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It's Time For Canadian Income Tax Rates To Match Those Of The U.s.

My wife and I have some long-term friends who we get along with swimmingly, but we sometimes disagree, like most friendships. We work through it maturely because we value the history and the relationship. We don’t use disagreements as an excuse to rupture something built over decades.

That’s how I feel about Canada and the United States right now. Donald Trump’s approach — the tariffs, the 51st state rhetoric, his claim that the United States doesn’t need anything from us — is genuinely corrosive. Many Canadians’ response — vacuous slogans, boycotting U.S. booze, cancelling trips, refusing U.S. products on principle. It feels like solidarity — is just therapy, not strategy.

What that reaction misses is how lopsided the economic relationship is. More than 70 per cent of our merchandise exports go to the U.S. Trade in goods and services makes up roughly two-thirds of our gross domestic product. This isn’t a fight between equals and pretending otherwise doesn’t change the math.

Real diversification has been the goal for decades, without ever coming close, for the simplest of reasons: we share a border and a continent with the U.S., not with whoever ends up on top of the global economy 50 years from now. That isn’t changing in any of our lifetimes.

If symbolic retaliation isn’t real leverage, what is? Making Canada an attractive place to invest, build a business and take risks with capital is entirely within our control. And one of the biggest levers we’ve refused to pull is changes to our personal tax system .

Canada’s top federal bracket — 33 per cent — kicks in at $258,482 of taxable income for 2026. That top bracket and four percentage point tax increase was introduced as one of Justin Trudeau’s first measures after getting elected in the fall of 2015.

It was sold as a straightforward revenue grab from the wealthy. Instead, taxable income reported by top-bracket earners fell sharply enough that the change was a net revenue loser once behavioural effects and the resulting drop in provincial revenue were accounted for.

In the U.S., the top federal bracket of 37 per cent doesn’t start until US$640,600 for a single filer and US$768,700 for a married couple filing jointly.

Canada’s taxes look even worse when you add in the provincial rates. Ontario, British Columbia, Quebec and some of the Atlantic provinces impose a combined top marginal rate above 53 per cent, topping out at 54.8 per cent in Newfoundland and Labrador.

The U.S. range when including state taxes runs lower at the bottom, but isn’t uniformly so at the top. Nine states don’t levy a broad-based income tax on wages, leaving a high earner’s total federal burden at 37 per cent, while New York City and California both push combined marginal rates just past 51 per cent once local surtaxes and uncapped state payroll levies are counted.

The floor is where the real gap lives, not the ceiling. Alberta, one of Canada’s lowest-taxing provinces, still charges 48 per cent at the top, which is at or above almost every U.S. jurisdiction outside New York City and California.

For a two-income professional household — say, a physician or a lawyer — both spouses can be paying Canada’s top rate on income that wouldn’t come close to triggering the top U.S. bracket for either one alone, unless they happened to live in one of that country’s two most aggressively taxed jurisdictions.

Alberta is proof that competing with the U.S. is possible. From 2001 to 2015, the province ran a flat 10 per cent provincial rate — paired with a generous exemption to reduce regressiveness — for a combined 39 per cent top tax rate that was genuinely competitive with much of the U.S.

However, Rachel Notley’s NDP provincial government scrapped it in 2015 and introduced the graduated structure that today tops out at 15 per cent provincially. Alberta remains the most competitive province as a result of what’s left of that legacy, but Premier Danielle Smith would be right to restore the old rate.

Then there’s what happens when an entrepreneur tries to grow or exit a business. Canada’s lifetime capital gains exemption — $1.275 million for 2026 — is a lifetime limit for gains on qualifying small business corporation shares and farming/fishing property.

The U.S. equivalent, section 1202 ‘s exclusion for qualified small business stock, can shelter up to US$15 million of gains per company after five years. Unlike Canada’s system, it can apply separately to multiple qualifying companies.

The rules for deferring gains on reinvestment tell the same story, only more starkly.

In the U.S., section 1031 of the Internal Revenue Code lets an investor or business owner exchange qualifying business or investment real estate for other qualifying business or investment real estate while deferring the gain. Hold the final piece of real estate until death and the stepped-up basis heirs receive wipes out the accumulated income-tax gain entirely. Investors call it “swap till you drop.”

That eventuality is not possible in Canada. Canada’s equivalent — section 44 of the Income Tax Act — is far narrower, offering little real ability to reinvest proceeds on a tax-deferred basis.

Fixing this does not require U.S. cooperation like a trade deal does. It requires deciding that comprehensive tax reform is a critical piece of improving our economic sovereignty and is an urgent national priority.

My friends and I never get anywhere by cataloguing each other’s faults. We look at our own side of the ledger instead. Canada, so far, has reached for boycotts and bumper stickers that say Canada Strong or Elbows Up.

Strong is a tax system that competes. Ours doesn’t, and pretending otherwise is the actual rupture. That’s the fix within our control.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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It's Time For Canadian Income Tax Rates To Match Those Of The U.s.

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