Taxation is bad enough, but inflation doubles the pain says new report

CD Howe Institute highlights how inflation is negatively impacting Canadians' tax burden

Taxation is bad enough, but inflation doubles the pain says new report
Steve Randall

While some of the impacts of oversized inflation are plain for all to see, others are less obvious, such as how it affects our tax burden.

With many Canadians already unhappy about the level of taxation, even among the highest income earners, a new report from the CD Howe Institute will be of no comfort.

Written by CEO William Robson and director of research Alexandre Laurin, the report highlights how some federal and provincial taxes are adjusted for inflation, some are not. And even those that are, may not be done in the best interests of taxpayers.

As an opening thought, the report asserts that inflation is a form of taxation, given that “…when inflation reduces the currency’s purchasing power, the government gains from the lower value of the liability at the expense of the currency holder, who loses from the lower value of her asset.”

But the report, Double the Pain: How Inflation Increases Tax Burdens, goes on to point out how inflation interacts with certain taxes, “often increasing the tax bite, with little transparency or legislative oversight.”

Personal income tax is a case in point. If prices and incomes rise, people may be pushed over higher tax thresholds and pay a larger share of their income in tax even though their purchasing power has not increased.

The report acknowledges that Canada is one of only nine countries out of 160 analyzed that does increase tax thresholds periodically in line with inflation, although this is not universal across all provinces or all thresholds.

It gives the example of Ontario where the two thresholds for those earning more than $150,000 are not indexed to the Consumer price Index.

The $150K and $220K thresholds were set in 2014 so, given inflation, those thresholds drop to $120K and $176K in 2014 dollars.

The report notes that Child Care Expense Deduction, Northern Residents Deduction, and the $10,000 foreign employee exemption in the Canada-US tax treaty are among other parts of income tax that are not indexed to inflation.

Other taxes

Personal Income tax is not the only area eroded by inflation.

Tax credits and transfers, business income taxes, and consumption taxes are also negatively affected.

And then there’s investment income taxes.

The report gives the example of a 1-year GIC which recently yielded 4.4%, the same amount as inflation at the time, resulting in a zero real return. But a 40% income tax rate would cut the return to around 2.6% and the inflation would take it to minus 1.8%.

While the interaction of inflation and taxation is often complex, the report calls for action from policymakers.

“Our starting position is that all thresholds for income and consumption taxes should rise with

consumer prices from now on. Changes in the real value of thresholds should be explicit and transparent, not accidental by-products of monetary policy,” the authors state.

The full report is available from