Canada's tax system needs substantial reform to restore fairness and reduce the growing gap between rich and poor, says a study by the Canadian Centre for Policy Alternatives, an Ottawa-based social policy research institute.

Key to the authors' findings is a call for richer Canadians to pay more tax and to eliminate the preferential tax treatment given to many forms of income like capital gains, dividends, and stock options — income that tends to be earned by those in the upper income brackets.

"At a time of rising income inequality and unprecedented concentration of wealth in the hands of a few, restoring fairness should be the primary objective of the Canadian tax system," says study co-author Iglika Ivanova, a CCPA economist.

"Instead, the past 20 years of tax cuts have disproportionately lined the pockets of Canada’s wealthy," she says.

On the tax front, the study's authors suggest that Canada bring in additional, higher tax brackets. It gives the top one per cent and top 0.1 per cent of income earners as examples of which groups could be targeted by these new tax rates.

The authors cite one recent U.S. study that estimated that the optimal top marginal tax rate for the top one per cent of earners was 73 per cent. Currently, the top marginal tax rate in Canada is about 50 per cent, depending on the province.

All income taxed

The study suggests that the tax base be broadened to tax income from all sources on the same progressive basis. This would see income that is now exempt from tax — such as lottery winnings and gains from the sale of a principal residence — become taxable. In some cases, the study's authors recommend that such income be averaged over several years to reduce the tax hit. 

'Canada is currently one of the few developed countries that does not tax bequests and inheritances.' —CCPA study

The authors also want to limit the ability of Canadians to transfer wealth from one generation to another.

"Canada is currently one of the few developed countries that does not tax bequests and inheritances," the authors write. "We recommend that large inheritances and gifts be included in the recipient’s taxable income." 

The study also says a number of tax deductions and credits may need to be scaled down or eliminated.  It spells out the RRSP and registered pension plan deductions, the basic personal amount, spouse or common-law partner amount and the amounts for eligible dependents and children, the employee stock options deduction, and the charitable donations tax credit as items that deserve to be evaluated. 

The authors also call for:

  • Increasing corporate income tax rates, which they say are the lowest in the G8.
  • Bringing in a basic or guaranteed income by amalgamating the various income-tested tax credits and benefits into a single income transfer that would phase out gradually.
  • The establishment of a fair tax commission to carry out a comprehensive review of the tax system. 

The Canadian Centre for Policy Alternatives is well known for its social justice agenda, which is frequently at odds with government policy. It brings out its own alternative federal budget each year.