30th August 2017

July 25th, 2017, marks the day Canadians have been paying their income tax for a century! The same day in 1917, three years into the First World War, The Conservative Finance Minister Sir Thomas White introduced Parliament to federal income tax. The purpose of the tax was mainly to increase military support.

Many Canadians thought the tax was for a temporary period, especially because it was wartime. Sir Thomas otherwise stated in his tax introduction that it was intended for one or two years after the war, then the Parliament would review the clause to determine whether it was suitable for future application. Today, Canadians still pay the income tax. But how has the tax evolved as it turns a century old?

“The tax started out as a levy on the very richest Canadians. In the early years, as few as one in 50 people paid,” wrote Professor William Watson of McGill University. He also commented that only 2.3% of the population paid the tax in 1938. However, as of today, the tax was paid by most Canadians and 75% of them also file tax returns. This means income tax makes up nearly half of the country’s federal revenue.

However, as its population and economy grow, the country needs to revisit their income tax in other perspectives. Professor Watson suggested that Canada’s income tax is “too high, too important, too complex and too costly” for the country’s current situation.

Statistically, Canadians pay for their income tax at higher rates than most US states. According to the report, seven Canadian provinces were ranked in the top 10 marginal tax rates in North America. Professor Watson also noted the difference of margins for paying at top rates, “Top rates for U.S. states start at over $500,000, in some cases almost $1.5 million. In most provinces, by contrast, the top combined federal-provincial rate starts at $200,000”.

Out of 35 OECD countries, Canada ranks fifth highest for countries that rely on income tax revenue. The federal government, together with other provinces, received more than 33% of their revenue from income tax payers nationwide, while the average of other OECD countries is less than 25%.

Other points of concern for this current income tax are that it is “too complex and costly”. According to Dr. Watson, the current income tax contains a million words which is equivalent to 1,406 pages, compared to when it first launched in 1917 (it spread to only 10 pages). More importantly, there is significant increase in tax expenditures. In 2014, Canada recorded their tax expenditures to as many as 128 while there is also a 27% increase in number. Moreover, with all the complexity, every year a Canadian family on average spends no less than a value of $500 either in time or expense to have their tax done.

According to Professor Watson, in order to have a more efficient and reasonable income tax program for everyone, Canada may have to rethink their tax system. They may have to change how people pay tax by making the base broader and the rate lower, or even considering a low but progressively rising rate on personal consumption.