Contents
Executive Summary / i
Introduction / 1
1. Changes to Canada’s Statutory Marginal Income Tax
Rates on Labour Income / 3
2. Statutory Marginal Income Tax Rates in Canada Compared to
the United States / 17
3. Statutory Marginal Income Tax Rates in Canada Compared to
OECD countries / 27
4. Tax Rate Increases Do Not Generate the Expected
Government Revenue / 31
Conclusion / 34
References / 35
Acknowledgments / 42 About
the authors / 41 Publishing
information / 43
Supporting the Fraser Institute / 44 Purpose,
funding, and independence / 44 About the
Fraser Institute / 45
Editorial Advisory Board / 46
Executive Summary
In December 2015, Canada’s new Liberal government introduced changes
to Canada’s personal income tax system. Among the changes for the 2016
tax year, the federal government added a new income tax bracket, rais- ing
the top tax rate from 29 to 33 percent on incomes over $200,000. This
increase in the federal tax rate is layered on top of numerous recent prov-
incial increases. Starting with Nova Scotia in 2010, through 2019 at least
one Canadian government has increased the top personal income tax
rate in every year except 2011 and 2019. Over this period, seven out of 10
provincial governments increased tax rates on upper-income earners. As a
result, the combined federal and provincial top personal income tax rate
has increased in every province since 2009.
The largest tax hike has been in Alberta, where the combined top
rate increased by 9 percentage points (or percent), in part because
the new rates were added to a relatively low initial rate. In Ontario, the
combined top rate increased by percentage points (or percent); in
Quebec it increased by percentage points (or percent).
These increases have important consequences for Canada’s economy.
In particular, high and increasing marginal tax rates—that is, the tax rate
on the next dollar earned—discourage people from engaging in productive
economic activity, ultimately hindering economic growth and prosperity.
This occurs because marginal tax rates reduce the reward of earning more
income and, in the case of personal income taxes, more labour income.
There is general agreement in the economic literature on this point; the
debate is about the magnitude of the effect.
The federal and provincial increases to Canada’s marginal income tax
rates from 2009 to 2019 have put the country at a greater competitive
disadvantage for attracting and retaining skilled labour and, less directly,
investment and entrepreneurs. Even before the changes, the country’s
combined federal and provincial top marginal tax rates compared un-
favourably to those in the United States and other industrialized countries.
Out of 61 Canadian and US jurisdictions (including the provinces,
states, and Washington, DC), Nova Scotia currently has the highest com-
bined top statutory marginal rate ( percent), followed by Ontario
( percent), and Quebec ( percent). Nine Canadian provinces
occupy the list of 10 jurisdictions with the highest top combined marginal
income tax rates and all provinces are in the top 13. There are a total of 48
US jurisdictions with combined top tax rates that are lower than all Can-
adian provinces.
The fact that Canada’s top tax rates are often applied to lower levels
of income than is the case in other countries further erodes our tax com-
petitiveness. To adjust for differences in income thresholds, we compare
the combined statutory marginal tax rates at various income levels in
Canadian dollars for each Canadian and US jurisdiction. At an income of
CA$300,000, the highest threshold (with the slight exception of Alberta)
in which a Canadian combined top rate is applied, Canadians in every
province face a higher marginal income tax rate than Americans in any
US state. Results are the same at an income of CA$150,000 and Canada’s
marginal tax rates are also uncompetitive at incomes of CA$75,000 and
CA$50,000.
Taken together, Canada’s personal income tax rates are decidedly
uncompetitive compared to those in the United States. And, Canada also
competes with other industrialized countries for highly skilled workers
and investment. To measure the competitiveness of Canada’s top tax rates,
the study compares the combined top statutory marginal income tax rates
with rates in 36 industrialized countries. In 2018 (latest year of available
international data) Canada had the 7th highest combined top tax rate out
of 36 countries. The federal change to the top rate in 2016 has markedly
worsened Canada’s competitive position. For instance, Canada had the
13th highest combined tax rate in 2014, before the changes in the federal
top rate.
Canadian governments have put the country in this uncompeti-
tive position in part to raise more revenue as they grapple with persistent
deficits and mounting debt. However, the tax increases are unlikely to
raise as much revenue as governments expect since taxpayers—particu-
larly upper-income earners—tend to change their behaviour in response
to higher tax rates in ways that reduce the amount of tax they might pay.
Federal and provincial governments would do well to consider reversing
the trend towards higher marginal tax rates on upper-income earners, and
lower personal income tax rates.
Introduction
In December 2015, Canada’s new Liberal government introduced changes
to Canada’s personal income tax system. Specifically, for the 2016 tax year,
the federal government added a new personal income tax bracket, raising
the top tax rate from 29 to 33 percent on incomes over $200,000. It also
reduced the marginal tax rate on incomes between $45,000 and $90,000
(from to percent).
The federal government’s tax rate hike is part of a recent trend that
has seen Canadian governments increasing personal income tax rates on
upper-income earners. Starting with Nova Scotia in 2010, through 2019 at
least one Canadian government has increased the top personal income tax
rate in every year except 2011 and 2019. Over this period, seven out of 10
provincial governments increased tax rates on upper-income The
federal tax changes are therefore being layered on top of numerous recent
provincial increases in tax rates. As a result, the combined federal and
provincial top personal income tax rate has increased in every province
since 2009.
These increases, which partly motivated by a desire for higher
revenues and concerns over income inequality,2 have important conse-
quences for Canada’s economy. In particular, high and increasing mar-
ginal tax rates—that is, the tax rate on the next dollar earned—discourage
people from engaging in productive economic activity, ultimately hin-
dering economic growth and This occurs because marginal
1 For some provinces, the tax changes have been erratic over the period. For example,
the government of British Columbia is among the provincial governments that
increased personal income tax rates on upper-income earners. However, unlike those
in many other provinces, this tax increase was temporarily rescinded. Specifically, the
BC government created a new temporary personal income tax bracket with a higher
top income tax rate in 2014. It was then removed for the 2016 tax year. Yet in 2018, the
newly elected BC government restored the (higher) top tax bracket.
2 However, a simulation by Milligan and Smart (2015) suggests that increasing top
provincial income tax rates by five percentage points would have only a small effect on
the share of income earned by the top 1 percent of income earners.
3 A series of studies led by Bev Dahlby have estimated the cost to society of raising
tax rates reduce the reward of earning more income and, in the case of
personal income taxes, more labour income. There is general agreement in
the economic literature on this point; the debate is about the magnitude of
the
The federal and provincial increases to Canada’s personal income tax
rates from 2009 to 2019 have put Canada at a greater competitive
disadvantage for attracting and retaining skilled labour and, less directly,
investment and entrepreneurs. Even before the changes, the country’s
combined federal and provincial top marginal tax rates compared un-
favourably with those in the United States and other G7 countries (Mur-
phy, Clemens, and Veldhuis, 2013), and this disparity was magnified when
the US engaged in a significant tax reform in late 2017. The fact that Can-
ada’s top tax rates are often applied to lower levels of income than in other
countries further erodes competitiveness. Worse still, the tax increases are
unlikely to raise as much revenue as governments expect since taxpayers—
particularly upper earners—tend to change their behaviour in response to
higher tax rates in ways that reduce the amount of tax they pay (Lafleur,
Palacios, and Emes, 2015).
This paper is divided into four sections. The first explains in more
detail the changes to Canadian top personal income tax rates since 2009.
The second section explores how Canada’s top rates compare to those
of the United States—including a brief discussion of corporate income
taxes as well—while the third section compares Canada to other OECD
countries. The final section discusses how the tax increases are unlikely to
provide as much government revenue as expected.
an additional dollar of government revenue, referred to as the marginal cost of public
funds. In a recent study, Dahlby and Ferede (2012), using data from 1972 to 2006,
estimated that the marginal cost of public funds from raising one dollar of personal
income tax ranged from in Alberta to in Quebec.
4 For reviews of the literature on the economic impact of taxes, see Gale and
Samwick, 2014; Speer, Palacios, and Ren, 2014; Murphy, Clemens, and Veldhuis, 2013;
and Palacios and Harischandra, 2008. For a textbook discussion of Canada’s income
tax system and its impact on labour supply, savings, and other economic decisions, see
Rosen, Wen, and Snodden, 2012.
