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- Equity: the taxation of persons should be proportional to their ability to pay;
- Certainty: the system should be clear and transparent;
- Convenience: the timing and system of payment should be convenient for taxpayers;
- Economy: the costs to administer and collect taxes should be minimized.
In my view, Canada has work to do to get back to adhering to the above four basic tenets. Accordingly, I’ve been a loud advocate for comprehensive tax review and reform for far more than a dozen years. I’m certainly not alone in this call. For example, CPA Canada has also called for a review. It’s well overdue.
However, I’m a purist. I believe the government should convene a well-qualified committee of experts (that would include academics, economists, practitioners and public-policy experts, all of whom would not include any vested interests) who would have an open book to review our current taxation system and recommend change.
The last time such a comprehensive review happened was in 1962, when prime minister John Diefenbaker convened the Royal Commission on Taxation. It released its voluminous report and recommendations in 1966. Such recommendations were vigorously debated, but, ultimately, were the impetus for significant income tax reform effective Jan. 1, 1972.
Some of the commission’s recommendations were implemented, but lots were not. As a side note, Canada has had limited reviews of certain aspects of its taxation system since 1972, but nothing comprehensive.
I’m a tax review purist because I believe the review should be as free from political pressure as possible. But in today’s day and age, such a view is admittedly naïve. No matter what your political stripes are, it is doubtful that “your” political party would agree to an open-ended review of the taxation system. Why? Because it’s very risky politically. Who knows what the review panel would ultimately recommend? Would it align with the politics of the government of the day? Would the ultimate report cause political harm to the governing party?
The answers to these questions are not known, and so in today’s environment, what is ultimately good for the population as a whole often takes a back seat to the risks of whether or not the governing party would get re-elected. I acknowledge that. But there is no doubt that Canada needs a comprehensive tax review. I’d be happy with even a limited-time review since there is a lot that needs to change.
Given the above, I’m often asked what I would change if I had my way (which, of course, I do not). To answer such a question might pre-suppose the purpose of a comprehensive review, so I’m often resistant to answer. In other words, if a comprehensive review was to be completed, all parties at the table should have an open mind, be prepared to look at all sides of an issue and, as previously mentioned, not have vested interests.
Nevertheless, here are some obvious issues that I would hope would be on the table:
The role of personal income tax in overall government revenues. Should it be the biggest revenue driver?
For personal income tax, why is family taxation not the primary taxing unit as compared to the individual? Wouldn’t this go a long way to helping to solve some of the existing Income Tax Act’s complexity?
What rates of personal income tax would help improve Canada’s productivity and attract the best and the brightest? (As a side note, the 1966 Report of the Royal Commission on Taxation strongly recommended that the top personal tax rate should not exceed 50 per cent … this is not the case in many provinces across Canada where the top-end rates approach 54 per cent).
What should the role of consumption tax (such as the GST / HST) be? Should it be increased in favour of reduced personal income tax rates / revenues?
How should capital gains be taxed?
Should the principal residence exemption be an unlimited amount? Or should it be restricted?
Is there a good tax policy reason to have the alternative minimum tax?
Should Canada have an estate tax like that of the United States? Canada did have an estate tax, but it was abolished effective Jan. 1, 1972.
Should there be a better effort to try to coordinate the provincial and federal tax laws better? If so, how exactly could that be done?
Today’s Income Tax Act is incomprehensible, even to tax professionals. How could this be dramatically simplified?
How could Canada’s income tax administration be greatly simplified? What role does increased and better technology play in such a simplification while very carefully safeguarding privacy?
Despite the Organization for Economic Co-operation and Development’s efforts to change taxation of international businesses that Canada is following and implementing, could this country somehow make its international taxation system simpler? And fairer?
What role does reporting information / disclosure and penalties play into the future? Today’s system is becoming more driven to intrusive information disclosure with a draconian carrot and significant “stick” approach occurring.
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The above short list is very incomplete and is simply the obvious … there’s a ton more.
Adam Smith was onto something more than 200 years ago. It’s time for Canada to modernize its taxation system and get closer to the core principles laid out by him.
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 [email protected] and his LinkedIn profile is www.linkedin.com/in/kimmoody.