Economists and tax experts agree that Canada’s taxation system is confusing, antiquated and complex. Beyond that, income taxes are too high, and could be better balanced with other types of taxation.
There has been no major reform of the tax system since the early 1970s, and there has not been a broad study of the tax system since the Royal Commission on Taxation in the 1960s. Such commissions seem to be out of favour now. The federal Liberal government called a public inquiry on foreign interference only after resisting calls from the opposition for months. The only high profile inquiries in recent years have been the Truth and Reconciliation Commission launched in 2008, and more recently the Emergencies Act inquiry, but that inquiry was legislatively mandated after the federal government invoked the Act.
Nevertheless, a broad, independent inquiry is necessary. Government changes to the tax system have done more to complicate it than to simplify it. Not only is the current government guilty, so was the previous Conservative government. Remember their boutique tax credits, which included curiously specific measures like the children’s fitness tax credit and the tradesperson’s tool deduction?
The federal Liberal government added the carbon tax during their first term in office. The smoothly functioning BC carbon tax of 2008, the first in North America, provided a great revenue neutral model. Carbon levies collected were returned to BC residents via income tax reductions. The federal Liberals, instead, imposed a complex tax and rebate system, further convoluted by a patchwork of federally accepted provincial programs and a diversion of some funds into clean energy initiatives. It is difficult simply to grasp how all the pieces fit together.
The income tax act, in particular, is extremely lengthy and complicated. It is “incomprehensible”, to use tax expert Kim Moody’s term. This increases risks for businesses considering entering the country or developing projects here, and for their employees. Neither companies nor individuals can be sure how complex tax measures will be interpreted. (This also creates risks for the government. Interpretations of tax policy, not foreseen, may present businesses and individuals with tax loopholes they can exploit.) Uncertainty stifles investment. The tax system, therefore, must offer clarity and confidence.
Experts also suggest governments rely more on value-added taxes (the GST and HST) and less on income taxes. In other words, governments should tax consumption at higher and income at lower rates. This will incentivize work, savings and investment. Investment is something Canadian industry desperately needs. A Fraser Institute study in June of this year, “found that from 2014 to 2021 (the latest year of available data), business investment per worker in Canada, (adjusted for inflation) declined by 20%.”
Canada critically lags other nations. US investment grew by 14.6% over the same period. Joel Emes (Senior Economist) and Tegan Hill of the Fraser Institute assert, “the federal government’s recent tax and regulatory policies have helped spur an overall flight of investment capital from Canada.” In particular, energy sector investment did not recover as strongly in Canada as in the US after the oil price collapse in 2014, “due to an increase in regulatory constraints, policy uncertainty and an unfavourable business environment for energy investments in Canada.” (The Liberal government took power in late 2015.)
Corporate and personal tax rates, the regulatory environment and public debt levels, and how all these elements compare to those in other countries, effect where business investment migrates. Investment, in turn, impacts economic growth, productivity growth and income growth. Any growth in GDP this year has been due to population growth alone. Real per capita GDP (personal income) has still not recovered to pre-pandemic levels, and its growth has been non-existent in 2023. (In the 3rd quarter it was down over 2% from last year.) Tax issues, in summary, influence the growth of business investment, which has real impact on the prosperity of Canadians.
Some other key tax issues to consider: Should there be more emphasis on establishing internationally competitive corporate tax rates, and less on the large and proliferating government grants and subsidies to industry? How important is it for governments to provide a stable and predictable tax system for business and individuals? How should that be achieved? What are the most appropriate approaches to grow productivity and Canadians’ incomes?
Governments, on their own, will never fix these extensive, interrelated taxation problems. A public inquiry, led by business, labour, economic and tax experts, could develop comprehensive recommendations for the entire tax system. Lastly, Canadians obviously need a government committed to launching an inquiry and implementing sound reforms.
Bruce W Uzelman
I attended the University of Saskatchewan in Saskatoon.I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.
I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.