1. Changes to Canada’s
Statutory Marginal Income Tax
Rates on Labour Income
The discussion in this publication focuses on three aspects of tax
First is the statutory rate, which is the tax rate before accounting for the
deductions and various tax credits that an individual tax filer claims. This
can differ from the effective tax rate that people actually pay. Second, the
discussion focuses on marginal tax rates, as opposed to average tax rates,
because of the important role that the marginal tax rate plays in decision
making (Murphy, Clemens, and Veldhuis, 2013).6 An individual gener-
ally decides to engage in additional work based on the extra or marginal
benefit that the additional work could provide. A higher marginal benefit
encourages someone to engage in additional work. Those given the oppor-
tunity to work more and earn more labour income are discouraged from
doing so when a significant portion of their increased income is consumed
by taxes. Third, the discussion focuses on statutory and marginal tax rates
applied to labour This is opposed to corporate income or invest-
ment income from capital gains and dividends, which are taxed at different
rates, although the tax rates on capital gains and dividends are affected by
personal income tax rates. Notwithstanding our focus on the taxation of
labour income, we still include a brief discussion of corporate taxation in
section 2 because of the significant reduction in the US corporate income
5 All of the tax rates are adjusted for surtaxes and the Quebec abatement where
appropriate. The federal abatement means that Quebecers pay less in federal taxes
than other provinces. The abatement exists as part of an arrangement that allows
provincial governments to opt out of certain federal-provincial programs. For more
details, see Canada, Department of Finance, 2016.
6 For example, a study by Romer and Romer (2014) found that changes to the
marginal rate in the years between World War I and World War II on those earning
the highest income had a statistically significant impact on reported income and on
business formation.
7 It is beyond the scope of this paper to measure total tax competitiveness, which
would include other forms of taxes including corporate income taxes, payroll taxes,
and sales taxes.
tax rate in late 2017, coupled with a trend of increases in Canadian corpor-
ate tax rates.
Although the entire tax structure is important for tax competitive-
ness, key metrics for assessing the competitiveness of a jurisdiction’s
personal income tax system are middle and upper marginal rates, and par-
ticularly the top (highest) marginal tax rate. Upper-income earners tend to
be highly skilled professionals, and often mobile internationally, so attract-
ing and retaining them is important for a country’s economic performance
and These workers include the country’s doctors, engineers,
lawyers, and senior The rest of this section examines changes
to Canadian personal income tax rates since 2009, with a particular focus
on the top tax rates.
Changes in federal and provincial
marginal personal income tax rates since
2009
In recent years, there have been a number of important changes to federal
and provincial personal income tax rates across Canada. The most notable
trend is for provincial governments, and now the federal government, to
8 University of Calgary professor Jack Mintz recently expressed a concern that
Canada’s weakening Canadian dollar and higher tax rates could contribute to a
“brain drain” of highly productive Canadian workers leaving for other jurisdictions,
particularly the United States (Mintz, 2016, January 13). Canada has a history of
losing productive workers to the United States. A Statistics Canada study found that
emigrants to the United States in the 1990s were overrepresented among Canadians
who were well educated, of prime working age, and had a higher income (Zhao, Drew,
and Murray, 2000). In addition, Wagner (2000) finds that Canadians who had the most
to gain from higher income or tax savings by moving to the United States were more
likely to do so. Moreover, empirical research suggests that tax rates play an important
role in attracting highly skilled labour. For example, Kleven, Jacobsen, Landais, and
Saez (2013) provide evidence that the average and top (marginal) personal income tax
rate and social security tax rates play a statistically significant role in attracting foreign
professional soccer players to top leagues in 14 Western European countries. The
effect was particularly strong for high quality players, defined as players who had been
selected for national teams at least once in their career. In a separate study, Akcigit,
Baslandze, and Stantcheva (2015) identify “superstar” inventors based on patent
citation data in eight countries (including Canada and the United States) from 1977
to 2000 and find that their tendency towards international migration was significantly
influenced by the effective top marginal tax rate.
9 Of the top 1 percent of income earners in 2011, percent are in medicine,
percent in law and jurisprudence, percent in general business/commerce,
and about percent in general engineering, civil engineering, and mechanical
engineering (Lemieux and Riddell, 2015).
create an additional personal income tax bracket with a new, higher tax
rate applied to upper income earners. Table 1 summarizes these changes
from 2009 to 2019.
Most increases in the personal income tax since 2009 have come in
the form of new income tax brackets with higher tax rates. The exception
is New Brunswick, where the provincial government initially lowered, then
raised, tax rates for every income tax bracket. New Brunswick once again
reduced tax rates on upper-income earners in 2016, yet each of the
province’s tax rates are higher than they were in Some tax rates in
other jurisdictions, however, have been reduced over the years. For ex-
ample, Ontario’s lowest rate was reduced from to percent in 2010
and the federal government enacted a reduction in 2016, decreasing the
percent rate to percent. But most tax changes have brought new,
higher tax rates.
Nova Scotia started the trend of increasing marginal tax rates on
upper income earners in 2010 when it added a provincial income tax
bracket with a tax rate of percent applied to incomes over $150,000.
The previous top personal income tax rate was percent on incomes
over $93,000. Canada’s two most populous provinces, Ontario and Que-
bec, enacted similar changes in 2012 and 2013, respectively. Ontario’s top
provincial income tax rate (including surtaxes) is currently percent
for incomes over $220,000, compared to the previous rate of percent
on incomes over $78,370 in 2011. Although Quebec’s statutory provincial
tax rates are not directly comparable because of the federal abatement,
the Quebec government has introduced a new rate of percent for
incomes over $100,000 in 2013 and over $106,555 in 2019 (in 2012, the tax
rate was percent on incomes over $80,200).11
In 2016, the federal government created a new top federal tax rate of
33 percent on incomes over $200,000, whereas the previous top rate was
29 percent on incomes above approximately $140,000.
The only provinces that did not enact changes to the top provincial
personal income tax rates (or make any other changes to provincial tax
rates) during this period were Manitoba and Prince Edward Island (see
table 1). Furthermore, Saskatchewan also bucked the trend because its
changes effective July 1, 2017 were to reduce personal income tax rates by
a half percentage point across all brackets.
10 Personal income tax rates in New Brunswick have been remarkably volatile, with
changes in provincial tax rates almost every year starting in 2009.
11 The federal abatement results in Quebecers paying less in federal taxes than other
provinces. A direct comparison between statutory provincial rates, without adjusting
for the abatement, can be misleading in terms of judging the differences in tax rates
paid in Quebec versus other provinces.
In 2014, the British Columbia government added a new, temporary personal income-
tax bracket with a tax rate that is higher than the previous top income-tax bracket.
The new tax bracket was % applied to incomes over $150,000. This tax bracket
was eliminated for the 2016 tax year and the top tax rate returned to its previous
level. But in 2018, the new elected British Columbia government reverted this tax
rate cut and added back the tax bracket of %, which was applied to incomes
over $150,000.
British Columbia
In 2017, the Saskatchewan government reduced each personal income tax bracket by
percentage points effective July 1, 2017. The three tax brackets now have tax rates
of %, % and % respectively.
Saskatchewan
In 2010, the Ontario government reduced its lowest income tax rate from % to
%. In 2012, the Ontario government added a new personal income tax bracket
with a rate that is higher than the previous top personal income tax bracket. The
new top rate was % and applied to income over $500,000. In 2014, the income
threshold for this rate was lowered to $150,000 and another personal income tax
bracket was added with a rate of % applied to income over $220,000.
Ontario
Table 1: Summary of Recent Changes to Canada's Personal Income
Tax Rates,1 Federal and Provincial, 2009 to 2019
Jurisdiction Summary
Federal The federal government created a new personal income tax bracket in 2016 with an
income tax rate that was higher than the previous top income tax bracket. The new
tax bracket had a tax rate of % and was applied to incomes over $200,000. In
2016, the federal government also reduced the personal income tax rate on incomes
between $45,000 and $90,000 from % to %.
Alberta In 2015, the Alberta government eliminated the single tax rate of %, creating
a total of five separate rates. The new personal tax rate structure starting in 2016
was as follows: 10% on income not exceeding $125,000; 12% on income between
$125,000 and $150,000; 13% on income between $150,000 and $200,000; 14% on
income between $200,000 and $300,000; and 15% on income over $300,000.
Manitoba No changes.
Quebec In 2013, the Quebec government added a new personal income tax bracket with a
rate that is higher than the previous top tax bracket. The new top tax rate was %
applied to income over $100,000. In 2017, the Economic Plan Update announced
that the tax rate for the lowest tax bracket would be reduced from 16% to 15%, retro-
actively to January 1, 2017.
