What if Canada’s Income Tax Rate Was Zero?

It won’t happening. And perhaps it shouldn’t happen. But we can talk.

By reputation, income tax is an immutable fact of life. But perhaps we can push back against that popular assumption. Or, to put it a different way, thinking about how different things can be is actually loads of fun.

That’s not to suggest that accurately anticipating the full impact of blowing up central economic pillars is simple. But it’s worth a conversation.

First off, because they’ve been around so long, we can easily lose sight of the fact that income taxes cause real economic pain. The median Canadian household earns around $85,000 in a year. Of that, some 13 percent ($11,000) is lost to federal income tax. Provincial income tax and sales taxes, of course, drive that number a lot higher. If owning a house is out of reach for so many Canadians, that’s one of the biggest reasons why.

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Having said that, the $200 billion or so in personal income taxes that Canada collects each year represents around 40 percent of federal spending. In fact, in the absence of other policy changes, eliminating federal personal income tax would probably lead to significant drops in business tax revenues too. (I could see many small businesses choosing to maximize employee salaries to reduce their corporate tax liability.)

So if we wanted to cut taxes without piling on even more debt, we’d need to replace that amount either by finding alternate revenue sources or by cutting spending. If you’ve been keeping up with The Audit, you’ve already seen where and how we might find some serious budget savings in previous posts.

But for fascinating reasons, some of that $200 billion (or, including corporate taxes, $300 billion) shortfall could be made up by wiping out income tax itself. How’s that?

For one thing, many government entitlements and payouts essentially exist to make up for income lost through taxes. For example, the federal government will spend around $26 billion on child tax credits (CCB) in 2025. Since those payments are indexed to income, eliminating federal income tax would, de facto, raise everyone’s income. That increase would drop CCB spending by as much as $15 billion. Naturally, we’d want to reset the program eligibility thresholds to ensure that low-income working families aren’t being hurt by the change, but the savings would still be significant.

There are more payment programs of that sort than you might imagine. Without income taxes to worry about:

The $6.2 billion GST/HST credit would cost us around $3 billion less each year.
The Canada Workers Benefit (CWB) could cost $1.5 billion dollars less.
The Old Age Security (OAS) Clawback would likely generate an extra billion dollars each year in taxes.
The Guaranteed Income Supplement for low-income OAS recipients could save $4 billion a year.

Even when factoring in for threshold recalculations to protect vulnerable families from unintended consequences, all those indirect consequences of a tax cut could easily add up to $20 billion in federal spending cuts. And don’t forget how the cost of administering and enforcing the income tax system would disappear. That’ll save us most of the $11 billion CRA costs us each year.

Nevertheless, last I heard, $30 billion (in savings) was a long, long way from $300 billion (in tax revenue shortfalls). No matter how hard we look, we’re not going to find $270 billion in government waste, fraud, and marginal programs to eliminate. And adding more government debt will benefit exactly no one (besides bond holders).

Ok then, let’s say we can find $100 billion in reasonable cuts (see The Audit for details). That would get us close to half way there. But it would also generate some serious economic turbulence.

On the one hand, such cuts would require dropping hundreds of thousands of workers off the federal payroll¹. It would also exert powerful downward pressure on our gross domestic product (GDP).

On the plus side however, a drop in government borrowing of this scale would likely reduce interest rates. That, in turn, could spark private investment activities that partially offset the GDP hit. If you add the personal wealth freed up by our income tax cuts to that mix, you’d likely see another nice GDP bump from sharp increases in household spending and investments.

Precisely predicting how a proposed change might affect all these moving parts is hard. Perhaps the ideal scenario would involve 20 percent or 50 percent cuts to taxes rather than 100 percent. Or maybe we’d be better off by playing around with sales tax rates. But I’m not convinced that anyone is even seriously and objectively thinking about our options right now.

One way or the other, the impact of such radical economic changes would be historic. I think it would be fascinating to develop data models to calculate and rank the macro economic consequences of applying various combinations of variables to the problem.

But taxation is a problem. And it’d be an important first step to recognize it as such.

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Although on the bright side, as least they wouldn’t have to worry about delayed or incorrect Phoenix payments anymore.

Related Topics:#DavidClinton CanadaGovernmentSpending CanadaIncomeTax CanadaTaxRate TheAudit

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Agriculture

Dairy Farmers Need To Wake Up Before The System Crumbles

Published on March 6, 2025

Todayville

From the Frontier Centre for Public Policy

By Dr. Sylvain Charlebois

Without reform, Canada risks losing nearly half of its dairy farms by 2030, according to experts

Few topics in Canadian agriculture generate as much debate as supply management in the dairy sector. The issue gained renewed attention when former U.S. President Donald Trump criticized Canada’s protectionist stance during NAFTA renegotiations, underscoring the need to reassess the system’s long-term viability.

