Tax System in Canada: A Tool for Social Justice

Nothing is certain except death and taxes, so goes the famous saying by Benjamin Franklin. Using this certainty – Taxes – to bring about social justice in society is what governments of many countries have been doing, including Canada.

There are many pillars of social justice, but access and equity are the two most important pillars that remove barriers to income security among marginalized communities. Social justice also seeks to redistribute wealth in society—and one of the most powerful ways to achieve this is through taxation.

The tax system is a key tool for redistributing wealth. Closing the gap between rich and poor is not only a moral and ethical imperative, but also critical to restoring a healthy balance to a market-based economy.

Progressive Taxation

Two common ways in which taxation in Canada helps in redistribution of wealth are progressive tax system and income tested benefits. Three different levels of government levy taxes in Canada: Federal, Provincial, and Municipal governments. While Federal and Provincial governments collect taxes on Employment, businesses, goods and services, municipal governments are responsible for property taxes. Taxation amongst provinces varies greatly, however, all these taxes are progressive in nature.

Progressive Tax System entails taxing higher incomes at a higher rate. In personal taxation, Canada achieves this by graduated scales where the tax rate increases as income rises. This progressive approach allows the government to collect more from high-earning individuals and use this tax revenue to provide resources to marginalized communities. This reduces the income inequality to a certain extent, achieving the objective of wealth redistribution.

Personal income tax is the federal government’s largest single revenue source. In fiscal year 2023–24, federal tax revenues, including personal, corporate, and non-resident income taxes contributed to overall government spending, including approximately $102.3B in major income-support programs such as child and seniors’ benefits. This indicates that taxes, collected on a progressive basis, play a crucial role in providing these benefits and alleviating financial anxiety amongst low-income individuals and families.

Income Tested Benefits

While progressive taxation is all about taxing incomes, Income-tested benefits, delivered through the tax system, determine benefit levels based on income, that individuals and families receive. In Canada, this approach follows income taper and poverty reduction strategy.

One of the key objectives of Canada’s poverty reduction strategy is to increase resilience and security among low-income individuals and families and those living in poverty. Income-tested benefits is one of the ways to achieve this objective.

Income-tested benefits promote a more equitable distribution of resources by targeting financial assistance to people who need it most. In Canada, income-tested benefits are those that are reduced or eliminated if an individual’s or family income rises beyond a certain threshold.

One of the earliest federal income-support programs introduced in Canada was the Old Age Security, which came into effect in 1952. In 1966, income-tested Guaranteed Income Supplement (GIS) was introduced. This marked the beginning of Canada’s long history of using income-tested benefits as a social taxation policy.

Many benefits such as the Canada Child Benefit (CCB), GST/HST tax credit, Canada works benefit, are all income-tested. Various provinces have also introduced benefits that depend on income. In Ontario, benefits such as Ontario Trillium Benefit (OTB), Ontario Child Benefit and LEAP all depend on adjusted family income.

Another advantage of income-tested benefits is that they aid social cohesion. Income distribution, equity, inclusion and access are some of the key elements of social cohesion which are partially achieved by the distribution of income-tested benefits. In Canada, research has shown that the Guaranteed Income Supplement (GIS) has been proven to be an effective program in reducing senior poverty and supports social inclusion among older adults. People receiving such benefits having greater participation in society, contributing to social cohesiveness.

Canada’s tax system is more than a way to collect revenue – it is a powerful tool for social justice. Progressive taxation and income-tested benefits are good taxation policies that aid social justice by redistribution of wealth and alleviating income insecurity. However, this is possible only when low-income and marginalized individuals and families file tax returns. The Community Volunteer Income Tax Program (CVITP) overseen by the CRA plays a very important role in this regard. A just tax system is not only an economic necessity, but moral necessity to a more inclusive Canada.

—By Jyothi Venkatesh, Lead Staff, Financial Empowerment for Newcomers Project, North York Community House (NYCH)