From 2008 to 2011, the New Brunswick government lowered the personal income
tax rate for each of the income tax brackets. However, in 2013 the New Brunswick
government partly reversed these tax rate cuts. For example, the top tax rate went
down from % in 2008 to % in 2010 and then back to % by 2014. In
2015, the government added two new tax brackets with tax rates that were higher
than the previous top tax bracket. The rates for the new tax brackets were %
New Brunswick2
Table 1: Summary of Recent Changes to Canada's Personal Income
Tax Rates,1 Federal and Provincial, 2009 to 2019
Jurisdiction Summary
and % for incomes over $150,000 and $250,000 respectively. Retroactively as
of Jan. 1, 2016, the top tax bracket was removed and the new top rate was % on
incomes over $150,000.
Nova Scotia In 2010, the Nova Scotia government added a new tax bracket with a tax rate that
was higher than the previous top personal income tax bracket. The new tax bracket
had an income tax rate of % applied to income over $150,000. At the same time,
the Nova Scotia government removed its surtax, which effectively eliminated a tax
bracket and reduced the second highest tax rate from % to %.
Prince Edward Island
Newfoundland &
Labrador
Retroactive to January 1, 2018, one year earlier than originally plannned, Prince Ed-
ward Island’s basic personal amount increased to $9,160, and its spouse/equivalent
to spouse personal amount increased to $7,780.
Starting in 2010, the Newfoundland government decreased the tax rates for the top
and middle personal income tax brackets, from % to % and % to
%, respectively. However, in 2015, the Newfoundland government added two
new personal income tax brackets with tax rates higher than the previous top income
tax bracket. The lower of the two new tax brackets originally had a personal income
tax rate of % with a threshold of $125,000 and the higher new tax bracket had a
tax rate of % which was applied to incomes over $175,000. In 2016, these rates
increased to % and %, respectively. Additionally, the tax rates for the 1st
bracket increased to %, the second bracket became %, and the third bracket
increased to %. In 2017, all tax rates increased to %, %, %, %,
and %.
Notes:
1) Personal income tax rates include surtaxes where applicable.
2) The description of changes in New Brunswick starts in 2008 to include the full extent of the decrease in
personal income tax rates from 2008 to 2011.
3) Income brackets could be subject to inflation indexing.
Sources: CRA (2019); PwC (2009-2019); calculations by authors.
Table 2: Federal and Provincial Personal Income Tax Brackets Added
from 2009 to 20191 (Marked in Green)
Federal Manitoba Nova Scotia
$0 – $12,069 % $0 – $9,626 % $0 – $8,481 %
$12,069 – $47,630 % $9,626 – $32,670 % $8,481 – $29,590 %
$47,630 – $95,259 % $32,670 – $70,610 % $29,590 – $59,180 %
$95,259 – $147,667 % Over $70,610 % $59,180 – $93,000 %
$147,667 – $210,371 % Ontario2,3 $93,000 – $150,000 %
Over $210,371 % $0 – $10,582 % Over $150,000 %
British Columbia $10,582 – $43,906 %
$0 – $10,682 % $43,906 – $77,313 %
Prince Edward
Island2
$10,682– $40,707 % $77,313 – $87,813 %
$40,707 – $81,416 % $87,813 – $91,101 %
$0 – $9,160 %
$81,416 – $93,476 % $91,101– $150,000 %
$9,160 – $31,984 %
$93,476 – $113,506 % $150,000 – $220,000 %
$31,984 – $63,969 %
$113,506 – $153,900 % Over $220,000 % $63,969 – $98,997 %
Over $153,900 %
Quebec
Over $98,997 %
Alberta $0 – $15,269 % Newfoundland
$0 – $19,369 % $15,269 – $43,790 % & Labrador
$19,369 – $131,220 % $43,790– $87,575 % $0 – $9,414 %
$131,220 – $157,464 % $87,575 – $106,555 % $9,414 – $37,591 %
$157,464 – $209,952 % Over $106,555 % $37,591 – $75,181 %
$209,952– $314,928 %
New Brunswick $75,181 – $134,224 %
Over $314,928 %
$0 – $10,264 % $134,224 – $187,913 %
Saskatchewan $10,264 – $42,592 % Over $187,913 %
$0 – $16,065 % $42,592 – $85,184 %
$16,605 – $45,225 % $83,351 – $138,491 %
$45,225 – $129,214 % $138,491 – $157,778 %
Over $129,214 % Over $157,778 %
Notes:
1) Thresholds and rates are for the 2019 tax year. The federal and some provincial governments changed tax
rates in existing tax brackets in addition to adding new tax brackets. For example, the federal reduced its
second tax rate from % to % in 2016. New Brunswick and Newfoundland & Labrador are the only
provinces that increased tax rates in tax brackets that existed in 2009.
2) Includes surtax.
Sources: CRA (2019); Revenu Quebec (2019); calculations by authors.
Figure 1: Income above which the Top Personal Income Tax
Rate is Applied, by Jurisdiction, 2019
Alberta
Ontario
Federal
Newfoundland & Labrador
New
Brunswick Nova
Scotia British
Columbia
Saskatchewan
Quebec
Prince Edward Island
Manitoba
$314,928
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000
CA$
Note: Thresholds take into account surtaxes where applicable.
Sources: CRA (2019); Revenu Quebec (2019); calculations by authors.
Table 2 displays the personal income tax rates and brackets for the
federal and provincial governments in 2019. The tax brackets that have
been added since 2009 are marked in green. Alberta stands out for having
added four new income tax brackets, compared to the one or two added
by other jurisdictions. Previously, Alberta had the unique advantage within
Canada of a single, pro-growth tax rate of 10 The highest prov-
incial marginal tax rate in Alberta is now 15 percent, 50 percent higher
than the previous rate.
Another notable takeaway from table 2 is the variation in the thresh-
old above which the top personal income tax rates are applied. The thresh-
olds range from $70,610 in Manitoba to $314,928 in Alberta. The federal
threshold for the top income tax rate is $210,371. Figure 1 illustrates the
range of thresholds.
The thresholds at which tax rates are applied are important to con-
sider as part of assessing overall competitiveness. Simply comparing the
12 For a discussion of the advantages of a single personal income tax rate, see
Clemens, 2008.
$220,000
$210,371
$187,913
$157,778
$153,900
$150,000
$129,214
$106,555
$98,997
$70,610
Table 3: Provincial Statutory Marginal Tax Rates1 at Various
Income Levels, 2019
Marginal
tax rate
(%) at
$50,000
Marginal
tax rate
(%) at
$75,000
Marginal
tax rate
(%) at
$150,000
Marginal
tax rate
(%) at
$300,000
Number
of tax
bracket
s
British Columbia 6
Alberta 5
Saskatchewan 3
Manitoba 3
Ontario 7
Quebec2 4
New Brunswick 5
Nova Scotia 5
Prince Edward Island 4
Newfoundland & Labrador 5
Notes:
1) Personal income tax rates include surtaxes where applicable.
2) For comparability, the Quebec tax rates are adjusted downwards due to the federal abatement. The federal
abatement results in Quebecers paying less in federal taxes than other provinces. A direct comparison be-
tween statutory provincial rates, without adjusting for the abatement, can be misleading in terms of judging
the differences in tax rates paid in Quebec versus other provinces.
Sources: CRA (2019); Revenu Quebec (2019); calculations by authors.
top rate across jurisdictions can be misleading if the top tax rate in one
jurisdiction is applied to a much lower level of income. For example, con-
sider the case of Manitoba, where the provincial top rate is percent.
The rate considered on its own suggests that Manitoba’s top tax rate makes
its competitiveness mid-range among Canadian provinces. However, the
threshold for Manitoba’s top marginal rate is unusually low ($70,610).
Compare this to Nova Scotia, where the top provincial rate is considerably
higher ( percent) but the income threshold ($150,000) is more than
twice the highest threshold in Manitoba. So to give a specific example,
someone earning the relatively high income of $149,000 would face a
marginal tax rate of percent in Nova Scotia and an almost identical
percent in Manitoba, which shows that simply looking at top bracket
rates can give a misleading idea of the relative tax treatment among the
provinces.
For this reason, top tax rates alone are not precisely comparable
because they do not capture the marginal tax rate that people with equiva-
lent incomes face in the jurisdictions compared. A comparison of the
marginal rates at a particular income level helps mitigate this problem, al-
though it admittedly does not capture differences in tax credits and deduc-
tions, which can affect the effective tax rate. Nonetheless, the point is that,
when measuring the competitiveness of tax rates between jurisdictions,
as much as possible it is important to account for differences in income
thresholds when comparing marginal tax rates.
Table 3 compares marginal income tax rates across the provinces
at different income levels—$50,000, $75,000, $150,000, and $300,000.
The marginal rate at the $300,000 income level represents the top com-
bined marginal rate in every province except Alberta (see figure 1).13
This comparison at different income levels allows for an assessment of
the competitiveness of the various provincial income tax systems. For
example, marginal tax rates are the lowest in British Columbia at the
$50,000 and $75,000 income levels, and British Columbia’s marginal tax
rate at $150,000 is the third lowest. By contrast, the rates in Nova Scotia
are among the highest at each income level. Ontario is an interesting case
because the provincial marginal tax rates are relatively more competi-
tive at incomes of $50,000 and $75,000 but much less so at $150,000 and
$300,000.
Increases in combined federal and
provincial marginal income tax rates
While the federal government is responsible for administering the per-
sonal income tax system, both the federal and provincial governments
maintain their own structure of rates and thresholds for taxing personal
Because Canadians pay both federal and provincial taxes,
considering the tax rates separately does not capture the full extent of the
personal income taxes they pay. An analysis of tax competitiveness must
13 When Alberta’s new top rate was instituted in 2016, it was at the $300,000
threshold. Since then, the threshold for Alberta’s top income tax rate has risen to
$314,928 due to indexation (see table 2). We have decided to retain the clean $300,000
cutoff for our analysis in figure 1, even though it means we are actually only catching
the second highest tax bracket in Alberta by doing so.
14 Prior to 2000, provinces other than Quebec determined the income tax owed by
multiplying the provincial rate by the federal rate, a so-called tax-on-tax (Emes and
Walker, 2001). After 2000, provincial governments moved to the current system of tax
rates that are applied to taxable income rather than federal tax rates.
Table 4: Top Statutory Marginal Income Tax Rate,1 Provincial, Federal,
and Combined, 2009 and 2019
2009 2019
Top
provincia
l rate
Top
federa
l rate
Combine
d top
rate
Top
provincia
l rate
Top
federa
l rate
Combine
d top
rate
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec2
New Brunswick
Nova Scotia
Prince Edward Island
Newfoundland &
Labrador
Notes:
(1) Personal income tax rates include surtaxes where applicable.
(2) The federal personal income tax rate is lower in Quebec due to the Quebec Abatement, which is applied
because Quebec has opted out of various federal programs. For more information, see
fedprov/
Sources: CRA (2019); PwC (2009); Revenu Quebec (2019); calculations by authors.
account for both the federal and provincial tax rates. Since most of the in-
creases in personal income tax rates since 2009 have been to the top rate,
the focus of the discussion will be on the combined top
Table 4 shows all 10 top provincial personal income tax rates, the
federal top tax rate, and the combined federal-provincial top rates for 2009
and 2019. In 2009, the highest top combined personal income tax rate was
percent, in Nova Scotia, followed closely by percent in Que-
bec. Alberta had the lowest combined rate at percent. In 2019, up-
15 The combined marginal tax rates for incomes of $50,000 and $75,000 has
decreased in every province (except for Newfoundland & Labrador for incomes of
$50,000) from 2009 to 2019, largely due to the 2016 reduction in the federal income
tax rate applied to income between $45,000 and $90,000. The combined marginal
rate at $150,000 either increased or remained the same in each province, except for
Saskatchewan, where it decreased slightly by percent.
Figure 2a: Growth in Top Combined Statutory Marginal Income Tax
Rates from 2009 to 2019 (in Percentage Points)
Alberta
New
Brunswick
Ontario
Newfoundland & Labrador
British
Columbia
Nova
Scotia
Quebec
Prince Edward Island
Manitoba
Saskatchewan
0 1 2 3 4 5 6 7 8 9 10
Figure 2b: Growth in Top Combined Statutory Marginal Income Tax
Rates from 2009 to 2019 (in Percent)
Alberta
New
Brunswick
Ontario
Newfoundland & Labrador
British
Columbia
Nova Scotia
Quebec
Manitoba
Prince Edward Island
Saskatchewan
0% 5% 10% 15% 20%
%
25%
Notes:
1) Personal income tax rates include surtaxes where applicable.
2) Quebec's tax rates are adjusted for the federal abatement.
%
%
%
%
%
%
%
%
%
Source: Table 4.
per-income earners in Nova Scotia face the highest marginal income-tax
rate at percent, an increase of percentage points. Ontario now
has the second highest marginal personal income tax rate ( percent),
followed by Quebec ( percent). At percent, Saskatchewan has
the lowest combined rate in 2019, slightly below Alberta at percent.
Notably, in 2009, upper-income earners in all provinces faced
marginal tax rates that were below percent. However, as a result of
the changes that have since been implemented, upper-income earners in
seven out of 10 provinces—Manitoba, Ontario, Quebec, New Brunswick,
Nova Scotia, Prince Edward Island, and Newfoundland & Labrador—now
face a marginal tax rate above percent. This means that after a certain
income threshold, upper-income earners in these provinces lose to taxes
more than 50 cents of every extra dollar of labour income
Figures 2a and 2b display the percentage-point increase and percent-
age change, respectively, of the top combined federal-provincial personal
income tax rate by province from 2009 to 2019. The largest increase is in
Alberta, where the combined top tax rate went from to percent,
an increase of percentage points (or percent). In other words,
Alberta had large increases that left its top rate lower than most other
provinces but, even so, because it started from such a low base it also had
the largest proportional increase in its top rate. Traditionally, Alberta had
Canada’s most competitive top tax rate but now that advantage is much
less pronounced. New Brunswick saw the second largest increase in com-
bined top tax rates, percentage points (or percent). This is despite
the decrease in tax rates announced by the provincial government in the
2016 budget. Saskatchewan saw the smallest percentage-point increase
( percentage points) as well as the smallest percentage change (an
percent increase).
Ontario and Quebec saw considerable growth in their highest com-
bined federal-provincial marginal tax rates. Ontario’s combined top tax
rate grew by percentage points, an increase of percent. In Que-
bec, the combined top tax rate increased by percentage points (or
percent). Notably, the combined top tax rates in both Quebec and Ontario
were below percent in 2009 but have both since climbed above the
percent threshold.
Figure 3 displays the combined top rates in 2009 and 2019, while
illustrating how much of the change in each province has been driven
by increases in the provincial rate and how much by increases in federal
rate. In most of the provinces, the increase in the combined top personal
16 To reiterate, the analysis here and throughout this publication assumes that no
use is being made of tax credits or other tax mechanisms available in the tax code to
reduce the effective marginal rate.
Figure 3: Top Combined Statutory Marginal Income Tax Rate in 2009
and 2019, with Federal and Provincial Changes Delineated
Nova Scotia
Ontario
Quebec
New
Brunswick Prince Edward
Island Newfoundland &
Labrador
Manitoba
British
Columbia
Alberta
Saskatchewan
0 10 20 30 40
Percent
50 60
Notes:
1) Personal income tax rates include surtaxes where applicable.
2) Quebec's tax rates are adjusted for the federal abatement.
3) Saskatchewan's provincial top rate was % in 2009 and % in 2019, a decrease of percentage
points.
Source: Table 4.
income tax rate was driven by changes at both the federal and provincial
levels. (Only the provinces of Manitoba and Prince Edward Island saw no
change in the top provincial marginal income tax rate, while Saskatchewan
actually saw a slight decrease of a half percentage point.) Even so, except
for Alberta, the increase in the federal top rate was larger than the provin-
cial increase between 2009 and 2019. Furthermore, without the federal tax
changes, the highest combined federal-provincial top tax rate would have
been percent, in Nova Scotia, followed closely by percent in
Ontario and percent in Quebec. In other words, the combined top
rate would not have exceeded percent anywhere in Canada.
