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1917 – Income Tax: Financing War through Taxes

In 1917, with the Income War Tax Act, the Government of Canada introduced a temporary general tax on income. The tax applied to both personal and corporate income.

Military and related spending had climbed substantially as a result of the First World War. By imposing a direct tax on income_a type of taxation that had until then been the domain of the provinces the government planned to increase its revenues enough to help finance the war effort. Previously, the bulk of federal government revenues had been raised through indirect taxes, such as customs duties and excise taxes.

Canada’s sources of revenue were not enough to cover the increased expenditures resulting from the First World War. The federal government had already borrowed huge sums of money to finance the war effort and its related costs. This led to high inflation and a national debt that grew fivefold over the course of the war. High unemployment at the beginning of the war had turned into a shortage of workers by the time conscription was implemented in 1917. Rising inflation soon led to unionization, strikes, and pressure from farmers and workers for the federal government to tax the wealthier segments of society more heavily and to nationalize banking and some other industries.

The poorer segments of society felt they had already sacrificed enough for the war effort. Although the Constitution Act of 1867 gave the Government of Canada the authority to impose any kind of tax, it had never before tried levying a direct tax on income. Since the provinces were limited to the imposition of direct taxes only, some of them had already implemented their own provincial income taxes long before the First World War.

Debt incurred because of war and post-war expenses such as veterans’ pensions necessitated the continuation of the income tax after the war ended. The financial burden resulting from the Second World War also brought about changes in the administration of income tax under the Wartime Tax Agreements (1941). Under those agreements, the provinces allowed the federal government to collect their income tax revenues for the duration of the war. In exchange, the provinces received payments from the federal government. (See 1941_Wages and prices controls: Managing a wartime economy.)

On January 1, 1949, the federal government ended the Income War Tax Act and introduced the Income Tax Act, making income tax a permanent source of revenue for the government. Today, personal and corporate income tax accounts for approximately 60% of federal budgetary revenues.

The federal government now collects personal income tax on behalf of all provinces and territories except Quebec, and then gives the provinces their share of the revenues collected. While the federal government also collects corporate taxes on behalf of some provinces, Quebec, Ontario and Alberta have their own corporate tax systems and collect their own corporates taxes.

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