The federal government’s expensive, bloated and overly complicated personal income tax (PIT) system is undermining economic growth, productivity and prosperity for Canadians, according to a new study by the fiscally conservative Fraser Institute.
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When combined with provincial PIT rates, the report says, Canada’s taxes are also uncompetitive with the United States.
The report released on Tuesday, Enhancing Economic Growth Through Federal Personal Income Tax Reform, recommends cutting federal PIT rates and reducing the number of income categories that determine how much Canadians pay in federal PIT from five to two.
It also recommends eliminating 49 tax credits, deductions and preferential programs that benefit some taxpayers, but not others, and using the money saved to help pay for broad-based federal PIT reform.
“With this plan … the federal government could create a more pro-growth environment than Canadians are presently living in,” said study co-author Jake Fuss.
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“By making these changes, Canada would (also) be more tax competitive with the U.S., which currently enjoys a substantial advantage over us on personal income taxes.”
Canada’s current annual PIT thresholds and the rate Canadians pay in federal income taxes depend on which category they are in: The tax rate is 15% for annual income of $15,000 to $53,359; 20.5% for income from $53,630 to $106,717; 26% for income from $106,718 to $165,430; 29% for income from $165,431 to $235,675; and 33% for income above $235,675.
The Fraser study recommends reducing the number of income thresholds from five to two and lowering tax rates across the board for anyone earning more than $53,359 annually.
Under the plan, the federal PIT rate would be 15% for incomes from $15,000 to $235,675 and 29% on income above that.
The study says this would return top Canadian earners to a marginal federal PIT rate of 29%, the same rate it was before the Trudeau government came to power in 2015 and raised it to 33% a year later on annual incomes of more than $200,000.
At the same time, the government reduced the rate in the second-lowest federal PIT category from 22% to 20.5%.
The Fraser Institute report estimates its tax reforms would cost the federal treasury $37.7 billion annually in lost revenue, which could be paid for by eliminating 49 existing tax credits, deductions and preferential programs costing the federal government $32.1 billion, plus an additional reduction in federal spending of $5.6 billion.
The study argues these changes would make combined federal and provincial PIT rates much more competitive with the U.S. and boost Canada’s economic growth.
“Canada has been uncompetitive on tax rates with jurisdictions in the United States for decades, but the federal government’s decision to increase its top PIT rate to 33% in 2016 has caused Canada’s tax competitiveness to deteriorate significantly in recent years,” the study says.
“In 2023, out of 61 Canadian and U.S. jurisdictions, Canadian provinces occupied the top eight positions for the highest top combined marginal PIT rates. The other two provinces, Alberta and Saskatchewan, placed 10th and 15th, respectively. The 10 provinces also have some of the highest combined marginal PIT rates at incomes of $75,000 and $150,000.
“Canada is also markedly uncompetitive on top statutory tax rates compared with … other advanced economies of the Organization for Economic Co-operation and Development. These relatively high tax rates discourage individuals from working, investing, saving and engaging in productive entrepreneurial activity. They also hinder Canada’s ability to attract and retain highly skilled workers, entrepreneurs and business owners.”
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