How Does the Canadian Government Pay for Itself?
A breakdown of Canadian federal funding streams
Over the past decade, Canada’s government spending has skyrocketed. The expansion of programs under the Liberal government has pushed spending from around $250 billion in 2015 to nearly half a trillion dollars today.
This significant and sustained increase has made government finances a hot-button political issue. As always, Pierre Poilievre and the federal Conservatives are quick to criticize the government, and with three-in-five Canadians (59%) expressing concern about the state of the country’s finances, these attacks seem to be resonating.
But amidst all the chatter about spending, a key question is often overlooked, how does the government actually pay for all of this?
This week, we take a look at what keeps the lights on in Ottawa.
The Big Five — Federal Funding at a Glance
Canada’s federal funding sources comes from five main sources. Let’s take a closer look at each.
1) Personal Income Tax
The largest slice of the pie (43%) comes from personal income taxes.
Personal income is made up of two main sources: earned income (wages, salaries, bonuses, tips, etc.) and capital gains (profits made from selling assets like stocks, bonds, or property).
Whereas all earned income is included in personal income, only a portion of capital gains are included. This is called the capital gains inclusion rate. While previously, half of capital gains were included, as of this summer, an additional 17% of capital gains above $250,000 are included in personal income.
This change was designed to increase the progressivism of Canada’s personal income tax structure. Progressive taxation simply means that the higher your income level, the higher percentage of taxes you pay.
Income is taxed on a sliding scale, beginning at 0% for your first $15,000 and climbing all the way up to 33% on income above $246,753. For example, someone making $50,000 would only pay 10.5% of their income in federal income tax, while someone making $550,000 would pay just over 28%.
As a result of progressive taxation, there are significant socioeconomic and regional differences in personal income tax contributions across the country.
Higher earners pay the vast majority of personal income tax. The top 20% of earners pay nearly two-thirds compared to the lowest 20% who pay just below 1%.
Geographically, provinces like BC, Alberta, Saskatchewan, and Ontario contribute far more personal income tax on a per capita basis. Meanwhile, provinces like Manitoba, Quebec, and the Maritimes (with the exception of Newfoundland and Labrador) fall well below the national average.
2) Corporate Income Tax
Canadian businesses, like individuals, pay taxes on both earnings and capital gains. The income generated by these two streams is roughly equal.
However, unlike personal income tax, corporate income tax is regressive, meaning businesses pay the same tax rate, no matter how much they make. The basic corporate income tax rate in Canada is 38%, but through various rebates and abatements, many businesses pay a lower figure.
The capital gains inclusion rate for businesses was also recently increased from 50% to 67%. This new rate applies to all capital gains, not just gains above $250,000 as it does for individuals.
The largest share of corporate income tax is paid by the finance and insurance sector (27%), followed by other industries like manufacturing, real estate, and technology.
There are also significant regional differences in contribution levels for corporate income tax. Once again, BC, Alberta, Saskatchewan and Ontario contribute the most, supporting less productive provinces like Manitoba and the Maritimes. However, unlike personal income tax, buoyed by a robust manufacturing sector and Canada’s second largest financial hub, Quebec makes a much larger contribution in both relative and absolute terms.
3) Excise Taxes and Duties
At 14%, excise taxes and duties make up the fourth-largest slice of the federal revenue pie.
Excise taxes are taxes levied on certain goods and services, typically charged directly at the point of sale or hidden in the sale price.
The Goods and Service Tax (GST) is the most significant federal excise tax, representing $54 billion of government revenue annually. The GST is a flat 5% tax on most goods and services in Canada, though some products (like groceries and prescription drugs) are exempt. In some provinces, the GST is combined with the provincial sales tax to make a Harmonized Sales Tax (HST).
Excise taxes can also serve a policy purpose — particularly through so-called sin taxes on products like tobacco and alcohol, designed not just to raise revenue, but also to discourage socially harmful behaviors.
Duties (also know as tariffs) are additional taxes imposed on imported goods. The amount of the duty depends on the type of good and the country that a product comes from.
Duties are often used to protect domestic industries from foreign competitors. For example, while most goods are subject to a 5% duty, clothing and other textiles are subject to a 16–18% duty. Trade agreements help keep duties low on many goods by reducing or eliminating tariffs on certain products.
4) “Other”
The “Other” category makes up around $100 billion of the federal government’s annual revenue.
The term “Other” isn’t particularly meaningful. Government finance is incredibly complicated and the “Other” category is a catch-all of many smaller revenue sources. Though not as simple or as glamorous as the rest of the big five, these smaller sources add up.
The government collects revenue from Crown corporations (government-owned but independently run businesses), Employment Insurance (EI) premiums, foreign exchange gains, and various fees and fines.
These sources don’t bring in massive amounts of cash, but they help keep the federal financial gears turning.
5) Debt
As Conservatives are quick to point out, the government also relies on debt to finance a portion of its budget — about 7% in 2024.
Once used as a targeted effort to stimulate the economy in tough times, since the late-2000s, deficit spending has become reflex for the federal government. In 2024, the federal government is expected to run a $40 billion deficit — its 17th straight annual deficit.
The government raises money from domestic and foreign investors, — individuals, institutions, and central banks — by issuing government bonds and treasury bills.
While Canada’s federal debt (currently sitting at $) is often criticized, the Parliamentary Budget Office — a nonpartisan provider of economic analysis — has deemed Canada’s fiscal policy as “sustainable over the long term.”
Painting the Picture of Canadian Federal Finance
Though spending debates often dominate the headlines, understanding the other side of the ledger helps paint a more complete picture of Canadian government finance.
The government relies most heavily on income taxes — both personal and corporate — but a litany of smaller revenue sources round out the remaining 40% of government funding. Excise taxes and duties provide valuable revenues while protecting certain industries and discouraging certain behaviors. Meanwhile dozens of smaller, but still significant, revenue sources fill in the gaps. And of course, government borrowing rounds out the mix.
Ultimately, how the government collects money can have as big of an impact as how it spends it. As the government grapples with a changing economy and society, its ability to adapt its revenue streams will determine if and how it meets the needs of Canadians in the future.
