Canadian Income Tax Act: Watershed Moments

Tax on income at the Federal level began in Canada in 1917.  It was introduced as a means to fund war time spending, and as such was called the Income War Tax Act.  It was then described as a temporary measure, but as we know today, it became a permanent and important source of tax revenue thereafter.  For example, in 1917, tax on income provided approximately 2% of all federal revenue, whereas a century later, it is providing over 50% of all federal revenue.  (See Fraser Institute Infographic) What happened?  I present for you here a sampling of what I consider are watershed moments in the history of our income tax system.

1941 – Up until now, the provinces had the right to levy provincial income tax for their own spending needs.  In 1941, the provinces surrendered that right to the federal government in exchange for “rental” payments from the federal to the provinces.

1942 – Pay-as-you-earn income tax is introduced.  Employers are now required to withhold tax from employee earnings and remit these amounts to the federal government each period.

(Click thumbnail to open a 1949 Income tax return in new window)

1949 – The Income War Tax Act is renamed, Income Tax Act, the first indication that income tax is no longer considered temporary.

1964 – “Social Insurance Numbers” replace “Unemployment Insurance Numbers” as the means to identify taxpayers.

1966 – Canada Pension Plan (CPP) is launched and “premiums” are added to the income tax system.  Maximum annual premium is $79.20, or 1.8% of the maximum insurable earnings of $4400.

1988 – “Personal Deductions” changes to “Non-Refundable Tax Credits”.  Instead of using these deductions to reduce your taxable income (at your highest marginal tax rate), these same deductions become credits, which can only be used to reduce your income tax at one flat tax rate (the lowest marginal tax rate).

What’s next?

2016 – New requirement to report the sale of a principal residence (your home).  Is this the precursor for a new tax?  Will there soon be tax levied on the “gain” from the sale of your home?

A government’s only source of revenue is taxation.  The bigger it grows, the more it taxes.  Watershed moments are taxation growth leaps or signals of a leap in the making.