(Disponible en français : L’impôt des particuliers au Canada : recettes, taux et justification)
Governments can finance the goods and services provided to citizens through various means, including through taxing, investing and borrowing. The first – taxation – can take several forms.
In Canada, federally funded or federally sponsored initiatives can be financed by personal income taxes, corporate income taxes, consumption taxes and social security contributions.
This HillNote analyzes the revenue, rates and rationale relating to personal income taxes. Other HillNotes examine these factors for corporate income taxes, consumption taxes and social security contributions.
As shown in Figure 1, in 2015–2016, personal income tax revenue was the largest contributor to federal tax revenue and social security contributions, at $144.9 billion, or 40.9%. Between 1984–1985 and 2015–2016, this percentage ranged from 36.9% to 43.5%.
Figure 1 – Federal Tax Revenue and Social Security Contributions, 2015–2016 ($ billions)
Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. While the QPP operates exclusively in Quebec, QPP contributions are combined with contributions to the CPP, which operates in the rest of Canada, thereby giving rise to the term “federal.” “Corporate income taxes” includes the capital tax on financial institutions. “Other taxes and revenues” are non-resident income taxes, revenue from federal Crown corporations, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by the authors using data obtained from: Statistics Canada, “Table 385–0032: Government finance statistics, statement of government operations and balance sheet, quarterly,” CANSIM (database), accessed 31 January 2017; and Receiver General for Canada, Public Accounts of Canada 2016, Volume 1, 2016.
Figure 2 shows that, as a share of gross domestic product, Canada’s personal income tax revenue in 2014 was higher than the average for Organisation for Economic Co‑operation and Development (OECD) countries. It was also the highest among G7 countries.
Figure 2 – Tax Revenue (Including Social Security Contributions) as a Percentage of Gross Domestic Product, All
Levels of Government, Selected Countries, 2014
Source: Figure prepared by the authors using data obtained from: Organisation for Economic Co-operation and Development, Tax on Personal Income (Indicator), 2016.
Over time, the number of federal personal income tax brackets, each bracket’s income thresholds and the tax rates applicable to those brackets have changed. Figure 3 shows changes in the number of personal income tax brackets and their respective rates since 1987.
Figure 3 – Personal Income Tax Brackets and Rates in Canada, 1987–2016
Source: Figure prepared by the authors using data obtained from: Canada Revenue Agency, Tax packages for all years.
Federal marginal personal income tax rates for the 2017 taxation year are:
- 15.0% on the first $45,916 of taxable income;
- 20.5% on taxable income between $45,916 and $91,831;
- 26.0% on taxable income between $91,831 and $142,353;
- 29.0% on taxable income between $142,353 and $202,800; and
- 33.0% on taxable income exceeding $202,800.
The income thresholds for tax brackets, as well as other amounts within the personal income tax system, have been fully indexed to inflation since 2000.
In Canada, most sources of domestic and foreign income are taxed, although individuals can claim a tax credit for taxes paid in foreign countries. Taxable income includes income from employment or self-employment, pensions, capital, real and intellectual property, and most government benefits. Some other sources of income – such as lottery winnings, gifts and certain government benefits – are not taxed.
Unlike in some other countries, in Canada, personal income tax liabilities are calculated on the basis of individual – rather than family – income, although tax benefits are generally based on the latter.
Taxpayers are entitled to earn income tax-free up to a defined amount, known as the basic personal amount. They may also claim an amount for a spouse, common-law partner or eligible dependant. This amount, which is equal in value to the basic personal amount, is reduced on a dollar-for-dollar basis by the net income of the spouse, common-law partner or dependant. Moreover, in addition to the basic personal amount, taxpayers aged 65 and older can claim the age amount.
As well, the personal income tax system contains other credits and deductions that recognize a variety of personal expenses that may be incurred during the year. These expenses include costs related to employment, union dues, contributions to pension plans and the Employment Insurance program, charitable donations and public transit.
Since 2007, spouses or common-law partners can split their pension income, with up to 50.0% of eligible pension income allocated to the spouse or common-law partner with a lower income.
The federal and provincial/territorial dividend tax credit can be claimed by investors for corporate taxes paid on the corporate dividends they receive.
Finally, since 1972, capital gains – which occur when an asset’s sale price exceeds its purchase price – have been taxed. Since 2001, 50.0% of this capital gain has been taxed; this rate has varied over time.
Through the Income War Tax Act, Canada’s federal government first imposed a tax on personal income in 1917 to finance participation in the First World War. Previously, almost all federal revenue had been derived from tariffs and excise taxes.
The personal income tax system is one policy instrument that governments use to redistribute wealth. Other instruments include social assistance programs, transfers to seniors, employment insurance and workers’ compensation programs, and health care, education and other public services.
In theory, the personal income tax system could affect decisions that individuals make about the quantity of labour they supply and the amount of money that they save.
Regarding labour supply decisions, an increase in personal income tax rates might change the number of hours that individuals decide to work. For example, individuals might work more to compensate for the lower amount of take-home pay. Alternatively, they might work less because the lower amount of take-home pay might lead them to prefer non-work activities.
That said, employees might not be able to determine the number of hours that they work. Their work hours might be decided by employers or a collective agreement.
Similarly, an increase in personal income tax rates might lead individuals to change the amount that they save. Except for Tax-Free Savings Accounts, taxes are paid on interest that individuals earn on investment income.
Therefore, when personal income tax rates increase, individuals might save more to compensate for the lower after-tax rate of return on their investment. Alternatively, they might save less, since the reduced amount of investment income might lead them to consume now rather than save for later consumption.
However, individuals might not change their spending and saving decisions when personal income tax rates rise. For example, these decisions may be based on a desire to maintain a lifestyle that is similar to that of their peers.
Empirical studies have not demonstrated a consistent and significant general relationship between labour supply and savings decisions on one hand, and the personal income tax system on the other hand.
Canada Revenue Agency, Final Statistics (T1 data), 31 January 2017.
Office of the Parliamentary Budget Officer, Ready Reckoner.
Authors: Dylan Gowans and Simon Richards, Library of Parliament