The Stealth Tax You Never Voted For

Why inflation is pushing Canadians into higher tax brackets without making them any richer

Governments don’t always need to raise tax rates to collect more from you. As inflation pushes wages higher, frozen tax brackets quietly pull more of your income into higher tiers without any public debate or vote. This is bracket creep, and it’s becoming a major revenue tool in provinces like Ontario, British Columbia, and Manitoba.

In this episode, Sabrina Maddeaux and Mike Moffatt break down how this hidden tax works, who it hits hardest, and why it raises serious questions about fairness, accountability, and the future of Canada’s tax system. From surtaxes capturing middle-class renters to generational divides in who benefits from inflation, this conversation exposes a system that increasingly taxes effort while rewarding assets.

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Below is an AI-generated transcript of the Missing Middle podcast, lightly edited.

Sabrina Maddeaux: Provincial governments are raising your taxes by stealth. These tax increases were never debated in legislatures and never voted on, but have a real impact on your bottom line. They do this through something called bracket creep. This happens when tax brackets don’t adjust over time with inflation and are fixed at set income thresholds. When inflation pushes wages up just to keep pace with the cost of living, more of that income tips into a higher tax tier automatically. We call that bracket creep. The result? Your purchasing power stays flat, but your tax bill goes up. You’re not actually any richer, but the government is collecting more from you as though you are.

Mike Moffatt: So, Sabrina, you had a fantastic piece of this over at the National Post. We’ll link to that in the show notes. How widespread is bracket creep?

Sabrina Maddeaux: Unfortunately, it’s becoming a lot more widespread. Bracket creep doesn’t happen by accident, as there’s a pretty simple fix. Index tax brackets to inflation every year. Several provinces in the federal government already do this, but now, B.C., Manitoba and Ontario have been freezing - or failing to adjust their brackets - turning inflation into a quiet revenue tool for politicians. The provinces moving in this direction include British Columbia, which announced plans to freeze brackets from 2027 to 2030 and hike the base tax rate for the first time in 25 years, which is a double hit for the middle class.

For example, a professional who earns $75,000 a year faces an immediate $272 hit from the rate hike alone. And then more creep each year from this freeze. Now, freezing tax brackets is projected to rake in an additional $60 million for the B.C. government next year. But then, the impact compounds every year as more workers are pulled into higher tax brackets. That total goes up really fast.

For the 2028-2029 fiscal year, the projection ballooned to around $590 million in extra taxes. So that’s huge. And they’re not the only ones who are doing this. Manitoba has now indefinitely frozen all brackets and their basic personal amount. The Canadian Taxpayers Federation estimates this extracted about $82 million in unvetted revenue in the last year alone.

And Ontario, on top of that, has its own version of this around surtax thresholds.

Mike Moffatt: And so when you add up all of these provinces, we’re in the billions. But I think the thing that really strikes me is that this isn’t just about the money; it’s the process. As you pointed out in the intro, these are tax increases by stealth. Normally, if a government wants to raise taxes, it needs to include it in a budget bill.

We’ve seen provinces introduce their budgets in recent weeks, and that would be a whole public thing - there’d be a whole debate around it. Governments would have to defend their choices. But here that’s not happening. So why does this matter so much?

Sabrina Maddeaux: That’s exactly right. A conventional tax increase means tabling a bill, standing in front of the legislature, defending it in front of the opposition, and ultimately getting it passed. It’s loud. It’s public and often uncomfortable. But that produces accountability. And that’s what our democracy is based on.

Now, these bracket freezes produce the exact same outcome of generating more tax revenue than having taxpayers pay a lot more, but with none of that accountability. So governments are collecting more money without ever having to make the case to voters in public.

