B. Civic Awareness · Civic Awareness: Democratic Values, Governance and Rights

Taxes, Budgets and Public Money

B2.5 B2.7About 70 minutes

Learning goals

I can describe how federal, provincial, municipal and Indigenous governments raise revenue.
I can calculate HST and property tax in simple examples.
I can explain what a budget is and how budgets address both short-term needs and long-term plans.
I can explain deficits, surpluses and debt, and how budget choices affect people and the economy.

Words to know

revenue
Money a government takes in, mostly from taxes.

budget
A government's plan for how much it expects to collect and spend in a year, and on what.

fiscal year
A government's financial year. For the federal and Ontario governments it runs from April 1 to March 31.

deficit
When a government spends more than it collects in one year.

surplus
When a government collects more than it spends in one year.

debt
The total amount a government owes from borrowing over many years.

progressive tax
A tax in which people with higher incomes pay a higher rate on the income in higher brackets.

property tax
A tax on the assessed value of land and buildings, the main source of municipal revenue.

Where does the money come from?

When you get a part-time job, your pay stub will show deductions before you see your pay: income tax and Employment Insurance (EI) premiums, and from age 18, Canada Pension Plan (CPP) contributions. When you buy a hoodie, you pay HST. When your family pays rent or owns a home, part of that money goes to property tax.

That money pays for roads, schools, hospitals, parks, snow clearing, the military, and much more. Deciding how to raise it and spend it is one of the most important things any government does. It happens through the budget.

How each government raises revenue

Federal government

Personal income tax, its largest source. Canada's income tax is progressive: higher portions of income are taxed at higher rates.
Corporate income tax on business profits.
GST (Goods and Services Tax), 5% on most purchases.
EI premiums (which fund Employment Insurance), customs duties (tariffs on imports) and excise taxes on items such as fuel, alcohol and tobacco.

Provincial government (Ontario)

Personal and corporate income tax.
Its share of the HST: in Ontario, the 5% federal GST and an 8% provincial portion are combined into one 13% Harmonized Sales Tax.
Federal transfers, such as the Canada Health Transfer and Canada Social Transfer. Some provinces also receive equalization payments, which help provinces that raise less revenue offer similar services.
Fuel tax and profits from provincial businesses such as the LCBO.

Municipal government

Property tax, the largest source. A provincial agency (in Ontario, MPAC) assesses property values; council sets tax rates.
User fees: water bills, transit fares, recreation programs.
Development charges paid by builders to help pay for new roads and pipes.
Grants from the province and the federal government (for example, the Canada Community-Building Fund).

Indigenous governments

Funding from federal transfers and agreements, own-source revenue from businesses and investments, and, for some First Nations, their own property taxes or sales taxes under federal laws that recognize those powers. (Under the Indian Act, the personal property of a status First Nations person located on a reserve is exempt from tax; most First Nations people pay the same taxes as everyone else on income earned and purchases made off reserve.)

Main revenue sources for each government. Notice that municipalities depend most on property tax, while the federal government depends most on income tax.

Worked example

Worked example: Sales tax and property tax

(a) How much HST do you pay on a $40.00 hoodie in Ontario, and how is it split? (b) A home is assessed at $450 000. The total property tax rate is 1.25%. What is the yearly property tax?

(a) HST is 13%: 0.13 × $40.00 = $5.20. Total cost: $40.00 + $5.20 = $45.20.
Split: federal GST 5%: 0.05 × $40.00 = $2.00. Ontario portion 8%: 0.08 × $40.00 = $3.20. Check: $2.00 + $3.20 = $5.20. ✓
(b) Property tax = assessed value × tax rate = $450 000 × 0.0125 = $5 625 per year.
In Ontario, the property tax rate usually combines the municipal rate (or rates for upper and lower tiers) and a provincial education rate that helps fund schools.
Even renters help pay property tax: it is part of the landlord's costs, which are reflected in rent.

(a) $5.20 HST ($2.00 federal + $3.20 provincial), total $45.20. (b) $5 625 per year.

In Ontario, HST is 13%: 5% goes to the federal government (GST) and 8% to the province. On a $40.00 item, that is $2.00 + $3.20 = $5.20.

Budgets: short-term needs and long-term plans

A budget is a government's plan for a year: expected revenue, planned spending and any new taxes or programs. Federally the Minister of Finance presents it; in Ontario, Ontario's Minister of Finance does. Budget votes are confidence votes: if a government loses one, it falls.

Good budgets balance two kinds of needs:

Short-term needs: responding to an emergency such as a flood, wildfire or recession; extra snow-clearing after a big winter; help for workers hurt by a sudden trade dispute.
Long-term plans: building transit or hospitals that last 50 years; replacing old water pipes before they burst; saving for an aging population's health care; reducing debt so future generations pay less interest.

Municipalities often separate an operating budget (day-to-day costs like staff and snow clearing) from a capital budget (big projects like bridges). In Ontario, municipalities must balance their operating budgets; they can borrow only for capital projects. The federal and provincial governments can run deficits.

Deficit, surplus and debt

Deficit: spending more than revenue in a year. The gap is borrowed.
Surplus: revenue more than spending in a year.
Debt: the total owed from all past borrowing. Each deficit adds to the debt; a surplus can reduce it.
Debt costs interest, which is money that cannot be spent on services. But borrowing can make sense for long-term investments, like a family taking a mortgage on a home, or in a recession to protect jobs.

