August 18, 2023
By William Robson and Alexandre Laurin
There’s been rampant inflation in Canada since early 2021. And while money losing its purchasing power hurts on its own, tax provisions that ignore inflation can multiply the pain for Canadians.
Inflation interacts with various tax provisions, often increasing their bite, with little transparency or legislative oversight. This happens in many ways, notably when prices and incomes rise, but the thresholds for determining tax payable and tax credits do not.
For example, if income tax brackets do not rise with inflation, people whose wages have simply grown with inflation can get inadvertently pushed into higher-taxed categories – even when the real value of their wages has not changed.
Some of these interactions between inflation and taxes are hard to address. For example, adjusting the value of corporate profits and investment income to tax only real income – that is, after deducting the portion of nominal income attributable to inflation – would create enormous complexity. But other aspects of this taxation issue are easy to address.
Many thresholds and amounts – such as those determining personal income tax rates, or goods and services tax or harmonized sales tax payable – can simply rise with the Consumer Price Index. Many do, such as federal income tax brackets, but as we discuss in a recent C.D. Howe Institute report, many others do not.
A salient example, with housing prices front-of-mind for many Canadians, is the GST/HST New Housing Rebate. It allows individuals to recoup a portion of the GST or the federal part of the HST paid for a new or extensively refurbished house. This rebate phases out for residences valued between $350,000 and $450,000 and is unavailable for homes that surpass $450,000. Remarkably, these thresholds remain unchanged since the GST was introduced in 1991.
Then, fewer than 10 per cent of new single-family homes sold were priced above $350,000. The phase-out applied to only a small fraction of new construction. Nowadays, fewer than 10 per cent of newly sold units fall below the $350,000 threshold. A policy originally designed to deny the GST rebate for the highest-end homes now denies it to nearly all homes.
Another instance is the maximum dollar limits for the Child Care Expense Deduction. Notwithstanding ad hoc increases since its inception in 1972, the deduction has not kept pace with inflation. The current maximum allowable expenses per child under age 7 stand at $8,000. A quarter of a century ago, this maximum was $7,000. If adjusted for inflation, parents would be able to deduct up to $12,000 for each child in 2023 – a 50-per-cent increase from the current amount.
The falling real value of these limits effectively raises the tax burden on working parents with children. Worse, if and when the federal government next raises them, likely by the same meagre increments of the past, they will likely proclaim tax relief for parents, even if the limits are still below the past real amounts.
William Robson and Alexandre Laurin are chief executive and director of research, respectively, at the C.D. Howe Institute.
