotives better reflects the useful life of these assets. It will also encourage rail operators to acquire a newer, more fuel-efficient fleet of locomotives (e.g. hybrid locomotives), which provide a more environmentally-friendly mode of transportation.

This change is effective for new locomotives acquired on or after February 26, 2008, as well as for reconditioning and refurbishing costs incurred on or after February 26, 2008. It is expected to reduce federal revenues by a small amount in 2008–09 and by $5 million in 2009–10.

Supporting Small and Medium-Sized Businesses

Canada’s Entrepreneurial Advantage is about putting in place the conditions for our businesses and entrepreneurs to invest and thrive at home and abroad. This means creating a competitive business environment that supports innovation, rewards success, and reduces unnecessary regulations and red tape that frustrate business initiative.

Scientific Research and Experimental Development Tax Incentive Program

Canada’s scientific research and experimental development (SR&ED) tax incentive program is one of the most advantageous systems in the industrialized world for supporting business investment in research and development (R&D), providing over $4 billion in tax assistance in 2007.

In Budget 2007 and in its science and technology strategy, Mobilizing Science and Technology to Canada’s Advantage, the Government committed to improve the SR&ED tax incentive program, including its administration, in a cost-effective manner. To that end, consultations were undertaken on how to make the SR&ED tax incentives more effective for Canadian businesses.

The Government appreciates the participation of stakeholders in these consultations. On the basis of these consultations, the Government is proposing several improvements to the SR&ED program and administration.

Enhanced Support for Small and Medium-Sized Businesses

Small businesses can face challenges in accessing capital to finance their R&D investments. To recognize these challenges, an enhanced SR&ED investment tax credit (ITC) of 35 per cent is available to small Canadian-controlled private corporations (CCPCs) on their first $2 million of qualified expenditures. These enhanced benefits are phased out based on the taxable capital and taxable income of the corporation.

During the consultations, many stakeholders noted that access to the enhanced SR&ED ITC is phased out quickly once the taxable capital threshold of $10 million is reached, and suggested that medium-sized businesses should also have access to some enhanced benefit. In addition, many suggested that the expenditure limit has not kept pace with technological innovations that have made start-up R&D investments more costly.

Budget 2008 proposes to increase the expenditure limit from $2 million to $3 million and to increase the upper limit for the taxable capital phase-out range from $15 million to $50 million. The upper limit of the taxable income phase-out range will also be increased, from $600,000 to $700,000. Increasing these limits will encourage small CCPCs to grow.

These changes will be generally applicable for taxation years that end on or after February 26, 2008.

SR&ED Outside Canada

Many stakeholders expressed concerns that, in certain circumstances, a SR&ED performer is required to carry on a portion of its SR&ED activities outside Canada in support of its SR&ED carried on in Canada. For example, certain taxpayers may require access to environmental conditions not available in Canada (e.g. a desert or a tropical climate). Budget 2008 proposes to extend the SR&ED ITC to certain activities carried on outside Canada. Eligibility will be limited to a maximum of 10 per cent of the Canadian SR&ED labour expenditures, and will apply generally to salaries and wages paid on or after February 26, 2008.

Administrative Improvements

The key administrative challenges identified by stakeholders were in the areas of accessibility, predictability and consistency. In recognition of these concerns, the Canada Revenue Agency (CRA) will introduce a new SR&ED claim form and guide and an eligibility self-assessment tool, and will review the program’s policies and procedures to ensure they are aligned with current business practices and applied in a consistent manner across the country.

The Government will also invest an additional $10 million annually to allow the CRA to implement an action plan to improve the administration of the SR&ED program by increasing the CRA’s scientific capacity and improving its services to claimants. Administrative measures will include:

  • Increasing the number of technical reviewers who determine scientific eligibility.
  • Providing additional training and establishing coordinated technical support for the technical reviewers across the country.
  • Increasing resources so that technical reviewers have more time to work with claimants to explain the review process.
  • Devoting more time to program services (Preclaim Project Review, Account Executive, Process Review, First-Time Claimant, outreach and information seminars).
  • Enhancing the quality assurance methodology at the national and local levels, including real-time review of claim decisions.
  • Reviewing dispute resolution procedures to ensure their effectiveness.

These actions will facilitate access to the SR&ED program, improve its consistency and predictability, and enhance the quality of the claims process.

Together, these changes to the SR&ED program and administration will cost $15 million in 2008–09 and $55 million in 2009–10.

Paper Burden Reduction

Reducing the administrative and paper burden on Canadian businesses improves Canada’s competitiveness and supports small businesses. Advantage Canada committed to reducing the paper burden on businesses by 20 per cent. In Budget 2007, the Government took action by requiring key federal regulatory departments and agencies to establish, by September 2007, an inventory of administrative requirements and information obligations with which business must comply. The Government also committed to achieve a 20-per-cent reduction of the requirements and obligations identified by November 2008. In addition, departments and agencies are being requested to implement complementary measures, which are simplifying for businesses, but do not reduce the inventory of requirements.

The Secretary of State (Small Business and Tourism) has worked closely with the Advisory Committee on Paperwork Burden Reduction, which is co-chaired by the Canadian Federation of Independent Business (CFIB), to implement these commitments. On October 5, 2007, the Government announced the completion of the inventory of administrative requirements and information obligations. Key federal regulatory departments and agencies are working towards reducing the paper burden on businesses by 20 per cent by November 2008.

Reducing the Tax Compliance Burden

To improve administrative efficiency and advance Canada’s Entrepreneurial Advantage, Budget 2008 proposes a number of measures to reduce the tax compliance burden for businesses, investors, employees, and self-employed individuals. These initiatives represent concrete steps toward achieving the Government’s paper burden reduction goals. Further information can be found in Annex 4.

Simplifying Compliance With the Motor Vehicle Tax Provisions

To support motor vehicle expense claims and calculate taxable benefits, the Canada Revenue Agency (CRA) requires individuals to keep a detailed record (i.e. a logbook) of their business driving, including the total and business kilometres driven annually, as well as the date, destination, distance driven and purpose for each business trip. This requirement can be burdensome for taxpayers. The CFIB has indicated that its members have identified the requirement to keep a logbook as the most burdensome aspect of the motor vehicle tax provisions.

In conjunction with the Office of the Secretary of State (Small Business and Tourism) and the CRA, simplification options were reviewed. To reduce the record-keeping burden and allow small business owners more time to devote to growing their firms, Budget 2008 proposes that maintaining a logbook during a sample period of time, that is representative of how the motor vehicle is used, be sufficient to support motor vehicle expense and taxable benefit calculations. To inform the development of the proposed record-keeping requirements, the CRA will undertake consultations in 2008 with key stakeholders, including the CFIB, and will implement a revised administrative policy in 2009.

Enhancing Canada’s Cross-Border Business and Investment Environment

Non-resident investors who realize capital gains on sales of taxable Canadian property are subject to Canadian tax on those gains. To ensure the vendor’s tax liability is collected, Canada requires that the purchasers of these properties withhold and remit to the Government a portion of the purchase price (unless the vendor has, under section 116 of the Income Tax Act, obtained certification from the CRA that income or capital gains taxes have been paid). The non-resident vendor is also required to file a Canadian tax return.

Stakeholders, including the venture capital and technological sectors, have identified these tax-withholding and return-filing rules as administrative burdens, particularly where a tax treaty prevents Canada from actually taxing the gain. To ease that burden and to enhance the cross-border business and investment environment, Budget 2008 proposes to streamline and simplify those rules by, generally:

  • Exempting dispositions by non-residents of treaty-protected property from the withholding requirements.
  • Ensuring that a person who purchases property from a non-resident is not liable for the withholding tax in certain circumstances.
  • Eliminating the need for a non-resident to file a Canadian income tax return in certain circumstances where no Canadian tax is payable.

