With a trade war and Canada’s large deficits, the federal parties are banking on tax cuts to win over the electorate. Popular, yes. Responsible? Unclear.
by Luc Godbout, Suzie St-Cerny. Originally published on Policy Options
April 15, 2025
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The start of the federal election campaign, against the backdrop of the trade war with the United States, raised hopes of a debate that would live up to the stakes. One might have thought that the campaign would rise above the usual game of election promises.
Alas, no.
What did the political parties do in the early days of the campaign? Four of them tried to please the electorate by competing to make the biggest tax cut.
Before analyzing the concrete potential impact of the proposals, let’s make it clear from the outset that this analysis focuses solely on the promised personal income tax cuts. We have set aside other commitments that would also reduce government revenue, such as abolishing the carbon tax, reversing the planned increase in the capital gains inclusion rate, exempting certain goods and services from the GST (including the purchase of a new home), raising the TFSA limit for Canadian investments, and deferring capital gains reinvested in Canada.
Two approaches to income tax reduction
In 2025, the progressive federal tax schedule will apply five marginal tax rates, from 15 per cent on the first taxable income bracket to 33 per cent on the fifth bracket.
To take account of basic needs, federal taxation provides for a basic personal amount (BPA), which exempts from tax the first dollars earned up to a certain amont.
The federal BPA is $16,129 and is progressively reduced to $14,538 when taxable income is between $177,882 and $253,414. This BPA multiplied by the rate of the first bracket therefore generates tax savings.
Essentially, both the Liberals and the Conservatives have opted to reduce the rate of the first bracket: the Liberals are proposing to lower it by one point to 14 per cent, and the Conservatives by 2.25 points to 12.75 per cent.
For their part, the NDP and the Green Party have opted to increase the basic personal amount. The NDP proposes to increase it to $19,500 (by $3,371) for people earning up to $177,882 and then reduce it, as is currently the case, but down to $13,500 (a $1,038 reduction) for those who earn more. The Green Party proposes increasing it to $40,000, but only for taxpayers with taxable incomes under $100,000.
Who gets the biggest savings?
To measure what these promises represent for an individual taxpayer, we’ve calculated for six levels of taxable income. As taxation is individual, the analysis does not reflect particular household situations.
Whether it’s the Conservatives or the Liberals, who are both promising to lower the first bracket, the picture is similar: taxpayers with a taxable income of $50,000 benefit from the biggest tax cuts in percentage terms while it’s the wealthiest – at $300,000 income, for example – who pocket the biggest savings in dollar terms. Obviously, since the Conservatives’ first bracket cut is greater, the savings are higher, both in cash and percentage terms.
In the case of the NDP, the cash savings are the same for the first four income situations, so the effect as a percentage of income is greatest at $25,000. Given the reduced the basic personal amount for higher income earners, tax savings are higher at $250,000 and $300,000 but the increase is minimal as a proportion of income.
The Green Party promise provides the same cash savings for income scenarios of $50,000 or $80,000, with the most significant reduction as a proportion of income at $50,000. However, since the promise is limited to taxpayers with incomes under $100,000, once income exceeds this threshold by a single dollar, i.e. from $99,999 to $100,000, the BPA would drop without transition from $40,000 to $16,129 (a reduction of $23,871), representing a tax change of in $2,990 in Quebec and $3,581 elsewhere in Canada for one additional dollar of income.
Note that savings differ depending on whether the taxpayer resides in Quebec or elsewhere in Canada, given the special Quebec abatement that reduces the federal tax Quebecers pay to Ottawa. The abatement stems from historical agreements to take into account federal programs from which Quebec has chosen to withdraw.
A significant drop in tax revenue
These tax reduction promises don’t come for free. They come with a significant potential drop in tax revenue for a federal government that is already in a budget deficit.
The cost of the promises range from $5.9 billion for the Liberals to $47 billion for the Greens, representing a significant drop in projected federal income tax revenues in 2025 between 2.4 per cent and 19.3 per cent.
Although no party has yet published a financial framework, some have given clues as to how they intend to finance their promises. The Liberals and Conservatives have not given much indication but the Conservatives have hinted at an equivalent reduction elsewhere in the government apparatus. The NDP would finance the whole thing by tackling tax loopholes, as well as cancelling capital gains tax cuts and tax treaties with jurisdictions considered tax havens. The Greens would increase the tax rate on large corporations from to 20 per cent and cut corporate tax expenditures by two-thirds.
Finally, let’s look at how the cost of the promises breaks down by income bracket. Around 28 per cent of taxpayers have a taxable income between $57,375 and $114,750, but this group of taxpayers receives a larger share of the benefits for all the promises analyzed. In the case of the Conservatives and the Liberals, the share of the total cost of their promises in the first income bracket is lower, as a larger share goes to taxpayers in the higher brackets. Note also that only the NDP promise recovers a share (one per cent) of costs from taxpayers in the fifth, wealthiest bracket.
Is this really the right time?
When the federal election was called at the end of March, there were already a number of warning signs that signalled a prudent approach was warranted.
First, the federal budget showed a deficit of $62 billion for the 2023-2024 fiscal year, and the parliamentary budget officer estimates a deficit of $50 billion for 2024-2025, with no return to balance between now and 2029-2030, when the deficit is projected to be $26.7 billion.
Additionally, Canada must significantly increase its military spending to meet NATO commitments, putting further pressure on public finances. Finally, the trade war provoked by the United States is creating major economic and budgetary uncertainty.
In this context, is it a good idea to promise tax cuts for individuals rather than building up the kitty to cover the wide range of events we face? The answer is no. If taxes had to be cut, it would have been wiser to target companies because they provide jobs and they are what will have to innovate to cope with the new economic context. The priority right now should not be tax cuts for individuals.
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This article first appeared on Policy Options and is republished here under a Creative Commons license.