Economists and parties disagree about how much deficit and debt are acceptable. That is a real political debate about values: present needs versus future burdens, and the size of government.

Deficits add to the debt; a surplus reduces it. Year 3's surplus lowers the debt from 118 to 115, but it is still higher than at the start.

Worked example

Modelled example: A town budget decision

The (fictional) Town of Maplewood has $2 million it can use this year. Option A: repave 20 streets with many potholes now. Option B: start replacing 60-year-old water pipes, a five-year project. How should council think about it?

Short-term need: potholes damage cars and bikes and cause complaints now. Option A gives visible results this year.
Long-term plan: old pipes can burst, causing flooding, water outages and costly emergency repairs. Option B prevents bigger costs later.
Smart sequencing: repaving a street and then digging it up for pipes wastes money. Council could replace pipes first on the worst streets, then repave those streets.
Funding options: water pipes are a capital project, so the town could borrow for them (allowed for capital) and pay over time, or apply for provincial or federal infrastructure grants.
Perspectives: drivers may want fast repaving; engineers and future residents benefit from pipes; taxpayers care about the tax rate. Council must explain its choice publicly.

A strong budget decision balances short-term needs and long-term plans, uses the right funding tool (operating versus capital, grants, borrowing) and explains trade-offs to residents.

How budget choices affect people and the economy

Tax changes change how much people take home and how much businesses invest.
Spending on projects creates jobs and services; cuts can save money but reduce services.
Transfers to individuals, such as the Canada Child Benefit or Old Age Security, directly support families and seniors.
Big deficits may push up borrowing costs over time; big cuts during a recession can deepen job losses. Most governments try to balance these risks.

Just for fun

The federal and Ontario fiscal years both start on April 1. So every year, the government's money calendar begins on April Fools' Day. No joke.

Hands-on activity

Receipt and budget detective

You need: three store receipts from your home, a calculator, and a device with internet access.

For each receipt, find the HST charged. Check it: multiply the taxable total by 0.13. (Some items, such as basic groceries, are zero-rated, so they have no HST. Find one if you can.)
For one receipt, split the HST into the federal 5% and Ontario 8% parts.
With a grown-up, look at your municipality's budget highlights web page. Find: the total budget, the biggest spending area, and how much property tax went up or down this year.
List two short-term items and two long-term projects in the budget.
If your family is comfortable sharing, look at a property tax bill or rent receipt together and talk about what it pays for. (This is optional; money can be a private topic.)
Write three sentences: one thing you learned, one choice you agree with, and one you would change, with a reason.

What to look for: correct HST calculations, short- and long-term items correctly sorted, and a budget opinion supported by a reason.

Your turn

What is the federal government's largest source of revenue? A municipality's?

Calculate the HST on a $25.00 item in Ontario and the total cost.

A home is assessed at $300 000 with a total tax rate of 1.1%. What is the yearly property tax?

What is the difference between a deficit and debt?

Give one short-term need and one long-term plan a provincial budget might address.

Can Ontario municipalities run deficits in their operating budgets?

What does "progressive" mean when describing Canada's income tax?

More practice: warm-up

What is the HST rate in Ontario?

When does the federal fiscal year begin?

Who presents the federal budget?

Name one user fee a municipality might charge.

What is a surplus?

More practice: on your own

A municipality needs $12 million more next year. Its total assessed property value is $3 billion. By how many percentage points would the tax rate need to rise to raise $12 million?

Why might borrowing to build a new hospital be reasonable, while borrowing to pay for office supplies is not?

Explain why a budget vote is a confidence vote and what that means in a minority Parliament.

Describe how a cut to provincial fuel tax could affect individuals and the government.

Why do renters indirectly pay property tax?

Challenge

A government has a debt of $200 billion and pays an average interest rate of 3%. How much interest does it pay per year? Why does this matter for services?

Some argue governments should always balance their budgets; others argue deficits are sometimes necessary. Explain both perspectives with an example.

Design a simple budget priority list for your municipality with one short-term item, one long-term project, and one way to pay for each. Justify one choice.

Check your understanding

Quiz

What is the main source of revenue for Ontario municipalities?

What is the HST on a $60.00 purchase in Ontario?

A deficit happens when a government:

Which is a long-term plan rather than a short-term need?

In Ontario, what must municipalities do with their operating budgets?

A home assessed at $400 000 with a 1.5% tax rate pays:

For parents and teachers

Big idea: B2.5 asks how different levels of government raise revenue and how budgets address short-term needs and long-term plans; B2.7 includes how policy affects individuals and the economy. The math here is simple percentages, a good chance to practise.

How to help: Check receipts together for HST. If you are comfortable, show your teen a pay stub (deductions) or a property tax bill, or simply talk through what taxes pay for. Money can be private: sharing real family numbers is entirely optional.

Common difficulties:

Mixing up deficit (one year) and debt (the total).
Percent calculations: 13% = 0.13; 1.25% = 0.0125.
Thinking borrowing is always bad. Discuss mortgages or student loans as analogies for long-term investments.