Anyone who has been exposed to the present taxation statutes of Canada will realize the difficulty in trying to understand the complications involved.
— Arthur Smith MP, 196

The existing Canadian system is a hodgepodge.
— Jack Mintz, Financial Post Magazine, 2014

In 1962, the government of Prime Minister John Diefenbaker established a Royal Commission on Taxation, chaired by Kenneth Carter. Arthur Smith, the Progressive Conservative MP for Calgary South, explained the reasons for establishing the Carter Commission in the February 20, 1962, statement in the House of Commons from which the first quote above is drawn. More than 50 years later, in the article from which the second quote is drawn, Jack Mintz, the Palmer Chair in Public Policy at the University of Calgary, identified the same problems of incoherence, complexity and unfairness in the tax system.1 The time for a new “Carter Commission” would seem to be upon us.

The Royal Commission on Taxation, 1962

The Carter Commission’s mandate was “to inquire into and report upon the incidence and effects of taxation imposed by Parliament … upon the operation of the national economy, the conduct of business, the organization of industry and the positions of individuals; and to make recommendations for improvements in the tax laws and their administration that may be consistent with the maintenance of a sufficient flow of revenue.” In particular, it was to look into “the distribution of burdens among taxpayers,” the economic effects of the tax system, loopholes that needed to be closed, the effects of taxes on income and investement flows, using taxation to encourage Canadian ownership of Canadian industry without discouraging foreign investment and “the changes that may be made to achieve greater clarity, simplicity and effectiveness in the tax laws or their administration” (pp. v–vi).2

Four years later, the commission submitted a six-volume report – since described as having “few peers among modern proposals for income tax reform”3 – to the government of Diefenbaker’s successor, Lester Pearson. The commission felt the tax system’s foremost objective should be fairness – summed up in the phrase, often attributed to Carter, that “a buck is a buck” – and determined that, by this standard, the system fell short. People in similar circumstances did not necessarily owe the same taxes while people in dissimilar circumstances did not necessarily bear “appropriately different” tax burdens (p. 1). The commission concluded that the tax system distorted the efficient distribution of goods and services and failed to compensate for non-tax barriers to efficient distribution. Moreover, the administration of the federal tax system was not sufficiently shielded from political influence (pp. 1–2). The commission proposed changes to the tax system in Canada that, if implemented, would have constituted a complete transformation of the system and resulted in improvements in both equity and efficiency (p. 2).

The commission recommended that the tax system be rebuilt on the foundation of counting all income equally, whatever its source. This comprehensive tax base should be subject to progressive rates of taxation, which would reflect the increasing proportion of discretionary income available as total income increases. The commission believed that “vertical equity is achieved when individuals and families pay taxes that are a constant proportion of their discretionary economic power” (pp. 5–6, emphasis added). A comprehensive tax base was necessary, the commission noted, as “relative to other kinds of taxpayers, employees have been overtaxed”; to achieve horizontal equity, capital gains would also have to be subject to taxation (pp. 12–13). The commission observed,

The top marginal rate is now about 80 per cent, and applies to income in excess of $400,000 they are readily avoided by most of the few wealthy people with incomes of this size … so that the effective marginal rate is much lower. Indeed, the effective average rate of tax on all income, including property gains, is now probably no more for extremely wealthy people than it is for those with much lower incomes.

We have examined the weight of total taxes on groups of families and individuals with different incomes as well as the value of the government benefits they receive, and find that while most middle and upper income taxpayers are net contributors to government, many of those at the very top are not making net contributions that are sufficiently large relative to their discretionary economic power. Broadening the base as we recommend, and lowering the rates as we propose, would increase the weight of tax on many wealthy families and individuals because the lower marginal rates would be more than offset by the broader base. (p. 21)

The Commission went further, commenting that “under the present tax system low income families pay a surprisingly high proportion of their income in taxes” (p. 42). The Commission also noted the economic impact of tax distortions:

The narrow tax base and some extremely expensive incentive or concessionary provisions built into the present system mean that, to raise the required revenue, tax rates have to be higher than would otherwise be necessary, and the tax burden on some is therefore correspondingly heavier. This has the effect of driving labour and capital away from activities that are heavily taxed and drawing them into tax-favoured activities. Unless these pressures nicely compensate for non-tax distortions in the market, labour and capital are less productively employed than they should be. Fewer goods and services are available for Canadians. (p. 24)

Finally, the commission estimated that if its recommendations were fully implemented 46.5 per cent of Canadians would see their tax burdens reduced by at least 15 per cent. Moreover, 44.1 per cent would see their taxes substantially unchanged, increasing or decreasing by less than 15 per cent, and only 9.4 per cent of Canadians would see their taxes increase by at least 15 per cent (p. 45). It concluded that “we are confident that with lower marginal rates of tax on wages and salaries to encourage labour and managerial effort, with little change in the rate of capital formation and with a much improved allocation of capital, the future output of the goods and services Canadians want would be increased” (p. 48).

Unfortunately, the recommendations were never fully implemented. The government of Pierre Trudeau released a white paper in 1969 proposing some of the commission’s ideas, but opposition from several provincial governments, oil and gas and mining companies and small business groups was so vociferous that Trudeau never undertook major reforms. Still, the report did lead to the partial taxation of capital gains, which was a lasting change.

Time for Carter Commission redux, 2016

In the 50 years since the Carter Commission reported, Canada’s tax system has become even more incoherent, inefficient, complex and unfair than it was in the 1960s. It has moved further away from the “a buck is a buck” principle that underpinned the Carter Commission’s recommendations for a fair and efficient system.

The problems with today’s tax system sound remarkably similar to those identified by the Carter Commission. This has not escaped the notice of commentators. Andrew Coyne, for example, has called for “a similarly sweeping overhaul of the tax system.”4 The problems with our tax system have drawn together such diverse groups as the Canadian Centre for Policy Alternatives, the Canadian Union of Public Employees,5 the Fraser Institute,6 the Canadian Council of Chief Executives and the Canadian Taxpayers Federation. Each has criticized the system’s inefficiency, complexity and unfairness, albeit with different emphases.

In 2012, the Conference Board of Canada noted that the Canadian tax system “has been stripped of the basic principles of efficiency, neutrality, and transparency due to myriad changes that have been added over the past two decades without regard to how the entire tax system is functioning.”7 The Canadian Chamber of Commerce has called for a comprehensive review of the tax system.8 Neil Brooks and Linda McQuaig, for their part, commented in 2015,

One of the most distinctive aspects of Harper’s tax agenda has been the enactment of a whole series of “boutique” tax breaks aimed at narrowly-defined groups of potential supporters … Embedding them in the tax system creates a number of problems: it undermines the legitimacy of the tax system … increases the complexity of tax legislation and the filing of tax returns … and invariably makes the tax system more regressive since the credits are usually claimed only by middle- and high-income taxpayers.9

Marc Lee and Iglika Ivanova, in a report prepared for the Canadian Centre for Policy Alternatives in 2013, looked back further, criticizing ad-hoc tax changes since the 1990s for seriously weakening the redistributive role of Canada’a tax system at a time when market inequalities call for more, not less, redistribution. They noted that “by 2005 … Canada’s top 1% faced overall tax rates slightly lower than those of households in the bottom 10%, with the highest tax rates found in the middle to upper-middle part of the income distribution.”10 They advocated broadening the tax base and reducing the number of tax deductions and tax credits, returning to the Carter Commission principle that “a buck is a buck.”11 Similarly, in the article cited above, Jack Mintz argued that most existing credits and targeted preferences can and should be eliminated, simplifying the tax system while decreasing its distorting effect on economic decisions. The few exceptions he would allow would be such things as deductions for education costs, which are an investment in human capital, and expenses incurred to earn a living, such as the costs of caring for children and disabled dependants.12

On the political side, the late Jim Flaherty made it a personal mission as Minister of Finance to close tax loopholes in the name of “fiscal integrity,” to the point of putting an end to income trusts, contrary to a Conservative election promise, and opposing Prime Minister Harper on the propriety of income-splitting. Flaherty was quoted as saying that the government has “been looking at various loopholes that some people engage in in order to avoid paying their fair share of taxes.”13 Tax policy experts endorsed Flaherty’s effort, as it would have not only made the tax system simpler and more efficient but also encouraged economically efficient decisions, bringing fairer results to Canadians. Unfortunately, the Harper government overall seemed more enamoured of narrowly framed tax credits to potential Conservative voters than of making the tax system simpler, more efficient and fairer.

