Fred O’Riordan is the national tax policy leader at EY Canada and a former assistant commissioner of appeals at the Canada Revenue Agency.
To convince Canadians the proposed increase in the capital-gains inclusion rate from half to two-thirds is needed to improve “tax fairness,” the Liberal budget used the following comparison:
“A nurse in Ontario earning $70,000 would face a combined federal-provincial marginal tax rate of 29.7 per cent. In comparison, a wealthy individual in Ontario with $1-million of income would face a marginal tax rate of 26.8 per cent on their capital gains. Differences in taxation rates between income earned from wages, capital gains, and dividends currently favour the wealthiest among us.”
Finance Minister Chrystia Freeland has since repeated the parable of the nurse and the millionaire in the days following the tabling of the budget. This comparison is only true in the very narrowest sense and thus requires clarity.
Canada’s capital-gains tax change continues decades-old debate over economic growth and tax fairness
Here is a more complete and accurate comparison of the tax treatment of these two individuals. In the case of the nurse earning $70,000 pretax, assuming all income was earned from employment and none from capital gains, combined federal-Ontario income taxes would amount to $12,591, for an average tax rate of 17.99 per cent and a marginal tax rate of 29.7 per cent, as the federal budget stated. Had any capital gains been earned and declared, the marginal tax rate on those earnings would have been 14.83 per cent (since only half would be subject to tax at the nurse’s marginal tax rate).
Now let’s turn to the tax treatment of the wealthy individual earning $1-million pretax. Assuming all income was earned from employment and none from capital gains, this individual would pay combined federal-Ontario income taxes of $491,952 at a marginal tax rate of 53.53 per cent, resulting in an average tax rate of 49.2 per cent, compared with the nurse’s 17.99 per cent. If some of the individuals’ earnings were in the form of capital gains, the marginal tax rate on those gains would be 26.76 per cent for the high-income earner and only 14.83 per cent for the nurse. It is hard to see how this taxation model is unfair, or how this currently favours the wealthiest of Canadians, as the budget claims.
Some critics might say this comparison is inaccurate because wealthy individuals use aggressive tax planning strategies to avoid actually remitting anywhere near the “fair share” they are legally liable to pay. And because of taxpayer confidentiality rules, we can’t see how much they actually pay.
I would direct those critics to Statistics Canada, where aggregate tax data from the Canada Revenue Agency are periodically published. The latest available data are for the 2021 taxation year. In 2021, 29,260 tax filers constituting the top 0.1 per cent of income earners in Canada earned an average income of $2,086,100. They paid an average of $911,600 in income taxes, resulting in an average tax rate of 43.7 per cent.
No one would argue that a nurse earning $70,000 in income should pay 43.7 per cent of that income in tax. That would not be fair by anyone’s metric. But I wonder if Canadians – including that nurse in particular – realize that on average, “the wealthy” actually do pay this much income tax? And if they did know this, would they still think that the rich don’t pay their fair share and should be asked to pay “just a little bit more”?
The top 0.1 per cent of all tax filers paid almost 9 per cent of all income taxes in Canada in 2021, while earning only 3.7 per cent of all income. The top 1 per cent paid 22.5 per cent of all income taxes while earning 10.4 per cent of all income and the top 10 per cent paid 54.4 per cent of all taxes while earning 34 per cent of all income. These statistics reflect Canada’s steeply progressive marginal tax rates that are imposed at relatively modest income threshold levels in comparison with countries like the United States, Britain and Australia.
Critics who believe the richest 0.01 per cent of individuals earned most of their income from capital gains on passive investments might be surprised to learn instead that they earned almost two-thirds of their total income from wages and salaries. This suggests there is no “leisure class” in Canada. We are all “working class.”
With that last simple fact in mind, perhaps instead of just having the backs of “the middle class and those working hard to join it,” a more just and inclusive federal government should have the backs of all the working class and those working hard to retire and leave it.