A Short History of Canadian Income Taxation

A little known secret about me is that I had a strong interest in history. Indeed before I majored in Political Science (my first degree is in poli sci, the remainder are in economics), I majored in Canadian history. I am one of those odd people who find Canadian history really interesting. When I started studying taxes, one of the first things I did was get a good understanding of our tax history and I thought I would do a short summary of income taxation in Canada for you.

Income tax was not imposed federally until 1917 when it was imposed as a temporary measure to help finance WWI.  The legislation, which was embodied in the Income War Tax Act, was relatively simple document of some ten pages in length (I even had a copy in my office). The provisions were effective September 20, 1917 and implemented a 4% on all income of single men over $2,000. For others, the personal exemption was $3,000. For those Canadians with annual incomes of more than $6,000, the tax rate ranged from 2 to 25 per cent.  Because of what were in fact high exemptions for the time, only about 2-8% of individuals had to file tax returns during this initial tax period. Indeed, in 1934, only 199,000 people paid income tax which represented just under 2% of the total population.

In 1948, the Income Tax Act was passed.  It was similar to the Income War Tax Act but was double in size (20 pages). By this time, there were ten different federal tax brackets which ranged from 15% to 84% and far more people were now paying income taxes (17% of the population).

A major reform of federal income tax legislation began in 1962 with the establishment of the Royal Commission on Taxation under Kenneth Carter (Carter Commission).  The Carter Commission presented its 7-volume report in 1967 recommending fundamental changes in tax legislation that would use a comprehensive tax base.  This culminated in the budget address of June 18, 1971 that proposed Bill C-259 to amend the Income Tax Act that became effective Jan. 1 1972.  The number of brackets peaked at 14 in 1973 and ranged from 4.58% to 61.34% and by then 37% of the population where paying taxes. The result was a considerable change in taxation in Canada and since that date, every budget address has presented a considerable number of amendments to the tax legislation.

Another major tax reform took place in 1987, the key change of which was to reduce the number of tax brackets which numbered nine at the time to three. In addition, tax rates were only indexed to inflation over 3% (this resulted in no change to brackets or benefits between 1991 and 1999 due to low but not 0 inflation – hence bracket creep).  In 1991, the GST was introduced.

Finally, substantial tax changes took effect in 2000 including the provincial moving away from the tax on tax system to one where they tax income directly and tax rates and benefits became fully indexed to inflation. The number of federal tax brackets was increased from three to four and by 2006 nearly 50% of the population of Canada paid income taxes.

As of 2010, the federal Income Tax Act alone amounts to 2,847 pages and is one of the worst books every written. There are also the federal Income Tax Regulations and they amount to 1,339 pages. Taxation in Canada is now a very complex system and few Canadians seem to understand it.