A wise approach to tax as Canada rebuilds its economy
Since the global outbreak of COVID-19, the Government of Canada has acted swiftly and decisively to deliver financial relief to help Canadians and Canadian businesses stay afloat. As the Department of Finance Canada, the Canada Revenue Agency and other federal departments fleshed out the details of these vital programs, CPA Canada worked shoulder to shoulder in our trusted advisor role, offering our advice and expertise to help ensure the programs distributed the intended benefits efficiently, fairly and effectively.
Now the government is starting to chart the way forward, and the policy choices being taken could make all the difference to the speed and strength of our country’s return to economic health. Where these plans rely on tax policy and administration, CPA Canada believes it’s critical to weigh them against the principles of a good tax system — that the tax system should be simple, fair, certain and efficient; internationally competitive; and geared toward raising revenue for the public good.
With these principles in mind, we suggest the government focus on three key themes:
- keep tax rules simple
- approach any potential tax increase with discipline
- apply a principled decision-making framework to proposed tax changes
Let’s look at each of these themes in turn, together with examples of how they might apply to recovery-related measures announced in the 2020 Speech from the Throne, the 2020 Fall Economic Statement (FES) and other forums.
KEEP TAX RULES SIMPLE
The difficulty that some Canadians and Canadian businesses faced when applying for certain emergency support measures—such as the initial rent assistance program (Canada Emergency Commercial Rent Assistance)—underscores the importance of simplicity in policy design. Even at the best of times, tax rules and administrative processes should aim to minimize the time spent by people, businesses, and other organizations to meet their obligations and access social benefits. Now more than ever, the tax system should use reasonable policies and cost-effective processes and technology to make timely tax filings, transactions, and interactions as easy as possible for everyone.
Examples: Supporting Canada’s economic recovery
Automatic tax return filing (2020 Throne speech commitment)
The government commits to provide automatic tax return filing for simple returns to ensure lower-income Canadians get the benefits intended for them. This is vitally important for the most vulnerable among us.
Currently, automatic tax filing is in place in countries like New Zealand and the U.K, but their personal tax systems are much simpler than Canada’s. Given Canada’s heightened tax complexity, it remains to be seen whether such a system would work here.
As well as enabling automatic filings, the government should work toward simplifying the tax system overall. In fact, CPA Canada believes that the personal income tax system needs to be simplified first to make this proposal work effectively.
Eligibility for disability programs (2020 Throne speech commitment)
The government proposes to set better processes for determining eligibility for government programs, and to introduce a new Canadian disability benefit program modelled after the Guaranteed Income Supplement for seniors.
As part of this, we urge the government to tackle the existing complexity of determining who qualifies for the disability tax credit and related programs — an onerous process that requires meeting often-disputed definitions of eligible conditions and certification by a medical professional.
Simpler rules and better guidance on how to follow them would help ensure people with disabilities receive their benefits.
Tax expenditure review (2019 election commitment)
We remind the government of its pledge to undertake a new comprehensive review of tax expenditures, announced with the aim of eliminating unfair tax breaks for wealthy Canadians. However, we recommend a broader mandate that covers streamlining tax credits and deductions, eliminating inefficient or poorly targeted tax preferences, and enabling more tax system automation.
Of course, we have long maintained that the tax system needs a top-to-bottom overhaul. With the current situation and immediate focus on economic recovery, this may have to wait temporarily — but it should be high on the government’s agenda in the medium term. A simpler, fairer, more efficient and competitive tax system is key to a sustainable economic recovery for Canada.
APPROACH ANY POTENTIAL TAX INCREASES WITH DISCIPLINE
The federal government has indicated that it is not currently contemplating raising taxes to restore the nation’s finances. We agree. It would be harmful to hike personal and corporate taxes in the current economic environment. If more tax revenue is needed, the government should look beyond rate increases to explore the best ways to do this, including broadening the tax base.
Examples: Supporting Canada’s economic recovery
Taxing extreme wealth inequality (2020 Throne speech and FES commitment)
The government intends to identify ways to tax “extreme wealth inequality.” While no details have been released, the approaches the government may employ could include increasing the top marginal personal income tax rate; changing specific tax rules, credits or deductions; increasing the amount of capital gains subject to tax; and/or adopting some form of estate or wealth tax.
With the highest personal tax rate topping 50 per cent in most provinces, the government needs to guard against unintended consequences. Measures to boost personal taxes even higher could discourage some, including wealthier Canadians, from earning income, lead them to shift income and/or capital from Canada, or incite aggressive tax avoidance or evasion.
For example, if Canada were to adopt a wealth tax equal to one per cent of net wealth over $20 million annually, a costing report from the Office of the Parliamentary Budget Officer (PBO) raised concerns over how wealth could be accurately valued and measured annually. The PBO would expect “a large behavioural response…due to avoidance and valuation optimization by high-net-worth families.”
