Taxing What We Earn, Spend, and Leave Behind
Taxes Reflect Choices
We Canadians probably think of taxes as primarily about raising government revenue. But taxes also reveal what society chooses to tax.
In Canada, we tax what people earn through income tax. We tax what people spend through provincial sales taxes, the Goods and Services Tax (GST), and the Harmonized Sales Tax (HST) in some provinces. We also tax some of what people accumulate and eventually pass on, such as through realized capital gains and the deemed disposition of many capital assets at death.
No one particularly enjoys paying taxes, but tax policy begins with a prior question: What should we tax? Should governments tax what people earn, what they spend, or what they accumulate over time? Each approach has strengths and drawbacks, and none is as simple as it first appears.
Income taxes: Familiar and Progressive, but Complex
Income tax is likely Canadians’ most familiar major tax. It is considered progressive because higher-income households generally pay tax at a higher rate. It also allows governments to deliver income-tested credits and benefits.
Its strengths are familiar. Income tax is relatively easy to collect through payroll withholding, generally reflects ability to pay, and can support redistribution through credits and benefits.
Its weaknesses are also familiar. The tax system is increasingly complex. Different types of income are taxed differently. Income tax can discourage extra work, saving, investment, or the realization of capital gains. It can also create incentives for tax planning and avoidance.
Tax planning is not, in itself, a problem. Canadians are entitled to arrange their affairs in lawful ways that reduce or defer tax. Contributing to an RRSP, using a TFSA, claiming available credits, splitting eligible pension income, or donating publicly traded securities in kind are all ordinary examples of legitimate tax planning.
The concern is different. As the tax system becomes more complex, it tends to create more opportunities for those with higher incomes, larger portfolios, private corporations, trusts, capital gains, and access to professional advice. Some planning follows both the letter and the purpose of the law. Other planning may push closer to the line, using technical rules to achieve results that legislators may not have intended. That is where tax avoidance, especially aggressive or abusive tax avoidance, becomes an issue. Tax evasion is different again: it is illegal and involves false reporting, concealment, or fraud.
The great strength of income tax is that it can be targeted. The great weakness is that every attempt to target it more precisely tends to make it more complicated.
Consumption Taxes: Efficient, but Need Fairness Offsets
We may not be familiar with the term “consumption tax,” but the taxes themselves are familiar. Provinces have sales taxes. At the federal level, we pay the GST or, in some provinces, the HST. These are taxes on spending, or consumption, rather than on earnings, savings, or investments.
Consumption taxes have value because they are broad-based, relatively efficient, harder to avoid than some income or wealth taxes, and less directly punitive toward saving and investment. The OECD has generally found consumption taxes to be less harmful to economic growth than personal and corporate income taxes.
Economists generally favour saving not because spending is bad, but because saving can become capital for investment. Investment can support productivity, business growth, infrastructure, and future wages.
Nevertheless, there are weaknesses. Lower-income households tend to spend more of their income, which can make consumption taxes regressive unless refundable tax credits are available. Higher GST/HST rates are also politically difficult. Finally, exemptions and credits that make the system fairer for those at the lower end of the income spectrum also make the system more complicated.
Wealth Taxes: A Real Concern, but Difficult to Design
As wide as the gap can be between high earners and low earners, the gap between ultra-wealthy Canadians and those with low or even negative net worth is even more dramatic. The Parliamentary Budget Officer estimates that in 2023, Canada’s top 0.1% of economic families, about 16,900 families with net wealth of at least $35.8 million, held $1.856 trillion in total net wealth, or 11.4% of the national total. In contrast, TD Economics, citing Statistics Canada’s 2023 Survey of Financial Security, reported median net worth of only $12,500 for households in the lowest quintile.
This is why arguments in favour of a wealth tax should be taken seriously.
A wealth tax directly addresses the problem of extreme concentrations of wealth. It may also reach people with large assets but relatively low taxable income. It responds to concerns about inherited or dynastic economic power.
This is not to say that a wealth tax would be easy to implement. Valuation is difficult. How do you put a price on private businesses, farms, cottages, art, and other illiquid assets? Wealthy taxpayers may restructure their financial assets or simply move. The latter is often referred to as “capital flight.” Liquidity can also be a problem. Even if a wealthy person is willing to pay, they may have to liquidate assets to raise the necessary cash. It could be quite difficult, for example, to sell off part of a farm or cottage. Overall, administration and enforcement look daunting.
Annual wealth taxes hold a certain appeal because they aim directly at concentrated wealth. They are difficult because they require governments to value and police that wealth year after year.
Wealth-Transfer Taxes: A Possible Middle Ground
Many countries tax accumulated wealth when it changes hands. For example, Canada uses “deemed disposition at death” for many capital assets. The U.S. has estate and gift taxes, payable by the estate or the giver, though with high exemptions and significant tax-planning opportunities. Japan has inheritance and gift taxes, but these are payable by the recipient. Other countries use similar estate, inheritance, or gift-tax systems.
These systems are not identical to an annual wealth tax, but they are still ways of taxing accumulated wealth. Estate, inheritance, gift, and deemed-disposition rules may offer a more practical middle ground. By taxing wealth when it changes hands, rather than requiring an annual valuation, it is easier for both tax agencies and taxpayers to manage.
The Tax Mix Matters
No tax is perfect. Each approach has trade-offs. One may be efficient but feel unfair. Another may be fair in principle but difficult to administer. Another may be familiar, but so complex that only some taxpayers can take advantage of its rules.
I am also aware of this personally. As someone preparing to enter retirement, I will soon stop earning employment or business income, but I will not stop paying tax. I may pay income tax on RRIF withdrawals, pension payments, annuity income, interest, dividends, and realized capital gains from non-registered accounts. My wife and I would also like to share some of our wealth with our children while it is still useful to them. That, too, can become complicated, especially because one of our children lives in Japan, where gift-tax rules are much more restrictive than Canada’s rules for gifts to adult children.
In short, taxation is challenging because life is complicated. People earn, spend, save, invest, retire, give, inherit, and support family members across borders. A tax system has to deal with all of that.
A good tax system should raise the revenue society needs, protect those least able to pay, and avoid unnecessary complexity. Income, consumption, and wealth each tell only part of the story. The challenge is finding a tax mix that is fair enough, efficient enough, and practical enough to endure.
What do you think? If Canada were to update its tax system, what should change first?
This is the 313th blog post for Russ Writes, first published on 2026-07-06.
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