The federal increase in the tax rate for upper-income earners
prompted the New Brunswick government to reduce its own provin-
cial top rate (New Brunswick, Department of Finance, 2016). Without
the provincial reduction, the combined top rate would have been
2009 rate Provincial increase Federal increase
percent, instead of percent. Despite the provincial government’s
actions, the combined top rate in New Brunswick has increased relative to
the 2009
The trend throughout Canada in recent years has been towards
higher marginal income tax rates on upper-income earners. This has im-
portant consequences for Canada’s ability to attract and retain the highly
skilled workers, professionals, and entrepreneurs who are key contributors
to overall economic prosperity. Even before the most recent changes to
federal tax rates, Canada’s tax rates compared unfavourably to rates in the
United States and other G7 countries (Murphy, Clemens, and Veldhuis,
2013). In fact, the two previous governments (one Liberal and the other
Conservative) in their respective economic plans called for a reduction
in personal income taxes to encourage skilled workers to work in Canada
(Canada, Department of Finance, 2005, 2006). Since then, the marginal
tax rates on upper-income earners have generally become less, not more,
competitive. The next two sections compare Canada’s current personal
income tax rates with competitive rates offered by the United States and
members of the OECD.
17 In addition, the New Brunswick government increased other taxes such as the
HST and corporate income taxes. In 2016, the provincial portion of the HST increased
from 8 to 10 percent, and the general corporate income tax rate increased from 12 to
14 percent (New Brunswick, Department of Finance, 2016).
2. Statutory Marginal Income
Tax Rates in Canada Compared
to the United States
The United States is Canada’s most direct competitor in attracting and
retaining highly skilled labour, entrepreneurs, and investors. Like Canada,
the United States has both federal and subnational (state) personal income
tax The combined federal and state tax rates differ among states
just as they differ among provinces in Canada. The combined top tax rate
in the United States ranges from a high of percent, in California, to a
low of percent in states that have no state-level personal income tax,
namely, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and
To get a sense of how competitive Canada is as a result of its
top personal income tax rates, it is useful to compare the combined statu-
tory marginal tax rates on labour income across Canadian and American
subnational jurisdictions. This includes the 10 provinces, the 50 states, and
Washington,
18 In the United States, local governments also impose income taxes. According
to the Tax Foundation, over 23 million Americans in 17 states live in jurisdictions
with local income taxes (Henchman and Sapia, 2011). That represents about 7
percent of the population. Local income tax rates are typically between 1 and 3
percent and can be as low as a flat charge of $2 or $3 per week (in West Virginia).
Local income tax is not included in this report’s analysis because the rates differ
within a state and the number of local governments that impose an income tax is
typically small. For example, again according to the Tax Foundation, San Francisco
is the only local government in California with an income tax. In Pennsylvania,
on the other hand, there are nearly 3,000 local governments that impose a local
income tax, more than half of the national total of 4,943.
19 Since these states have no personal income taxes at state level, the 37 percent top
tax rate is solely the federal rate.
20 This measure of US tax rates excludes the deductibility of state and local taxes
from the federal personal income tax as well as other tax deductions. US taxpayers
who elect to itemize deductions on their federal tax returns can deduct either state
and local income taxes or sales taxes, but not both (see United States, Internal
Revenue Service. 2018a). In 2016, percent of US federal income tax returns had
itemized deductions (United States, Internal Revenue Service, 2018b).
/ 17
Figure 4 displays combined top personal income tax rates for the 61
Canadian and American jurisdictions. Of the 61 jurisdictions, Nova Scotia
has the highest combined top rate ( percent), followed by Ontario
( percent), Quebec ( percent), and New Brunswick (
percent). California, the state with the highest combined top rate in the
United States, falls behind seven Canadian jurisdictions with its combined
top rate of percent. Nine Canadian jurisdictions occupy the list of 10
jurisdictions with the highest combined marginal income tax rates and all
10 provinces appear in the top 13. There are a total of 48 US jurisdictions
with combined top tax rates lower than all Canadian provinces. Overall,
figure 4 suggests that Canada’s top personal income tax rates are generally
uncompetitive with the United States.
Importantly, figure 4 does not account for the fact that Canadian top
tax rates tend to apply at lower levels of income than in the United States.
For example, California’s top personal income tax rate only applies to
income above US$1 Similarly, the top marginal tax rate in New
York is applied to incomes above about US$ million. The US federal top
marginal tax rate for a single filer applies to incomes over US$510,300 in
2019 (El-Sibaie, 2018). By comparison, Canada’s federal top marginal tax
rate applies to income over CA$210,371 and Alberta is the province with
the highest income threshold for the top marginal rate at CA$314,928.
An individual earning the equivalent of CA$314,928 in California or
New York faces a lower marginal income tax rate than what is implied by
the combined top tax rate. To adjust for differences in income thresholds,
figure 5 presents the combined statutory marginal personal income tax
rates at the equivalent income of CA$300,000 for each Canadian and US
jurisdiction since this income level is the highest threshold (except for Al-
berta) at which a Canadian combined top rate is Notably, at this
income level, the US federal marginal rate is 35 percent rather than the top
federal rate of 37 percent.
At an income of CA$300,000, Canadians in every province face a
higher marginal tax rate on labour income than Americans in any US state.
21 The US tax rate thresholds are reported for a single tax filer. Different thresholds
generally apply depending on whether the tax filer is single, married and filing jointly,
married but filing separately, or head of a household. For details, see US Tax Center,
2019.
22 To repeat our explanation from a previous footnote: Originally, the top Alberta
income tax threshold was $300,000, but to account for price inflation the top threshold
is now $314,928. In our analysis, we have decided to retain the clean $300,000 cutoff, at
the cost of now only catching the second highest tax bracket in Alberta. Also note that
in figure 5, Canadian dollars are converted into US dollars using the Bank of Canada
annual exchange rate.
Figure 4: Top Combined Statutory Marginal Income Tax Rate in
Canadian Provinces and US States, 2019
Nova Scotia
Ontario
Quebec
New
Brunswick Prince Edward
Island Newfoundland &
Labrador
Manitoba
Californi
a
British Columbia
Alberta
Hawaii
New Jersey
Saskatchewan
Oregon
Minnesota
Washington
.
New
York
Vermont
Iowa
Wisconsi
n
Maine
South Carolina
Connecticut
Idaho
Arkansas
Montana
Nebraska
Delaware
West
Virginia
Louisiana
Rhode Island
Georgia
Maryland
Virginia
Kansas
Missouri
North Carolina
Massachusetts
Kentuck
y Alabama
Mississipp
i
New Hampshire
Oklahoma
Ohi
o
Utah
Illinoi
s
New
Mexico
Colorado
Arizona
Michigan
Indiana
Pennsylvania
North Dakota
Tennessee
Alask
a Florida
Nevada
South Dakota
Texa
s
Washington
Wyoming
5
1
.
3
7
5
1
.
3
0
5
0
.
4
0
5
0
.
3
0
4
9
.
8
0
4
8
.
0
0
4
8
.
0
0
4
7
.
7
5
4
7
.
5
0
4
6
.
9
0
4
6
.
8
5
4
5
.
9
5
4
5
.
8
2
4
5
.
7
5
4
5
.
5
3
4
4
.
6
5
4
4
.
1
5
4
4
.
0
0
4
3
.
9
9
4
3
.
9
3
4
3
.
9
0
4
3
.
9
0
4
3
.
8
4
4
3
.
6
0
4
3
.
5
0
4
3
.
0
0
4
2
.
9
9
4
2
.
7
5
4
2
.
7
5
0 10 20 30 40 50 60
Percent
Notes:
1) Personal income
tax rates include
surtaxes where
applicable. Quebec's
tax rate is adjusted
for the federal
abatement.
2) For US states,
local income taxes
are excluded.
Sources:
CRA (2019); Revenu
Quebec (2019);
Loughead (2019);
El-Sibaie (2018);
calculations by
authors.
Figure 5: Combined Statutory Marginal Income Tax Rate at
CA$300,000 in Canadian Provinces and US States, 2019
Nova Scotia
Ontario
Quebec
New
Brunswick Prince Edward
Island Newfoundland &
Labrador
Manitoba
British
Columbia
Saskatchewan
Alberta
Hawaii
Oregon
Minnesota
California
Vermont
Iowa
Washington
.
Maine
South Carolina
Idaho
Arkansas
Montana
New York
Nebraska
Delaware
Connecticut
West
Virginia New
Jersey
Wisconsin
Louisiana
Rhode Island
Georgia
Virginia
Kansas
Maryland
Missouri
North Carolina
Massachusetts
Kentuck
y Alabama
Mississipp
i
New Hampshire
Oklahoma
Ohi
o Utah
Illinoi
s
New Mexico
Colorado
Arizona
Michigan
Indiana
Pennsylvania
North Dakota
Tennessee
Alask
a Florida
Nevada
South Dakota
Texa
s
Washington
Wyoming
0 10 20 30 40 50 60
Percent
Notes:
1) Personal income
tax rates include
surtaxes where ap-
plicable. Quebec’s tax
rate is adjusted for
the federal abate-
ment.
2) For US states,
local income taxes
are excluded.
3) The annual
exchange rate for
converting Canadian
dollars to US dollars
in 2019 is ,
which is published by
the Bank of Can-
ada (2020). At this
rate, CA$300,000
is equivalent to
US$226,091.
Sources:
CRA (2019); Revenu
Quebec (2019); ;
Loughead (2019);
El-Sibaie (2018);
Bank of Canada
(2020); calculations
by authors.
The province with the lowest marginal tax rate is Alberta (ranked 10th
overall) with a rate of percent. Hawaii, ranked next below Alberta,
has a marginal tax rate of percent.
An interesting subset of jurisdictions is those with large energy
sectors that generally compete for a similar pool of skilled workers and
investment. Three of these jurisdictions are Canadian provinces—Alberta,
Newfoundland & Labrador, and Saskatchewan—and seven are US states—
Alaska, Colorado, Louisiana, North Dakota, Oklahoma, Texas, and Wyo-
All three energy-producing Canadian provinces have higher com-
bined marginal tax rates than the seven energy-producing states. Among
these jurisdictions, Newfoundland & Labrador has the highest combined
marginal tax rate at percent. The tax rates are considerably lower
in Alaska, Texas, and Wyoming, where there are no state-level personal
income taxes, meaning only the federal rate of 35 percent applies to our
benchmark income level. The marginal rate in Alberta ( percent) and
Saskatchewan ( percent) is higher than Louisiana ( percent), the
energy-producing US jurisdiction with the highest rate. Notably, Alberta
was much more competitive prior to the recent changes to provincial and
federal income tax rates. As recently as the summer of 2015, Alberta’s
combined marginal tax rate at CA$300,000 was just percent—the
same rate as Louisiana at that time.
Another interesting subset of jurisdictions in figure 5 is Ontario and
Quebec plus the US “rust belt” states with large manufacturing sectors: Il-
linois, Indiana, Michigan, Ohio, and Ontario and Quebec’s
combined marginal tax rates are both above percent ( percent
and percent, respectively). In contrast, each of the rust belt states
has a combined rate at or below 40 percent. Of the rust belt states, Ohio
has the highest combined marginal tax rate (applicable to our benchmark
income level) at percent.
Canada’s marginal income tax rates are also uncompetitive at the
CA$150,000 income Figure 6 compares the combined marginal tax
23 This list of energy-producing jurisdictions is drawn from Di Matteo et al. (2014),
where jurisdictions were selected based on the size of the energy sector (Canada) or
the oil and gas sector (United States) as a percentage of the jurisdiction’s GDP.
24 The list of rust belt states is drawn from Murphy, Emes, Clemens, and Veldhuis
(2015).
25 The new, higher federal income tax rate introduced in 2016 did not change the
marginal rate at the $150,000 income level for 2019. However changes to the tax rate
by several provincial governments did increase the combined marginal rate in those
provinces. The $150,000 combined marginal tax rate either increased or remained
the same in each province, except for Saskatchewan, where it decreased slightly—by
percent.
Figure 6: Combined Statutory Marginal Income Tax Rate at
CA$150,000 in Canadian Provinces and US States, 2019
Nova Scotia
Quebec
Ontario
Prince Edward
Island New
Brunswick
Manitoba
Newfoundland & Labrador
British
Columbia
Saskatchewan
Alberta
Californi
a Oregon
Iowa
Washington .
Hawai
i
Minnesota
Vermont
Maine
South Carolina
Idaho
Arkansas
Montana
Nebraska
Delaware
West
Virginia New
York New
Jersey
Wisconsin
Connecticut
Louisiana
Georgia
Virgini
a
Kansas
Missouri
North Carolina
Massachusetts
Kentuck
y Alabama
Maryland
Mississipp
i
New Hampshire
Oklahoma
Utah
Illinoi
s
New Mexico
Rhode Island
Colorado
Ohi
o Michigan
Arizona
Indiana
Pennsylvania
North Dakota
Tennessee
Alask
a
Florida
Nevada
Texas
South Dakota
Washington
Wyoming
Notes:
1) Personal income
tax rates include
surtaxes where ap-
plicable. Quebec’s
tax rate is adjusted
for the federal
abatement.
2) For US states,
local income taxes
are excluded.
3) The annual
exchange rate for
converting Can-
adian dollars to US
dollars in 2019 is
, which is
published by the
Bank of Canada
(2020). At this
rate,CA$150,000
is equivalent to
US$113,045.
Sources:
CRA (2019);
Revenu Quebec
(2019); Loughead
(2019); El-Sibaie
(2018); Bank of
Canada (2020);
calculations by
authors.
0 10 20 30 40 50 60
Percent
rate at this income level in Canadian provinces and US states. The results
in figure 6 are similar to those in figure 5, except that the gap between the
lowest Canadian marginal tax rate and the highest US rate is wider. At
$150,000 CAD, Alberta has the lowest Canadian combined marginal tax
rate at percent. California has the highest combined marginal tax
rate among US states, with a rate of percent. That represents a gap
of percentage points, or percent, from the highest US rate to the
lowest Canadian rate.
Thus far the discussion has focused on the competitiveness of
Canada’s personal income tax system at income levels directly affected
by the tax increases on upper-income earners since 2009. However, the
federal government reduced the tax rate on incomes between $45,000
and $90,000 from to percent. Even at income levels in this range,
Canada’s marginal rates are generally uncompetitive.
Figure 7 shows the combined marginal personal income tax rate
for those earning CA$75,000; figure 8 gives the rate for those earning
CA$50,000. In both cases, Canadian provinces generally have uncompeti-
tive combined marginal tax rates. British Columbia is the only exception in
that it is relatively competitive with many US jurisdictions at the $75,000
income level. In other words, despite the reduction in the federal govern-
ment’s second-lowest income tax rate, Canada remains generally uncom-
petitive at these income levels compared to the United States.
In comparisons at multiple income levels, Canada’s overall statutory
marginal income tax rates are decidedly uncompetitive compared to those
in the United States. This puts Canada at a disadvantage for attracting and
retaining skilled and mobile workers.
Trends in corporate income taxation also
hurt Canadian competitiveness
This study focuses on Canadian competitiveness as it relates to personal
income tax rates. However, it is appropriate in this section to outline the
drastic changes that have been made to the US corporate income tax rate.
Specifically, the Tax Cuts and Jobs Act of 2017 reduced the statutory US
corporate income tax rate from 35 percent down to 21 percent, and the
corporate Alternative Minimum Tax was eliminated (Tax Foundation,
2017). This change in US policy was very significant, taking the US from
having one of the highest corporate tax rates in the world to having rates
that are below the average for the EU (Bunn, 2018).
The Canadian federal corporate income tax has remained steady at
15 percent. Thus the federal Canadian corporate rate is still six percentage
Figure 7: Combined Statutory Marginal Income Tax Rate at
CA$75,000 in Canadian Provinces and US States, 2019
Manitoba
Prince Edward Island
Nova Scotia
Quebec
New Brunswick
Newfoundland & Labrador
Saskatchewan
Californi
a Oregon
Alberta
Hawaii
Ontario
Iowa
Maine
Minnesota
South Carolina
Idaho
Arkansas
Montana
Nebraska
Vermont
Washington
.
Wisconsi
n New
York
British Columbia
Louisian
a West
Virginia
Georgia
Virginia
Kansas
Delaware
New Jersey
Connecticut
Missouri
North Carolina
Massachusetts
Kentuck
y Alabama
Mississipp
i
New Hampshire
Oklahoma
Utah
Illinoi
s
New Mexico
Maryland
Colorado
Michigan
Arizona
Rhode Island
Ohi
o Indiana
Pennsylvania
North Dakota
Tennessee
Alask
a Florida
Nevada
South Dakota
Texa
s
Washington
Wyoming
0 10 20 30 40 50 60
Percent
Notes:
1) Personal income
tax rates include
surtaxes where ap-
plicable. Quebec’s
tax rate is adjusted
for the federal
abatement.
2) For US states,
local income taxes
are excluded.
3) The annual ex-
change rate for con-
verting Canadian
dollars to US dollars
in 2019 is ,
which is published
by the Bank of
Canada (2020). At
this rate, CA$75,000
is equivalent to
US$56,523.
