Payroll Taxes Archives

Canadians to Pay Less, Thanks to Lower Income Tax Bite and GST Cut

Every year the Canadian Taxpayers Federation (CTF) releases projected income and payroll tax changes that kick in on January 1. The good news is that all taxpayers will pay less tax this year. A new employment tax credit – called the Canada Employment Credit – will increase to $1,000 for the 2007 tax year, up from $250 in 2006. This credit works like the basic personal exemption, which is set at $8,929 this year, and means workers will not pay income tax on the first $9,929 of earnings.

A fourfold increase in the Canada Employment Credit permits the Conservative government to truthfully assert taxes are going down even though Canadians will pay more payroll taxes and the lowest personal income tax rate, applied to the first $37,178 of income, will rise a quarter-point to 15.5% from 15.25%. This pleasant testimonial is only strengthened by the one-point GST reduction that will save consumers approximately $4.5-billion in ’07.

Some taxpayers will benefit much more than others. Ottawa will take less from the average individual taxpayer, but the amount is a pittance – 106 dollars to be exact. (See chart for federal income and payroll tax changes.) Low-income individuals, earning less than $25,000 annually, profit the most because they benefit from the employment credit and less income is subject to the 0.25% income tax rate increase.

Employment Insurance (EI) premium rates will drop by seven cents on January 1 to $1.80 for employees (per $100 of insurable earnings) from the current rate of $1.87. (The corresponding employer rate will drop by 10 cents to $2.52 from the current rate of $2.62.) Yet this gain is mostly offset because the tax rate will be applied to more income. Ottawa is giving tax relief with one hand and taking it back with the other. The maximum insurable earnings will rise from $39,000 to $40,000. This was not an inflationary boost as the previous EI threshold increase was in 1995. Ottawa was wrong to increase the EI threshold when the program continues to amass an annual $2-billion surplus. The seesaw EI changes represent a mere $9.30 reduction from 2006 levels.

Canada Pension Plan (CPP) payroll taxes will also rise by $79.20. While the tax rate will remain unchanged, the income threshold will increase to $43,700 from the 2006 level of $42,100. The bottom line is the net payroll tax bill on workers will increase by $69.90 (and $65.40 for employers) because EI tax reductions will be gobbled up by a higher EI threshold and rising CPP payments.

Tax Savings in 2007

Tax Savings in ’07 – Modest Gains for Individuals, Families with Young Children Win Big

Ottawa: The Canadian Taxpayers Federation (CTF) today released projected income and payroll tax changes kicking in on January 1st, 2007.

“All taxpayers will pay less tax in the New Year,” said CTF federal director John Williamson. “The new employment tax credit will increase to $1,000 for the 2007 tax year, up from $250 in 2006. This fourfold increase permits the finance minister to truthfully assert taxes are going down even though Canadians will pay more payroll taxes next year and the lowest personal income tax rate will rise a quarter-point to 15.5% from 15.25%.”

News Editors: It has been reported the value of the employment tax credit – unveiled in the 2006 budget – is $500 for the 2006 tax year. This is wrong. Please refer to the Canada Employment Credit, page 219, Annex 3 of The Budget Plan 2006. CTF calculations, which are prepared annually, include the new $1,200 (pre-tax) Universal Child Care Benefit for consistency as tax figures also incorporate the Canada Child Tax Benefit. These calculations do not measure the one-point GST reduction, the effect of pension splitting or the impact from tax credits that benefit some, but not all taxpayers.

Federal Income & Payroll Taxes 2007 vs. 2006 – Select Incomes (CTF Calculations)

See Chart 1 & 2 for calculation notes and provincial income tax amounts (web links are below).

“Without a doubt the biggest winners are families with young children. They will rocket ahead thanks mostly to the monthly $100 payment for each child under age 6,” stated Mr. Williamson.

Provincial Income Tax Changes –

Chart 1 – http://www.taxpayer.com/pdf/tax_savings_2007.pdf – details overall federal-provincial tax savings province by province for various income scenarios.

“Low-income individuals, earning less than $25,000 annually, benefit the most from Ottawa’s new employment tax credit. Also noteworthy are that the larger tax savings for individuals earning $80,000 is due to indexation and how unevenly families with similar income levels are taxed,” said Williamson. “One the provincial front, Manitoba taxpayers will realize the largest savings due to a drop in its middle income tax rate.”

Payroll Taxes Continue to Increase –

Effective January 1st, 2007, Employment Insurance (EI) premium rates will drop by seven cents to $1.80 for employees (per $100 of insurable earnings) from the current rate of $1.87. The corresponding employer rate will drop by 10 cents to $2.52 from the current rate of $2.62. However, the maximum insurable earnings will rise from $39,000 to $40,000. The previous EI threshold increase was in 1995. The seesaw EI changes represent a mere 1.3% reduction from 2006 levels.

Canada Pension Plan (CPP) premium rates (per $100 of insurable earnings) will remain unchanged at 4.95% paid by employees and 4.95% paid by employers. The threshold will increase to $43,700 in 2007 from today’s $42,100 level. See Chart 2 for 2007 and historical EI and CPP tax changes:

http://www.taxpayer.com/pdf/payroll_taxes_2007.pdf

“The net payroll tax bill on workers will increase because the EI tax reductions will be gobbled up by a higher EI threshold and rising CPP payments. Workers will pay $70 more in payroll taxes and employers $65 more,” said Williamson. “Ottawa was wrong to increase the EI threshold when the program continues to amass an annual $2-billion surplus. It is another example of giving a tax break with one hand, by lowering the EI tax rate, and taking it away with the other, by raising the threshold.”