While proponents argue that supply management ensures financial stability for farmers and shields them from global market volatility, critics contend that it inflates consumer prices, limits competition, and stifles innovation. A policy assessment titled Supply Management 2.0: A Policy Assessment and a Possible Roadmap for the Canadian Dairy Sector, conducted by researchers at Dalhousie University and the University of Guelph, sheds light on the system’s inefficiencies and presents a compelling case for reform.

Designed in the 1970s to regulate production and stabilize dairy prices, Canada’s supply management system operates through strict production quotas and high import tariffs. However, as successive trade agreements such as the USMCA, CETA, and CPTPP erode these protections, the system appears increasingly fragile. The federal government’s $3-billion compensation package to dairy farmers for hypothetical trade losses is a clear indication that the current structure is unsustainable.

Instead of fostering resilience, supply management has created an industry that is increasingly dependent on government payouts rather than market-driven efficiencies. If current trends persist, Canada could lose nearly half of its dairy farms by 2030 — regardless of who is in the White House.

Consumer sentiment is also shifting. Younger generations are questioning the sustainability and transparency of the dairy industry, particularly in light of scandals such as ButterGate, where palm oil supplements were used in cow feed to alter butterfat content, making butter harder at room temperature. Additionally, undisclosed milk dumping of anywhere between 600 million to 1 billion litres annually has further eroded public trust. These factors indicate that the industry is failing to align with evolving consumer expectations.

One of the most alarming findings in the policy assessment is the extent of overcapitalization in the dairy sector. Government compensation payments, coupled with rigid production quotas, have encouraged inefficiency rather than fostering innovation. Unlike their counterparts in Australia and the European Union — where deregulation has driven productivity gains — Canadian dairy farmers remain insulated from competitive pressures that could otherwise drive modernization.

The policy assessment also highlights a growing geographic imbalance in dairy production. Over 74% of Canada’s dairy farms are concentrated in Quebec and Ontario, despite only 61% of the national population residing in these provinces. This concentration exacerbates supply chain inefficiencies and increases price disparities. As a result, consumers in Atlantic Canada, the North, and Indigenous communities face disproportionately high dairy costs, raising serious food security concerns. Addressing these imbalances requires policies that promote regional diversification in dairy production.

A key element of modernization must involve a gradual reform of production quotas and tariffs. The existing quota system restricts farmers’ ability to respond dynamically to market signals. While quota allocation is managed provincially, harmonizing the system at the federal level would create a more cohesive market. Moving toward a flexible quota model, with expansion mechanisms based on demand, would increase competitiveness and efficiency.

Tariff policies also warrant reassessment. While tariffs provide necessary protection for domestic producers, they currently contribute to artificially inflated consumer prices. A phased reduction in tariffs, complemented by direct incentives for farmers investing in productivity-enhancing innovations and sustainability initiatives, could strike a balance between maintaining food sovereignty and fostering competitiveness.

Despite calls for reform, inertia persists due to entrenched interests within the sector. However, resistance is not a viable long-term strategy. Industrial milk prices in Canada are now the highest in the Western world, making the sector increasingly uncompetitive on a global scale. While supply management also governs poultry and eggs, these industries have adapted more effectively, remaining competitive through efficiency improvements and innovation. In contrast, the dairy sector continues to grapple with structural inefficiencies and a lack of modernization.

That said, abolishing supply management outright is neither desirable nor practical. A sudden removal of protections would expose Canadian dairy farmers to aggressive foreign competition, risking rural economic stability and jeopardizing domestic food security. Instead, a balanced approach is needed — one that preserves the core benefits of supply management while integrating market-driven reforms to ensure the industry remains competitive, innovative and sustainable.

Canada’s supply management system, once a pillar of stability, has become an impediment to progress. As global trade dynamics shift and consumer expectations evolve, policymakers have an opportunity to modernize the system in a way that balances fair pricing with market efficiency. The recommendations from Supply Management 2.0 suggest that regional diversification of dairy production, value-chain-based pricing models that align production with actual market demand, and a stronger emphasis on research and development could help modernize the industry. Performance-based government compensation, rather than blanket payouts that preserve inefficiencies, would also improve long-term sustainability.

The question is no longer whether reform is necessary, but whether the dairy industry and policymakers are prepared to embrace it. A smarter, more flexible supply management framework will be crucial in ensuring that Canadian dairy remains resilient, competitive, and sustainable for future generations.

Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.

Business

Canada’s Aging Population Is Creating A Fiscal Crisis

Published on March 6, 2025

Todayville

From the Frontier Centre for Public Policy

By Ian Madsen

Rising OAS and GIS costs outpacing economic growth, straining the federal budget

Canada’s aging population is creating a financial crisis that policymakers cannot afford to ignore. The rising costs of Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) pose a growing risk to federal finances, yet no dedicated funding has been established to ensure their long-term viability.

The numbers are staggering. The 2024 Financial Accounts (Public Accounts of Canada, Volume I, p. 43) show that spending on elderly benefits rose at a compound annual growth rate (CAGR) of 6.24 per cent between 2015 and 2024, climbing from $44.1 billion to $76.04 billion. Over the same period, total federal program spending increased at a CAGR of 7.24 per cent, from $248.7 billion to $466.7 billion.

Although elderly benefits made up 17.7 per cent of total program spending in 2015, they now account for 16.3 per cent. This decline is not due to reduced spending but rather a surge in pandemic-related government expenditures, which temporarily outpaced OAS-GIS growth. Nevertheless, the trajectory is clear: elderly benefits are now the federal government’s third-largest expense, behind only ‘Other Transfer Payments’ and ‘Operating Expenses.’

While these figures already indicate a growing fiscal challenge, government projections suggest the problem will only get worse. According to the federal Fall Economic Statement (Table A1.11, p. 211), economic growth is expected to average four per cent annually until 2029-30. Yet OAS-GIS costs are projected to grow at a compound annual growth rate of 6.5 per cent, outpacing both GDP growth and other program spending. By 2029-30, spending on elderly benefits is expected to reach $104.4 billion, or 18.3 per cent of all program expenditures.

Government projections highlight the rapid growth in elderly benefits over the next six years, as shown in the table below:

Fiscal Year                  Elderly Benefits ($B)                Total Program Expenses ($B)              Percentage of Total Program Expenses
2023-24                       76.0                                          466.7                                                   16.2 per cent
2024-25                       80.9                                          485.7                                                   16.7 per cent
2025-26                       85.5                                          500.3                                                   17.1 per cent
2026-27                       90.1                                          509.3                                                   17.7 per cent
2027-28                       94.6                                          529.7                                                   17.9 per cent
2028-29                       99.5                                          549.7                                                   18.1 per cent
2029-30                       104.4                                        570.3                                                   18.3 per cent

As the table shows, OAS-GIS spending is rising as a proportion of total government expenditures. This mirrors the original crisis in the Canada Pension Plan (CPP), when benefits outpaced contributions as the population aged.

The CPP once faced a similar sustainability crisis, and its reform in 1997 offers a potential model for addressing the challenges of OAS-GIS today. The federal government overhauled the CPP by creating the Canada Pension Plan Investment Board (CPPIB), which now manages $570 billion in assets. At the time, CPP benefits were paid through general government revenues rather than dedicated investments.

The solution involved higher contribution rates and the creation of an independent investment board to manage the fund sustainably.

These changes secured the CPP’s future, but OAS-GIS remains entirely dependent on government revenue, with no financial backing of its own. That makes it even more vulnerable to economic downturns and demographic shifts.

Policymakers must take decisive action to secure its future. One option is to tighten eligibility criteria to curb uncontrolled spending. Cost-of-living adjustments should also be limited to official inflation measures, ensuring sustainability without unfairly burdening low-income seniors.

The federal government must acknowledge the problem before it becomes unmanageable. The next finance minister should seek input from actuaries, investment professionals, economists and the public to explore feasible long-term solutions. A dedicated OAS-GIS Investment Board, similar to the CPPIB, could help ensure the program’s sustainability. The government already expanded CPP in 2019—there is precedent for such an approach.

Since OAS-GIS has no existing assets, the government will need to inject capital into the program. This could be done through annual surpluses deemed excessive for current needs or through long-term debt financing. Issuing 30-, 40- or even 50-year bonds specifically designed to fund OAS-GIS could provide a market-friendly, fiscally responsible path to solvency. If properly structured, such a plan could improve Canada’s credit rating rather than weaken it, ultimately reducing borrowing costs.

Even today, OAS-GIS spending exceeds the annual federal deficit, a clear warning sign that this issue can no longer be ignored. If no action is taken, Canada will face soaring elderly benefits with no sustainable way to fund them.

The time to act is now. Delaying reform will only make the crisis worse, burdening future generations with an unsustainable system. Policymakers have a choice: build a sustainable future for OAS-GIS or allow it to become a fiscal disaster.

Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy.