Canada | Federal Budget

An urgent call for tax reform as budget date approaches

As the federal government prepares to table its pre-election budget on March 19, a series of reports from CPA Canada highlights the need for a comprehensive tax review—and how to conduct such an extensive undertaking.

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Close-up of a businessperson's hand using a marker on documentCPA Canada has long advocated for an overhaul of our country’s tax system to eliminate inefficiencies, improve fairness and ensure economic competitiveness (Shutterstock/Andrey_Popov)

On March 19, all the focus will be on Ottawa when the federal government delivers its pre-election budget. In the lead-up over the past few months, CPA Canada has released a series of reports on the state of Canada’s tax system and the dire need for an overhaul. Here’s a brief look at the recommendations from the three reports. 

REPORT 1: LESSONS FROM OTHER COUNTRIES

The series kicks off with a look at how other countries have approached major tax reforms and reviews, and what Canada can learn from these initiatives. Entitled International Trends in Tax Reform: Canada is Losing Ground, the report points out that Canada has fallen behind many of its trading partners, such as the United States, France, New Zealand and Japan, which are making efforts to keep their tax systems competitive.

The report notes that 50 years have passed since Canada’s tax system last underwent a comprehensive review. But during that time, major shifts have taken place in the business landscape and in the ways countries collect tax. 

Here are some of the report’s key findings:

  • Canada’s top combined personal income tax rate stands at 53.53 per cent in Ontario—the third highest level in the G7. What’s more, the highest top statutory personal tax bracket kicks in at a much lower level of income than it does in other G7 countries.
  • Canada’s corporate tax advantage has been eliminated by U.S. tax reform measures, and this presents a serious competitive threat. With the corporate income tax differential gone, other deficiencies—including tax complexity and overregulation—are becoming key factors that are hindering business investment.
  • Canada also lags behind in terms of its tax mix, relying on personal and corporate taxes to raise government revenues. Economists believe a disproportionate reliance on income taxes—rather than consumption taxes—leads to larger economic costs.
  • CPA Canada has long advocated for an overhaul of our country’s tax system to eliminate inefficiencies, improve fairness and ensure economic competitiveness. A number of other national and even international organizations have also called for a review.

“Canada needs to act now more than ever or we will be left trailing the pack,” stresses Bruce Ball, vice-president, tax, with CPA Canada.

REPORT 2: HOW THE TAX SYSTEM FAILS TO DELIVER FOR CANADIANS

Released in December 2018 following the Fall Economic Statement by Finance Minister Bill Morneau, the second report, Canada’s Tax System: What’s so Wrong and Why it Matters, includes case studies to highlight the system’s impact on individual Canadians and businesses, along with other research. In addition to Canada losing its corporate tax advantage, the findings point out some troubling facts. For example:

  • Because of the complexity of our tax system, it is difficult for lower income and other vulnerable Canadians to gain access to income supports through the system. It is estimated than $1.2 billion in federal benefits (including the Guaranteed Income Supplement, the Canada Learning Bond and the Canada Child Benefit) are unclaimed by low-income families each year.
  • Tax compliance is becoming extraordinarily difficult, especially for small business owners and their advisers. 
  • Benefits delivered through Canada’s Scientific Research and Experimental Development (SR&ED) program—Canada’s largest investment supporting R&D—are decreasing, which could indicate a need to improve the program’s accessibility, certainty and ease of use.
  • Many Canadians have lost trust in the tax system, which could contribute to reduced compliance and a rise in the underground economy.

“Overall, we need a tax system that helps create jobs, attracts investment and keeps the Canadian economy competitive,” says Ball. “Unfortunately, the current system is falling short on those vital measures.”   

REPORT 3: SHAPING A 21st CENTURY TAX SYSTEM FOR CANADA

What should a tax review look like in Canada today? What can we learn from other countries’ experiences? The third and final report, The Best Way Forward: Designing a Tax Review for Canada, looks at how to move from discussion to action with a Canada-wide tax review process. 

The report suggests that the review should be guided by certain key principles, such as simplicity, fairness, competitiveness and efficiency. It should also be comprehensive in scope, putting all aspects of tax policy and administration on the table. And it should be conducted by an independent expert panel appointed by the Minister of Finance.

Says the report: “A sound tax system is essential to Canada’s competitiveness. Until we take a more universal approach to fix it, Canada’s competitive advantage will continue to fade, and prospects for sustainable growth and prosperity will continue to dim for Canadians, Canadian businesses and our economy overall.” 

Given the chorus of voices that are calling for tax reform, CPA Canada president and CEO Joy Thomas calls this a “golden opportunity” for the federal government to act.

“Stepping forward and announcing a review would pave the way to create a better tax system that positions Canada for both economic growth and social development,” she says.