We recommend that Finance Canada should review wealth taxes that have been adopted in other countries and whether they have been successful. For example, a report from the Fraser Institute found that of the 12 European countries that imposed wealth taxes in 1990, eight countries have since repealed them.
Simplifying and expanding the GST
While the government could opt to consider increasing the GST rate, we and others believe there are strong arguments for first simplifying the GST system and broadening the goods and services it applies to.
The current system allows many exemptions and concessions, making compliance overly complex, time-consuming, and expensive.
Further, it’s not known whether these preferences are achieving their aims at an acceptable cost. Finance Canada’s 2019 tax expenditure report pegged the cost of zero-rating of basic groceries at about $4.89 billion in 2019, for example. However, as we described in an earlier report, this specific measure has been shown to give proportionately more benefits to higher-income earners than the lower-income families it’s supposed to help.
Doing away with these preferences, perhaps as part of the government’s tax expenditure review, would simplify the system and broaden the tax base at the same time. At the same time, protections could be built in for lower-income and other vulnerable taxpayers as needed.
More broadly, increasing reliance on consumption taxes versus income taxes would also bring Canada’s tax mix more in line with most of our international peers (see our report for details).
APPLY A PRINCIPLED DECISION-MAKING FRAMEWORK TO PROPOSED TAX CHANGES
In good times and bad, all tax proposals on the table should be carefully reviewed to ensure they would support the economy, operate effectively and minimize disruption for Canadian taxpayers and businesses. New measures should be substantiated by evidence and properly targeted, and their design should consider their interaction with other tax measures and the tax system as a whole. They should not produce unintended results or add further unnecessary complexity.
Examples: Supporting Canada’s economic recovery
Taxing global digital economic activity (2020 Throne speech and FES commitment)
Current tax rules have not addressed the economic value created through transactions conducted digitally by companies that have no physical presence in the country. Like many other countries, Canada may be losing tax revenue as a result.
In addressing these issues, we believe we need to level the playing field for Canadians versus non-residents while ensuring that digital business activities are taxed in a fair, efficient and growth-friendly way.
In the 2020 FES, the government has proposed a tax on corporations providing digital services, effective January 1, 2022, with more details to be announced in the 2021 federal budget. The tax would apply until such time as an acceptable multilateral approach to tax digital profits comes into effect. This involves Canada and some 140 countries that are taking part in a global project, led by the Organisation for Economic Co-operation and Development (OECD), to develop uniform principles for taxing this activity.
Creating a framework that is not overly complex and gaining the required agreement among all these parties is a huge challenge. But finding a consistent global approach, if possible, still makes the most sense in terms of efficiency and fairness for all the countries involved, including Canada.
CPA Canada encourages the federal government to remain committed to and actively contribute to the OECD process to develop an agreed-upon, principles-based global framework for tax in a digitalized world.
In the meantime, we note that the government’s 2020 FES endorses CPA Canada’s recommendation to extend the GST/HST to foreign digital providers in the same way as domestic providers — in particular, by requiring foreign providers to register for, collect and remit the GST/HST on their taxable sales to Canadian consumers. We understand that other transactions involving non-resident suppliers will also be subject to GST/HST. These changes come into effect on July 1, 2021.
Cutting the corporate tax rate in half for clean tech companies (2020 Throne speech commitment)
The government aims to direct stimulus support toward business activities that promote clean technology. One proposal, referred to in the Throne speech, is to reduce the corporate tax rate by 50 per cent for companies that make zero-emissions products.
We applaud the government’s goal of promoting a more sustainable economy and recommends in-depth study and consultation as it explores this measure.
More details are needed to predict the impacts of this approach. For example, would the cut apply to the company’s profits overall, or only the share produced by its clean tech activities? The calculation should be kept as straightforward as possible. The government also needs confidence that the incentive would actually spur companies to change what they do, and not simply reward practices and plans already in place. How terminology such as “zero-emissions products” is defined is critical to achieving the desired outcomes.
The government should examine whether a tax incentive is the best approach to meeting its goals, so it should assess the costs and benefits of a range of alternatives to determine which ones would most benefit the environment, the economy, the government’s finances and the well-being of Canadians.
CONTINUE SHORT-TERM EMERGENCY MEASURES AS NEEDED
Of course, as the government recognized in its 2020 Fall Economic Statement, Canadians and Canadian businesses still need help to cope financially until the recovery is fully and broadly realized. While the accounting profession appreciates the need for measures now to support Canadians, businesses and the economy, we’re also mindful of the work ahead to manage the nation’s finances
These emergency measures should also be assessed in view of the three themes we describe above. Where the Canada Emergency Wage Subsidy is concerned, for example, there is still scope to streamline the rules and make it easier for struggling businesses to secure these funds and pay their employees. As the government rolls out these important programs, we will continue offering insights.