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Kim Moody: Canada needs a personal tax system that competes on a rate basis with that of the U.S.
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Canada’s personal tax rates are too high, as many of us realize. There are numerous data sources that consistently put this country’s personal tax rates amongst the highest on Earth. Yes, there are countries with higher marginal personal rates, but there are many more that are lower. Most Canadians, however, are more often concerned about our largest and most important neighbour — the United States.
Why? Well, there is a tremendous amount of personal and economic exchange between Canada and the U.S. and this has a direct and indirect impact on Canadians’ economic prosperity. Canada used to be the U.S.’s largest trading partner, but it lost its top spot to China a few years back and the two countries have been jockeying for top spot ever since. However, Mexico has surpassed Canada in 2023 and China has slipped below Canada.
Canada is often in a battle for skilled labour to help maintain its high standard of living. That labour can include talent such as executives, engineers, tradespeople and, yes, even professional athletes. Canada is also in a battle for foreign investment to ensure it can create and maintain jobs through business expansion or the start-up of new businesses.
Personal taxation is not the only factor in the competition for skilled labour with its largest trading partner, but it certainly is an important one. High personal tax rates are also a drag on overall productivity and innovation. Having fertile grounds for good productivity and innovation are well-known attributes for success for job creators. But Canada’s gross domestic product and productivity are dropping at an alarming rate. Not good.
How does Canada compare to its southern neighbour when it comes to personal taxation? To illustrate this, I created four random scenarios described below. All scenarios involve a married couple who have two very young kids.
For the U.S., I chose a high-tax state (California) and a low-tax one (Florida). Similarly, I chose a high-tax province (Ontario) and a low-tax one (Alberta) for the Canadian tax calculations. Foreign currency differences were ignored since all I want to illustrate is the family’s taxation load in all cases.
The U.S. has a modified family taxation system that a married couple can choose to use, “married filing jointly” (MFJ), or not, “married filing single” (MFS). I’ve shown both scenarios. (Thanks to Peter Blomfield of Blomfield Tax for the U.S. calculations and Jay Goodis of Tax Templates Inc. for the Canadian calculations).
The scenarios are as follows:
- Scenario 1: Mom and dad each earn $65,000;
- Scenario 2: Mom and dad each earn $150,000;
- Scenario 3: Mom earns $350,000 and dad earns $150,000;
- Scenario 4: Mom earns $1 million and dad earns $65,000.
The family taxation load results are as follows:
- Scenario 1: California (both MFJ & MFS): 10.57 per cent; Florida (both MFJ & MFS): 7.02 per cent; Ontario: 16.72 per cent; Alberta: 17.13 per cent;
- Scenario 2: California (both MFJ & MFS): 22.94 per cent; Florida (both MFJ & MFS): 16.2 per cent; Ontario: 28.47 per cent; Alberta: 26.35 per cent;
- Scenario 3: California MFJ: 30.03 per cent; MFS: 30.54 per cent; Florida: MFJ: 22.27 per cent; MFS: 22.77 per cent; Ontario: 37.56 per cent; Alberta: 33.68 per cent;
- Scenario 4: California: MFJ: 39.26 per cent; MFS: 41.96 per cent; Florida: MFJ: 30.15 per cent; MFS: 31.95 per cent; Ontario: 47.31 per cent; Alberta: 42.44 per cent.
As you can see, the U.S. family taxation load in all scenarios is materially less than that in Canada. It is quite a bit lower when looking at the Florida scenarios.
For example, under Scenario 1, the combined federal and state tax for a Florida resident is 9.7 percentage points lower than that of an Ontario resident. In Scenario 4, it is 17.16 percentage lower. These are very significant differences. Yes, one can nitpick and criticize these simple scenarios, but suffice it to say that one would have to create a very rare scenario to have the U.S. family taxation load be higher than that in Canada. For those interested in reviewing the calculations, you can review them here.
Do higher personal taxation rates really impact Canada’s ability to compete? You bet it does. And it also causes successful and productive people to consider leaving Canada.
One of the first things the Liberals did when they came to power in 2015 was create a new top-end personal tax bracket, effective as of 2016. They introduced it with the awful speaking point of “we’re asking (high-income earners) to pay just a little bit more.” You can quickly appreciate why that phrase is offensive when you understand how much high-income earners already pay as a percentage of the whole.
The high personal tax rates and the continued threat of more targeted increases (such as the threat of the introduction of a wealth tax, capital gains inclusion rate increases and the recent horrible amendments to the alternative minimum tax) have also contributed to the significant amount of high-income earning Canadians to consider leaving Canada.
In my practice, the number of files I have worked on in the past five years for Canadians who are exploring leaving (or have now left) has far exceeded the cumulative number of files in my entire 30-year career to that point.
The actual number of Canadians leaving is small compared to the recent number of immigrants, but it is the outsized amount of wealth, income and loss of future tax revenues associated with that small number of highly productive Canadians that is scary.
Inevitably, whenever I lecture or write about the number of successful Canadians exploring or leaving Canada, I get rebuttals (mostly from academics and government bureaucrats) that I’m exaggerating. I’m not. And I challenge such people to provide their evidence to rebut my practical experience.
Canada needs to compete strongly for skilled talent and help create a fertile ground for successful businesses.
Having a personal tax system that competes on a rate basis with that of the U.S. would be a great start.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.
