Slight reductions to personal income taxes and payroll taxes kicked in on January 1.

“Federal tax reductions will give all taxpaying Canadians some relief in ’05 and ’06,” said Canadian Tax Payers Federation (CTF) federal director John Williamson, in a release.

“Lower income taxes and employment payroll taxes will give the average taxpayer a net gain of $62 in 2006. However, last minute personal income tax changes announced in November will result in the average taxpayer savings $323 in 2005. Because these tax reductions are built into the tax code they roll into the next year. As a result, cumulative tax savings in ’06 will be $385.”

The personal income tax changes announced by the finance minister in the November 2005 economic update apply regardless of the federal election outcome.

In 2006 the basic personal exemption (BPE) will increase by $200 above the inflation rate (this change plus indexation will boost the BPE to $9,039 next year). This measure will save all taxpayers an additional $30 per year starting in 2006.

The November economic update increased the BPE by $500 (from $8,148 to $8,648), and lowered the bottom personal income tax bracket from 16% to 15%. Both measures kicked in retroactively to Jan. 1, 2005. Together, they will save all taxpayers earning $35,595 or more $323 a year, starting in 2005. (The BPE change results in a $75 savings and the lower tax rate translates into a $248 savings.)

Effective Jan. 1, 2006, Employment Insurance (EI) premium rates will drop by 8¢ to $1.87 for employees (per $100 of insurable earnings) from the current rate of $1.95. The corresponding employer rate will drop by 11¢ to $2.62 from the current rate of $2.73. These EI changes represent a 4.1% reduction from 2005 levels. (The maximum insurable earnings will remain unchanged at $39,000 for 2006.)

However, the CTF said the net payroll tax bill will increase because EI reductions will be eaten up by the Canada Pension Plan payroll tax. CPP premium rates (per $100 of insurable earnings) will remain unchanged at 4.95% paid by employees and 4.95% paid by employers. Yet because the threshold will increase to $42,100 in 2006 from today’s $41,100 level, workers will pay $50 more in CPP taxes next year.