Many provinces in Canada have combined a federal–provincial
personal income tax rate
that exceeds 50 per cent at the highest rate. For example, Ontario, British Columbia Quebec and many of the Maritime provinces are in the 54 per cent range.
Jamie Golombek
, managing director, Tax & Estate Planning, at CIBC, recently
pointed out
that Canada’s highest rates are reached at much lower levels of income than in the United States while discussing whether income averaging and family taxation are solutions.
He also compared our rates to the U.S. and how Canada’s highest rates are reached at much lower levels of income and discussed some possible solutions recently put forward by another tax practitioner: income averaging and family taxation.
That it is acceptable to have marginal personal tax rates that exceed 50 per cent is something that needs a rethink. Historians of tax might rebut me and say that Canada used to have marginal tax rates that were more than 80 per cent in the 1940s and ’50s, with the high being 97.8 per cent. But that needs some context.
First, Canada’s personal income tax system was relatively young back then. The number of taxpaying individuals, compared to the population as a whole, was much lower than it is today. Capital gains were also not taxable (they did not become taxable until 1972). So, of course, there was no shortage of gamesmanship for the small number of high-income taxpayers to convert their income into non-taxable capital gains.
Fast forward to 1966 and the Royal Commission on Taxation’s
.
“When marginal rates of tax exceed 50 per cent, the taxpayer receives less than half of any increase in income he earns. At such levels, taxation becomes a powerful deterrent to additional effort, savings, and investment,” the report said in chapter 15, volume 3. “We recommend that marginal rates of personal income tax should not exceed 50 per cent.”
These quotes are just as relevant today as they were in 1966. There is no doubt that personal tax rates need to come down, but that is much easier said than done given our country’s huge reliance on personal tax revenues and massive spending.
Personal tax revenues for the 2024 fiscal year for the federal government were
out of total revenues of $459.5 billion. That’s 47.4 per cent of revenues. Accordingly, any reduction in personal tax rates has a big impact on those total revenues.
For example, the recently proposed one per cent reduction of the lowest personal rate, not yet passed by Parliament but being administered as if it were, will cost the government an estimated
or so in lost revenues every year.
This means that any significant reduction in personal tax rates will need to be covered by corresponding cost cutting (something that needs to occur regardless) and/or increasing revenues from other sources.
The
GST should play a bigger role
in Canada’s taxing system given its efficiency and fairness. And especially since the hard edges of the regressiveness of a traditional consumption tax have been reduced with the GST given the exemptions for health care, basic groceries, housing rents and other basic necessities (combined with basic rebates for low-income households). Unfortunately, doing so would likely come at a significant political cost.
High personal tax rates are only part of the story. Equally troubling is how we treat the economic unit that bears the brunt of these policies: the family.
I’ve long been an advocate for
family taxation
. Good taxation policies should always follow the economic realities of life and/or business. The reality is that the family is the basic economic unit for most and will continue to be for hundreds if not thousands of years into the future.
Canada’s taxation policies should mirror those economic realities. The government has recognized that basic premise for purposes of calculating various credits, such as GST credits and the Canada Child Benefit. But for calculating income tax? Nope. And that’s wrong.
The result is increased administrative complexity, income tax burdens and some strange outcomes. For example, the tax burden of a married couple with $100,000 of combined income is very different if, say, one spouse earns all of the $100,000 versus both spouses earning $50,000 each. Should it? No.
Critics of family taxation, usually certain left-leaning academics and bureaucrats, have often voiced that family taxation has been proven to prevent women from entering the workforce. I was surprised at such arguments when I first heard them years ago.
Sure, there are academic papers written on that topic, but, with respect, they lack practicality, substance and common sense, especially since the combination of incomes for various credits doesn’t seem to bother such critics, nor does it appear to impact women from entering the workforce in the U.S. (which has had a form of family taxation for decades).
In most families I know, taxation policies — whether they are positive or negative — do not materially influence a parent’s decision to enter or stay in the workforce once children enter the scene.
To quote the 1966 Royal Commission on Taxation: “Taxation of the individual in almost total disregard for his … economic ties with … the family … is … another striking instance of the lack of a comprehensive and rational pattern in the present tax system.”
Again, this critique remains true.
We ignore the real-world financial dynamics within families when we tax individuals as isolated units. Add to that our willful tolerance of punitive personal tax rates, and it’s clear our tax architecture is outdated. Comprehensive tax review and reform is a must.
Do we have the political courage to build a tax system that truly reflects how Canadians live, work, and contribute? I hope so.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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