The Family and the Income Tax Act in Canada
David W. Beaubier *
One of the four fundamental objectives which the Report of the
Royal Commission on Taxation envisaged was that the tax system
ensure that the flow of goods and services be distributed equitably
among individuals and groups of Canadians.’ To achieve this object
the Report suggested that the tax system must be consistent with
the following purposes:
1. Most of the time most government expenditures should be financed
through taxes that are allocated in proportion to ability to pay. This
means, in effect, that the government must seek to impose progressive
marginal tax rates on all additions to personal economic power, without
regard to the source of those increments
in power. Wages, salaries,
business profits, gifts and capital gains all increase the economic power
of the recipients and should be treated on exactly the same basis for
tax purposes.
2. In most families incomes are pooled, consumption is collective, and
responsibilities are shared. It should be an objective of the tax system
to reflect this fact, by considering families as taxable units. The ability
to pay of the family, as distinct from the individual members of the
family, must be recognized.
3. The tax system must also recognize that the special responsibilities
and non-discretionary expenditures of unattached individuals and families
affect their ability to pay. Unusually heavy medical expenses, certain
education costs and the number of dependent children, for example,
should be taken into account in allocating tax liabilities.
4. It should also be a goal of the tax system to avoid tax concessions to
particular industries and to particular kinds of income. While the efficacy
of special treatment can be judged only in the light of the particular
circumstances, such tax concessions are always inequitable, are frequently
inefficient, tend to distort the allocation of resources, and erode the tax
base. If such special concessions are to be given, they should be provided
in a form that makes it possible to assess their costs, that is, revenue
forgone, so that the concessions can be appraised at periodic intervals.
Therefore, generally speaking, subsidies should be used rather than tax
concessions.2
Of the Saskatchewan Bar.
‘Report of the Royal Commission on Taxation, Queen’s Printer, (Ottawa,
2 1bid., Vol. 2, at pp. 10-11.
1967), Vol. 2, at p. 7.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
Perhaps the most curious aspects of the Report of the Royal Com-
mission on Taxation is that despite this dissertation concerning
equity in taxation and the use of progressive income taxes to achieve
this, the Report never dealt with the inequities which result when
a government which has the power to control both the rate of
progression in its income taxes and the national rate of inflation
(and hence the nominal gains of income and capital to those whom
it taxes) uses these powers to increase the real weight of taxation
on taxpayers in the community. The failure of the Royal Commission
to deal with this problem is particularly disconcerting when the
inequities which arise from the combination of progressive taxes
and inflation are examined.
The Report assigned a higher priority to the object of equity than
to any other of its objectives. The feeling among the commissioners
was that unless the tax system is generally accepted as fair, the
fundamental purpose of taxation is lost because once the public
believes the tax system to be unfair the social and political system
under which it operates is likely to collapse.3 In order to achieve
equity, the Commission recommended reorganization of the rates of
income taxes, the taxation of the family or individuals as a unit, the
integration of corporate and personal income taxes, the inclusion of
all gains in the tax base, and the elimination of separate taxes on gifts
and bequests. The Income Tax Act which came into force January 1,
1972 4 combined with the repeal of the Estate Tax Act, included
legislation which moved at least part way towards each of the
Commission’s major recommendations except that it did not change
the treatment of the family unit for tax purposes.
