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Reality Check

When it comes to tax credits, read the fine print By Robert Sheppard, CBC.ca Reality Check Team | Dec. 15, 2005 | More Reality Check

Tax credits-which are different than tax cuts-have become a staple of modern elections as campaigning politicians attempt to curry support with specific groups.

So far in this election, low-income earners, middle-income retirees and parents of kids active in sports like hockey, soccer and karate are among those who have been targeted by the Liberals and Conservatives in particular. NDP Leader Jack Layton is on record saying he doesn't much like the tax-credit route but he does support the main thrust of the Liberals' November budget, especially that portion that promises to reduce the lowest tax bracket. And that, as we shall see, has implications for some of the basic tax credits Canadians now take for granted.

The harsh truth about tax credits is that they don't live up to the headlines that Paul Martin or Stephen Harper likes to generate when appearing to promise $2,000 deductions for seniors and $500 breaks for hockey parents. That's because all tax credits are calculated by multiplying the dollar amount allowed-say $500 for sports fees-by the lowest tax rate, currently 16 per cent, for a maximum tax savings of $80 a year. With this in mind, Reality Check asked Prof. Lisa Philipps of Osgoode Hall Law School in Toronto for her assessment of three of the most prominent tax credits in the major party platforms. We start with the earliest.

Ralph's $500 personal exemption

In his Nov. 14 economic statement, a budget in all but name, Liberal Finance Minister Ralph Goodale pledged to lower all three of the country's tax brackets by one percentage point. That means the lowest, on which tax credits are calculated, would go from 16 per cent to 15 per cent, for the 2005 tax year if the Liberals are returned to office.

Goodale also promised to raise the basic personal amount (currently $8,149) on which no tax is paid by $500-which earned him a few headlines. But as Philipps reports, people who earn the basic amount or less-and that's at least a quarter of all tax filers, many of them students working summer jobs-actually come out with less under the new regime. That's because, to calculate the basic personal tax credit, which all taxpayers are entitled to, 15 per cent of the proposed higher amount is $7 less than what is now available with the 16 per cent rate.

Those who earn more than the basic minimum will be better off, of course, under the reduced brackets. But scaling back the lowest bracket will have the little publicized consequence of eroding the value of a host of personal tax credits, including the disability tax credit, the medical expense credit, and the caregiver, education, tuition and student loan interest credit, only some of which have been offset by other offerings.

Stephen Harper's pensioners' credit

To help middle-income seniors, the Conservatives promise to increase-from $1,000 to $2,000-the amount of private pension income from a registered plan or RRSP that can be earned free of tax. This is designed to help those whose Old Age Security benefits are clawed back when incomes reach $60,000.

This doesn't mean, however, that seniors receive a $2,000 reduction. This, too, is a tax credit, so the $2,000 exemption has to be multiplied by 16 per cent for a maximum tax savings of $160 a year.

Philipps also questions why the Conservatives chose this route for the stated goal of helping middle-income seniors because the pension credit is a universal one that applies to all seniors and will cost the treasury $2 billion, passing along very small benefits to higher-income pensioners. "This is kind of like turning on the overhead sprinklers in the whole office building just to water the plants in the lobby," Philipps says. Wouldn't it have been simpler just to raise the cap on the OAS clawback?

The soccer mom/hockey dad credit

Harper's $500 tax credit for parents with kids in organized sports has to appeal to anyone who spends their pre-breakfast mornings at a freezing cold rink. As noted, however, $500 in sports fees only yields a tax savings of $80 a year, enough perhaps for a pair of used skates.

There's little doubt that parents who put that kind of time and effort into their kids' physical activities deserve some kind of pat on the back. The program is estimated to cost Ottawa a modest $130 million annually. But, Philipps asks, if the point is to get more kids, especially inactive ones, into sports, why not direct the money to school-based programs or community centres?

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