Canada is in dire need of major

tax reform

. Facing a decade of virtually stagnant per-capita growth, a comprehensive overhaul of our tax system is needed to stimulate investment, raise

wages

and restore Canada’s global competitiveness, according to a new report out this week from the C.D. Howe Institute.

In “‘

Big Bang’ Tax Reform

: Unleashing Growth in the Canadian Economy,” the report’s authors, Jack Mintz, Alexandre Laurin and Nicholas Dahir, propose a sweeping, revenue-neutral “big bang” tax reform designed to fundamentally restructure Canada’s federal tax system. Their framework would reduce reliance on income taxes, simplify compliance and administration, modernize corporate taxation and remove barriers that discourage capital formation and work effort.

Tax reform can’t come soon enough. After all, it’s been 60 years since the last comprehensive review of Canada’s tax system, the

Royal Commission on Taxation

— often referred to as the Carter Commission — was published in 1966. Chaired by Kenneth Carter, the commission undertook a massive, multi-year study into the fundamental principles that guide our tax system. The commission’s multi-volume report set out a broad framework for tax reform that emphasized fairness, simplicity and economic efficiency.

And, while we have had some major structural tax changes since then, the last comprehensive tax reform occurred in 1987, almost 40 years ago. Since then, tax changes have tended to focus on select areas of tax, such as the 1991 sales tax reform that brought in the

goods and services tax

(GST) or the major changes to private company taxation introduced in 2017.

Let’s take a look at a couple of the major recommendations for personal tax reform put forward by the Institute.

Lower Canada’s tax rates

Canadian federal and provincial governments rely disproportionately more on personal income taxes compared with other revenue sources. This increased reliance began after the Second World War. In 1965, governments collected less personal tax (5.8 per cent of GDP) than sales and excise taxes (8.5 per cent). The most recent figures, in 2023, put personal income taxes at 13 per cent of GDP, making personal tax nearly twice the size of any other source of federal or provincial taxes.

Meanwhile, the top combined federal/provincial marginal tax rate is just over 53 per cent in British Columbia,

Ontario

and Quebec, and is higher than 50 per cent in eight of ten provinces (it’s 48 per cent in

Alberta

and Saskatchewan). The top tax rate is generally applied at income levels about 2.8 times the average wage, while the United States applies its top rate at an income level of 8.8 times the average wage.

“Canada’s high marginal tax rates on middle- and upper-income earners discourage work, risk-taking, and the retention of talent — precisely when stronger growth is needed,” said Mintz.

As a result, the report proposes reforming the federal personal income tax schedule to compress marginal tax rates at higher income thresholds while maintaining the government’s recent reduction in the lowest tax bracket, since rate reductions are more economically effective at higher income levels.

Our current 2026 federal tax brackets are: up to $58,523 of income (14 per cent); above $58,523 to $117,045 (20.5 per cent); above $117,045 to $181,440 (26 per cent); above $181,440 to $258,482 (29 per cent), with anything above that taxed at 33 per cent.

The Institute proposes keeping the lowest rate of 14 per cent for income under $60,000, and then widening the second 20.5 per cent bracket for middle-income earners for those with income between $60,001 and $180,000. High-income earners who make more than $180,001 would pay tax at a federal rate of 26 per cent.

These changes would lower the marginal tax rates applying to income above roughly $117,000, and would enhance economic efficiency by reducing disincentives to earn additional income, particularly among higher-income earners where behavioural responsiveness to tax rates is well documented.

If provinces leave rates unchanged, the top tax rate would fall to 46.53 per cent in Ontario and 41 per cent in Alberta. This would be consistent with one of the principles in the Carter Report, which concluded that top rates should be below 50 per cent to balance social fairness with economic pragmatism, since high rates discourage effort, initiative and tax compliance.

Reduce complexity

Another important recommendation for reform is to simplify the tax system. Back in 1917, when the “temporary” Income Tax War Act was introduced as an emergency measure to fund the First World War. It spanned all of six pages. My most recent two-volume version of the act, which is too heavy to carry around, runs nearly 3,000 pages.

Similarly, the T1 General Income Tax Return has grown to include 14 schedules and multiple sections, reflecting decades of accumulated rules and tax preference items. As a result, the average taxpayer increasingly relies on accountants, tax preparers or specialized software to complete their returns if they have anything beyond a T4 slip.

To reduce complexity, the institute is proposing a new optional non-refundable simplified tax credit that would replace numerous existing deductions and credits. The simplified credit amount would be set at $10,000, and added to the existing basic personal amount. As a result, individuals could earn more than $26,000 tax-free.

The simplified credit would be optional in that taxpayers could either claim the $10,000 simplified credit, or retain access to all existing credits and deductions by forgoing it. Under the simplified credit system, a limited set of credits and deductions would still be available: the basic personal amount (enhanced with the new simplified credit),

Canada Pension Plan

(CPP) and Employment Insurance (EI) contribution credits, disability and caregiver credits, the charitable donations credit and federal dividend and foreign tax credits. Taxpayers would also still get to deduct

RRSP

contributions, spousal support, CPP/QPP on self-employment income, 50 per cent of

capital gains

, and employment and business expenses.

By eliminating most of the credits and deductions, the simplified option would ease the tax filing burden for many Canadians, lower their compliance costs and facilitate tax-filing automation by increasing the number of people with basic tax returns. It would also potentially curb the tendency of elected officials to introduce narrowly targeted tax preferences (anyone remember the now extinct

digital news subscription tax credit

?) as tools for political gain or broad policy objectives, fostering a more neutral tax system.

Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com

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CRUSH YOUR TAXES: A live Q&A with Jamie Golombek

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