The “family unit” recommended by the Royal Commission
would have consisted of a resident husband and his wife and family,
an unmarried woman with a child, an unmarried individual who has
adopted a child, or a divorced or separated spouse with one or more
dependent children. The family unit was to be granted a special rate
schedule and would be taxed on the aggregate family income which
would be filed as a single return. Under the schedule, to be known
as a “family unit rate schedule” family units would pay less tax than
individuals with the same income. Individuals were granted a basic
exemption of $1,000.00 and family units a basic exemption of
$2,100.002 In addition, tax credits were allowed in the amount of
$100.00 for the first child and $60.00 for each additional child where
3 Ibid., Vol. 2, at p. 17.
4 S.C. 1970-71, c. 63.
5 Report of the Royal Commission on Taxation, op. cit., n. 1, Vol. 3, at p. 173.
McGILL LAW JOURNAL
[Vol. 18
two parents exist in the family unit; if the family unit had a working
mother the tax credit for school age children was $80.00 each and
for pre-school children it was $200.00 each.’ The Royal Commission
described the difference between tax credits and exemptions suc-
cinctly:
The difference between tax credits and exemptions is simple. A
tax
credit involves a reduction in taxes of a given amount, while an exemption
grants a reduction in taxable income. The latter results in a tax reduction
that increases with income. Because an exemption excludes from tax the
last dollars of income received by a taxpayer, the value of an exemption
depends upon the marginal rate applicable to the taxpayer. A tax credit,
on the other hand, in effect exempts a given amount of the first dollars
of a taxpayer’s income. A tax credit thus affects all taxpayers in the
same amount, while an exemption provides an allowance which increases
in value as income increases. To put this in other terms, the revenue
loss resulting from the use of exemptions is higher than from the use
of credits, where credits and deductions achieve the same result for low
income families. 7
The Royal Commission attempted to reduce the regression in the
Canadian tax load which derives in large measure from the fact that
the Canadian sales tax is roughly double the United States rate and
is among the highest in the world; with this in view the Royal Com-
mission aimed to establish a rate schedule that would result in
roughly equal income taxes for middle income tax payers in Canada
and the United States so as to narrow the unfavourable income tax
differential between Canada and the United States and prevent an
exodus of middle income Canadians to the United States. The Royal
Commission also decided that the maximum rate of tax on any form
of income should be no greater than 50% so as to minimize disin-
centive effects.”
The first federal income tax statute, The Income War Tax Act,
1917 9 provided an exemption for the first $1,500.00 of income of an
unmarried person, widow or widower without dependent children.
Any other person was granted an exemption of the first $3,000.00.
A flat 4% income tax rate was levied on all amounts in excess of
these sums in addition to which a super tax was charged on a pro-
gressive basis.’ The $3,000.00 marital exemption was reduced to
$2,400.00 in 1932,”1 in 1933 it was reduced to $2,000.00,12 and in 1940
6 Ibid., Vol. 3, at p. 181 and p. 193.
7 Ibid., Vol. 3, at p. 180.
8 Ibid., Vol. 3, at pp. 154-162.
P 7-8 Geo. V, S.C. 1917, c. 28.
10 Ibid., s. 4.
11 S.C. 1932, c. 43, s. 4.
12 S.C. 1932-33, c. 41, s. 4.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
. The marital exemption was once again
it was reduced to $1,500.00
increased to the sum of $2,000.00 in 1948 11. In 1927 a taxpayer was
granted $500.00 exemption for each dependent child under 21 1. In
1932 this was changed to a $400.00 exemption for each child and
in 1946 this was further amended as a result of The Family Allow-
ances Act, 1944, to provide an exemption of $100.00 for each depen-
dent child who might have been registered under The Family Allow-
ances Act, 1944, and an amount not exceeding $300.00 expended by
the taxpayer during the taxation year to support any other dependent
child. 6
In 1952 this was amended to provide dependent child
exemptions in the amount of $150.00 for those in receipt of family
allowances and $400.00 for others. By 1971 the Income Tax Act
provided a deduction of $2,000.00 to a married taxpayer who sup-
ported his spouse and, in addition thereto, deductions of $300.00
for each dependent child under the age of 16 and $550.00 for each
normal, dependent child over the age of 16 but under 21 17. Through-
out this period the rates of income tax were also varied.
The “Proposals for Tax Reform” prepared by the Minister of
Finance, and tabled in the House of Commons on November 7, 1969
suggested that the personal exemptions be increased by $400.00 to
$1,400.00 for single taxpayers and by $800.00 to $2,800.00 for married
taxpayers; the exemptions for dependent children were to remain
the same as they were at December 31, 1971. In making this recom-
mendation the Minister of Finance specifically compared the United
States exemption provisions with the Canadian exemptions. He
stated:
… However, they are now much lower than formerly in relation to the
general level of earnings in Canada. Moreover, provincial and federal
sales taxes and municipal property taxes have increased substantially,
falling heavily on income just above exemption levels. And the present
exemptions will no longer compare as favorably with those in the United
States if proposals now before Congress are approved.’ 8
These recommendations were accepted, virtually without comment,
by the House of Commons Report on Taxation. 9 The Standing
Senate Committee on Banking, Trade and Commerce recommended
that the increased personal exemptions be granted only to single
1. S.C. 1940, c. 34, s. 11.
14 S.C. 1948, c. 52, s. 25.
15 S.C. 1927, c. 97, s. 5(e).
10 S.C. 1946, c. 55, s. 4(2)(e).
‘7 R.S.C. 1952, c. 148, s. 26, as amended.
