Time to bring back income averaging, tax study finds

the tax liability. Those provisions were ultimately removed when the number of federal tax brackets was reduced from ten to three to simplify the tax code.

But in 2017, we have five federal brackets: zero to $45,916 (15 per cent), $45,916 to $91,831 (20.5 per cent), $91,831 to $142,353 (26 per cent), $142,353 to $202,800 (29 per cent), with anything above that being taxed at 33 per cent, the new high-income bracket introduced by the government in 2016. Each province also has its own set of provincial tax brackets, which vary widely from the federal ones. This results in an Ontario taxpayer, for example, actually having 11 effective tax brackets, ranging from a total combined federal/provincial rate of 20 per cent to 53.5 per cent once the federal, Ontario and surtax rates are taken into account.

The authors say that the time for tax reform is ripe, with the recent increase in the number of federal and provincial tax brackets combined with the fact that incomes have been less stable in Canada since the 1970s, particularly with the growth of the part-time work in the so-called sharing economy. They advocate for the reintroduction of the income-averaging provisions which they feel would help address the fluctuation penalty.

So how would income averaging work?

The authors focus on two main methods that could be used: general income averaging and general forward averaging. The methods are quite complex, but here’s a high-level simplification of each method.