A not-so-happy 100th birthday to income tax in Canada

This summer marks a century since Ottawa reluctantly imposed the first federal income tax on Canadians to pay for the war. Once entrenched, though, the tax never went away.

“The Taking of Vimy Ridge,” 1917. Painted by Richard Jack

“The Taking of Vimy Ridge,” 1917. Painted by Richard Jack, the official Canadian war artist. (Universal History Archive/UIG/Getty Images)

With the summer release of Dunkirk, a movie about the famous evacuation of British soldiers from the French shoreline in late May and early June 1940, and the 100th anniversary of federal income tax—introduced in Parliament in the summer of 1917—we have a reminder of how taxes often start: wars, with the new imposts rarely ending after a conflict stops.

No one should begrudge the start of Canada’s income tax. Soldiers in 1917, and their supporting infrastructure, needed the taxes of Canadians. Money is the least non-combatants can provide in any just war. My musing on the start of the federal income tax is not a complaint, merely an observation. Anyone who opposes new taxes when tyrants are on the march, and while the young are losing blood in battles, would be tone-deaf to the existential needs of a nation.

An additional observation: 100 years ago, the politicians of the day were actually reluctant to impose new taxes except in the most extreme circumstances: war. How the Canadian income tax arrived is a story of political respect for the ability of people to pay, and for the fiscal needs and roles of other governments.

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First, some tax facts from antiquity: History’s first tax also arose as a result of hostilities, six thousand years ago in Sumer, on a fertile plain between the Tigris and Euphrates rivers (now modern Iraq). It was there that someone inscribed details about the tax on clay tablets, imposed to help fight what was described as a ferocious war. Then, as recently, when the battles ceased, the tax stayed. Apparently that caused some discontent among the locals, who complained that taxes filled up the land from one end to the other.

In Canada, our federal income tax arrived much later, but for a British colony, it was not path-breaking. The British initiated an income tax under Prime Minister William Pitt in 1798, in Great Britain’s war with France. (Napoleon refused to institute a similar tax.) The British income tax was to provide a third of the revenues needed in the ongoing conflicts with France.

Helpful to the war effort, the English income tax was still unpopular: “It is a vile, Jacobin, jumped up Jack-in-Office piece of impertinence,” remarked a naval officer in 1799. “Is a true Briton to have no privacy? Are the fruits of his labor and toil to be picked over, farthing by farthing, by the pimply minions of bureaucracy?”

Pitt’s tax was repealed in 1802 and a modified version introduced by his successor. That latter income tax was cancelled at the end of hostilities in 1815. That cancellation also turned out to be temporary: British income tax returned in 1842 and remains in effect.

In Canada, our main influence for many taxes was usually American. They set the precedent for sales taxes, property taxes, gasoline taxes and corporate taxes. As a rule, before the Second World War, American states would impose a tax and Canadian provinces would follow much later.

This was also true of the federal income tax. The United States brought in its first federal levy on incomes in 1862, during the Civil War. It ended one decade later, in 1872. After a skirmish at the U.S. Supreme Court in the 1890s over the constitutionality of that federal levy, the Americans were again exposed to federal taxes on income beginning in 1913. That new federal income tax arrived courtesy of a federal amendment to the constitution (the Sixteenth) which explicitly allowed the federal and state governments to impose a tax on incomes.

In Canada, and despite our nation’s early entry into the First World War, in 1914, the federal Finance minister of the day, Conservative Sir Thomas White, was reluctant to introduce a federal income tax.

READ: How Canada’s bloodiest day at Vimy defined Great War sacrifice

Speeches of the day indicate two reasons offered up by White: First, two provinces (British Columbia and Prince Edward Island) already levied a tax on personal income, as did select cities. “The Dominion should not enter upon the domain to which they [the provinces] are confined to a greater degree than is necessary in the national interest,” remarked the finance minister, in 1915.

Instead, in both his 1914 and 1915 budgets, White increased tariffs on coffee, sugar, spirits, and tobacco; he also raised excise duties.

A second reason for White’s reluctance was a genuine concern for the ability of Canadians to pay.

On this point, White noted it didn’t matter whether the tax was a proposed income tax, or the existing Business Profits Tax, already in effect and which some argued should be raised. He defended that Profits tax as a wartime measure but objected to increasing the rate: “It is really a tax upon business success, and consequently tends to discourage business enterprise” remarked White, in 1916.

Besides, as White also noted, a tax, even when not targeted to individual pockets, “tend to transfer itself to the consuming public.” White and his colleagues well understood there is no free lunch, including in the effect of taxes on consumers. Businesses will pass on extra tax costs to the public just as they would any other increase.

Still, White was increasingly unable to garner the revenue need to fight what was then known as the Great War. As late as April 1917, the federal finance minister resisted calls for an income tax. But three months later, another 100,000 men were called up to serve Canada in Europe. This was an extra cost not only to the treasury but more importantly, potentially in men’s blood; White amended his position and introduced the Income Tax War Act in Parliament on July 25, 1917.

Did White intend the federal income tax to be permanent? Given his reluctance over multiple years to introduce it, it seems unlikely. He anyway realized the decision about its permanence was not likely his to make. From his speech that year: “I have placed no time limit upon this measure, but merely placed upon Hansard the suggestion that a year or two after the war is over, the measure should be definitely reviewed by the Minister of Finance and the Government of the day, with a view of judging whether it is suitable to the conditions which then prevail.”

Thus was Canada’s first federal income tax born; the rate began at four percent for any income above $1,500, or about $24,500 in today’s dollars.


Mark Milke is author of Tax Me I’m Canadian: Your Money and How Politicians Spend It.