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Ottawa plans to offer modest across-the-board income tax relief tomorrow in a wide-ranging budget that sources say includes a $1-billion investment fund for greenhouse-gas reduction

Sources told The Globe and Mail that as part of a five-year fiscal plan, Ottawa will raise the basic personal exemption, the amount of income that people can earn tax free.

The exemption — what the Canada Customs and Revenue Agency calls the "basic personal amount" — is $8,012 for the 2004 taxation year, and nearly $8,150 for 2005. The budget will increase the 2005 number further.

"It's something that would help [low-income earners]," a source said. "Because the higher you make that threshold, the more people you take off from paying any tax. So on that basis, it would be sold as a low-income initiative."

However, because all taxpayers can claim the basic personal amount, higher-income earners will get the tax break as well.

The Liberal minority government needs the support of the opposition to pass the budget. Raising the basic personal exemption would meet the Conservatives' call for tax cuts and appeal to the New Democrats as a measure to help low-income earners.

The budget will also provide several hundred million dollars for native Canadians and refer to abuse at residential schools and the need to speed compensation for victims.

As well, it will set aside $1-billion over five years for an arms-length trust to encourage environmental entrepreneurs to cut greenhouse-gas emissions for profit.

The trust will be part of the $5-billion to $6-billion in five-year spending reported in The Globe last week, money that Ottawa plans to pump into the budget for environmental measures, fuelled by its commitment to the Kyoto accord.

The fund will invest in projects that cut greenhouse-gas emissions — believed to cause global warming — and bank credits for those reductions that would count toward Canada's Kyoto targets.

It aims to create a market incentive for companies to create projects to reduce the amount of heat-trapping greenhouse gases emitted into the atmosphere.

Examples of investments it might make include buying the emissions reductions generated by a company that retrofits buildings to make them more energy efficient.

Or the fund could provide a loan guarantee for a business such as Ottawa's Iogen Corp. to build a plant that makes ethanol from cellulose.

Most of the trust would be spent in Canada, but officials said it could also invest in foreign projects — as long as they resulted in verifiable emission reductions and as long as Canadian companies benefited from the international investment.

Opposition Conservative MPs have attacked proposals to buy foreign emission-reduction credits as wasteful spending. But the government says some projects will be worthwhile if they offer inexpensive emission credits and promote and advance Canadian technology. "There's a strict test in the budget," a government official said. "It has to involve a Canadian company's technology or process. It has to give a Canadian company a leg up in getting into the international [market]."

Officials declined to say what percentage of the trust could be spent outside Canada, but one person familiar with the plan estimated perhaps 20 per cent could go overseas.

The Conservatives have warned against buying foreign emission-reduction credits, charging it would be wasted on so-called "Russian hot air."

This refers to credits that countries such as Russia have to sell that are not from genuine emission-reduction efforts but the economic collapse of the 1990s that cut their greenhouse gas output far beyond the treaty's targets.

Officials said the fund's rules would prohibit this kind of credit purchase.

The trust will be a cornerstone of Ottawa's revamped plan to meet Canada's obligations to cut greenhouse gas emissions.

Officials declined to say what magnitude of greenhouse gas emissions the fund might target. But one person outside government who is familiar with the plans estimated the fund could produce reduction credits worth as many as 90 megatonnes of emissions, which would amount to one-third of this country's current Kyoto target of 240 megatonnes.