A Tax Cut Plan for All Canadians –

The CTF proposes to increase both the basic personal and spousal exemptions to $15,000 over four years. This will save taxpayers $940 a year. In addition, the top two personal income tax rates should be reduced by 3% – phased-in over three years – from 29%-to-26% and 26%-to-23%.

“It is not sufficient for parliamentarians to only discuss cutting taxes for low- and modest-income Canadians,” concluded Williamson. “According to the OECD and even Canada’s finance department, our personal income tax burden remains the highest of the G-7 nations. This standing has not changed in almost a decade. Broadly-based tax relief in the ’07 budget is necessary to ensure all income earners benefit from lower taxes.”

John Williamson
Federal Director
Canadian Taxpayers Federation

CRA SERIOUS ABOUT COMPLIANCE

The Canada Revenue Agency (CRA) has release a news release in response to allegations that it treats some taxpayers unfairly.

"The Income Tax Act requires employers whose monthly source deduction remittances exceed $50,000 make their payments at a financial institution by the business day they are due. This is to ensure that the payments are immediately credited to the Government of Canada. Some employers have been making their remittances directly to the CRA, with the result that the deposit was often delayed until the next business day, which might occur two or even three days later. Playing the system this way, while advantageous to some employers, was unfair to all other taxpayers."

The CRA has indicated that it has clearly advised nearly 57,000 large employers of the penalty where large employers continue to make late remittances. The penalty represents 10 per cent of the amount of the payment.

"Suggesting that such penalties are unfair is in fact suggesting that the CRA not apply the provisions of the Income Tax Act. This would have the effect of giving a small number of businesses what amounts to unfair financial advantages."

The news release continues that the CRA remains committed to equal treatment of all taxpayers and will impose penalties where warranted.

For more information on this news release, visit the CRA website at: http://www.cra-arc.gc.ca/newsroom/releases/2006/nov/nr061124-e.html

Automobile Benefits

Whether you're an employer (including a corporation you own) responsible for correctly reporting taxable benefits or an employee in receipt of taxable benefits, you need to be informed. Although there are a variety of benefits that are taxable, automobile benefits are among the most common. So read on for some general information on automobile benefits bearing in mind that this is an introduction to the topic.

An automobile is considered to be available to an employee if that employee has access to or control over the automobile. Personal driving is any driving for reasons not related to the employee's employment - including travel between home and the place of employment. If there is no personal use, there is no taxable benefit, even if the automobile was available to the employee.

Where there is personal use, the taxable benefit that must be reported on a T4 slip consists of two parts - a standby charge and an operating benefit. The standby charge represents the benefit an employee receives when the employer's automobile is available for his/her personal use. Where the employer pays for the operating expenses of the automobile, the operating benefit represents the portion of those expenses related to personal use.

In general, the standby charge is 2% per month of the car's original cost (including GST and PST, but not including any reduction for a trade-in), or 2/3rds of the monthly lease costs, calculated with reference to the number of days the automobile was available to the employee. Where the employee is required to use the employer's automobile in the course of the employer's business, then if the employee's personal travel during the year is less than 20,000 km (1,667 km per month) and more than half of the employee's travel is business travel, the standby charge may be reduced. The reduction factor is equal to the number of kilometres driven personally divided by 20,000 kilometres.

In general, if the employer pays any amount of operating expenses of the automobile, there is an operating cost benefit. The amount of this benefit is, for 2004, $0.17 per kilometre of personal use. For 2005, the rate is $0.20 per kilometre of personal use. Where the employee reimburses the employer in the year or within 45 days after the end of the year, for all operating expenses attributable to personal use, there is no operating benefit to be included in employment income. If the employee reimburses the employer for part of the automobile's operating costs, the amount reimbursed is deducted from the originally calculated benefit.

There is an optional method for calculating the operating benefit. Where a standby charge has been included in the employee's income, the employee used the automobile more than 50% of the time for employment purposes, and the employee notifies the employer in writing before the end of the taxation year to use this method, then the operating cost benefit can be calculated as 1/2 of the standby charge - before deducting any reimbursements made by the employee. Obviously this is only preferential if it results in a lower taxable benefit.

Where the employer is a GST registrant, there is a GST element to certain taxable benefits, including taxable automobile benefits. The logic behind this is that the employer would have claimed an input tax credit (ITC) at the time of incurring the expense or outlay (e.g. purchase of vehicle, repair costs, etc). By adding the benefit to the employee's income, the employee is now the one to have incurred a portion of the GST ITC's previously claimed by the employer. The employer is considered to have collected GST on the taxable benefit at the end of February in the following calendar year (i.e. T4 filing deadline). The employer has to include this amount as GST collected in the GST return for the reporting period that includes the last day of February. The amount of GST considered to be collected equals 6/106ths of the standby charge and 5% of the value of the operating benefit (before any reimbursement by the employee).

As you can see, taxable benefits are not always straight forward and can have implications beyond the obvious. It's never a bad idea to get assistance - from your human resources/payroll department, the Canada Revenue Agency, or your accountant.

Caren MacLeod
Scott, Rankin & Gardiner Chartered Accountants
www.srgg.com