A single act of courage is needed to fix Canada’s tax system

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Has the overall Canadian tax system hit a tipping point? I’ve been concerned about this for quite some time and while I try hard not to cry wolf, I try to shine some light on some very serious concerns.

What are some of those concerns? There are many, but let’s highlight some of the bigger and most recent ones.

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Incomprehensible legislation

You know there’s a problem when seasoned tax specialists consistently struggle with new legislation. Combine this with the fact that anyone can call themselves a “tax specialist” (when they’re not and so the public is left to fend for themselves), and the consequences of being wrong are not good. The development of a rigorous tax designation to protect the public would be a step in the right direction, but this has unfortunately had a choppy history and is not likely to happen anytime soon.

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Shortage of accountants

Accountants dominate the tax profession in Canada, but there is a significant shortage of them, with many qualified candidates not being attracted to the challenges of accounting as a career. This is causing significant holes in the ability to properly administer the rigorous demands of the tax administration as well as properly and efficiently dispense tax advice. This will likely continue until the profession deals with these issues head-on.

Poorly thought-out legislation

Legislation that treats otherwise honest Canadians in a fashion that is extremely punitive does not encourage them to comply and can actually do the opposite. For example, the new legislation on short-term rentals (which will deny otherwise legitimate expense deductions against rental income in areas that prohibit such activity) is a great example. This kind of legislation is so obviously designed to be a short-term political “win” for the government and make them look good to their voter base, but it ignores good public policy. This is dangerous for Canada.

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Immediate legislative backtracking

Those who followed the Underused Housing Tax and bare trust-reporting debacles will know that legislation was introduced that ignored the concerns and feedback of many in the tax community, only to then have the government backtrack on some of the sharper edges of both pieces of legislation. In both cases, the backtracking occurred very late in the process and after a massive amount of effort was wasted by taxpayers and their advisers. These two examples are poster-child examples of how not to introduce tax legislation that affects the masses. It needs to change.

Excessively high personal tax rates

This country’s personal tax rates are much too high, extremely punitive and discourage many from taking much-needed entrepreneurial risks. High rates discourage the best and the brightest from coming to Canada and have caused a flurry of successful Canadians to leave the country. These high rates are a real drag on our country’s serious productivity challenges and they need to change.

Beyond simple rates, there is lots of tinkering that governments do to increase a person’s marginal tax rate. For example, if the proposed amendments to the federal alternative minimum tax are enacted into law, they could increase a “rich” person’s tax load if they have certain income (such as capital gains) or use certain deductions and credits (like charitable donations). These amendments are poorly thought out.

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The Manitoba provincial government’s recent budget is another example. It announced that beginning in 2025, the basic personal exemption amount will be phased out for resident individuals with incomes of between $200,000 and $400,000.

These recent examples are shameful attacks on high-income earners that increase their marginal tax rates and encourage behaviour to avoid such attacks.

Too many credits

The tax system massively redistributes wealth by introducing credits and cash rebates (such as the Canada Child Benefit, GST credits, carbon tax rebates, pharmacare, dental care, etc.) that all require the filing of a tax return in order to be eligible for them. Such credits, while lauded by some, are simple Robin Hood wealth redistribution schemes that ultimately redistribute tax revenues generated from the so-called rich to lower-income residents. Without automatic tax filing, many lower-income people who would likely be eligible for such credits do not receive such amounts since many are intimidated by the tax system.

So, what is the result of all these concerns? If left unchecked, the negative consequences could be increased non-compliance, significant pushback on further legislative amendments and governments that realize significantly less “revenues” because of non-compliance and behavioural changes by affected residents to avoid the negative implications of our tax system.

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What’s the solution? Throwing more money at our already bloated civil service is certainly not the answer. Instead, the solution is multi-faceted and will involve significant courage, reflection and policy changes to ensure Canadians are well served. “A single act of courage is often the tipping point for extraordinary change,” as author and speaker Andy Stanley once said.

It won’t happen under this current federal government, disappointingly, but the single act of courage required to fix our tax system is tax reform and review. It needs to happen to counter the negative consequences of our tax system being tipped over.

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.

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