Canada's Tax Code Punishes Work and Rewards Wealth Hoarding: Four Reforms That Would Actually Fix It
A Toronto lawyer earning $180,000 keeps 47 cents of every additional dollar after federal and provincial tax. A Toronto landlord holding six rental properties for thirty years can sell the portfolio, trigger a $4 million capital gain, and keep half of it free from the capital gains inclusion (though still subject to marginal income tax on the included portion). The person who showed up and did the work pays more. The person who sat on appreciating assets pays less.
This is not a glitch. The Income Tax Act has grown from six pages at its inception in 1917 to over 1,400 pages today, has been systematically engineered to favour passive wealth accumulation over earned income. The last comprehensive review was the 1966 Carter Commission, which recommended treating "a buck as a buck" regardless of source. Every government since has ignored that principle in favour of boutique credits, carve-outs, and complexity that rewards those who can afford planners to exploit it. The predictable result: Canada's productivity has lagged the G7 for years, the tax gap sits in the billions annually, and the marginal effective tax rate on new capital investment remains high enough to make scaling a business economically irrational for many owners.
Four structural changes would reverse this without blowing up the revenue base.
Flatten and broaden personal income tax
The current top combined rate exceeds 53% in Ontario, Quebec, and Nova Scotia. At income levels above $150,000, someone working for salary pays this rate while someone living off dividend income from a holding company pays a lower effective rate on the same economic gain. Broaden the base by eliminating most personal deductions except for true costs of earning income (childcare, moving expenses for work), then flatten the rate structure into two or three brackets with a top rate around 35%. The revenue loss from rate reduction gets recovered by closing loopholes and including more forms of gain in the base. The efficiency gain comes from reducing the incentive to convert salary into dividends, defer income, or hide in small-business structures to stay under the $500,000 threshold that qualifies for the 9% federal rate.
Equalize capital gains inclusion
The proposed increase to 66.7% inclusion rate for capital gains over $250,000 was cancelled in January 2025 and did not take effect; the rate remains 50% for all individuals in 2026. At the 50% inclusion rate, half of capital gains are excluded from the taxable income base, reducing the effective tax burden on investment income. Make the inclusion rate 100% and eliminate the exemption. A dollar of gain is a dollar of income. The objection that this would hammer retirees selling homes collapses when you remember the principal residence exemption already exists and covers most homeowners. The people this would actually affect are those holding multiple properties, investment portfolios, or business interests where the gain represents real economic income that currently escapes a third of its tax burden.
Eliminate the small business deduction cliff
The current system gives the first $500,000 of qualifying business income a 9% federal rate, then jumps to 15% above that threshold. The result is businesses that deliberately stay small, split income across family members, or create multiple corporations to multiply access to the low rate. This is productivity poison. Replace the cliff with a gradual phase-out over a wider income band, or better yet, eliminate the distinction entirely and apply one corporate rate to all active business income. Pair it with accelerated depreciation for capital investment to reward companies that reinvest rather than those that game the threshold.
Shift revenue toward consumption
Canada leans harder on personal income tax than most OECD peers, who rely more on value-added taxes like the GST. Raise the GST by two points and use the revenue to fund the rate reductions above. Consumption taxes are regressive, but they are also harder to avoid, easier to administer, and do not punish the decision to work an extra shift or take a promotion. Low-income households can be protected through refundable credits delivered outside the tax system.
The Carter Commission was right in 1966. A buck is a buck. The tax code since then has been a fifty-year exercise in pretending it isn't.
A Toronto lawyer earning $180,000 keeps 47 cents of every additional dollar after federal and provincial tax. A Toronto landlord holding six rental properties for thirty years can sell the portfolio, trigger a $4 million capital gain, and keep half of it free from the capital gains inclusion (though still subject to marginal income tax on the included portion). The person who showed up and did the work pays more. The person who sat on appreciating assets pays less.
This is not a glitch. The Income Tax Act has grown from six pages at its inception in 1917 to over 1,400 pages today, has been systematically engineered to favour passive wealth accumulation over earned income. The last comprehensive review was the 1966 Carter Commission, which recommended treating "a buck as a buck" regardless of source. Every government since has ignored that principle in favour of boutique credits, carve-outs, and complexity that rewards those who can afford planners to exploit it. The predictable result: Canada's productivity has lagged the G7 for years, the tax gap sits in the billions annually, and the marginal effective tax rate on new capital investment remains high enough to make scaling a business economically irrational for many owners.
Four structural changes would reverse this without blowing up the revenue base.
Flatten and broaden personal income tax
The current top combined rate exceeds 53% in Ontario, Quebec, and Nova Scotia. At income levels above $150,000, someone working for salary pays this rate while someone living off dividend income from a holding company pays a lower effective rate on the same economic gain. Broaden the base by eliminating most personal deductions except for true costs of earning income (childcare, moving expenses for work), then flatten the rate structure into two or three brackets with a top rate around 35%. The revenue loss from rate reduction gets recovered by closing loopholes and including more forms of gain in the base. The efficiency gain comes from reducing the incentive to convert salary into dividends, defer income, or hide in small-business structures to stay under the $500,000 threshold that qualifies for the 9% federal rate.
Equalize capital gains inclusion
The proposed increase to 66.7% inclusion rate for capital gains over $250,000 was cancelled in January 2025 and did not take effect; the rate remains 50% for all individuals in 2026. At the 50% inclusion rate, half of capital gains are excluded from the taxable income base, reducing the effective tax burden on investment income. Make the inclusion rate 100% and eliminate the exemption. A dollar of gain is a dollar of income. The objection that this would hammer retirees selling homes collapses when you remember the principal residence exemption already exists and covers most homeowners. The people this would actually affect are those holding multiple properties, investment portfolios, or business interests where the gain represents real economic income that currently escapes a third of its tax burden.
Eliminate the small business deduction cliff
The current system gives the first $500,000 of qualifying business income a 9% federal rate, then jumps to 15% above that threshold. The result is businesses that deliberately stay small, split income across family members, or create multiple corporations to multiply access to the low rate. This is productivity poison. Replace the cliff with a gradual phase-out over a wider income band, or better yet, eliminate the distinction entirely and apply one corporate rate to all active business income. Pair it with accelerated depreciation for capital investment to reward companies that reinvest rather than those that game the threshold.
Shift revenue toward consumption
Canada leans harder on personal income tax than most OECD peers, who rely more on value-added taxes like the GST. Raise the GST by two points and use the revenue to fund the rate reductions above. Consumption taxes are regressive, but they are also harder to avoid, easier to administer, and do not punish the decision to work an extra shift or take a promotion. Low-income households can be protected through refundable credits delivered outside the tax system.
The Carter Commission was right in 1966. A buck is a buck. The tax code since then has been a fifty-year exercise in pretending it isn't.
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