18 Queen’s Printer, (Ottawa, 1969), at p. 14.
19 Queen’s Printer, (Ottawa, 1970), at pp. 13 and 14.
McGILL LAW JOURNAL
[Vol. 18
individuals whose income did not exceed $3,000.00 and married
persons whose income did not exceed $8,500.00 with a notch provision
for calculating the taxes of those with income in excess of these
amounts. 0
In the Proposals for Tax Reform the Minister of Finance recom-
mended taxation of the total amount of capital gains, the full
integration of income from closely-held Canadian corporations, and
permitted credit for one-half the income tax paid by widely-held
Canadian corporations on their profits. The House of Commons
report recommended half integration for Canadian residents with
respect to all Canadian corporations resident in Canada and full
integration for closely-held Canadian corporations with taxable in-
comes of $50,000.00 or less annually. The Standing Senate Committee
recommended a capital gains tax to be virtually identical with the
system used in the United States and rejected the proposal of the
Minister of Finance for integration of corporate and shareholder
taxes. Both the House of Commons committee and the Senate com-
mittee made these recommendations with a careful eye on the tax
provisions in existence or proposed in the United States. Both the
House of Commons and the Senate are considered to be somewhat
representative of the people of Canada, yet neither compared the
practical effect of the proposed individual rates and exemptions with
those in effect in the United States as did the Royal Commission
on Taxation; nor did they refer to the problem of taxing the indivi-
dual and the family in terms of the relative tax burden borne by
similar people in the United States, although both the Minister of
Finance and the Royal Commission on Taxation considered this term
of reference to be sufficiently important to require substantial review
and discussion. Despite this cavalier attitude towards the individual
and the family, both Committees examined the problems associated
with business income and large capital accumulations extremely
carefully and sympathetically, perhaps because these areas of study
represented the chief concern of briefs submitted to them.
The discrepancy between the amount of income tax levied in
Canada and in the United States on a married couple derives largely
from the fact that in the United States a joint income tax return is
permitted to a married couple. The joint income tax return in the
United States came about as a result of litigation concerning com-
munity property there. In the Sura cases 21 the Canadian courts
2oReport on The White Paper Proposals for Tax Reform presented to the
Senate of Canada, (September, 1970), at p. 53.
21 57 D.T.C., 478; 59 D.T.C., 1280; (Ex. Ct.) and 62 D.T.C., 1005 (Supreme Ct.).
No. 4]
THE FAMILY AND THE INCOME TAX ACT
examined the right of a husband to file the equivalent of a joint
income tax return on income from community property. The Tax
Appeal Board, which was chaired in that instance by a member
educated in the common law, decided that there was a right to divide
income from community property between the husband and wife.
Both the Exchequer Court and the Supreme Court of Canada decided
that the income from community property is solely that of the
husband. Taschereau, J., speaking for the Supreme Court of Canada,
described the Supreme Court’s view of the matter in the following
words:
… Thus, if it is true, as I believe it to be, that the wife is co-owner of
the community property, it is also true that she does not have the exercise
of the plenitude of the rights which ownership normally confers (406 C.C.).
Her right is formless, dismembered, inferior even to the right of one
who has bare ownership of property in which another has a life-interest.
Her right is stagnant, nearly sterile, because it is unproductive for the
duration of the life of the husband. It is only at the dissolution of the
community that the wife will be vested with the plenitude of her rights
of ownership, which brings with it the jus utendi, fruendi et abutendi, of
which her married status has temporarily deprived her.
