In his 1776 book, The Wealth of Nations, economist Adam Smith outlined four principles of a good tax system, believing that it should be: fair (the tax burden should be proportionate to one’s ability to pay), certain (there should be clarity around how the tax owing is calculated), convenient (the timing and manner of the tax collection should be easy for the taxpayer) and efficient (the tax system should not distort economic decision-making).
These principles are as relevant today as they were then. How does Canada’s tax system stack up? The truth is, we’re failing miserably. Frankly, we’ll never have a tax system that is perfect – but perfection doesn’t have to be the goal.
What if we had a system that reflected the first two of these principles – fairness and certainty? This would be a good start. The coming election represents an opportunity for each political party to show true leadership by ensuring our tax system is both fair and certain.
Fairness
Do Canadians pay taxes in proportion to their ability to pay? The Liberal government would have us believe that the rich are not paying their fair share. But this is disingenuous.
In 2017, the top 20 per cent of income earners in Canada, which included families with an annual income greater than $186,875, earned 49.1 per cent of all income in Canada. Those families paid 55.9 per cent of all taxes, including income taxes, payroll taxes, sales taxes and property taxes, among others, according the Fraser Institute in a study published Nov. 30, 2017. The top one per cent earned 10.7 per cent of all income in the country in 2017, and paid 14.7 per cent of all taxes (up from 11.3 per cent in 1997).
When looking at income taxes alone, the study revealed that the top one per cent of earners paid 17.9 per cent of all federal and provincial income taxes, while the bottom 50 per cent paid 9 per cent of all income taxes in 2017.
In 2016, the Liberals increased the tax rates of the highest earners so that the highest marginal tax rate in Canada now averages 50.2 per cent, meaning that the government keeps more of your last dollar of income than you do, if you’re in the top tax bracket in an average province.
Despite these figures, the Liberals have vowed, if re-elected, to undertake “a new comprehensive review of government spending and tax expenditures, to ensure that wealthy Canadians do not benefit from unfair tax breaks." Ask almost any high-income Canadian and they’ll tell you that they’re content paying a higher proportion of their income to the taxman than others. The question becomes: How much is enough?
Perhaps Mr. Trudeau is misinformed about how much of the tax burden higher-income earners are already bearing. And if not, he should share with Canadians – as should the other party leaders – his party’s view on just how much of the total tax burden the top 50 per cent, 20 per cent and top one per cent of earners should be paying. This will allow Canadians to assess whether the system is fair.
Certainty
For our tax system to provide certainty around the amount of tax owing, it must be simpler. Complexity is the enemy of certainty and predictability. For more than 100 years, we’ve been tinkering with the tax system, which has become an ugly patchwork of rules, bells and whistles that is virtually incomprehensible to the average taxpayer.
You may recall the ruckus in 2017, when the Liberals introduced new tax rules (the tax on split income and passive income rules) that apply to private company owners. Those rules are the most complex that we’ve seen introduced in decades – and possibly ever. These rules, which the Conservative party is promising to largely repeal, have added significant costs of compliance to taxpayers, and will bog down our court system for years as we all try to interpret the rules that even the Canada Revenue Agency is still trying to figure out.
To be sure, every government since the 1970s, regardless of political stripe, has contributed to the mess that is our tax system today. The political parties would do well to avoid targeted boutique tax credits that are aimed for political impact but help very few, and focus instead on broad-based tax measures and simplifying the system.
The Conservatives are the only party, so far, to announce that they will undertake a comprehensive review to modernize and simplify the tax system. In June, the Liberals said that this would not be on their agenda. The NDP, Green Party, People’s Party of Canada and the Bloc Québécois have not made commitments to a review of our system for the purpose of simplification.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
Tim Cestnick