Canada’s personal tax rates need to come down. Here’s how to do it

Personal tax revenues for the 2024 fiscal year for the federal government were $217.7 billion out of total revenues of $459.5 billion. That’s 47.4 per cent of revenues. Photo by Graeme Roy/The Canadian Press

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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.

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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.

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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.

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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.

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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.

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“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.”

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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.

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Personal tax revenues for the 2024 fiscal year for the federal government were $217.7 billion 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.

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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 $6 billion or so in lost revenues every year.

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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.

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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.