Thus she withdraws no income from the property of the community,
of which the husband is the sole administrator (1292 C.C.), without being
required, as a general rule, to obtain the concurrence of the wife. All
income is his, he may dispose of it, he may alienate it, even gratuitously,
except for the restrictions imposed by the law (1292 C.C.). The result
is that the wife receives no income from community property, that she
has “no salary, wages and remuneration”, that she “receives nothing from
is precisely
business, property, offices and employments”. Now this
what is taxable 3
During the hearings of the Sura cases reference was made by
counsel to the fact that the American Courts had already decided
that in the eight states of the United States where there is legal
community, co-ownership of property had been determined as
between the husband and wife and that two income tax returns were
required. However, Taschereau, J. pointed out that various autho-
rities in American law admit that the civil law existent in the
United States has been infiltrated with common law. In his view the
American authorities did not reflect the position of the law in
Quebec
23
As a result of the decisions concerning the taxation of income
from community property, the United States government enacted
legislation in 1948 to enable all married couples to file a joint return.
22 62 D.T.C., 1005, at pp. 1008-1009.
23 Ibid., at pp. 1009-1010.
McGILL LAW JOURNAL
[Vol. 18
The effect of the United States system is to allow each married
couple to total its income, deduct the exemptions, halve its income
and calculate at individual rates on the half so computed; the result
of this calculation ‘is multiplied by two in order to determine the
total tax payable. The consequence of United States legislation
permitting a family to file a joint return has been a dramatic
discrepancy in taxes paid by a couple in Canada and the United
States on the same income. The Royal Commission on Taxation
illustrated this in its Report as is shown in the following table:
INCOME TAXES PAYABLE BY A FAMILY WITH TWO CHILDREN
FILING AVERAGE ITEMIZED DEDUCTIONS UNDER
1966 RATE SCHEDULES IN CANADA AND THE UNITED STATES
AND RATES RECOMMENDED BY THE ROYAL COMMISSION
Income Taxes Payable
Income
$ 1,500
2,500
3,500
5,000
6,500
8,000
10,000
12,000
15,000
25,000
40,000
70,000
100,000
Canada
67
294
586
865
1,316
1,827
2,744
6,758
13,666
29,362
46,571
United States
$
3
23
76
268
478
715
1,065
1,409
1,996
4,284
8,886
21,117
34,145
Recommended
Rates
1
235
505
777
1,177
1,586
2,251
4,900
10,056
22,460
36,018
Note:
Itemized deductions under the 1966 Canadian and United States tax
laws are average deductions shown in Appendix H, Volume 3, Report
of the Royal Commission on Taxation. United States taxes include
average and local income taxes. Canadian taxes include the provincial
tax. In all cases, it is assumed that the taxpayer claims only standard
and the old age security tax.24
24 Report of the Royal Commission on Taxation, op. cit., n. 1, Vol. 3, at p. 188,
Table 11-14.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
The Royal Commission on Taxation also examined the effective
income taxes payable by individuals in Canada and in the United
States in 1966. An American filing as an individual paid slightly less
in effective taxes than did a Canadian. The rates recommended by
the Royal Commission on Taxation would have resulted in the indi-
vidual Canadian taxpayer paying substantially less income tax had
the recommendations been put into effect. The following table, as
taken from the Report of the Royal Commission, describes the
Commission’s findings:
INCOME TAXES PAYABLE BY AN UNATTACHED INDIVIDUAL
CLAIMING STANDARD DEDUCTIONS UNDER THE 1966
RATE SCHEDULES IN CANADA AND THE UNITED STATES,
AND RATES RECOMMENDED BY THE ROYAL COMMISSION
Income Taxes Payable
Income
$ 1,500
2,500
3,500
5,000
6,500
8,000
10,000
12,000
15,000
25,000
40,000
70,000
100,000
Canada
$
51
202
394
691
1,018
1,384
1,940
2,585
3,730
8,175
15,620
32,510
50,955
United States
$
88
265
454
727
1,033
1,366
1,849
2,441
3,488
7,977
16,130
34,842
55,298
Recommended
Rates
$
54
211
395
714
1,063
1,423
1,942
2,501
3,400
6,747
12,495
25,692
40,090
Note: United States taxes include state and local income taxes of an average
state; Canadian taxes include the provincial tax abatement but not
provincial taxes in excess of the abatement, and the old age security
tax. In all cases, it is assumed that the taxpayer claims only standard
deductions. Under the Royal Commission’s recommendations, the
standard deduction of $50.00 is used.25
25 Ibid., at p. 172.
McGILL LAW JOURNAL
[Vol. 18
The percentage differences between United States and Canadian
income taxes in 1966 were described by the Royal Commission in the
following table:
PERCENTAGE DIFFERENCES BETWEEN
UNITED STATES AND CANADIAN INCOME TAXES
1966
Assessable
Income
$ 1,500
2,500
3,500
5,000
6,500
8,000
10,000
12,000
15,000
25,000
40,000
70,000
100,000
200,000
Percentage Dif-
ference for Single
Persons, No
Dependants, Using
Standard Deduction
76.5
34.8
16.2
5.2
1.5
1.3
–
-4.7
–
–
–
5.6
6.5
2.4
4.5
7.2
8.5
5.3
Percentage Dif-
ference for Married
Couples, No
Dependants, Using
Standard Deduction
249.0
55.4
11.6
1.8
3.7
–
-11.9
-15.2
-21.5
-28.5
-23.7
-14.8
-10.9
–
6.6
Percentage Dif-
ference for Family
With Two children
Itemizing
Deductions
13.4
18.4
-18.4
-17.3
-19.1
-22.9
-27.3
-36.6
-35.0
-28.1
-26.7
-24.3
Note: The percentages shown in this table are calculated so that a “plus”
figure shows United States income taxes being higher than Canadian
income taxes; a “minus” figure shows United States taxes being
lower. In all cases the base of the comparison is the Canadian income
tax payable on that income. United States taxes include average
state income tax; Canadian taxes include only the lowest provincial
income tax. Old age security taxes are included in Canadian
tax
figures. Compulsory contributions to government pension plans are
not included in either United States or Canadian tax figures.20
2
6 Ibid., at p. 161.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
However, the foregoing tabels do not adequately describe the
extent of the discrepancy between United States and Canadian
income taxes on individuals and married couples. The Royal Com-
mission stated that:
… Including average state income taxes, the United States middle income
taxpayer pays roughly 10% less tax than does a Canadian taxpayer with
the same amount of taxable income. However, because taxable income
is, on the average, a lower fraction of gross income for the United States
taxpayer, the middle income United States taxpayer in fact pays almost
30 per cent less tax.
The lower United States taxes result largely from a lower ratio of
taxable income to gross income. This lower ratio, in turn, results from
the deductibility of items such as mortgage interest, property taxes, state
and local sales taxes and state income taxes, as well as from a more
liberal definition of what can be claimed as charitable deductions, ex-
penses of earning employment income and other deductions. 27
In his Proposals for Tax Reform, the Minister of Finance suggest-
ed that the top rate of income tax be 82.4% of taxable income in
excess of $400,000.00 per year on the basis that the provinces levy
an income tax 28% of the federal tax. Over the first five years it was
proposed that the rates in the top brackets be reduced until the
maximum combined provincial and federal rate would be 51.2 per
cent (the provinces to tax at 28 per cent of the federal tax). On
January 1, 1972, the Income Tax Act, came into force. Personal
exemptions were set at $1,500.00 for an unmarried individual and
$2,850.00 for a inarried taxpayer. Dependant’s exemptions were
$300.00 for those under the age of 16 and $550.00 for those 16 years
of age and over.28 Individual rates for 1972 range from a low of 17
per cent to a high of 61.1 per cent. The following table compares
the tax levy for a married taxpayer with two dependent children at
1971 rates, at the rates proposed in the White Paper and at the rates
proposed under the new Income Tax Act for 1972:
27 Ibid., at pp. 619-620.
28S.C. 1970-71, c. 63, s. 109(1)(d)(iv) and s. 109(1)(d)(v).