Extending Capital Gains Tax Relief in Respect of Donations of Securities

Budget 2006 introduced an additional incentive for Canadians to increase their charitable giving, by eliminating capital gains tax on donations of publicly-traded securities. Some securities are not publicly traded, but are exchangeable into other securities that are. A person who exchanges such non-publicly-traded securities in order to make a charitable gift of the publicly-traded securities acquired on the exchange is not exempt on any resulting capital gain, because the gain arose on the exchange and not on the gift.

Budget 2008 proposes to exempt from tax the capital gain arising on the exchange of certain exchangeable securities, where the securities acquired on the exchange are themselves eligible for a capital gains exemption and are donated to a registered charity within 30 days of the exchange. A provision will be put in place to appropriately measure the exempt capital gain where the exchangeable security is a partnership interest.

A Strong Record of Tax Relief

The changes proposed in Budget 2008 build on the Government’s strong record of tax relief. This section highlights previous actions taken since 2006.

Tax Relief for Families and Individual Canadians

Almost three-quarters of all tax relief implemented by the Government benefits individual Canadians and their families directly. Canadians are benefiting from actions such as the 2-percentage-point reduction in the GST rate as well as personal income tax relief, which includes reducing the lowest personal income tax rate to 15 per cent from 16 per cent and increasing the basic amount that all Canadians can earn without paying federal income tax.

As shown in Table 3.3, broad-based tax reductions are providing substantial tax savings for Canadians at all income levels, with proportionately greater savings for those with lower incomes. For example, for those families with incomes of $15,000 to $30,000, tax relief in 2008 will average $510—a reduction of 30 per cent—while families in the $80,000 to $100,000 range will receive, on average, a tax reduction of $1,751, or 14 per cent.


Table 3.3
Broad-Based Tax Relief1 for Individuals
by Family Income Group, 2008
(dollars, unless otherwise indicated)
Family Income
Average Tax Relief
in 2008
Tax Relief as a Share
of Net Tax Paid
2 (%)
GST Income
Less than 15,000 132 83 215 177
15,000 – 30,000 270 240 510 30
30,000 – 45,000 392 530 922 23
45,000 – 60,000 498 706 1,204 19
60,000 – 80,000 618 878 1,496 16
80,000 – 100,000 742 1,009 1,751 14
100,000 – 150,000 930 1,138 2,068 11
Over 150,000 1,725 1,540 3,265 6

1 In Budgets 2006 and 2007, the 2006 Tax Fairness Plan and the 2007 Economic Statement. Does not reflect additional relief from targeted tax relief measures such as the Children’s Fitness Tax Credit and the Public Transit Tax Credit.
Net tax paid equals federal personal income tax plus GST minus federal refundable tax credits (mainly the GST credit) prior to Budget 2006.

Family Income
Average Tax Relief
in 2008
Tax Relief as a Share
of Net Tax Paid
GST Income
Less than 15,000 132 83 215 177
15,000 – 30,000 270 240 510 30
30,000 – 45,000 392 530 922 23
45,000 – 60,000 498 706 1,204 19
60,000 – 80,000 618 878 1,496 16
80,000 – 100,000 742 1,009 1,751 14
100,000 – 150,000 930 1,138 2,068 11
Over 150,000 1,725 1,540 3,265 6

1 In Budgets 2006 and 2007, the 2006 Tax Fairness Plan and the 2007 Economic Statement. Does not reflect additional relief from targeted tax relief measures such as the Children’s Fitness Tax Credit and the Public Transit Tax Credit.
Net tax paid equals federal personal income tax plus GST minus federal refundable tax credits (mainly the GST credit) prior to Budget 2006.

Chart 3.7 - Share of Personal Income Tax Relief and Taxes Paid by Tax Bracket, in 2008

In addition to broad-based tax relief, the Government has introduced measures targeted to help families, students, seniors and pensioners, workers, persons with disabilities, and communities.