It is doubtful that last October’s change in government at the federal level will lead to real improvement in our tax system. So far, on top of the Conservative government’s numerous “boutique” tax credits, the new Liberal government has promised a “middle class” tax cut that benefits the wealthy rather than the actual middle class. In exchange, there will be a new, higher tax bracket for the extremely wealthy, which will not generate enough revenue to offset the tax cut. This may make good electoral politics, but as fiscal policy it simply adds incoherence onto incoherence.

The Liberals have also promised to invest in infrastructure to help stimulate the economy. These investments will generate jobs in the short term, but what is really needed is the fundamental, long-term economic stimulus that comes from policies to enhance our productivity. From various OECD and other studies, we know that income inequality, which has been growing in Canada in recent decades, impedes economic growth. As the Carter Commission told us 50 years ago, a fair, progressive tax system that is built on a broad tax base and does not distort economically efficient decisions by businesses and individuals can reduce income inequality and enhance our productivity as a country.

Recently, the House of Commons Finance Committee called for a royal commission to investigate ways to reduce the Canadian tax system’s inefficiency and complexity, adding to the many criticisms of the Canadian tax system as it exists today and calls from across the political spectrum for a comprehensive review. It seems that Andrew Coyne is right: nearly 50 years after Kenneth Carter delivered his report, the creation of a royal commission to undertake a similar study and propose a similarly comprehensive reform of the tax system is an idea whose time has come – again.


1 Jack Mintz, “17 Reasons Why Canada Needs Simple Tax Reform Now,” Financial Post Magazine, April 3, 2014.

2 For all information and quotes drawn from the Carter Commission Report, see Royal Commission on Taxation, Report, Vol. 1 (Ottawa: Queen’s Printer, 1966).

3 Boris I. Bittker, “Income Tax Reform in Canada: The Report of the Royal Commission on Taxation,” 35 U. Chicago Law Rev 637 (1967–68), p. 637.

4 Andrew Coyne, “Returning to the Fairness of the ‘A Buck is a Buck’ Principle of Taxation,” National Post, November 26, 2014.

5 Toby Sanger, an economist with the Canadian Union of Public Employees, has observed that increasingly generous tax loopholes for the wealthy have increased inequality, led to greater financial instability for government, and actually slowed down economic growth, as noted by Daniel Tencer in his February 24, 2016, article for the Huffington Post Canada, “Tax Loopholes For Rich Cost Canada $16 Billion A Year: Study.”

6 In a January 2015 paper for the Fraser Institute entitled Reforming Federal Personal Income Taxes: A Pro-Growth Plan for Canada, Charles Lammam, Joel Eames, Jason Clemens and Niels Veldhuis noted that “a proliferation of tax expenditures … have complicated the income tax system and do not increase incentives for individuals to work, save, invest, or engage in entrepreneurial activities … There is an opportunity to broaden the tax base by eliminating a number of these measures and to use the fiscal room to offset the cost of broad-based personal income tax reductions” (p. 1).

7 Glen Hodgson, Reinventing the Canadian Tax System: The Case for Comprehensive Tax Reform (Ottawa: Conference Board of Canada, 2012), p. 1, retrieved here.

8 Reported by Andrew Coyne in “Returning to the Fairness.”

9 Neil Brooks and Linda McQuaig, “Robbing the Poor to Give to the Rich,” Canadian Dimension, October 6, 2015, retrieved here.

10 Marc Lee and Iglika Ivanova, Fairness by Design: A Framework for Tax Reform in Canada (Ottawa: Canadian Centre for Policy Alternatives, 2013), pp. 16, 18, retrieved here.

11 Ibid., pp. 21–27.

12 Mintz, “17 Reasons Why Canada Needs Simple Tax Reform Now.”

13 Quoted in Coyne, “Returning to the Fairness.”