McGILL LAW JOURNAL
[Vol. 18
MARRIED TAXPAYER – TWO DEPENDENT CHILDREN
UNDER AGE 16
Income
$ 2,800
3,000
3,500
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
20,000
25,000
30,000
50,000
75,000
100,000
1971 Income
Tax Rates
$
15
44
118
928
1,215
1,496
1,764
2,044
2,353
2,677
3,038
3,414
5,592
7,910
10,346
21,022
35,818
51,643
White Paper
Rates
1972 Income
Tax Rates
841
1,132
1,448
1,780
2,122
2,481
2,839
3,206
3,590
5,652
7,956
10,381
20,621
33,421
46,221
816
1,089
1,370
1,669
1,976
2,301
2,634
2,985
3,351
5,486
7,761
10,156
20,156
35,238
50,513
Note: The 1971 tax is the current tax including old age security tax, social
development tax, and the 3 per cent surtax, plus provincial tax at
28 per cent of basic tax. White Paper tax is federal tax plus provincial
tax at 28 per cent as shown in the White Paper. 1972 tax is federal
tax for 1972 using the new rate schedule and the basic exemption
for married taxpayers of $2,850.00 plus provincial tax at 30 per cent
of federal tax. In calculating tax under the new Act, taxpayer received
the employment expense deduction of 3 per cent, maximum $150.00.
No account has been taken of other proposed adjustments to income
such as taxation of capital gains. In all cases it is assumed that
taxpayers take the optional standard deduction of $100.00. Taxpayers
are assumed to be under age 65.29
29 Summary of 1971 Tax Reform Legislation, Hon. E. J. Benson, Minister of
Finance, at p. 20.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
The effective rates for a single taxpayer without dependants
at 1971 rates, at rates proposed in the White Paper, and at the
rates proposed in the Income Tax Act, effective 1972 are set forth
in the following table:
SINGLE TAXPAYER WITHOUT DEPENDANTS
Income
$ 1,200
1,400
1,600
1,800
2,000
2,500
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
20,000
25,000
30,000
50,000
75,000
100,000
1971 Income
Tax Rates
$
15
44
74
104
133
230
331
563
817
1,100
1,387
1,657
1,924
2,229
2,538
2,894
3,254
3,661
4,073
6,334
8,651
11,170
21,928
36,806
52,715
White Paper
Rates
1972 Income
Tax Rates
11
54
96
207
324
576
841
1,132
1,448
1,780
2,122
2,481
2,839
3,206
3,590
3,974
4,372
6,574
8,878
11,405
21,645
34,445
47,245
32
75
187
304
547
803
1,076
1,355
1,654
1,960
2,285
2,616
2,967
3,331
3,734
4,137
6,373
8,648
11,144
21,765
36,429
51,704
Note: The 1971 tax is the current tax including old age security tax, social
development tax, and the 3 per cent surtax, plus provincial tax at
28 per cent of basic tax. White Paper tax is federal tax plus provincial
tax at 28 per cent as shown in the White Paper. 1972 tax is federal
tax for 1972 using the new rate schedule and the basic exemption
McGILL LAW JOURNAL
[Vol. is
for single taxpayers of $1,500.00 plus provincial tax at 30 per cent
of federal tax. In calculating
taxpayers
received the employment expense deduction of 3 per cent, maximum
$150.00. No account has been taken of other proposed adjustments
to income such as taxation of capital gains. In all cases it is assumed
that taxpayers take the optional standard deduction of $100.00. Tax-
payers are assumed to be under age 65.30
txa under the new Act,
It will be noted that there are severe discrepancies between
the rates recommended by the Royal Commission on Taxation
and those put into effect by the Income Tax Act, 1971, especially
for the married taxpayer. The Royal Commission on Taxation had
as part of its task the problem of fixing rates which would yield
an income equivalent to that already received by the government
from income tax and this affected the selection of a rate schedule 1
In large measure the discrepancies result from the attempt of the
Royal Commission on Taxation to bring Canadian income taxes
into some measure of alignment with United States income taxes.
