A Trip Down Tax Memory Lane 

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A Trip Down Tax Memory Lane

Reflections on the evolution of taxation and tax rates.

FROM: JAN-FEB 2008 ISSUE | BY J. THOMAS McCALLUM

Given this year marks the 100^th anniversary of CGA-Canada, I thought it would be fun to take a short trip down tax memory lane. While federal income tax did not exist in 1908, (and no, I don’t have any personal memories of that!) eight short years after the founding of CGA the government introduced the Federal Business Profits War Tax Act, which eventually morphed into today’s Income Tax Act.

A Brief History of Taxation

Contrary to popular belief, the 1916 Act wasn’t the first income tax in Canada, as British Columbia earned the honour of being the first federal or provincial government to levy a personal income tax in 1876. Quebec was next, introducing a corporate income tax in 1884.

Despite what we hear from politicians and government, the structure of income tax isn’t getting simpler; rather, it’s become ever-increasingly complex. The reason is simple. While originally intended as a vehicle to raise revenue for government, income tax has long been the government’s major instrument for social-economic policy. This is what makes it complex, and unless or until government finds a more effective tool, it will always be so.

Currently, the federal corporate tax rate on business income is 19.5 per cent, and 11 per cent on the first $400,000 of small business income. In the mid-sixties the rate was an astonishing 41 per cent, although the first $35,000 was taxed at 12 per cent. The provincial corporate tax rate was 9 per cent in all provinces other than Ontario (11 per cent), Quebec (12 per cent), Manitoba (10 per cent), and Saskatchewan (10 per cent). It is worth noting that provincial corporate tax rates have all gone up, not down, since the mid-sixties.

Further Observations on Tax Rates

Federal corporate tax rates are around 40 per cent less than what they were just 40 years ago, while the federal tax rate on small business is pretty much the same today as it was then. However, if we adjust the low-rate $35,000 allowance (equivalent of today’s small business limit) for inflation, it’s $222,000 in today’s money. Compare that to the current $400,000 small business limit, and it is clear that today’s limit is more favourable.

Let’s turn to personal taxes and compare the income tax on the average industrial wage. In 1965, it was $96 per week; by 2006 it was $747. Ignoring Quebec/Canada Pension Plan and Employment Insurance, our typical 1965 taxpayer paid approximately $700 in federal and provincial income taxes, whereas in 2006, he or she paid about $7,500. The wage-earner has lost, on average, five percentage points in after-tax income not including QPP/CPP contributions, which have escalated from 1.8 per cent of earnings in 1966 ($79.20 maximum) to 4.95 per cent of earnings in 2008 ($2,049 maximum). I’ll leave you to draw your own conclusions, but I believe the implications are quite apparent.

One of the brighter sides of personal income tax change was the 1988 consolidation of a host of tax brackets (10 in 1987) into three broad brackets, which included capping the highest tax bracket at about 45 per cent. Looking back to 1965, there were 17 tax brackets, including an excruciatingly painful 80 per cent upper bracket.

Canada uses a progressive tax system (as opposed to a proportional or regressive system) and progressive has always meant “based on ability to pay” – essentially, the more you earn, the more tax you pay, and at progressively higher rates. But in the last few years, progressive has come to mean “favouring innovation or social reform” and I think the government is continuing to search for ways to increase fairness and equity in the tax system.

As for the future, it is likely there will be more ‘tweaking’ of the system in an effort to make it fairer. And consistent with a worldwide trend, corporate tax rates will continue to decline. Personal income taxes may decrease somewhat, although they’ll be offset by increases in, and the broadening of, consumption taxes such as the GST/HST/PST. Unfortunately, there isn’t one particular strategy that can be employed by taxpayers to deal with all of this. And so we strive to bring you information on effective, up-to-date strategies in this column.

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