Top 20 Percent of Canadian Earners Pay More Than Half of Nation’s Taxes: Study

The Canada Revenue Agency building is seen in Ottawa on April 6, 2020. The Canadian Press/Adrian Wyld

The top 20 percent of income-earning families in Canada contribute nearly two-thirds of the country’s personal income taxes and more than half of total tax revenue, a new study suggests.

The highest income-generating households contribute 65.3 percent of the total personal income taxes and 58.3 percent of all taxes, while earning 49.5 percent of the total family income in Canada, according to a newly published report by the Fraser Institute.

Despite this, the report authors wrote that there is a “common misperception” in Canada that top income earners do not pay their fair share of taxes. They argued that assessing “fairness” requires examining the relationship between the share of income earned by a group and the share of total taxes it contributes.

Earnings Vs. Taxes

The report outlines what different income groups earn compared to what they pay in taxes each year.

The lowest 20 percent of income-earning families—those with earnings ranging from $0 to $63,068—contribute 1.7 percent of the overall tax revenue while accounting for 4.3 percent of the total family income, the report says.

Households earning between $63,089 and $111,354 contribute 6.5 percent of the overall taxes while receiving 9.3 percent of the total family income. The middle-income group, which earns between $111,355 and $171,298, contributes 12.7 percent of taxes and earns 14.6 percent of total income.

Families in the second highest income bracket—$171,299 to $270,472—contribute 20.8 percent of total taxes, while accounting for 22.3 percent of the total family income.

The data shows the top 20 percent of income-earning households— those earning more than $270,472—are the only group that bears an unequal share of the overall tax burden when compared to their income share. Top income earners pay approximately 16 percentage points more than their share of total income, and have an earnings and payment disparity of 8.8 percentage points, the report notes.

“The idea that top earners don’t pay their ‘fair share’ of taxes ignores the evidence that these families pay a disproportionately large share of the total tax bill,” Fraser Institute director of fiscal studies and co-author of the report Jake Fuss said in a press release. “Canadians should be aware that the country’s tax system is already progressive, and calls to raise taxes further on top earners can have unintended economic consequences.”

Earlier studies referenced in the research indicate that increases in taxes for high-income Canadians frequently lead to changes in behaviour.

When faced with the higher 2016 rate, affected taxpayers actively adjusted their behaviour to reduce taxable income through strategies like tax planning, income shifting, and avoidance, the report said.

Furthermore, because the tax change was announced in 2015, many top earners accelerated their income into the previous tax year to avoid the new, higher rate, causing average total income for these earners to jump in 2015 and then decline in 2016.

Tax hikes also diminish Canada’s competitiveness compared to other developed nations, the report said. Raising taxes on high-income earners in particular renders Canada a less appealing destination for highly skilled workers, including doctors, scientists, managers, and software engineers.

Canada has the fifth-highest combined personal income tax rate out of the 38 countries in the Organisation for Economic Co-operation and Development (OECD), the authors said.