Canada's tax policy is rotting from underneath. Here's how to fix it in the upcoming budget

A contractor looked at my deck a few years ago and found rotting boards underneath. His fix: sand it down, apply filler and add a coat of paint. Cheap and fast, so I agreed.

Recently, a second contractor pulled back the paint and showed me decay that had spread well past cosmetic repair; the whole structure was now at risk. I was frustrated and embarrassed with myself. I had the chance to do it right the first time, but instead paid for something that wasn’t.

That story keeps coming to mind, because it describes how Canada tends to approach tax policy.

The Department of Finance has run a string of stakeholder meetings and consultations over the summer ahead of the next budget, with a public portal for submissions closing Tuesday. The government’s language frames the coming budget around growth, trade diversification, investment, competition and what it calls economic sovereignty. Read between the lines: Finance wants big ideas, and it wants them to sound bold.

My concern is what “bold” ends up meaning. There’s a real difference between genuine, structural tax reform and a grab bag of politically appealing measures dressed up in reform language. The former requires confronting the whole system at once. The latter photographs well.

One approach I’d hate to see imported are populist, high-optic tax measures. For example, California’s billionaire tax initiative — a one-time five per cent levy on residents worth more than US$1 billion — is now officially certified for the Nov. 3 ballot after signature verification cleared the required threshold.

Other states also have populist tax amendments in various stages.

Washington’s capital gains tax — the one that reportedly helped push Jeff Bezos to Florida a few years ago — already carries a 2.9 per cent surtax on gains over US$1 million (9.9 per cent combined). It has now gone even further: in March, it signed into law a new 9.9 per cent tax on all income of more than US$1 million — effective for 2028 — which is notable given the state didn’t have a broad-based income tax at all before this year.

Maryland has already layered on new top brackets and a two per cent capital gains surtax on income over $350,000, while Illinois, Virginia and Minnesota have further copycat proposals stalled at various legislative stages, from committee hearings to bills awaiting a floor vote.

The instinct behind all these proposals is a sand-and-paint tax policy: satisfying in the moment, rot and hollow underneath.

Even the jurisdiction that pushed furthest is now retreating. Since the Dutch parliament’s lower house passed a 36 per cent tax on unrealized gains on certain property, a newly formed coalition government has moved to scrap that component entirely and revert to taxing gains only when realized, before the measure even takes effect, though the governing parties remain divided on the timeline. That tells you something about the durability of the idea.

I doubt Mark Carney has the appetite to import similar revenue-raising measures since the political risk of a straightforward revenue grab is obvious even to a government sitting on real capital and a population struggling with affordability issues.

The more likely temptation runs the other way: new tax expenditures. Flashy, populist, narrowly targeted tax relief measures aimed at a sympathetic constituency — perhaps teachers, union workers, take your pick — that generates “we’re doing something for you” applause. Again, it’s the same populist instinct, just run in reverse.

Every “elbows up” jab at the United States earns Carney applause from a constituency that responds more to tone than substance, and that’s exactly the kind of political capital a targeted giveaway is built to spend.

If Canada wants genuine wins instead of populist giveaways, there are plenty of ideas.

An easy first idea is personal tax rate reduction , although it would need to be combined with other measures to offset the revenue loss. Canada’s top federal tax bracket hits at roughly $258,000 of income versus more than US$640,000 in the U.S. Even Alberta, our most competitive province, lands near 48 per cent combined at the top. Since most provinces at the top end have combined rates exceeding 50 per cent, that needs attention.

Deferring tax on reinvested income or gains would give entrepreneurs a genuine reason to keep capital working here.

On the corporate side, economist Jack Mintz has already done the heavy lifting, proposing two revenue-neutral paths: a 10 per cent Irish-style rate paired with a broader base or a 13 per cent tax on distributed profits that defers taxation on reinvested earnings entirely. If provinces followed with modest rate cuts of their own, he estimates the combined federal-provincial rate could land near a genuinely competitive 20 per cent.

Ireland is the proof: its 12.5 per cent rate, paired with a broad base, turned one of Europe’s poorer economies into one of its wealthiest per capita. Rate and base moved together, which is something Canadian politicians tend to skip.

The distinction worth noting is that real tax reform needs to be combined with simplicity measures, base broadening and real spending discipline. Revenue-neutral means little if the government hides deficits behind its operating-versus-capital split — a gimmick , not governance.

Quick wins can spark growth, but they’re a down payment, not the full job. Calling the down payment reform just delays the real bill, which is the same mistake I made with my deck.

I know how that story ended because I lived it. Three years of looking fine, then a much bigger bill and a structure at risk. Ottawa has real capital and a shelf of good ideas. The question for the government is whether it hires a contractor who wants the budget to look good in November or does the unglamorous work underneath.

I know which contractor I’d hire.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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