Targeted Tax Relief

For families:

  • A Child Tax Credit, which will provide tax relief of up to $306 per child in 2008.
  • Increasing the spousal and other related amounts to equal the basic personal amount so that single-earner families, including single parents, receive the same tax treatment as that already provided by the basic personal amount to two-earner families.
  • Promoting physical fitness among children through a Children’s Fitness Tax Credit, which recognizes up to $500 in eligible fees for enrolment in a physical activity program.

For students and those who support them:

  • A Textbook Tax Credit on amounts of up to $65 per month to provide better tax recognition for the cost of textbooks for students.
  • Strengthening the Registered Education Savings Plan program by eliminating the annual contribution limit, increasing the lifetime contribution limit to $50,000 from $42,000, and increasing the maximum annual Canada Education Savings Grant per beneficiary to $500 from $400 to help parents save for their children’s education.
  • Exempting scholarship and bursary income from tax.

For seniors and pensioners:

  • The October 2006 Tax Fairness Plan, which delivers over $1 billion in tax savings for Canadians by increasing the Age Credit amount by $1,000 and by allowing pension income splitting.
  • Providing seniors with more flexibility to better manage their retirement money by increasing the age limit for maturing their pension and Registered Retirement Savings Plan from 69 to 71.
  • Doubling the amount of pension income eligible for the Pension Income Credit, which benefits nearly 2.7 million pensioners.

For workers:

  • A Working Income Tax Benefit to improve incentives for low-income Canadians to work and to lower the welfare wall by providing a refundable tax credit of up to $510 per year for individuals and $1,019 for families. More than 1.2 million low-income Canadians will benefit.
  • The Canada Employment Credit, which recognizes work-related expenditures such as home computers, uniforms and supplies.

For persons with disabilities:

  • The Registered Disability Savings Plan, which will help parents and others save to ensure the long-term financial security of a child with a severe disability. This will provide parents with greater peace of mind regarding the financial security of their loved ones when they can no longer care for them.
  • Addressing outstanding policy recommendations of the Technical Advisory Committee on Tax Measures for Persons with Disabilities by extending eligibility for the Disability Tax Credit, and increasing the Child Disability Benefit and the maximum amount of the Refundable Medical Expense Supplement.

For communities:

  • The Public Transit Tax Credit for the purchase of eligible transit passes to encourage individuals to make a sustained commitment to public transit use.
  • A capital gains tax exemption for donations of publicly listed securities to all registered charities to encourage charitable giving.
  • An exemption from capital gains tax on donations of ecologically sensitive land to encourage more Canadians to make ecogifts—thereby promoting conservation.

Canada’s Business Tax Advantage

The Government recognizes the significant role of taxes in improving the international competitiveness of Canadian businesses. A forward-looking government must ensure strong economic fundamentals and a competitive business tax system, to encourage new investment and job creation and to help Canadian businesses in all sectors adapt to both an increase in global competition and the high value of the Canadian dollar. Canadian businesses need to be well positioned to face these economic challenges and should be provided with the tools needed to do so.

In the October 2007 Economic Statement, the Government accelerated and deepened the already announced corporate income tax (CIT) reductions, introducing a new era of business taxation that will bring the federal CIT rate to 15 per cent by 2012 (Table 3.4).


Table 3.4
General Federal Corporate Income Tax Rates Post-2007 Economic Statement
(per cent)
  2007 2008 2009 2010 2011 2012
Corporate income tax rates 22.121 19.5 19.0 18.0 16.5 15.0

1 Includes the 1.12-per-cent corporate surtax, which was eliminated January 1, 2008.

These historic broad-based tax reductions will give Canada the lowest statutory tax rate in the Group of Seven (G7) by 2012 and allow Canada to achieve the goal of having the lowest overall tax rate on new business investment (marginal effective tax rate (METR))[1] in the G7 by 2010.[2] Canada will also have a significant METR advantage over the U.S. of 9.1 percentage points by 2012 (Chart 3.8).

