Canada’s income tax regime is confusing even to experts

Article content

Recently, I had the good fortune to visit Juno Beach in Normandy, weeks before the 80th anniversary of D-Day. It was a haunting experience to think of the thousands of Canadian and Allied Forces who served and sacrificed their lives on that very spot so that we could preserve our freedoms, continue to learn, grow and capture opportunities.

Accordingly, I’d like to describe a big opportunity that Canada has regarding its taxation future.

Article content

First, a little context. Canada has a rich history when it comes to income taxation, but it didn’t start until 50 years after Confederation when an income tax was introduced into law to help finance Canada’s First World War efforts in 1917. Originally, the income tax statute was 11 pages long and very simple by today’s standard. As Canada’s population and economy grew, our Income Tax Act also grew to try to keep up with the changes.

In 1962, prime minister John Diefenbaker commissioned the first ever Royal Commission on Taxation, calling on its eminent members to study and make recommendations on how Canada’s taxation system should look in order to provide for the country’s future. The Commission released its voluminous report in 1966. It was debated hotly for years after but ultimately served as the basis for major tax reforms that were implemented on Jan. 1, 1972.

Since 1972, there have been some limited-scope reviews and reforms (such as the 1986 Budget and the 1997 Report of the Technical Committee on Business Taxation) but nothing as significant as the Royal Commission. For at least the past dozen years, many tax practitioners, organizations such as CPA Canada and some academics have been calling for another round of tax reform since society has changed greatly in the last 52 years.

Article content

Article content

Today’s Income Tax Act is roughly 2,000 pages of almost incomprehensible language that even seasoned tax specialists like me struggle with. It has become a patchwork quilt of “fix” upon “fix.”  In addition, there is no shortage of politically motivated provisions. Overall, this makes the administration of the Act very complex and causes our taxation system to be unapproachable to the average Canadian.

I have previously written on what I would do if I was in charge of another Royal Commission. Realistically, though, an open-ended review similar to the one between 1962-1966 is unlikley given the current political environment. Instead, it is more realistic to have another limited-scope review — but one that is much more expansive than the prior ones — that focuses on overall improvements to our taxation system, including simplification measures and measures that are aimed at improving our country’s productivity challenges. Such measures should include reducing personal tax rates and ensuring there are tangible incentives to risking one’s assets to be an entrepreneur (such as reduced capital gains inclusion rates), among many others.

Article content

Don’t get me wrong, I love the idea of having another open-ended taxation commission. I have spent hundreds of hours thinking about how our system could be improved, and there is no shortage of options. But, given the choice of a limited scope review or no review at all (this current government has chosen the latter and is certainly not interested in any form of taxation review), I’ll choose limited scope. Why? I think a limited scope review commission that is comprised of experienced practitioners, academics and other experts could make a real difference, quickly, to help improve Canadians’ lives.

Taxation policies matter. It starts with rewarding success and trying to attract the best and the brightest to Canada while ensuring our country’s social safety nets are good enough to take care of the most vulnerable. Too many of our recent taxation policies are politically motivated and are focused on punishing successful people and redistributing wealth. The high personal tax rates on the “rich” are an obvious example of that, with many Canadian provinces having a combined federal-provincial tax rate of approximately 54 per cent. In my view, that’s egregious and it needs to change.

Article content

It also means ensuring lower income Canadians are not punished for wanting to earn more; encouraging compliance with our income tax laws by making it easier for people to file (by, for example, introducing automatic tax filings for many taxpayers); and eliminating many egregious and politically motivated tax measures (such as the ridiculous “flipping tax” on real estate and expense denial for certain short-term rental owners) so as to simplify our system.

So, what is the opportunity, then? Well, by now I hope it’s obvious. With the Liberal Party in obvious decline, Canadians have the opportunity within the next 16 months to demand change. If the Conservative Party forms the next government, it has promised it will commence a limited scope taxation review. And that is the real opportunity for significant and positive change. Again, taxation policies matter. Just like prudent fiscal policies matter.

The famous American economist Milton Friedman once said: “We have a system that increasingly taxes work and subsidizes non-work.” I think that quote aptly describes Canada’s recent taxation policies. We have significant work to do to change that.

Article content

Fingers crossed that by Canada’s 159th birthday in 2026, we’ll see significant progress towards an improved taxation system for all Canadians. Capturing such an opportunity would be a small but continuing and important step to honour the efforts of those Canadians, such as those who landed on Juno Beach, who made the ultimate sacrifice to preserve our democracy and freedoms.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimmoody.

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content