January 27, 2009 / 10:00 PM / in 9 years

Canada budget opts for permanent tax cuts

OTTAWA (Reuters) - Canada’s government pledged C$20 billion ($16.3 billion) worth of permanent personal income tax cuts over five years as part of an economic recovery plan presented in its budget on Tuesday.

Ottawa also promised tax measures for businesses costing C$1.9 billion over the same period, from 2008-09 through 2013-14.

Some of the personal tax measures target low-income earners, which was a key demand of the opposition Liberals for supporting the minority Conservative government’s budget. If the budget is not passed in Parliament an election may be called or the Liberals may try to form a coalition government.

Under the plan, the basic personal amount workers must earn before taxes kick in would be raised by 7.5 percent in 2009 from 2008 levels.

The upper threshold of the first two income tax brackets would be raised by 7.5 percent each, allowing more people to be taxed at the 15 percent rate rather than the 22 percent rate. Likewise, more people will fall into the 22 percent rate from the 26 percent rate.

Combined, the government estimates these measures will cost C$470 million in 2008-09 and C$1.9 billion in 2009-10.

Similarly, the upper income limit for families to be eligible for an existing child tax benefit would be raised.

Building on another previous initiative, the government said it would permanently beef up its so-called working income tax benefit -- a refundable tax credit that supplements earnings of low-income earners. It proposes adding C$580 million in benefits to the program annually through 2013-14.

Other tax measures include paying out an extra C$1,000 a year to seniors eligible for an “age credit”, a tax credit for first-time home buyers, and a temporary home renovation tax credit.

On the business tax side, the biggest item is a two-year extension of a temporary acceleration of capital cost allowance rate for companies investing in machinery and equipment. The measure, a favorite of manufacturers hard hit by the U.S. recession, was due to be phased out starting at the end of 2009 but would be extended to 2011.

Ottawa also promises to introduce a 100 percent capital cost allowance rate for computer-related business purchases for a two-year period ending in February 2011.

It also threw a bone to small businesses in a bid to help them expand and hire more workers, lowering the tax rate on the first C$400,000 of qualifying income earned by Canadian-controlled businesses.

The tax package was the source of much speculation before the budget’s release, largely because it appeared to be the main source of conflict between the minority government of Prime Minister Stephen Harper and the three opposition parties.

Liberal leader Michael Ignatieff, had said he was worried that permanent tax cuts would plunge the government into permanent deficits and he urged Harper to target tax measures at the “most vulnerable” Canadians.

($1=$1.23 Canadian)

Editing by Peter Galloway

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