Chart 3.8 - Canada's Progress Towards a New Era of Business Taxation METR on New Business Investment, Selected Country Groups, in 2012

The Government also provided tax relief in Budgets 2006 and 2007 to help strengthen the Tax Advantage for Canadian businesses, including:

  • Accelerating the elimination of the federal capital tax by two years to January 1, 2006.
  • Eliminating the corporate surtax for all corporations as of January 1, 2008.
  • Increasing the amount of small business income eligible for the reduced federal tax rate to $400,000 from $300,000 as of January 1, 2007, and reducing the federal tax rate applying to qualifying small business income to 11 per cent.
  • Introducing a temporary incentive for investment in the manufacturing and processing sector that allows businesses in this sector to claim accelerated capital cost allowance (CCA) for machinery and equipment investments made on or after March 19, 2007, and before 2009.
  • Increasing the CCA rates for a number of assets, including non-residential buildings, computers, natural gas distribution pipelines and liquefied natural gas facilities, to better reflect their useful life and increase the efficiency of the tax system.

Taken together, these tax measures will provide over $50 billion in tax relief to Canadian businesses over this and the next five fiscal years. In 2008–09 alone, they will provide incremental tax relief totalling $5.2 billion through permanent corporate tax reductions and the temporary accelerated CCA for investment in machinery and equipment in the manufacturing and processing sector, which contributes $565 million to this total. The substantial tax relief coming into force this year will increase the competitiveness of our business tax system, encourage new business investment and bolster confidence in the Canadian economy on a long-term basis.

Federal-Provincial-Territorial Collaboration

Reducing the Combined Federal-Provincial-Territorial Statutory Tax Rate

Provinces and territories have a crucial role to play in securing a Tax Advantage for Canada. As shown in Chart 3.9, Canada’s Tax Advantage over the U.S., which will continue to widen between now and 2012, is attributable mostly to the substantial corporate tax relief provided by the federal government. Between 1980 and 2012, the federal corporate income tax rate will have declined substantially from 37.8 per cent to 15 per cent, while, based on current provincial legislation, there will be virtually no change in the average provincial corporate income tax rate over this period.

Several provinces have responded favourably to the temporary financial incentive introduced by the Government in Budget 2007 to encourage provinces to eliminate their capital taxes. Specifically, Ontario and Quebec have announced the elimination of their capital taxes by 2010 and 2011, respectively, and Manitoba has announced plans to do so, subject to budget-balancing requirements. More recently, British Columbia announced in its February 19, 2008 budget that it will eliminate its capital tax on financial institutions by April 1, 2010, at which time it will be replaced by a minimum tax. These provinces could benefit even more from the financial incentive by accelerating the elimination of their capital taxes.

Chart 3.9 - Canada-U.S. Statutory Corporate Income Tax Rates

Canada is well positioned to make its Tax Advantage even more significant, but provinces need to do their part. If provincial and territorial governments were to reduce their corporate income tax rates to 10 per cent, Canada could reach a 25-per-cent combined federal-provincial-territorial statutory tax rate by 2012 and enhance its position as a country of choice for new investment. British Columbia, in its 2008 budget, has proposed reducing its corporate income tax rate to 11 per cent on July 1, 2008, and set the goal of a 10-per-cent tax rate by 2011.

Provincial Sales Tax Harmonization

Replacing remaining provincial retail sales taxes (RSTs) with value-added taxes harmonized with the GST is another area where provinces can contribute to strengthening Canada’s Tax Advantage. Provincial RSTs impair competitiveness because they apply to business inputs, increasing production costs and deterring investment. By comparison, a value-added tax system provides most businesses with full tax relief through the input tax credit mechanism. Provincial sales tax harmonization is the single most important step provinces with RSTs could take to improve the competitiveness of Canadian businesses.

