(February 28 – 16:00 ET) The federal government is proposing to restore full indexation effective Jan.1, 2000.

The indexation factor for a given tax year will be set based on the year-over-year change to the average level of the consumer price index. The factor will be set on the Sept. 30 prior to the tax year.

For example, the indexation factor effective January 2000 will be the percentage change in the average level of the CPI from Oct. 1, 1998, to Sept. 30, 1999, relative to the average level from Oct. 1, 1997, to Sept. 30, 1998.

Under the current rules, several personal income tax parameters are adjusted based on the CPI change, if the CPI changes by more than 3%. But, states the Finance Department in Budget Plan 2000, since “inflation has been below three percent in recent years, the personal income tax system has effectively not been indexed.”

Several parameters will be fully indexed for 2000, beginning Jan.1, 2000. Some of the parameters are:

> the basic personal amount;
> spousal amount;
> taxable income thresholds at which the 26% and 29% rates begin to apply;
> medical expense tax credit;
> old age security repayment threshold;
> GST credit;
> Canada Child Tax Credit.

For the purpose of indexing, as of Jan.1, 2000, Ottawa is setting the personal basic amount at $7231. Assuming an annual inflation rate of 1.8% over the next five years, Ottawa is projecting that the basic amount will reach $8,000.

Using the present indexation plan, and the assumed inflation rate of 1.8% annually, Ottawa is projecting that within five years Canadians will be able to earn $35,000, instead of $29,590, and stay within the lowest tax bracket. Using the same formula Ottawa projects that the highest bracket won’t kick in until Canadians earn $70,000.
-IE Staff