Canada should allow joint tax filing for spouses

Since the advent of the personal income tax in 1917, Canada has taxed individuals. Each Canadian resident files a tax return and pays tax computed on a progressive rate schedule — the higher the income, the higher the marginal rate. Neither spousal status nor combined family income matters: each individual is taxed separately.

This can lead to unequal treatment of families, depending on how their household income is earned. For example, a married couple in Ontario in which each partner earns $75,000 pays about $15,300 individually ($30,600 total), while a couple (or a single person) with the same $150,000 income earned by one individual bears a much heavier $42,000 tax burden. And the unfairness compounds for families with higher incomes and therefore higher marginal rates.

These disparities would not arise if we had a flat tax, taxing all income at the same marginal rate. But the progressivity principle is entrenched. Canadians accept that contributions to social programs and other public purposes should be based on ability to pay, so that as people's income rises, so does their tax rate.

The problem is that our progressive tax rates are applied to individual taxpayers and not to the combined income of the family household. Our personal tax system therefore violates the principle of “horizontal equity”: families with similar ability to pay — as measured by their aggregate family income — suffer higher tax burdens if their combined income is not earned equally by each family member.

This inequity was exacerbated in 2016 when the government hiked the top marginal tax rate to over 50 per cent so as to achieve even steeper progressivity. This gave families seeking a more equitable tax burden even stronger incentives to shift income from the higher- to the lower-income spouse. In 2018 the government countered with complex “tax on split income” rules to constrain these arrangements, effectively reinforcing the unequal tax treatment of families with similar combined incomes but different patterns of earning it.

If progressive rates are here to stay, we need to re-evaluate the fundamental question of the taxing unit. Who should be taxed: individuals, spouses, or families?

This problem was considered by the Carter Commission on tax reform in 1966. It recommended the taxing unit be the family — spouses and their dependent children. It viewed the family household as the basic economic grouping in society and concluded that ability to pay (and thus the corresponding tax burden) should be assessed on the income of the family, not the individual.

The government of Pierre Trudeau did not accept this recommendation, however. At a time when married women were increasingly entering the workforce, there was concern that mandatory joint filing would subject a woman's earnings to the higher marginal tax rate applicable to her husband, amounting in effect to both a “tax on marriage” and a “tax on married women working.” These objections continued through the 1970s as advocates for the status of women argued the continued separate taxation of individuals was more compatible with hard-won progress on women's rights.

As a result, Canada still taxes individuals, while other countries have moved to taxing family income or combined spousal income. For decades the United States has permitted married couples to opt for a joint tax return in which their combined income is subject to a separate and distinct rate schedule. Other OECD countries with spousal taxation regimes include France, Germany, Ireland, Spain, Israel, Switzerland, Belgium, the Netherlands, Luxembourg, Poland and Iceland. In these countries, families are generally given a choice whether to be taxed separately or jointly, thus mitigating the concerns that led to rejection of the Carter Commission proposal for joint filing in Canada.

Whatever changes we pursue our tax system should remain neutral with respect to key decisions about family. Canadians should face no tax incentive or disincentive to co-habit, marry, have children, increase or decrease their working hours, or terminate a relationship, including by divorce. Our Income Tax Act was amended 20 years ago to create spousal equivalency and neutrality for married and common-law partners. But families with similar incomes continue to suffer unfair differences in tax burdens because we persist in taxing individuals rather than families.

The next royal commission on tax reform should consider modernizing our taxing unit to take into account the contemporary Canadian context of improved gender equality and a wide diversity of family circumstances. Canadian families are the bedrock of our society. We should spread the tax burden across them more fairly, reflecting their true ability to pay, by giving spouses (and perhaps their dependent children, too) the option to be taxed on a combined basis.

FAMILIES WITH SIMILAR INCOMES ... SUFFER UNFAIR DIFFERENCES IN TAX BURDENS.