Canadians are wasting money, productivity with recent tax changes

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Canadian tax practitioners awoke from their summertime slumber on Aug. 12 to a mountain of new draft tax legislation to review, a voluminous package of material containing complex technical amendments to implement many new tax proposals.

The highlight provisions were amendments to clarify the new capital gains inclusion rate increase, clarifying whether “bare trusts” still need to be reported after the debacle that was the 2023 trust filing season (they do, but not for 2024 and now there are a bunch of new exclusions in an attempt to reduce the number of impacted trusts), various amendments to the new interest deductibility restriction rules and technical amendments to the Alternative Minimum Tax.

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There were also details on the new Canadian Entrepreneurs Incentive (despite some “improvements” to the original April 2024 Budget Day announcement on this, the improvements are not enough to make this a game changer), amendments to the proposed Global Minimum Tax and a slew of other changes, including a surprise and welcome amendment that should be helpful in administering estates of deceased persons.

Along with the Department of Finance being busy, the Canada Revenue Agency was, too. It recently released some guidance on the amendments to the complex and broad mandatory disclosure rules — essential reading for tax practitioners.

I’ve chatted with a couple of dozen tax practitioners across Canada about the materials being released by the government. The conversations would put most people to sleep in a hurry, given the technical nature of the chatter. Nevertheless, these conversations are important in order to obtain an understanding of other practitioners’ views and interpretations of the proposed laws and related administrative guidance.

What was very apparent, however, is that practitioners’ tolerance level for the voluminous amounts of change and complexity is at a breaking point. Complexity in tax is not new (I believe the study of taxation and taxation policy is one of the most difficult subjects known to man), but the massive volume of material released in such a short period of time is causing many in the accounting and legal professions to abandon the practice of taxation.

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For example, when the mandatory disclosure rules were first introduced, many in the tax community were shocked by the breadth of their application, complexity and steep life-altering penalties for not complying (even in “foot-fault” scenarios). Rather than sucking it up, some senior practitioners decided to call it a day and retired from active practice or significantly altered or reduced their practices.

I know about 15 very senior and great tax practitioners who did so. I also know some youngsters who decided to specialize in other areas of law and/or accounting when they understood the breadth of some of the recent changes. Some might argue that the new rules achieved their objective then, but that’s a cynical and shortsighted view of what’s happening.

In an era when there is a significant shortage of accountants, the country can ill afford to have tax practitioners abandoning the profession and not having enough youngsters to take their place. Our country can ill afford for average Canadians to not have a basic understanding of our tax system and to pay tremendous amounts of dollars in wasted productivity to simply comply.

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I always like looking at how complex Canada’s tax system is compared to other countries and what it costs citizens to comply. Some organizations that track this sort of thing put Canada towards the top of comparative complexity. One study concludes Canada has a medium level of complexity, but it is still slightly higher than the average of other Organization for Economic Co-operation and Development countries.

A recent report by the Fraser Institute concludes that the total compliance cost associated with the filing of 2022 Canadian personal income returns was $4.2 billion, equivalent to 0.15 per cent of the gross domestic product. This obviously doesn’t include compliance costs for corporations and trusts. Another recent report estimates that tax complexity costs the United States economy US$546 billion annually — a staggering figure.

Adam Smith, the Scottish economist and philosopher, laid out his four basic tenets of a sound taxation system in his 1776 landmark, The Wealth of Nations:

• Equity: the taxation of persons should be proportional to their income;
• Certainty: the system should be clear and transparent;
• Convenience: the timing and system of payment should be convenient for taxpayers;
• Economy: the costs to administer and collect taxes should be minimized.

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Canada has significant work to do on all the above tenets, but it should be obvious that the fourth one is something that needs to dramatically improve.

The recent Department of Finance releases have clarifying provisions that are helpful for tax practitioners, but the bigger picture needs to be front and centre. Such provisions are horribly complex, add to an already horribly complex tax system and do nothing to improve Canadians’ ability to comply with them.

I think John Oakey, vice-president of taxation at CPA Canada, put it aptly in a LinkedIn post last week when he said the “complicated rules to mitigate the impact of complicated rules do not do our tax system any favours.”

Bang on. The solution, of course, is for our country to purposely engage in meaningful efforts to simplify our system and to introduce what economist Jack Mintz calls “big-bang tax reform to wake up the economy.”

In other words, it’s time for a significant rethink and reform of our tax system.

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That might only be possible with a change in government.

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/kimgcmoody.

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