And now that phrase taxation without representation isn’t hyperbole here. It has deep roots in why democratic institutions exist in the first place. And so what makes this entire trend particularly sneaky is how easy it is to miss. Most people aren’t tracking their tax bracket thresholds year over year or paying attention to the minutia of tax policy when a bracket is frozen, unless there’s a headline big rate hike, it can go over their heads. So it just starts to look like your paycheck is a little bit lighter than expected. But it does add up over time.

And beyond that accountability piece, there’s a real economic question about who this actually lands on because bracket creep doesn’t hit everyone equally, does it?

Mike Moffatt: No, it doesn’t. But I am disappointed that not everybody has their marginal tax rate Excel sheet like me and my cohort do. It really depends on the province here and how those brackets are set. It tends to hit medium and mid-to-high-income earners the most. Those who earn their income through a paycheck rather than capital gains, because they’re generating wealth through assets, such as a home, investments, or a business. Inflation often works in your favour because the asset values climb, and in many cases, you’re not taxed on those gains, and you’re certainly not taxed on the unrealized gain.

And on the unrealized gains, if the asset is in a tax sheltered vehicle like a TFSA or your primary residence, or the shares of a qualified small business corporation, you’re not going to pay capital gains on that. So that inflation actually helps you rather than harms you, as we see in bracket creep.

So you end up with this dynamic where the people who are already most exposed to the cost of living crisis are the same ones who are most exposed to the stealth tax.

There’s no cushion, and there’s a clear generational divide, as younger Canadians, like you, are far more likely to be income-dependent and far less likely to hold significant assets, like me.

So it also hits the middle class particularly hard, as high earners have accountants and structures to manage their tax exposure. So there’s that as well. The complexity of the system tends to advantage the really high-income earners who can find these vehicles, maybe find a qualified small business corporation to invest in to avoid some of these taxes.

Sabrina Maddeaux: That is something I feel personally because I’m someone who’s still renting, still hasn’t been able to afford homeownership, and yet I’ve been paying Ontario surtax for years now. I know I’m far from alone in that situation. There’s this whole category of people earning decent salaries, living in expensive cities, who the tax code is treating as wealthy, but who are absolutely not.

Instead, the surtax is capturing the downwardly mobile middle class. Now, Mike, can you walk us through what’s actually going on with that surtax and how we got in this situation?

Mike Moffatt: Yeah. So in Ontario, you have your marginal tax rates, but once you hit a certain threshold, you have a surtax, which is literally a tax on top of the regular tax. These thresholds were set decades ago, and they’ve barely moved. So when the thresholds were initially written, they were designed to catch genuinely high-income earners. And the idea was that, if you’re making this much, you can afford a little extra. I think it was originally designed to put more money into the health care system. But today, an income of less than $110,000 triggers that surtax - or can trigger that surtax - a salary that in most of Ontario is not enough to qualify for a mortgage on the average home.

So you’re talking about solidly middle-class workers, like teachers and so on. They’re often renters, but they’re being taxed like they’re rich. So the result of that is an effective top marginal tax rate of over 53% in Ontario on income above that threshold. That’s one of the highest in North America. And that has real consequences for behaviour and productivity.

At some point, people are going, okay, why am I staying here, and why am I working harder if I’m losing $0.54 on the dollar? For every extra dollar I earn?

Sabrina Maddeaux: So, at what point does this actually start changing people’s behaviour? Is there evidence that bracket creep and high marginal rates actually make people think twice about working harder or taking on more?

Mike Moffatt: I think it absolutely can. And I think with that harder work, you’re going to do that in a way that doesn’t generate as many taxable gains. So maybe you’re going to spend more of your time on primary real estate rather than going to work or trying to land a new client or something like that.

But I think the biggest impact it has is that it causes people to move. Why stay in Ontario, where tax rates are high, when it’s nearly impossible to buy a home, when you can move to Alberta? Or as those ads on the TTC said, Alberta is calling. Both home prices and taxes have contributed to the record levels of outmigration that Ontario has experienced in recent years.