In addition, between 1966 and 1971, the income taxes imposed on
the middle income taxpayer have risen by very substantial amounts
in Canada. Even the fact that only one-half of capital gains are
taxed under the Income Tax Act, 1971, whereas all capital gains
are taxed under the recommendations of the Royal Commission,
does not account for the volume of discrepancy contained in the
following table:
EFFECTIVE AMOUNTS OF INCOME TAX
MARRIED TAXPAYER WITH
TWO DEPENDENT CHILDREN
UNDER 16
Income
$ 5,000
8,000
10,000
12,000
15,000
25,000
100,000
Royal
Commission
$ 235
779
1,185
1,586
2,251
4,900
36,018
Act
1972
$ 302
1,089
1,669
2,301
3,351
7,761
50,513
SINGLE TAXPAYER
WITHOUT DEPENDANTS
Act
Royal
1972
Commission
$ 714
1,423
1,942
2,501
3,400
6,747
40,090
$ 803
1,654
2,285
2,967
4,137
8,648
51,704
30 Ibid., at p. 18.
31 Report of the Royal Commission on Taxation, op. cit., n. 1, Vol. 3, op. cit.,
n. 24, at p. 154.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
The Income Tax Act does not follow the proposal of the White
Paper or the Report of the Royal Commission on Taxation for the pur-
pose of taxing capital gains. The Act taxes one-half the value of
capital gains in a fashion similar to the United States tax system.
Modifications were also made to the recommendations that Royal
Commission insofar as corporations and shareholders are taxed;
generally speaking a system like that in use in the United States
is contained in the Act. The Income Tax Act deals with mining and
petroleum income and expenses in a manner which is also analo-
gous to the system used in the United States. However, no major
change was made in the system by which the single or married
taxpayer is dealt with under the Act. In particular, the new Act
has not adopted either the joint return which is in effect in the
United States or the family unit concept which was recommended
by the Royal Commission. As has been noted, the exemptions were
merely raised somewhat in order to comply more or less with the
exemption allowed in the United States. The reason for the minute
concession granted to the married taxpayer, as compared to the
changes recommended by the Royal Commission or in effect in
the United States may be found in study paper No. 10 Taxation
of the Family prepared for the Royal Commission on Taxation.
This paper estimated that the United States Government suffers
a revenue loss of a little over 10 per cent of tax revenue by virtue
of the income spliting provisions created by the joint income tax
return. It also estimated that the adoption of a joint income tax
by Canada in 1961 would have reduced revenues between 10 and
12 per cent or $190,000,000.00.32
The failure of the Canadian Government to recognize the re-
sponsibilities associated with the family unit and the family’s con-
sequent real ability to pay, as described in the purposes of an
equitable tax system by the Royal Commission on Taxation and
set forth in the introduction to this article, is especially glaring
in view of the concessions which are granted to married taxpayers
in the United States by the joint income tax return. Although
gross, this failure exceeded by the failure of both the Royal Com-
mission on Taxation and the Federal government to recommend
and enact an adjusting factor which would remove the inequities
which result from a combination of progressive rates of income
tax and an inflationary economy. From 1939 until May of 1972,
32E. J. Mockler, John G. Smith and Claude Frenette, Studies of the Royal
Commission on Taxation, No. 10, Taxation of the Family, Queen’s Printer,
(Ottawa, 1966), at pp. 123-124.
McGILL LAW JOURNAL
[Vol. 18
the Canadian Consumer Price Index has risen to 282.7 using 1939
as 100. 3 3 At the same time the Canadian General Wholesale Index
has moved up to 305.3 3- (using 1935 – 1939 as 100). It will be re-
called that in 1939 (before the Family Allowances Act, 1944, came
into effect) the tax exemption granted for a married couple was
$2,000.00; two dependent children resulted in further exemptions
of $400.00 each, being a total of $2,800.00.
In real terms an income of $10,000.00 in 1972 would have amount-
ed to $3,537.00 in 1939. In 1939 the income tax payable by a married
man with two dependent children under 16 on $3,537.00 would
have amounted to $26.53, using the deductions that were then
available to him; prorating the 1939 income tax of $26.53 to 1972
on the basis of an increase in the cost of living index in the same
period of 282.7, would result in a similar taxpayer earning a 1972
income of $10,000.00 paying a 1972 income tax of $75.00. Similarly,
the real value of $25,000.00 in 1939 amounted to $8,843.00, upon
which a married man with two dependent children under the age
of 16 would have paid $400.64 income tax; prorated forward, the
1972 income tax would amount to $1,132.61 if the income tax on
$25,000.00 in 1972 funds were determined on an identical basis
with that available to its real income equivalent in 1939. Instead
of paying $75.00 income tax the Canadian recipient of $10,000.00
pays $1,669.00 income tax in 1972; and the $25,000.00 income earner
doesn’t pay $1,132.61. Rather, in 1972 income tax he pays $7,761.00.
It should be remembered when reviewing these figures that
the Canada Pension Plan, health and welfare schemes, better roads,
better national parks, and a dramatically changed way of life have
transpired in the interval between 1939 and 1972; however, it re-
mains to be determined whether a man earning $10,000.00 a year
is receiving more than 22 times the amount of benefit from the
government than his peer would have received in 1939, since he
is paying more than 22 times the amount of income tax; and
whether the $25,000.00 per year income earner is obtaining almost
7 times as much in benefits for his increased taxes.
The destructive effects of an inflationary economy on the tax-
payer faced with a “progressive tax” system can only be alleviated
if Parliament enacts income tax legislation which fixes the value
of the dollar as of a base year for the purposes of tax calculations.
33 Statistics Canada, Catalogue 62002, Prices and Price Indexes, (May, 1972),
p. v., and calculations based thereon.
34Ibid., at p. vii.
No. 4]
THE FAMILY AND THE INCOME TAX ACT
In the examples used, the base year is 1939. To fix the dollar value
for that year legislation necessitating the following before deter-
mining income adjustments or tax calculations would be required
for the year 1972:
Assume 1972 income is $10,000.00.
Assume 1939 is the base year.
Assume that the cost of living index is used
as the adjustment index.
$10,000.00 X 100 = $3,537.00
282.7
(Cents rounded to the nearest
dollar)
Thereupon the tax could be calculated on the basis of rates and
exemptions created for 1972, which would yield no tax in the exam-
ple used. If the same procedure were adopted for a man with a
wife and two dependent children under 16, and an income of
$25,000.00 in 1972, using the 1972 rates and exemptions his real
income tax in 1939 dollars would be $1,323.26. Such a procedure
would enable rates to be adjusted in accordance with social policy
so as to permit change and would simultaneously remove the in-
sidious expropriation of the citizen’s income which is permitted
by the present system. It would require careful attention to the
index used for calculation in order that the index will not ulti-
mately be weighted or adjusted against the taxpayer with results
similar to the present system; this will mean that both the ad-
ministrators adjusting the index must be as independent as is, for
instance, the Auditor General of Canada, and the factors contained
in the index must be flexible so as to allow for changes in social
habits and development of new goods and services.
As was suggested by the Royal Commission on Taxation and
admitted by the Minister of Finance, the heaviest burden of in-
come taxation and non discretionary expenditure falls on the
family. It is the most poorly treated tax unit under our present
policy both in principle and competitively. It is also the tax unit
which is the most adversely affected by an inflationary fiscal policy
since it cannot pass the effects of inflation on to any other unit.
It was in recognition of the weight of the progressive income tax
system on family earners in relation to the expenditures which are
required of them that the Royal Commission recommend that a
“family unit” be created for income tax purposes and given a
reduced rate schedule. In discussing this and the concept of a joint
income tax return, the Minister of Finance stated in the White
Paper:
McGILL LAW JOURNAL
[Vol. 18
After the basic reforms proposed in the present paper are in effect,
it would be possible to reconsider separately a family unit basis, or a
more complicated system similar to some of those used in other countries,
as a further instalment of reform. 35
In compliance with the recommendations of the Royal Commis-
sion on Taxation and the undertaking of the Minister of Finance
contained in the Proposals for Tax Reform, it is appropriate that
Parliament enact income tax legislation to create a more equitable
tax policy by alleviating the income tax burden on the family. When
doing so it would also be appropriate for Parliament to pass legis-
lation to stop the erosion of earnings which has been created by
consistent government policies of “progressive” taxation and in-
flation to the detriment of the Canadian taxpayer.
35Proposals for Tax Reform, Hon. E. J. Benson, Minister of Finance, (1969),
at p. 15.