Sources:
CRA (2019); Revenu
Quebec (2019);
Loughead (2019);
El-Sibaie (2018);
Bank of Canada
(2020); calculations
by authors.
Figure 8: Combined Statutory Marginal Income Tax Rate at
CA$50,000 in Canadian Provinces and US States, 2019
Quebec
Nova Scotia
New
Brunswick
Newfoundland & Labrador
Prince Edward Island
Manitoba
Saskatchewan
Alberta
Ontario
British Columbia
Oregon
Hawaii
Minnesota
South Carolina
Idaho
Arkansas
Montana
Nebraska
Maine
Wisconsi
n
Iowa
New York
Washington
.
Californi
a Georgia
Virginia
Kansas
Delaware
Missouri
North Carolina
Massachusetts
Kentuck
y Alabama
Connecticut
Mississippi
New Hampshire
Oklahoma
Utah
Illinoi
s
New
Mexico
Maryland
Colorado
West
Virginia
Michigan
Louisiana
Rhode Island
New Jersey
Arizon
a Vermont
Indiana
Pennsylvania
Ohi
o Tennessee
North Dakota
Alask
a Florida
Nevada
South Dakota
Texa
s
Washington
Wyoming
Notes:
1) Personal income
tax rates include
surtaxes where ap-
plicable. Quebec’s
tax rate is adjusted
for the federal
abatement.
2) For US states,
local income taxes
are excluded.
3) The annual ex-
change rate for con-
verting Canadian
dollars to US dollars
in 2019 is ,
which is published
by the Bank of
Canada (2020). At
this rate, CA$50,000
is equivalent to
US$37,682.
Sources:
CRA (2019); Revenu
Quebec (2019);
Loughead (2019);
El-Sibaie (2018);
Bank of Canada
(2020); calculations
by authors.
0 10 20 30 40 50 60
Percent
points lower than the comparable US rate. However, the fourteen percent-
age point drop in the US rate has obviously made that jurisdiction much
more competitive than it was before 2018, which only exacerbates the
analysis of the personal income tax that forms the core of this study.
3. Statutory Marginal Income
Tax Rates in Canada
Compared to OECD countries
Taken together, Canada’s personal income tax rates are decidedly uncom-
petitive compared to those of the United States. This is particularly true af-
ter accounting for the important fact that Canada’s combined top tax rates
generally apply to lower income levels than those in the United States. But
Canada also competes with other industrialized countries for highly skilled
workers and investment. To measure the competitiveness of Canada’s top
tax rates, in this section we compare the combined top marginal income
tax rates on labour income with the rates in the 36 industrialized countries
making up the Organisation for Economic Co-operation and Develop-
ment (OECD). The available data for this section come from the OECD
and are limited to the combined top rates for 2018. To capture the changes
in Canada’s provincial income tax rates up to 2019, we compare the 2019
Canadian provincial tax rates with the available OECD rates for 2018.
Although some countries may have changed their income tax rates since
2018, this comparison provides a general sense of how Canada compares
to other industrialized countries.
Figure 9 displays the combined top tax rate for 2018 for Canada
and other industrialized It is important to mention that the
combined top tax rate in Canada was the same in 2018 and 2019. Of the
36 OECD countries, Canada had the 7th highest combined tax rate in 2018
( percent). This indicates that in 2018, while Canada’s top tax rate was
more competitive than in some countries, it was uncompetitive compared
to most OECD countries including the United States, the United King-
dom, and other English-speaking countries such as Australia.
26 For countries with subnational and/or local personal income tax rates, the OECD
calculates the combined rate either by taking an average of the subnational and
local rates or by selecting a jurisdiction that the OECD considers representative. In
Canada's case, the "representative" jurisdiction is Ontario; for the United States, it is
Detroit, Michigan.
/ 27
Figure 9: Top Combined Statutory Marginal Income Tax Rates in
OECD Countries, 2018
Sweden
Japan
Denmark
France
Greece
Austria
Canada
Portugal
Belgium
Netherlands
Finland
Sloveni
a
Israel
Ireland
Germany
Ital
y Australia
Iceland
Korea
Luxembour
g
United
Kingdom
United States
Spai
n
Switzerland
Norway
Turkey
Mexic
o
Chile
New Zealand
Poland
Latvi
a
Slovak Republic
Estonia
Lithuania
Hungary
Czech Republic
Notes:
0 10 20 30 40 50 60
Percent
1) The graph shows the highest combined statutory personal income-tax rate that is applied on earned
income, taking into account that some personal income taxes may be deductible from the base of other per-
sonal income taxes, but before any other tax deductions. The top statutory tax rates are the combined rates
of the national and subnational governments.
2) For countries with subnational and/or local personal income tax rates, the OECD calculates the com-
bined rate by either taking an average of the subnational/local rates or selecting a jurisdiction that OECD
considers representative. For Canada, the “representative” jurisdiction is Ontario; for the United States, it is
Detroit, Michigan.
Source: OECD (2019).
Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness, 2020 / 29
Figure 10: Top Combined Statutory Marginal Income Tax
Rates in Canadian Provinces (2019) and OECD Countries
(2018)
Sweden
Japan
Denmark
France
Greece
Austria
Nova
Scotia
Ontario
Quebec
New Brunswick
Portugal
Belgium
Netherlands
Prince Edward
Island Newfoundland &
Labrador
Finland
Manitoba
Slovenia
Israel
British
Columbia
Alberta
Ireland
Saskatchewan
Germany
Ital
y Australia
Iceland
Korea
Luxembour
g
United
Kingdom
United States
Spain
Switzerland
Norway
Turkey
Mexic
o
Chile
New Zealand
Poland
Latvi
a
Slovak Republic
Estonia
Lithuania
Hungary
Czech Republic
Notes:
0 10 20 30 40 50 60
Percent
1) The Canadian tax rates are for 2019 tax year and the OECD rates are for 2018.
2) The graph shows the highest combined statutory personal income-tax rate that is applied on earned
income, taking into account that some personal income taxes may be deductible from the base of other per-
sonal income taxes, but before any other tax deductions. The top statutory tax rates are the combined rates
of the national and subnational governments.
3) For countries with subnational and/or local personal income tax rates, the OECD calculates the com-
bined rate by either taking an average of the subnational/local rates or selecting a jurisdiction that OECD
considers representative. For Canada, the “representative” jurisdiction is Ontario; for the United States, it is
Detroit, Michigan.
Source: OECD (2019); table 4.
We have seen, however, that personal income tax rates vary con-
siderably across Canada and that the top combined tax rate in some prov-
inces is significantly less competitive than in others. Figure 10 illustrates
this by displaying the 2019 combined top tax rate for each province and
the 2018 rate for each OECD country. Out of 45 jurisdictions, Canadian
provinces occupy four of the top 10 spots for highest top tax rates: Nova
Scotia ( percent), Ontario ( percent), Quebec ( percent),
and New Brunswick ( percent) all have among the highest combined
top personal income tax rates in the OECD. Prince Edward Island (
percent), Newfoundland & Labrador ( percent), Manitoba ( per-
cent), British Columbia ( percent), Alberta ( percent), and Sas-
katchewan ( percent) have rates that are in the middle range. These
rates are higher than those in the United States ( percent) and the
United Kingdom ( percent). Overall, Canada’s top personal income
tax rates are generally uncompetitive. It is particularly notable that the two
most populous Canadian provinces, Ontario and Quebec, are among the
top 10 jurisdictions with the highest personal income tax rates. Among
industrialized countries, Canada generally has relatively high marginal tax
rates on upper-income earners, and this diminishes Canada’s attractive-
ness as a destination for highly skilled workers and investment.
4. Tax Rate Increases Do Not
Generate the Expected
Government Revenue
A primary reason that various governments have increased their top per-
sonal income tax rates since 2009 is to bring in more government revenue,
either to reduce their budget deficit, to partly pay for a reduction in other
tax rates, or to finance new However, governments often
overestimate how much revenue they will reap from increasing the tax
rate because they fail to take into account the various ways that taxpayers
respond to such increases. As a result, government finances often do not
gain as much new revenue as initially expected.
The level of revenue collected from a specific tax depends not just on
the tax rate, but on the base, or the total income that is subject to the tax.
Multiplying the tax rate by the tax base results in the amount of revenue
that a government will receive from a particular tax. When governments
increase tax rates, taxpayers often respond by changing their behaviour in
ways that shrink the tax base. This often results in governments collecting
significantly less revenue than they expect as a result of new tax rate in-
creases, especially if they assume that these tax rate increases will induce
no behavioural responses that will shrink the tax base.
