The Personal Income Tax (PIT) system in Canada, François Vaillancourt CIRANO et Université de Montréal l IBFP, Bruxelles October 2011

Outline Distribution of tax powers in Canada The PIT system: origins to 2000 The system 2

Canadian federation-:revenues constitution (1867) Central government: 91.3 The raising of Money by any Mode or System of Taxation Provinces : 92.2 Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes Court decision 1930s direct =>sales taxation 3

Canadian federation-:revenues practice Central: PIT, CIT, GST(VAT),payroll taxes ( social security + employment), excises, custom duties Provincial PIT, CIT, Q/HST(VAT) or RST, payroll taxes, excises, resource royalties and transfers Local: Property taxes, fees, transfers Full base, rate and collection freedom at provincial and central level 4

Non PIT aspects CIT collected by federal G for 8/10 provinces Sales tax collected by federal G for 5(4) provinces HST -Max 5% base ∆ GST collected by Québec G for federal G with QST Provincial payments to federal G for exclusive use of gambling field 5

PIT in Canada pre WWII Introduced in late19th century at local then provincial level Introduced at federal level in 1917 By 1939 most provinces have a PIT with own base, rates and collection 6

Canada WWII tax rental agreements: provinces rent against transfers PIT,CIT, Succession duties to Fed G=> Central collection with federal base and rates 1947-Fed G proposes status quo: Keynes et al but 5% leeway for PIT 7

Canada : Québec reintroduces PIT with own collection -Fed G adapts (10% abatement) 1957:Equalization introduced (three tax bases ) to induce provinces to accept tax responsibility tax room and tax on tax with free federal collection. Nine provinces use it : they must set a surcharge rate to obtain $ 8

Canada : Increases in provincial tax room by reduced federal taxation Opting -Out/ offered in 1964:↓ transfers / ↑ tax room ;only Québec uses it (-16.5% of federal PIT per individual 1972-:Implementation of tax reforms 1977 reform of Health and Social transfers even more tax room and labeling fight 9

PIT –key points Income includes: –Wages, earnings, self employment income; –Net rents, interest, dividends,K gains (50%) –Pensions(public and private), unemployment insurance, –All $ are added-up, deduction exemptions applied and one tax calculated Residence is on 31 st December :fact based not linked to place of employment 10

% federal PIT in total PIT collection, Canada, 4 years 11

Canada 1999 In years of shared stable tax occupancy Provincial use of Fed base and progressivity modulated by use of surtaxes (tax on tax on tax! ) Various provincial credits ( savings schemes, age) in place 12

Canada Federal G allows as of 2000 tax on income (TONI): 9 provinces can now set progressivity :brackets and rates on Federal taxable income They can still use tax credits 13

Canada (ROC) 2008 One flat tax Alberta: 10% rate One bracket Three (5) to five (1) brackets Step up 1=>2 varies from $(NS) to $ (Sask) larger for 2=>3 Rates vary between provinces as do outcomes So at $: NS PIT= and Alt PIT= $ => 20%∆ 14

Three indicators, PIT rates,Canadian provinces,

Canada

Canada

Why these PIT rates our tax system better meets our own social, economic, fiscal needs NB 2000 PIT mimicking in Atlantic Canada not elsewhere Flat tax as fair Alt 2000 drop in # of taxed individuals Five brackets in BC is ‘fairer’ BC

An aside on the USA 2008 Seven states do not have a PIT 4 states use flat tax and 4 use tax on tax Mean number of brackets is 4.4 Max is 10 No central collection but offered in 1970s CV rates: USA VS Canada –1 st rate:0.64 VS 0.24 –Highest rate 0.63 VS

Conclusion Greater freedom in defining PIT since 2000 was used by Canadian provinces to vary progressivity Neighbours of flat Alberta exhibit highest BC and lowest Sask statutory progressivity Difference smaller in burden-tax competition? No unravelling of Canada 20