C.D. Howe Institute Calls for Major Tax Reform to Boost Canada's Economy
A comprehensive overhaul of Canada's tax system is urgently needed to stimulate investment, raise wages, and restore the country's global competitiveness, according to a new report released this week by the C.D. Howe Institute. The report highlights that Canada has experienced a decade of virtually stagnant per-capita growth, making tax reform a critical priority for economic revitalization.
Proposing a "Big Bang" Tax Reform
In the report titled "'Big Bang' Tax Reform: Unleashing Growth in the Canadian Economy," authors Jack Mintz, Alexandre Laurin, and Nicholas Dahir propose a sweeping, revenue-neutral reform designed to fundamentally restructure Canada's federal tax system. Their framework aims to reduce reliance on income taxes, simplify compliance and administration, modernize corporate taxation, and remove barriers that discourage capital formation and work effort.
Tax reform cannot come soon enough, as it has 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 guiding the tax system, emphasizing fairness, simplicity, and economic efficiency.
While there have been some major structural tax changes since then, the last comprehensive tax reform occurred in 1987, nearly 40 years ago. Since then, tax changes have tended to focus on select areas, such as the 1991 sales tax reform that introduced the goods and services tax (GST) or the major changes to private company taxation in 2017.
Key Recommendations for Personal Tax Reform
The report puts forward several major recommendations for personal tax reform, with a focus on lowering Canada's tax rates. Canadian federal and provincial governments rely disproportionately more on personal income taxes compared to other revenue sources. This increased reliance began after the Second World War. In 1965, governments collected less personal tax (5.8% of GDP) than sales and excise taxes (8.5%). The most recent figures, in 2023, put personal income taxes at 13% of GDP, making personal tax nearly twice the size of any other source of federal or provincial taxes.
Meanwhile, the top combined federal/provincial marginal tax rate is just over 53% in British Columbia, Ontario, and Quebec, and is higher than 50% in eight of ten provinces (it's 48% 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.
"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.
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.
Our current 2026 federal tax brackets are:
- Up to $58,523 of income (14%)
- Above $58,523 to $117,045 (20.5%)
- Above $117,045 to $181,440 (26%)
- Above $181,440 to $258,482 (29%)
- Anything above that taxed at 33%
The C.D. Howe Institute's report underscores the urgency of tax reform to address Canada's economic challenges and position the country for future growth in a competitive global landscape.
