This past weekend, Michael Wilson died.  Here in Toronto he was well known for his multiple roles on Bay Street, his work as a mental health advocate and his six years as chancellor of the University of Toronto; elsewhere in Canada he is remembered as our ambassador to the United States (2006-2009) and, more dimly, as a senior cabinet minister in the Mulroney Government, most importantly holding the Finance portfolio from 1984 to 1991. 

However, one thing he doesn’t often get credit for is making the Canadian tax system a whole lot fairer; including the system of tax expenditures for education.  That’s what I want to tell you about today.

I have previously told the story about how Canada’s system of education tax expenditures came into existence, so I will be brief: in 1959, Prime Minister Diefenbaker was coming under pressure to do *something* to subsidize students, and the Liberals were promising a “national scholarship program” (this promise eventually morphed into the Canada Student Loans Program once they were actually elected).  At the time Diefenbaker was, improbably, head of a caucus which contained over 50 Quebecers who weren’t keen on anything which involved a fight with Duplessis (spending programs with provincial opt-outs hadn’t been invented yet).  However, while Duplessis wasn’t interested in federal spending programs in education, he couldn’t find a reason to object to assistance if it was done through the tax system.  And thus, as so often in Canadian history, a policy tool came into existence not because it was fit for purpose but because it was fit for whatever version of federalism was then in vogue: in this case, a tax deduction for tuition fees and a monthly tax-deductible “allowance” for students.

Now, before leaving office, Diefenbaker created a Royal Commission on Taxation – mainly to satisfy business that he was doing something about lowering tax burdens – and asked a very nice Bay Street tax lawyer named Kenneth Carter to head it up.  Contrary to all expectations, however, when the staid Carter finally submitted his report in 1967 (the relevant chapter for us, on personal taxes, is available here), it turned out his recommendations were quite radical.  Among other things, it called for a broadening and flattening of the tax base and – crucially for our purposes – the replacement of most tax deductions with tax credits.

[Brief aside for everyone who needs a refresher on tax.  A tax deduction reduces your taxable income.  As such, it reduces the amount payable in that taxpayer’s highest tax bracket and is thus worth more to someone making (say) $100,000 than it does to someone making $20,000.    A tax credit reduces the amount owed on taxes by a set amount; in Canada, this is done by multiplying the value of the credit by the lowest marginal tax rate.  As such, tax credits are worth an equal amount to every tax-payer regardless of their income (assuming they have taxable income against which to use it, unless a) they can carry it forward to a year in which they have income against which to use it, or b) the credit is refundable)].

Anyways, these recommendations were too radical for Pearson, who was running a shaky minority government, but they were also too radical for Trudeau as well.  It therefore fell to Wilson, nearly 20 years after the Carter Commission submitted its report, to tackle the bit about making the tax system somewhat fairer.  Initially, the plan was to revise the entire tax system in one swoop; however, politics intervened and the tax reform was split in two – a revamp of personal taxation in 1987 (pre-re-election) and the introduction of the Goods and Services Tax in 1989 (post-re-election).  This was good in the sense it made the first half go through easily; bad in the sense that the unpopularity of GST ended up completely overshadowing his legacy and that of the first set of reforms.

Changing the system from deductions to credits made no difference to students who claimed the credit, since effectively all of them were in the lowest tax-bracket anyway.  But it made a huge difference in cases where students transferred the deduction to their parents: rich parents saw the value of the tax assistance fall significantly and the total tax expenditures going to parents fell by half (about $400 million in today’s terms from federal and provincial taxes combined). 

Despite less money being spend on post-secondary-related causes overall, this was certainly a Good Thing.  The tax system was made fairer, tax expenditures were cut, and it was all done without poorer students and families feeling a nickel worse-off.  It was something for Wilson should have received a lot more credit than he did, because it was probably the single largest move to make the tax system fairer in my lifetime.  It is also something other Conservative governments <cough> Ford! Ford! <cough> could profitably choose to emulate, if they so wished. Rest in Peace.