So, Sabrina, you write about politics and policy, and you’re also exactly in the income range and the age range that gets clobbered by this. So what do you think the political consequences are when governments normalize this kind of thing? And in particular, I don’t understand why we haven’t seen the Ford government address more of this, given their political leanings, it would seem to be right up their alley.

Sabrina Maddeaux: Yeah, it should be a common-sense conservative solution to address bracket creep and save taxpayers’ money in a way that will also enhance productivity.

The core bargain of democratic taxation is that people understand what they’re paying and why, and that they have a say in it when that breaks down, trust in institutions erodes. And it’s not just trust and tax policy specifically. For younger Canadians who already feel like the system wasn’t built for them and is actually working against them. This is just another entry in that long list of evidence or their views, that Canada is not working for them and doesn’t care about them, so it reinforces that cynicism and anger.

And the bipartisan nature of politicians resorting to bracket creep should be alarming to everyone. When governments of very different political stripes all reach for the same quiet revenue tool, it suggests this is becoming a structural habit, and that becomes harder to reverse than a single bad tax policy.

I think there’s also something particularly galling about working harder to try to get ahead and finding out that the harder you push, the more you get taxed for it. The system is actually punishing effort.

The federal government and many provinces already index brackets to inflation automatically. So fixing this isn’t some radical idea. And yet Ontario hasn’t updated its surtax thresholds in decades. And now B.C. and Manitoba are going even further by not just not updating them, but actively choosing to freeze the indexing that they previously had; they’re failing to fix the problem. But we’re seeing a scenario where provinces are making it worse.

So, the obvious fix: indexing brackets and base personnel amounts to inflation.

What does this say about the broader ways our taxation system is breaking? Is this a symptom of even bigger problems?

Mike Moffatt: Yeah, I think it is, because that political challenge is real. Governments have quietly depended on this revenue because the alternatives are either finding cuts elsewhere or making the honest case for tax increases. And neither of those things is easy. And this whole bracket creep issue reminds me a lot of shrinkflation, that once you become aware of this phenomenon, you see it everywhere. You can’t avoid it.

In a lot of provinces, this same version of bracket creep applies to things like the minimum wage or disability support payments - they don’t rise with inflation. So the value of these programs diminishes over time. And then it allows the Premier of that province to come in like Santa Claus, increase these amounts and get patted on the back for being so generous. But in reality, they’re not really increasing anything. They’re simply having these payments, or having the minimum wage keep up with inflation. So at the end of the day, recipients really aren’t receiving any more value in real terms.

When it comes to the bracket creep issue, the broader fix is a tax code rethink. The whole system was designed around assumptions that made sense a generation ago. Stable employment, buying a home in your late 20s, having that home price go up and up and up. Then one day you could sell it, not pay capital gains on any of it, a workplace pension and so on. And that’s not the reality for most Canadians now, especially Millennials and Gen Z.

So if we are serious about a tax system that treats people fairly, regardless of which generation they were born into, that’s a bigger conversation. We need to start having.

Sabrina Maddeaux: One hundred percent, bracket creep is just one element of this. Younger people are being unfairly burdened by the tax system that just doesn’t recognize their current economic circumstances, and how Canada has changed over the years. So this is something that I think will continue to bubble up. And, tax fairness will become a bigger issue over the next few years. I expect to see it in a lot of headlines.

Thank you, everyone, for watching and listening. And to our amazing producer, Meredith Martin and editor Sean Foreman.

Mike Moffatt: And if you have any thoughts or questions about how Gen X is winning, please send us an email to the Missing Middle podcast at gmail.com.

Sabrina Maddeaux: And we’ll see you next time.

Additional Reading/Listening that Helped Inform the Episode:

Sabrina Maddeaux: Provinces Are Profiting From Your Inflationary Pain

Canadian Taxpayers Federation Report On Manitoba Bracket Freeze

Kelowna Capital News On BC Bracket Freeze Revenue Projections