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Maxed-out taxpayers limit fiscal choices in Canada

Finance Minister Bill Morneau has been anxious to quash speculation about the capital gains tax once and for all.

Frank Gunn/THE CANADIAN PRESS

Accountants will tell you that a switch goes off in peoples' brains when they start paying more than half of what they earn in taxes. They feel angry and frustrated. Many look more aggressively for tax relief – legal or otherwise.

Five years ago, Nova Scotia was the only province with a top marginal income tax rate of 50 per cent. Today, that's the case in seven out of 10, including every province east of Saskatchewan. In Ontario, Quebec, New Brunswick and Nova Scotia, top earners face an income tax bite of at least 53 per cent. This reality goes a long way toward explaining the ubercautious approach by Ottawa and many of the provinces during this year's budget season.

It's not just the prospect of deep tax cuts in the United States that's limiting budget wiggle room. Fearing a tax revolt, governments know they're nearing the limit of what Canadians are willing to pay.

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The federal Liberals have talked about squeezing tax breaks for the wealthy. Rumours were rampant before the recent federal budget that Ottawa was looking at grabbing a bigger chunk of people's capital gains. In the end, the government opted to do nothing. And in the budget's aftermath, Finance Minister Bill Morneau has been anxious to quash the capital gains speculation once and for all. "Those were not in our budget and those are not key areas of focus," he told The Globe and Mail's Bill Curry.

The Trudeau government likes the soak-the-rich rhetoric, but its actions suggest it's reluctant to go much beyond what it has already done. It's not just Ottawa bumping up against a psychological tax ceiling. All the provinces know there is only one taxpayer – and he's increasingly maxed out.

Quebec unveiled a third consecutive balanced budget this week – a cautious document that contained targeted spending for high-priority items, such as health care and education, and modest tax relief. The former fiscal bad boy among the provinces has become a paragon of restraint and should be applauded. Quebec's debt-to-GDP ratio is now falling faster than in any other province, after peaking at more than 50 per cent five years ago.

Ontario, meanwhile, is on track to balance its budget in 2017-18 after nine consecutive deficits. But this new resolve is more about limited choices than fiscal fortitude. When governments in Canada hit a debt wall in the 1990s, it was all about their ability to sustain debt in an era of high interest rates. Sinking credit ratings meant lenders weren't willing to keep the party going.

In today's low-interest-rate environment, governments can borrow more with relative ease. Quebec, for example, may be in line for a bump in its credit rating if it stays on its current fiscal track. But it's not clear where the province would find the revenue to run up its credit card balances. Quebeckers are already the most heavily taxed of all Canadians, with a ratio of tax revenue to GDP of 37.6 per cent, more than three percentage points higher than the average among the OECD club of developed countries.

The dirty little secret of the past decade is that the provinces have quietly filled a tax void created when the former Conservative government cut the federal goods-and-services tax in the mid-2000s. The two-percentage-point cut would have put roughly $14-billion a year back into Canadians' pockets – if the provinces hadn't grabbed it.

Since 2010, Quebec has increased the provincial sales tax by two percentage points (to 10 per cent), put an extra four-cent carbon tax on gas, bumped up the tax on cigarettes by almost a third, hiked taxes on beer and wine, boosted pension contributions and added a special health tax (since eliminated).

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But the willingness of Canadians to keep giving is stretched.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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