Tax issues are back on the agenda, as they should be. In the wake of the breakdown of Canada-U.S. trade talks, there is a renewed focus on what Canada needs to do to get its economy out of the doldrums. Although we have no control over what the U.S. may do next to destabilize our economy, our tax system is one of the areas over which we have full control. It is widely acknowledged that most aspects of our system of taxation are out of whack and have been for some time. Virtually all credible tax experts in Canada are calling for a “big bang” approach to tax reform, where a very comprehensive review and reform of our tax system is conducted, possibly by a Royal Commission.
Recent years in Canada have seen some temporary stop-gap measures such as Ontario’s gas tax cut, which was initially temporary, then made permanent. The federal government just announced that they would continue the federal excise tax holiday on gasoline and diesel until the end of January 2027. These are politically popular tax reductions as they are very visible to consumers. However, although they may leave a few more dollars – not many – in an average worker’s pocket, they do nothing to make our economy more competitive or encourage businesses and individuals to be more productive. Nor do they attract the foreign and domestic investment Canada badly needs right now.
Corporate taxes are often the part of the tax system that is most targeted, as it is easy to compare these statistics across different countries and they are an important determinant for where large corporations decide to establish their businesses. Canada’s corporate taxes are still out of sync with the U.S. U.S. corporate taxes were reduced significantly in 2018, when a corporate tax system was changed from a graduated structure peaking at 35 per cent to a flat tax level of 21 per cent. Under the Trudeau government, Canada never matched this tax reduction and it was a major reason Canada lost a tax advantage in the corporate sector.
More recently, personal income taxes have been a focus. As successful entrepreneurs and professionals leave Canada for greener pastures south of the border, one major inducement is lower personal income taxes. Kim Moody, one of Canada’s leading tax experts, recently focussed on the need to lower our income taxes. He notes that currently, Canada’s top federal income tax bracket – 33 per cent – kicks in at just over $250,000 of taxable income for this year. Provincial personal income tax rates raise that to over 50 per cent in most provinces. The notion of giving over half of what you earn to government should be appalling for any thinking person.
The U.S. personal income tax system is also very progressive, with the highest federal rate 37 per cent applying to incomes over $640,000 for an individual – in U.S. dollars. These high taxes are applied at much higher income levels in the U.S. than in Canada. U.S. state income taxes vary widely, with some states not levying any income tax at all. Canada’s lifetime capital gains exemption also disadvantages Canadian entrepreneurs, as the exemption is capped at $1.275 million for this year. The comparable U.S. measure permits the tax sheltering of up to $15 million – in U.S. dollars. The overall impact of the Canadian system is to punish success, and we have the weak economy to show for it.
The notion of “tax the rich” is always appealing to the vast majority of citizens who do not consider themselves rich. Yet history around the world has consistently shown that these taxes always punish the economies that implement them more than they ever punish the “rich.” Europe is famous for having had many wealth taxes over the decades but has pretty much abandoned them as they found out they actually raised lower revenues for government than the previous tax system, as the wealthy left or used more creative accounting measures to avoid the higher taxes. High taxes on entrepreneurs and other successful professionals serves to primarily drive them away, as Canada is now experiencing with its productive individuals leaving in droves for the more attractive circumstances in the U.S.
The province of Ontario has recently been running an interesting advertising campaign, promoting the notion that Ontarians are very lucky because the government has not raised income taxes on them in the eight years they have been in power. This is kind of like the federal government wanting gratitude for removing the consumer carbon tax. Both governments seem to think they should be commended for not punching taxpayers in the face yet again. We should have better expectations of all of our governments.
Yet this Ontario government claim that they have not raised income taxes is not accurate. The top two tax brackets in Ontario, for those folks earning more than $150,000 in the fourth bracket and $220,000 in the fifth and highest bracket, have not been indexed to inflation for years. Having tax brackets that don’t move with inflation means an increase in real taxes imposed on Ontarians in these brackets. So basically, the folks who are entrepreneurs, professionals, and others in these tax brackets – the ones who are choosing to leave this country for better opportunities – are facing real income tax increases every year and have been for some time. So much for the Ontario government’s claim they haven’t increased income taxes.
As the old saying goes, the best defence is a good offense. Prime Minister Mark Carney has melodramatically claimed we are “at war” with our major trading partner the U.S. The most effective way of combatting this is by good economic policy that enables Canada to better withstand any shocks the US throws at us. Serious tax reform should be a leading item on the list of the many things we need to fix yet doesn’t seem to be a big priority for the federal or provincial governments at this time.
It’s getting harder to take any Canadian government seriously that chooses to focus its energy on railing against the U.S. to whip up political support in Canada while they refuse to make the policy changes that would truly help make Canada less vulnerable to the threats of the U.S. and anyone else. Canadians will continue to suffer until our governments start to do the substantive things that will help us, not just the politically expedient ones that might feel good in the short term but accomplish nothing.
Catherine Swift was President of the Coalition of Concerned Manufacturers & Businesses Canada from 2022 to 2026. She was previously President of Working Canadians from 2015-2021 & President & CEO of the Canadian Federation of Independent Business (CFIB) from 1995-2014. She was Chief Economist of the CFIB from 1987-1995, Senior Economist with TD Bank from 1983-1987 & held several positions with the federal government from 1976-1983.
She has published numerous articles in journals, magazines & other media on issues such as free trade, finance, entrepreneurship & women business owners. Ms. Swift is a past President of the Empire Club of Canada, a former Director of the CD Howe Institute, the Canadian Youth Business Foundation, SOS Children’s Villages, past President of the International Small Business Congress and current Director of the Fraser Institute. She was cited in 2003 & 2012 as one of the most powerful women in Canada by the Women’s Executive Network & is a recipient of the Queen’s Silver & Gold Jubilee medals.
