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Canada is in dire need of major tax reform. Facing a decade of virtually stagnant per-capita growth, a comprehensive overhaul of our tax system is needed to stimulate investment, raise wages and restore Canada’s global competitiveness, according to a new report out this week from the C.D. Howe Institute.

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In “‘Big Bang’ Tax Reform: Unleashing Growth in the Canadian Economy,” the report’s authors, Jack Mintz, Alexandre Laurin and Nicholas Dahir, propose a sweeping, revenue-neutral “big bang” tax reform designed to fundamentally restructure Canada’s federal tax system. Their framework would reduce reliance on income taxes, simplify compliance and administration, modernize corporate taxation and remove barriers that discourage capital formation and work effort.

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Tax reform can’t come soon enough. After all, it’s been 60 years since the last comprehensive review of Canada’s tax system, the Royal Commission on Taxation — often referred to as the Carter Commission — was published in 1966. Chaired by Kenneth Carter, the commission undertook a massive, multi-year study into the fundamental principles that guide our tax system. The commission’s multi-volume report set out a broad framework for tax reform that emphasized fairness, simplicity and economic efficiency.

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And, while we have had some major structural tax changes since then, the last comprehensive tax reform occurred in 1987, almost 40 years ago. Since then, tax changes have tended to focus on select areas of tax, such as the 1991 sales tax reform that brought in the goods and services tax (GST) or the major changes to private company taxation introduced in 2017.

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Let’s take a look at a couple of the major recommendations for personal tax reform put forward by the Institute.

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Lower Canada’s tax rates

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Canadian federal and provincial governments rely disproportionately more on personal income taxes compared with other revenue sources. This increased reliance began after the Second World War. In 1965, governments collected less personal tax (5.8 per cent of GDP) than sales and excise taxes (8.5 per cent). The most recent figures, in 2023, put personal income taxes at 13 per cent of GDP, making personal tax nearly twice the size of any other source of federal or provincial taxes.

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Meanwhile, the top combined federal/provincial marginal tax rate is just over 53 per cent in British Columbia, Ontario and Quebec, and is higher than 50 per cent in eight of ten provinces (it’s 48 per cent in Alberta and Saskatchewan). The top tax rate is generally applied at income levels about 2.8 times the average wage, while the United States applies its top rate at an income level of 8.8 times the average wage.

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“Canada’s high marginal tax rates on middle- and upper-income earners discourage work, risk-taking, and the retention of talent — precisely when stronger growth is needed,” said Mintz.

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As a result, the report proposes reforming the federal personal income tax schedule to compress marginal tax rates at higher income thresholds while maintaining the government’s recent reduction in the lowest tax bracket, since rate reductions are more economically effective at higher income levels.

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Our current 2026 federal tax brackets are: up to $58,523 of income (14 per cent); above $58,523 to $117,045 (20.5 per cent); above $117,045 to $181,440 (26 per cent); above $181,440 to $258,482 (29 per cent), with anything above that taxed at 33 per cent.