Tax system complex, unfair: critics
Seniors, think-tanks, business organizations call for reform
OTTAWA — Dan Braniff considers himself a savvy investor, quite knowledgeable about the federal tax system. The retired telecommunications manager once oversaw a multimilliondollar budget, and still plays the financial markets to help sustain his post-work life.
But heading into tax season, the razor-sharp 81-year-old says even he uses an accountant to navigate an increasingly labyrinthine system to find tax relief for seniors.
Braniff was among a group of retired Canadians who pushed the federal government to offer pension income-splitting for seniors, yet even he is frustrated by the tax system.
“In itself, I suppose taxes are complicated, but they don’t have to be as complicated as they are,” Braniff says from his home in picturesque Blue Mountains, Ont., northwest of Toronto.
His story is symptomatic of larger concerns as Canadians head into tax season and await a federal budget.
More and more business owners, chambers of commerce, individuals and members of Parliament are calling for a formal review of the convoluted tax system.
The House of Commons finance committee, the majority of whose members are Conservative MPs, recently called for a royal commission to examine ways to reduce the system’s complexity and inefficiency. It said a review is needed to ensure fairness and neutrality “by continuing to close tax loopholes that allow select taxpayers to avoid paying their fair share of tax.”
Similar requests for a review of the tax system have come from taxpayer watchdogs, lobby groups and think-tanks such as the Canadian Taxpayers Federation, the Canadian Council of Chief Executives and Canadian Centre for Policy Alternatives.
“Ad hoc changes to tax legislation by successive governments and the enactment of temporary provisions have complicated the tax system and increased compliance costs,” says the Canadian Chamber of Commerce, calling for a “comprehensive review” of the tax system.
In 1962, prime minister John Diefenbaker launched the Royal Commission on Taxation. The panel’s report, completed in 1966, called for more tax fairness and equity, and effectively led to capital gains tax.
Almost 50 years later, Finance Minister Jim Flaherty is closely examining his finance committee’s recommendations for a royal commission and for closing tax loopholes.
“We’ve been looking at various loopholes that some people engage to avoid paying their fair share of taxes,” Flaherty said last week.
Over the years, “distortions” have crept into the system, says Ian Lee of Carleton University’s Sprott School of Business in Ottawa, adding: “There’s lots of legitimate tax deductions, and there’s many that aren’t so legitimate.”
James Rajotte, chair of the Commons finance committee, says there’s currently not much of a plan to reform personal, corporate or consumption taxes because the focus is on eliminating a $26-billion deficit by the next election, expected in 2015.
Yet calls for tax reform — and the need for a major government review — have the support of many of Prime Minister Stephen Harper’s MPs.
What tax reform would look like remains to be seen.
Opposition parties believe the government has offered too many tax breaks for multibillion-dollar corporations, at the expense of small businesses and families.
The government and business groups say lower taxes spur innovation and grow the economy.
“There’s a real need, I think, for some analysis of the Canadian tax system,” argues Jack Mintz, head of the School of Public Policy at the University of Calgary, who chaired a panel examining business taxation for the Liberal government in the 1990s.
Canada’s federal income tax system is “progressive.” Canadians with larger incomes pay more in taxes and a greater percentage of their income. There are four personal tax brackets into which a portion of an individual’s income may fall.
Personal income from most domestic and international sources is taxed in Canada, including employment earnings, pension income and capital income.
For businesses, Canadian corporations pay tax on their taxable income earned in Canada and abroad, while foreign companies pay corporate tax on income earned in Canada. Small businesses are taxed at a lower rate than larger ones.
Federal personal income tax rates have been mostly unchanged over the last decade, although income thresholds to reach the different tax brackets, and the basic personal allowance, have increased, offering taxpayers some relief, but some experts question their effectiveness, fairness and intent.
Corporate income tax rates have come down steadily over the last six years. The small-business tax rate has only decreased slightly during that time.
The Canadian Taxpayers Federation wants the four personal income tax brackets replaced with just two tax brackets. The federation, the Opposition NDP, Liberals and a number of economists say there are too many “boutique” tax credits, eroding federal revenues.
The mineral exploration tax credit for certain shareholders, children’s fitness and arts tax credits, a volunteer firefighters tax credit, first-time home buyers tax relief and a political contribution tax break are just some of the credits and deductions costing the government billions of dollars annually.
Many economists believe the government could generate additional revenue and trim income taxes by increasing consumption taxes, such as the GST and gas tax, or introducing new ones that target specific activities. Others say they’re unfair, especially for lower-income taxpayers.
The Canadian Centre for Policy Alternatives, a leftleaning think-tank, has its own recommendations, including: broaden the income-tax base to include more sources, including possibly taxing lottery winnings and inheritances; increase the top income-tax rates and add one or more highincome tax brackets; increase Canada’s corporate tax rates, currently lowest in the G8; and modify or eliminate some tax credits and deductions.
The Edmonton Chamber of Commerce wants the federal government to examine financial penalties associated with estate and succession planning for businesses, such as transferring a family-owned business.
Also, the progressive tax system should be reviewed, the chamber says, but “within the context of our Canadian values,” including high-quality health care, education and infrastructure.
Seniors and retiring Canadians welcome tax breaks offered in recent years — such as pension income-splitting — but insist more help is needed.
Susan Eng, vice-president with CARP, argues the tax system contains inequities that discriminate against seniors.
Ottawa’s efforts to offer specialized tax relief are overburdening the system, and paying taxes is becoming too complex, Eng says.
However, the Canadian Federation of Independent Business believes a royal commission or other massive review would be too costly and produce few tangible results. It suggests it might be better for the Finance Department and a few ministers to consult a handful of experts, then deliver recommendations.
“The big reviews often turn into something more than they were intended,” says CFIB president Dan Kelly.
Back in Blue Mountains, Dan Braniff believes a wholesale review of the system is needed to help simplify it and introduce more fairness. “Royal commissions cost so damn much,” he says, “but maybe that’s the only way to do it.”