Payroll Taxation in Canada: An Overview

Despite constituting the third most important source of revenue for Canadian governments, payroll taxes receive relatively little attention. This is particularly surprising on two counts: first, there are important controversies regarding the employment effects of these taxes and, second, payroll taxes have grown substantially over the last 30 years and are likely to continue to increase in the future. Payroll taxes rose from 2.9 per cent of total government revenue in 1965 to 12.9 per cent in 1993. As a share of total labour income, they increased from 1.9 per cent in 1961 to 10.3 per cent in 1992. Payments for the three major programs funded through payroll taxes — Unemployment Insurance, the Canada and Quebec Pension Plans, and provincial workers’ compensation — rose from 3.6 per cent of GDP in 1985 to 5.1 per cent in 1992. The goals of this article are to provide a comprehensive overview of payroll taxation, to consider its future direction, and to discuss its potential impacts. We begin by outlining the current state of payroll taxation in Canada, chronicling its recent growth as a revenue source. We also consider the range of marginal payroll tax rates across provinces and use earnings distribution data to determine the groups facing the highest payroll tax rates. We then discuss anticipated future trends. Following this, the impact of payroll taxation on wages and employment is considered. We conclude that these taxes do have a negative impact on employment; however, there are a wide range of estimates as to the size of this effect. Payroll Taxes in Canada