Canada’s Tax System Needs a Rethink — Especially for Families

In many parts of Canada, the top combined federal and provincial personal income tax rates exceed 50 per cent, even reaching around 54 per cent in provinces like Ontario, British Columbia, Quebec, and several in the Maritimes.

What makes this even more burdensome is that Canadians hit these high tax rates at much lower income levels than in the U.S. This raises questions about the fairness and structure of our system, especially when some have proposed potential fixes like income averaging and family-based taxation.

Historically, Canada has seen even higher marginal rates, topping out at nearly 98 per cent in the 1940s and ’50s. But back then, very few people paid taxes, and capital gains weren’t taxed at all. So, while the rates were high, the actual burden was very different.

In 1966, the Royal Commission on Taxation warned against letting marginal tax rates exceed 50 per cent. They argued that such rates discourage effort, saving, and investment, a view that remains just as relevant today.

But lowering personal tax rates is complicated. Personal income taxes account for nearly half (47.4 per cent) of the federal government’s revenue, about $217.7 billion of $459.5 billion in the 2024 fiscal year. Even a small cut, like a proposed 1 per cent reduction in the lowest tax bracket, could cost the government around $6 billion annually.

To reduce rates responsibly, the government would need to cut spending and/or find new revenue sources. One potential solution is relying more on the GST, a relatively efficient and fair consumption tax, especially with exemptions on essentials like health care, groceries, and rent. But any increase to the GST would likely come at a political cost.

Beyond high rates, there's also a major issue with how Canada taxes individuals instead of families. While credits like the GST rebate and the Canada Child Benefit are based on household income, income taxes are calculated individually. This often leads to unfair outcomes, for example, a single-earner couple making $100,000 pays significantly more tax than a dual-earner couple making $50,000 each.

Critics argue that family taxation might discourage workforce participation, particularly among women. But this concern seems overstated, especially considering that the U.S. has long used family taxation without it discouraging workforce entry in any measurable way.

In reality, most parents decide to work or stay home based on child-care needs, lifestyle, and values, not tax rates.

Ultimately, Canada’s tax system overlooks the economic role of families and continues to impose high individual burdens. A modern system should reflect how people actually live, work, and support each other. It’s time for serious tax reform, if we have the political will to pursue it.