Skip to main content

Livio Di Matteo is a senior fellow of the Fraser Institute and professor of economics at Lakehead University.

As the tax deadline looms, it's worth reviewing a brief history of Canada's federal income tax, to see how far we've come and where we might be going in terms of the income taxes we send to Ottawa.

Along with Confederation's 150th anniversary, 2017 also marks the centennial year for Canada's federal income tax. As a result of the funding demands of the First World War, the federal government brought in personal income and corporate income taxes in 1917, and the federal sales tax in 1921.

Story continues below advertisement

The personal income tax marked a shift in federal tax philosophy, as since Confederation, the ethos was that taxing incomes weakened Canada's competitive position. It changed federal public finances and our lives forever.

Canada's federal personal income tax arrived Sept. 20, 1917, with a 4-per-cent tax on all income of single people (unmarried persons, widows or widowers without dependent children) over $1,500. For everyone else, the personal exemption was $3,000. In today's dollars, the exemptions were worth approximately $24,500 and $50,000, respectively.

For married Canadians with dependents and an annual income greater than $6,000 (approximately $99,500 in today's dollars), the tax rate ranged from 2 to 22 per cent. However, because of the relatively high exemptions, only between 2 per cent and 8 per cent of individuals filed returns during the initial years of the federal personal income tax. Indeed, federal personal income taxation remained a relatively modest source of federal government revenue until the transformations of the Second World War.

The Second World War dramatically expanded the federal personal income tax with the most notable change being the introduction of high marginal tax rates. For example, the pre-Second World War marginal tax rate on taxable income between $1,000 and $2,000 in the dollars of the day was 4 per cent. By 1942, it had increased to 44 per cent. For taxable income between $10,000 and $15,000, it was 13.7 per cent before the war, but 69 per cent by 1942.

While marginal tax rates came down after the war, they remained substantially higher than they had been before the war. Moreover, the proportion of the population having to file income taxes rose over time. While only 2.3 per cent of the population filed personal income taxes in 1938, by 1975, that number had grown to 52 per cent and currently stands at approximately 75 per cent of Canadians.

Changes occurred in tax rates and brackets over time. By 2015, there were four brackets with rates of 15, 22, 26 and 29 per cent. However, the brackets increased to five in 2016 with rates ranging from 15 per cent to 33 per cent. And there are concerns further changes may be on the way given the increase of spending.

The one constant in all of this change is growing revenue from the personal income tax. In terms of per-person federal personal income taxes, the burden has increased from roughly $14 a person in 1918 (in 2016 dollars) to roughly $4,120 in 2017, an almost 300-fold increase. As a share of GDP, it has grown from 0.2 per cent and is expected to be 7.2 per cent in 2017. As a share of total federal revenue, the tax has grown from 2.6 per cent in 1918 and is expected to reach 51 per cent in 2017.

Story continues below advertisement

It's ironic that a tax that was anathema to federal politicians during the first 50 years after Confederation and that many believe was introduced as a temporary wartime measure has come to be the dominant source of federal government revenue. Indeed, its creation and most dramatic expansion occurred during periods of war.

While the late 20th century saw a series of reforms that resulted in a reduction in the number brackets, a lowering of rates and a broadening of the base, recent federal tax policy has taken the first steps toward both higher rates and more brackets.

Report an error
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter