Canadian Taxes Set to Remain High Under Federal Policy in 2025

Federal tax policy in Canada presented a significant challenge for taxpayers throughout 2024, and projections indicate an ongoing, worsening situation. A persistent trend of increasing tax rates, coupled with adjustments to key tax programs, has created a considerably more burdensome financial landscape for many Canadians. This situation isn’t a new development; it’s become a consistent reality since the Trudeau government established the 33% income tax bracket in 2016. As of 2024, the combined federal and provincial top tax rates exceed 50% in nearly every province – only Alberta (48.0%) and Saskatchewan (47.5%) have a lower combined rate.

The core of the issue resides in several key tax changes. The Canadian government instigated a sixth consecutive increase to the Canada Pension Plan (CPP) tax. In 2018, prior to the government’s CPP “enhancements,” a worker earning $85,000 faced a combined employer/employee CPP tax of $5,188. By 2024, that same worker’s tax bill rose to $8,111 – a 56% increase, largely driven by the newly introduced “CPP2” tax. Looking ahead, the situation only deteriorates for 2025, with projected tax increases for CPP reaching $8,860 for an $85,000 earner, representing a further 71% increase, considering both higher tax rates and elevated income thresholds. The use of the term “enhancement” by the government to describe these increases has drawn criticism, highlighting the significant financial strain they impose.

Adding to the financial pressures is the ongoing rise in the carbon tax. In April of 2024, the government raised the carbon tax from $65 to $80 per tonne. Similarly to the CPP tax, this cost is set to increase again this year, reaching $95 per tonne. The administration of this tax has also created administration costs and logistical challenges for businesses. Furthermore, the government implemented a capital gains tax hike in June of 2024, claiming it would only affect “0.13 per cent of Canadians in any given year,” a statistic that proved misleading. Initially, only 0.13% of Canadians are those that had capital gains within a particular year, however, in reality, a larger percentage of Canadians will be impacted by the tax at some point in time, primarily due to the holdings of investments to which the tax now applies.

Economist Jack Mintz’s analysis estimates that approximately 4.74 million Canadians – 15.8% of tax filers based on 2021 data – would be affected by the higher capital gains tax, significantly exceeding the government’s initial suggestion. Moreover, the capital gains tax impacts many Canadians through their ownership stakes in private corporations. Critically, higher capital gains taxes are anticipated to reduce business investment. Canadian business investment has fallen behind rates in the United States and other developed economies, contributing to stagnation. Mintz notes that this situation is exacerbated by the increased tax burden. Finally, the end of 2024 concluded with a two-month sales tax “holiday” that imposed administrative and logistical nightmares on businesses. While intended to stimulate the economy, it actually increased government deficits and further amplified the tax burden.

The continued trajectory of federal tax policy paints a challenging picture for Canadians. Matthew Lau, a Toronto writer and adjunct scholar with the Fraser Institute, highlights the ongoing concern. Looking forward, the situation is projected to worsen in 2025, with the CPP tax growing by 71% and the capital gains tax continuing to impact investment. The complex interplay of rising tax rates and the imposition of new taxes on investments creates a significant impediment to economic growth, highlighting the need for a reevaluation of the nation’s fiscal policy.