5 minute read
Let’s talk about tax “loopholes” and the problems in our tax system and how Bill Morneau just made it a lot worse.
Our tax system is complicated. Overly, excessively complicated. My Practitioner’s Income Tax Act is comprised of 2,253 double-columned pages of tax law, notes, remission orders, tax treaties and more (not including its 195-page index). There are entire sections of definitions because the language used in it doesn’t produce self-evident results.
Our tax system is an intricate spider-web of different income scenarios, tax credits and deductions, provincial tax, federal tax, payroll tax, GST rules, and more… all of which has been dreamt up by multiple generations of politicians trying to raise nation building funds but probably always with an eye towards scoring political points with their voting base. It’s a mishmash of complex policy that has been patched together over decades.
The CRA requires 5-times the employees per capita to enforce our tax laws than the IRS does in the United States. Even with CRA’s ‘mega’ workforce of 40,000, they are so overwhelmed by the complexity of our Income Tax system that when taxpayers call them (because they don’t understand the tax system either) taxpayers can expect to receive the wrong answer 30% of the time, if they are lucky enough to get through at all. A 2017 Auditor General report concluded that the CRA block over 50% of their calls because they simply can’t handle the call volume, this includes the automated system.
Get this: “Canada’s tax system is based on the self-assessment principle which means that you have to complete a tax return each year (for yourself and any corporations you own) to report your income and calculate whether you owe tax or receive a refund”. Most Canadians have little or no understanding of our tax system, hell most accountants barely understand it. Thus: one of the great injustices of our income tax system: It is so amazingly complex that it is very difficult and expensive for taxpayers to properly comply.
It is no wonder Bill Morneau struck a nerve with Canadians of all stripes on July 18, 2017 when he released his proposals to change the way that Entrepreneurial families are taxed. Bill Morneau proudly proclaimed that his proposals would ‘level the playing field’ between small business owners and employees.
The original proposals that were released were so offensive and poorly thought out that Canada’s business community revolted. There were 21,000 submissions made during the 75-day consultation period including scathing submissions from the most reputable financial, accounting, and legal bodies in Canada. Even Canada’s own Standing Senate Committee on National Finance, recommended that the government completely abandon these changes, and then a few months later, the Senate passed the final version without question.
The Department of Finance’s release was called “Minister Morneau Announces Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies”. I find the word ‘loophole’ offensive, there is only the law. Using the word ‘loophole’ insinuates that prior governments passed laws which did not capture their intentions at the time, quite a bold idea. During the consultation period, many tax experts submitted much simpler ideas to accomplish the Minister’s stated objectives and pointed out that the proposals impact businesses of all sizes, not just the wealthy. By passing laws that negatively impact small businesses that are not owned by wealthy individuals, Bill Morneau completely contradicted his own stated objectives.
In the government’s original release, Bill Morneau uses the word ‘fair’ (or variants of it) over 70 times. Is it fair to burden our tax system with an additional 27-pages of convoluted, vague and offensive legislation which require an additional 47-pages of explanatory notes? This was eventually reduced to 11-pages of new legislation and 24-pages of explanatory notes. The final ‘fair’ version of this legislation is still rife with half finished thoughts and ambiguities that will keep the CRA, tax lawyers, and our court system busy for a decade, until the ‘loopholes’ in this new legislation are firmed up by Canada’s judiciary. This is the hallmark of poorly drafted legislation.
The final version of the legislation focuses on two areas:
Tax on Split Income: applying a punitive tax to dividends that are paid to certain family members who own shares in family companies;
Passive Income Changes: applying a punitive tax to corporations whose savings accounts the Liberal’s deems to be ‘too-large’. By the way, the tax rate on savings income held in a Canadian Controlled Private Company was already north of 50% before the changes;
In my view, the Liberal’s approach making of income tax act more complicated and ambiguous is not the brand of ‘fairness’ that Canadians deserve. We think that Canadians deserve a tax system that is simple, fair and even for everyone. The Chartered Professional Accountants of Canada “have long advocated for a tax system overhaul to ensure efficiency and remain competitive.”. This has been echoed by the OECD, the International monetary Fund and Canada’s own Senate.
Taking on the challenge of meaningful tax reform would be a big-job that would span many years, and it would not be politically convenient, but it is what Canadians deserve.
If you would like more information about how Bill Morneau’s tax changes impact your small business, please don’t hesitate to reach out to us today.