It's hard to get ahead in Canada. Our people feel the burden of a root productivity problem. We need a fix to make work, saving, and building worth it again for the working Canadian.
What if we address this by making the first $100,000 of income federal tax free? This lets a worker keep the reward for the extra shift, lets a family keep enough to afford a home and raise kids, and lets a small business owner keep capital to reinvest.
This can be funded through government efficiency, retirement benefit reform, and program consolidation, then phased in over seven years to ease Canadians in.
Summary
Canada’s core economic failure this decade is productivity. Inflation-adjusted GDP per person has fallen below where it stood in mid-20191, while American living standards grew 11% over the same period – the widest prosperity gap in nearly a century2. 61% of Canadians say they’re worse off than before the pandemic, and per-person GDP has slipped to $58,8553. Behind those numbers is a simple reality: Canadians are working hard, but just can’t get ahead.
What if restarting productivity requires changing incentives at scale in Canada? We outline our proposal: make the first $100,000 of personal income federal tax free.
For the roughly 88% of tax filers who earn under that amount, federal income tax disappears entirely; everyone above keeps the same first-$100,000 benefit.4 It rewards entering and staying in the workforce, or building a career and a family here rather than south of the border.
The price is, admittedly, quite large. On the order of $130 – 140 billion a year in forgone federal revenue.5, 6 However funding it is a choice within our power.
It could be unlocked by disciplined spending reform, retirement benefit restructuring, program consolidation, the revenue that returns through consumption and growth, and, critically, a phase-in tied to realized savings, so the threshold only rises as the money is found.
Let’s be honest now, no country has cut taxes on this scale before. Doing it would be hard (and furthermore) courageous. But it would do the one thing incremental policy never does – change what Canadians can expect from their own effort.
The Problem
Something has broken in Canada’s economic promise, and at root it is productivity. A 2025 Fraser Institute study confirmed what Canadians already feel: living standards are falling. Inflation-adjusted per-person GDP fell 2.0% over 2020–2024 and now sits below 2019 levels – the worst such decline since the Great Depression. The average Canadian is poorer today than six years ago, and the extra effort no longer produces a better life.7
The contrast with America is stark. U.S. per-person GDP grew 11% from mid-2019 to mid-20258. Every Canadian province now has higher combined federal-provincial tax rates than every U.S. state at high income levels; Ontario’s top earners face combined rates above 53%.
Skilled workers, entrepreneurs, and ambitious middle Canadians – exactly the people whose output drives productivity – notice this, and often leave.
Federal spending has grown 45% in real terms over the past decade with little to show for it in productivity or growth. The system takes too much, delivers too little, and blunts the incentive to work, save, and build.
This is a component of the failure. When working harder and earning more no longer translates into a better life, people respond: they invest less, build less, and in many cases leave. Productivity doesn’t recover until the reward for effort does.
A Bold Solution
This could start to change with a single simple (and very bold) policy:
Raise the Basic Personal Amount – the income Canadians can earn before paying federal tax – from $16,129 to $100,000, making the first $100,000 of income federal tax free.9
About 88% of tax filers earn under $100,000; for them, federal income tax disappears entirely.10
Provincial income tax and payroll contributions still apply – this is a federal measure – but for most Canadians it is the single largest cut to their tax bill they will ever see.
Imagine what this unlocks for our working class Canadians. A teacher earning $65,000 keeps the roughly $7,000 they now pays in federal income tax. A young tradesperson earning $65,000 saves about $8,500. A small business owner keeps an extra $15,000 to reinvest or hire. A young couple keeps enough to put toward a down payment and start a family here in Canada.
It is hotly contested if putting money back in the pockets of the working class will actually result in increased individual worker productivity. To address this, in our model the gains do not come from existing workers putting in more hours.11 The durable gains come from three better-evidenced channels:
- drawing people into work and rewarding second earners at the margin,
- retaining and attracting the mobile, high-skill workers and entrepreneurs who respond strongly to the Canada–U.S. tax gap,
- and leaving households with capital to save, reinvest, and start businesses, which is the capital deepening whose absence the Fraser data identifies as the core problem.12, 13
This is a policy that grows the workforce and the capital stock.
How to Pay For It
The costs are expansive, but fun to explore. Removing federal tax on the first $100,000 of income forgoes roughly $130–140 billion a year in federal revenues (or about 60% of net federal personal income tax). Roughly $90 billion is the tax that the ~88% of filers under $100,000 pay today; the remaining ~$40–45 billion is the first-$100,000 benefit flowing to higher earners, who keep paying tax only on income above the threshold. Earlier estimates understated the cost by leaving out that second piece.14, 15
The first unlock to $50,000 costs about $67 billion, covered by the ~$69 billion in savings and recaptured revenue identified below. It’ll take immense political will to unlock this, but there’s identifiable areas to draw from:
First, government efficiency. A previous Build Canada analysis16 identified $35.1 billion in potential annual savings through line-by-line spending review: $16.6 billion from grants and contributions that fail basic public-interest tests, $13.6 billion from operating-expense reductions through technology and procurement reform, and $4.4 billion from restructuring or eliminating organizations that aren’t delivering value. With a serious internal review, the savings could go higher.