As illustrated in Chart 3.10, the RSTs in effect in British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island are significantly increasing each province’s METR on new business investment. If all five provinces were to adopt a value-added tax harmonized with the federal GST, Canada’s METR on new business investment would be reduced by about 7 percentage points. The benefit to businesses in provinces with RSTs would be much greater. For example, the METR in Ontario would fall by 11.2 percentage points and Ontario businesses would save more than $5 billion annually on sales tax on business inputs—an amount they must pay now even when they are not earning profits.

The Government recognizes the significant economic benefits to Canada from sales tax harmonization and is willing to work with the five provinces that still have RSTs to help facilitate the transition to provincial value-added sales taxes harmonized with the GST.

Chart 3.10 - METRs1 on New Business Investment, by Component, in 2012

Provincial sales tax harmonization, together with a 25-per-cent combined federal-provincial-territorial statutory tax rate by 2012, would bring Canada’s METR down to 16.4 per cent, well below the average METR for countries in the Organisation for Economic Co-operation and Development (OECD) and small developed countries (Chart 3.8).

Recap: Major Tax Relief Measures

Major Federal Tax Relief for Individuals and Families

Year of entry
into force



  • Reduction of GST rate to 6 per cent
  • Reduction of the lowest personal income tax rate from 16 to 15.5 per cent
  • Increase in the basic personal amount to $8,839
  • Introduction of the Canada Employment Credit
  • Reduction of tax on large corporation dividends
  • Double the pension income amount
  • Increase the Age Credit amount
  • Introduction of the Public Transit Tax Credit
  • Reduction of the lowest personal income tax rate from 15.5 to 15 per cent
  • Increase in the basic personal amount to $9,600
  • Introduction of the Working Income Tax Benefit
  • Introduction of the Child Tax Credit
  • Introduction of pension income splitting
  • Reduction of GST rate to 5 per cent
  • Increase in the basic personal amount to $10,100
Major Federal Tax Relief for Business
  • Elimination of the capital tax
  • Introduction of the Apprenticeship Job Creation Tax Credit
  • Increase in the eligible income threshold for the small business tax rate
  • Alignment of capital cost allowance rates with useful life
  • Introduction of the temporary incentive for investment in manufacturing and processing machinery and equipment
  • Elimination of the corporate surtax
  • Reduction of the general corporate income tax rate from 21 to 19.5 per cent
  • Reduction of the small business tax rate from 12 to 11 per cent


  • Reduction of the general corporate income tax rate to 19 per cent
  • Reduction of the general corporate income tax rate to 18 per cent
  • Reduction of the general corporate income tax rate to 16.5 per cent
  • Reduction of the general corporate income tax rate to 15 per cent


Table 3.5
Strengthening Canada’s Tax Advantage
(millions of dollars)
  2008–09 2009–10 Total
Tax-Free Savings Accounts 5 50 55
Extending assistance for Canada’s
  manufacturing sector
  155 155
Increasing the CCA rate for railway locomotives   5 5
Scientific research and experimental
  development tax incentive program1
15 55 70
Total—Strengthening Canada’s
  Tax Advantage
20 265 285
Note: Totals may not add due to rounding.
1 Includes additional funding provided to the Canada Revenue Agency for administrative improvements.

1 The METR on new business investment takes into account federal and provincial statutory corporate income tax rates, deductions and credits available in the corporate tax system and other taxes paid by corporations, including provincial capital taxes and retail sales taxes on business inputs. When measured on a province-by-province basis, METRs vary due to differences in provincial tax systems and differences in the distribution of investment across provinces. The methodology for calculating METRs is described in the 2005 edition of Tax Expenditures and Evaluations (Department of Finance). [Return]

2 In December 2007, Italy legislated reductions in its corporate income tax rates and a broadening of its tax base. Overall, these changes increase Italy’s METR for 2008 and onward, from 27.1 per cent to 29.2 per cent. As a result, Canada will have the lowest METR in the G7 by 2010, one year earlier than reported in the 2007 Economic Statement. [Return]

Table of Contents - Previous - Next