Few people today realize that income tax was introduced in Canada in 1917 as a temporary war measure. The finance minister at the time, Sir Thomas White, called the bill the War Tax Upon Income Bill, reflecting the hope that this bill would be repealed once the war was over. Almost 100 years later, Canadians still pay income tax.
Some taxpayers, though, are seeing a reversal of fortune, with less of their hard-earned money going into government coffers, and more staying in their pockets. In fact, most provincial governments are reducing income taxes. Good thing too, as a Statistics Canada report showed that income taxes were the biggest expense for Canadian households in 2007, bigger than even shelter costs.
So now, provincial politicians in British Columbia, Alberta and Saskatchewan twist themselves into pretzels trying to make the claim that that their province has the lowest income taxes. Of course, only one province can be the lowest. Figuring out which is the lowest is no easy task. But for people wondering which province rewards working, saving, and investing the most, it pays to find out.
In an ideal world, determining which province has the lowest taxes would be a breeze. Imagine if the income tax form was the size of a postcard. All taxpayers would have to do is fill in their income and subtract a personal exemption, a spousal exemption, any child exemption, and any RRSP and charitable contributions. Taxpayers would then multiply the remainder by a single tax rate, subtract any tax already paid, and voila, pay the balance, that's it.
Alberta has the closest to a flat personal income tax system in Canada. An income tax rate of 10 percent is paid at all income levels over $16,775, the basic personal exemption.
But does that mean people in Alberta pay less income tax than those in B.C. and Saskatchewan? Alberta claims "Albertans face the lowest taxes among provinces," and that "a working family with two children that is eligible for the Alberta Family Employment Tax Credit can earn $41,100 before paying provincial income tax."
However, the Alberta government does confess that at some income levels Albertans pay more in income taxes than they would in other provinces. In fact, B.C.'s Finance Minister Colin Hansen claims B.C. has "the lowest tax rates in Canada for anyone earning up to $111,000 a year. Individuals earning $15,000 or less will pay no provincial income tax in B.C."
But what about Saskatchewan? The Premier of Saskatchewan, Brad Wall claims "a working family with two children can now earn up to $41,300 before they start to pay any provincial income tax." That beats Alberta.
Saskatchewan has seen the wisdom of leaving money in its citizens’ pockets. It implemented a major tax reform in October 2008. Both the basic personal and spousal exemption rose to $12,945. The top marginal tax rate, of 15 percent, kicks in at incomes over $72,000.
Saskatchewan's income tax system has three rates instead of Alberta's one, but B.C. has a complicated system of five marginal tax rates. The basic personal exemption in B.C. is $9,373, but the spousal exemption is only $8,026, which is reduced once spousal income falls below $803. The top marginal tax rate of 14.7 percent kicks in at incomes over $99,588.
Politicians get as twisted as pretzels because of the myriad of add-ons and exemptions to the income tax system. For example, as of January 1, 2009 B.C. is the only province of the three that still charges a health tax -- but there are exemptions. Alberta claims that although some people might pay more income tax than in other provinces, the lack of a sales tax makes up for it. How is the average taxpayer supposed to figure this out?
Add-ons and exemptions, while no-doubt well intentioned, complicate the system. It is possible that some people who are eligible for an exemption may not know about it and not get the benefit from it. Removing the jumble of deductions increases the system's transparency and allows for a lower tax rate.
So, which province is on first? Alberta. Not just thanks to the lack of a health premium tax or a provincial sales tax, but because of the relative simplicity of Alberta’s income tax code. That beats Saskatchewan.
What this means is instead of tax systems riddled with feel-good deductions making provincial comparisons a cumbersome task, a lower, simpler and flatter tax system will allow everyone, including those without an accounting designation, to choose the best place to live and work. A transparent tax system allows government to raise revenue and gets politicians out of the social engineering business. One single, low tax rate rewards people for working hard, saving, and investing -- it doesn't punish people for being successful as the high marginal tax rates in Saskatchewan and B.C. do.
Maureen Bader, BC Director,
Scott Hennig, AB Director,
Lee Harding, SK Director,