Second, retirement benefit reform. Old Age Security and the Guaranteed Income Supplement cost $76 billion annually, and current benefits flow regardless of need. Accelerating the clawback for high-income seniors and adjusting indexation could save roughly $13 billion while protecting those who actually need support, as laid out in this recent Build Canada memo.
Third, program consolidation. Federal Indigenous spending totals $30–35 billion across dozens of overlapping programs, yet outcomes remain poor. Consolidating these into block grants with outcome-based accountability could save roughly $10 billion in administrative overhead while improving service delivery, with similar consolidation applied to other fragmented program areas.
Fourth, tax system simplification. Compliance costs alone run about $6 billion annually. With roughly 88% of Canadians paying no federal income tax, the apparatus for processing returns, verifying credits, and managing phase-outs shrinks dramatically. (The Canada Workers Benefit is retained – it remains a valuable support for low-income workers and is not on the table.)
Fifth, revenue that comes back. Money left in people’s pockets gets spent and invested, and some returns to Ottawa through the GST and corporate tax, approx. on the order of $5–7 billion a year. Modest, as federal GST is only 5% and exempts rent, groceries, and other essentials.17
And beyond that picture, there is the proposed longer-run return. If this policy does what it is designed to do – deepen the capital stock, grow the workforce, and keep middle to high earners onshore – it raises the level of GDP over time, by extension generating more revenue from the growing tax revenues that remain. Even a modest, sustained lift to productivity could, over a decade, return billions annually to the treasury through corporate, consumption, and above-threshold income taxes. We don’t bank these dynamic gains in the table above, but they are the mechanism by which the final phases ultimately begin to become more achievable.
Together, the spending measures and recapture for the first $50,000 of reform total to roughly $69 billion. The full program at $100,000 leaves a remaining gap of roughly $60 billion to be closed by deeper review and the dynamic growth effects above.
That is the demanding part, and it is exactly why the policy must be phased in and gated on realized savings: the threshold rises only as the money is found. If savings come faster, the tax cut arrives faster; if slower, the timeline extends.
What Must Be Done
Begin phasing towards the first $100,000 federal tax free. Raise the Basic Personal Amount toward $100,000, phased over 7–10 years: $30,000 in Year 1, $50,000 by Year 3, $75,000 by Year 6, and $100,000 once savings targets are met.
Launch a comprehensive spending review. Following the approach in Create a More Productive Government, launch a program review to find $35.1 billion or more in annual savings.18
Reform retirement benefits. Lower the OAS clawback threshold from $86,912 to $60,000 and index benefits to CPI only while protecting vulnerable seniors, as outlined in our Old Age Security Reform Memo19. Target: $13 billion in annual savings.
Consolidate program delivery. Replace dozens of overlapping Indigenous programs with block grants to Indigenous governments, shifting accountability from process compliance to outcomes. Apply similar consolidation elsewhere. Target: $8 to 12 billion in annual savings.
Tie the tax cut to the savings. Each scheduled increase in the threshold takes effect only when the corresponding savings are realized, so the measure never adds to the deficit.
Common Questions
“Won’t this explode the deficit?”
Not if it’s implemented with discipline. Each threshold increase is tied to realized savings – if reforms fall short, the timeline extends, with real political consequences for letting it. The first unlock to $50,000 is already roughly covered by identified savings; only the final phases lean on growth. Canada balanced its budget in the 1990s through disciplined program review, and Sweden swung from an 11.2% deficit to a 3.8% surplus in five years.8 The discipline exists when the political will exists.
“Would this benefit the wealthy more than the poor?”
Everyone earning $100,000 or more receives the same dollar benefit – because only the first $100,000 is exempted; income above it is still taxed. Someone earning $50,000 saves about half as much in dollars, and far more as a share of income. The lowest-income Canadians keep their existing supports, including the Canada Workers Benefit. This is built for the broad middle class – the teacher, the tradesperson, the small business owner, the young family – who carry the heaviest load and have the least room to get ahead.
“What does this have to do with families?”
A great deal. Housing and living costs have climbed far faster than incomes. Shelter costs rose 27.4% from early 2020 to early 2025, well ahead of overall inflation. Affordability is now one of the top reasons young Canadians give for delaying or forgoing children; in one survey, 38% of those aged 20–29 didn’t believe they could afford a child within three years.20
Putting thousands of after-tax dollars back in a young household’s budget is among the most direct things government can do to make starting a family financially possible again. On the alternative, a country that can’t afford to have children has no productivity future at all.
Conclusion
Canada’s economic trajectory is unsustainable, and average Canadians feel that the economy no longer rewards their effort. Productivity has stalled, living standards are falling, and talented people are leaving for places that hard work pays off.
Our proposal is a broad, and very bold, productivity transformation via federal income tax reform. By making the first $100,000 federal tax free could.
It is absolutely ambitious, but it’s the kind of effort that restarts a stalling economy by putting the incentive to work, save, build, and raise a family back at its centre. It signals that Canada once again believes in letting people keep what they earn and get ahead.
The fiscal path is demanding but achievable if the discipline matches the ambition and political will of the people. The alternative – continued stagnation while other countries pull ahead – is far worse.