There are a number of ways that taxpayers can respond to a tax in-
crease that would reduce the tax base (Lafleur, Palacios, and Emes, 2015).
First, a higher tax rate can encourage some taxpayers to work less and re-
port less taxable income. Second, higher income taxes could lead taxpay-
ers to negotiate with employers to substitute away from taxable income to
more tax favourable forms of compensation such as fringe benefits. Third,
a taxpayer can take advantage of lower small business tax rates by channel-
ling income through a small business. Fourth, a taxpayer could make use
of other legal means to avoid taxes via various rules in Canada’s complex
tax Finally, some taxpayers can shift income to other jurisdictions
27 Addressing concerns over income inequality is another stated motivation.
28 For a discussion on the complexity of Canada’s tax code, see Vaillancourt, Roy,
/ 31
with lower tax rates. Upper-income earners tend to be more responsive to
tax
A series of recent tax changes in the United Kingdom provides an
illustration of a tax increase that took in less revenue than expected due to
the response in taxpayers’ behaviour (HM Revenues and Customs, 2012).
Specifically, the UK government introduced a percent income tax rate
on upper-income earners in 2010. The tax increase was expected to bring
in £ billion but a government report estimated that it brought in £1 bil-
lion or less. The United Kingdom’s top rate has since been reduced to
percent.
Another illustrative example, this one from Canada, is the evolv- ing
estimates of how much revenue will be brought in by the new, higher
federal marginal income tax rate. During the 2015 election, the federal
Liberal Party estimated that the proposed tax hike on upper-income earn-
ers would bring in $ billion in 2016/17 (Liberal Party of Canada, 2015).
This estimate included a $600 million “prudence factor,” which reduced the
estimate from $ billion. These estimates, however, did not appropriately
account for the likely responses of taxpayers to a higher marginal income tax
rate. Once the Liberal Party formed government after the election, the esti-
mate provided by the Department of Finance, which then included behav-
ioural responses, was $ billion (Canada, Department of Finance, 2015).
Other organizations have produced their own estimates of how
much revenue will be gained by the federal government’s increase in the
rate of income tax paid by upper-income earners. For example, the Par-
liamentary Budget Office estimated that taxpayers responding to the tax
hike by reducing taxable income would decrease the amount of revenue
taken in by $ billion from $ billion, over the period from 2015/16
to 2020/21 (PBO, 2016). An earlier estimate by the CD Howe Institute
showed that the federal tax increase on upper-income earners will bring
in $ billion in 2016 before behavioural responses and less than $1 bil-
lion after adjusting for how taxpayers will likely respond (Laurin, 2015).30
and Lammam, 2015. For a measure of the cost of tax complexity in Canada, see
Vaillancourt, Roy-César, and Silvia Barros, 2013.
29 Milligan and Smart (2015) examine provincial tax rate changes in Canada from
1982 to 2011 and find that the top 1 percent and top percent of income earners
had a stronger behavioural response than other income earners. Similarly, Canada’s
Department of Finance (2010) study finds a stronger behavioural response in terms of
taxable income for upper-income earners.
30 Estimates from the Parliamentary Budget Office (2016) and Laurin (2015) are based
on an assumption about the “elasticity of taxable income,” which is the percentage
change in taxable income after a one percentage-point change in the “net-of-tax” rate (1
minus the tax rate). The elasticity of taxable income for individuals earning more than
Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness, 2020 / 33
The CD Howe Institute also estimated that, because taxpayers’ responses
would also likely reduce the provincial income tax base, provincial govern-
ments will lose $ billion in revenue, more than the amount the federal
government is estimated to A recent Fraser Institute study esti-
mated that in 2020, the federal tax rate increase on upper-income earners
would lead to $ billion dollars in additional tax revenue before any
behavioral response, but only $ billion in tax revenue after account-
ing for behavioral effects (Ferede, 2019). The study also found that in the
longer-term (after the first 9 years), the tax increase would result in lower
revenue gain than without any tax rate change.
Furthermore, in a recent Fraser Institute study, Lafleur, Palacios, and
Emes (2015) estimated the impact on government revenues from Alberta’s
new provincial income tax rates. They estimated that between 2016 and
2020, behavioural responses resulting from the tax increases will reduce
the amount of revenue generated by the tax increase by percent
compared to what would be generated in the absence of a behavioural
$200,000 assumed by PBO (2016) is and the preferred assumption by Laurin (2015)
is . The Department of Finance examined the elasticity of taxable income based on
Canada’s experience reducing marginal income tax rates in the late 1990s and early
2000s (Canada, Department of Finance, 2010). That study estimated an elasticity of
for individuals earning $150,000 or more (in $2006).
31 Milligan and Smart (2015) made a similar point by regarding the negative effect
on federal government revenue from a reduction in the tax base due to provincial tax
increases. That is, taxpayers that respond to provincial tax increases by reducing their
provincial taxable income will also be reducing their federal taxable income, which
adversely affects federal government revenue. The same likely applies to federal tax
increases that erode the provincial base.
32 This estimate assumes an “elasticity of taxable income” of in the short run
and in the long run (Lafleur, Palacios, and Emes, 2015).
Conclusion
Since 2009, the federal government and most provincial governments have
imposed new, higher top personal income tax rates. These increases have
led to considerable increases in the marginal tax rates that upper-income
earners across Canada pay. This has important economic consequences
because higher income taxes discourage productive economic activ-
ity. Higher income taxes also put Canada at a competitive disadvantage
in attracting and retaining highly skilled workers, ultimately hurting the
country’s economic prospects.
Canada has traditionally had a relatively uncompetitive personal
income tax system, particularly compared to the United States. This situa-
tion has recently worsened and Canada now has among the highest mar-
ginal tax rates on upper-income earners among industrialized countries.
A comparison of tax rates with those in the United States, in particular,
highlights Canada’s lack of competitiveness, particularly after differences
in income thresholds are accounted for. Someone making CA$300,000 or
CA$150,000 anywhere in Canada would face a higher marginal income tax
rate on labour income than a person with the same income anywhere in
the United States.
Canadian governments have put the country in this uncompetitive
position partly in an effort to raise more revenue. However, taxpayers,
especially upper-income earners, respond to tax increases in ways that
reduce the amount of revenue that governments would otherwise collect.
For this reason, Canadian governments are unlikely to receive as much of
a revenue boost from increasing the top personal income tax rate as they
expect. Federal and provincial governments would do well to consider
reversing the trend towards higher marginal tax rates on upper-income
earners, and lower personal income tax rates.
34 /
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About the Authors
Tegan Hill
Tegan Hill is an Economist at the Fraser Institute. She holds a Bachelor of
Economics and a Master’s Degree in Public Policy from the University of
Calgary. Ms. Hill’s articles have appeared in major Canadian newspapers
including the Globe and Mail, National Post, and Ottawa Citizen. She spe-
cializes in government spending, taxation, and debt.
Nathaniel Li
Nathaniel Li is an Economist at the Fraser Institute. He holds a . from
the Fudan University in China and a . in Food, Agricultural and Re-
source Economics from the University of Guelph. Prior to joining the Fraser
Institute, he worked for the University of Toronto as a postdoctoral fellow
and the University of Guelph as a research associate. His past research work
has been published in many high-quality, peer-reviewed academic journals,
including the Applied Economic Perspectives and Policy, Agricultural Eco-
nomics, Preventive Medicine, and Canadian Public Policy. His current re-
search covers a wide range of issues in fiscal, education, and labour-market
policies.
Milagros Palacios
Milagros Palacios is the Associate Director for the Addington Centre for
Measurement at the Fraser Institute. She holds a . in Industrial Engin-
eering from the Pontifical Catholic University of Peru and a . in Eco-
nomics from the University of Concepcion, Chile. Ms. Palacios has studied
public policy involving taxation, government finances, investment, produc-
tivity, labour markets, and charitable giving, for nearly 10 years. Since join-
ing the Institute, Ms. Palacios has authored or coauthored over 100 com-
prehensive research studies, 80 commentaries and four books.
Acknowledgments
The authors thank the Barbara and Bob Mitchell Fund for generously sup-
porting this project. They also thank the unidentified external reviewers
for their many helpful suggestions and comments on earlier drafts. Any re-
maining errors are the sole responsibility of the authors. As the research-
ers have worked independently, the views and conclusions expressed in
this paper do not necessarily re
