Opinion: Canada’s tax system is weighing down the economy — if not now, when will it be reformed?

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FILE PHOTO: The national headquarters of the Canada Revenue Agency in Ontario, Canada April 19, 2023. REUTERS/Blair Gable/File PhotoBlair Gable/Reuters

Steve Suarez is a partner at the law firm Borden Ladner Gervais LLP and co-chair of the Economics and Taxation Committee of the Canadian Chamber of Commerce.

The Toronto Maple Leafs have yet to win another Stanley Cup, but a lot has changed since Canada’s tax system was last overhauled in the late 1960s. Capital, people, goods and services (the things we pay taxes on) are all highly mobile; Services and digital assets play a huge role in Canada’s economy; And it’s much easier to sell things in Canada without brick-and-mortar. All of these have a profound impact on the effectiveness of our tax system.

This is important because its impact goes beyond taxation. Study after study identifies poor productivity (of labor and capital) as Canada’s most pressing economic malady. The answer is innovation and capital investment, but we have a dismal record of attracting or achieving them as living standards have flatlined over the past several years. At the heart of the problem is our antiquated tax system.

Some we tax too much and others not enough. As Toronto’s current woes show, the allocation of taxing powers between different levels of government is completely dysfunctional (a city sales tax, which it’s trying to introduce, is a fiscal „own destination” that will absorb local businesses when shoppers drive 20 minutes to the surrounding areas to avoid it). Our tax system is not competitive with other countries, many of which (including the US) have completely redesigned in the last decade. As a result, we discourage desired behaviors and fail to attract our share of foreign investment, while our domestic businesses compete on an uneven playing field with their foreign counterparts.

Also, an outdated regime that has been run with patches and bolt-ons for decades is becoming more complicated for both tax administrators and taxpayers. The resulting compliance costs increasingly leave taxpayers feeling stressed and throwing up their hands in frustration (I often see my business clients receive lengthy information requests from three or four Canada Revenue Agency audit teams concurrently). The government’s response to every problem is another reporting form to fill out, penalties for not filing it on time, and disputes that take years to resolve. The result is an expensive tax consulting industry that caters to those who can afford it. The system has reached its breaking point.

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Part of the problem is that the government devotes too few resources to tax policy: a small number of good people do a great deal of work. Unfortunately, much of that potential is used in well-intentioned but unhelpful endeavors.

The government is proposing a digital services tax on some online platforms that would trigger damaging trade retaliation against our largest trading partner, the United States — where Internet companies are based — despite raising less revenue. The government is participating in a bizarre attempt to create a global taxation system among dozens of different countries. Designed to ensure that companies don’t skirt jurisdictions or use creative profit shifting to avoid paying higher taxes, the plan has already stalled due to enormous complexity and Americans’ reluctance to join.

To prevent this, the government is introducing a new automatic 25 percent penalty on taxpayers who, in its view, don’t pay enough but comply with the letter of the law – something the government says now doesn’t really mean (but doesn’t say when it’s implemented). Sincere explanatory uncertainty). These are restored shiny chrome hubcaps from a 1968 Ford Torino, spewing smoke from under the hood and running on bald tires. Our priorities are wrong.

Of course, Canada’s massive public-sector Covid-19 debt increase and rising interest rates mean government revenue needs won’t abate anytime soon. But instead of blindly looking to tax new areas, we need to get out of the problem by looking at who and what we tax (and how much we tax them) and by shedding the weight of the public and private sectors. Tax administration and compliance costs. It should be a shared purpose for the benefit of all Canadians.

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Fortunately, we can learn a lot from what other countries are doing, both in terms of tax policy and administration. For example, Estonia’s highly rated corporate income tax is levied not when companies make money, but only when they distribute profits to shareholders, rewards and reinvestment of funds in the business. Australia’s move towards a digital-first small-business ecosystem will integrate the Tax Authority’s compliance systems with existing business processes and data feeds (for example, accounting software), removing tax burdens and making compliance much easier and cheaper.

By looking at what others have done and adapting it to our own circumstances, we can get the best of all worlds without starting from scratch. While there is resistance to major institutional change in the status quo, we as a country must rise above the inaction of continuing to do what we are doing. .

Deciding what to tax is a big part of the equation. Taxes come in many forms: for example, income taxes, sales taxes, land taxes, wage taxes, excise taxes, customs and duties, carbon-related taxes, and wealth taxes. Canada relies more on income taxes and less on sales taxes than the rest of the Group of Seven countries, excluding the United States—and that’s where we should start in reforming Canada’s tax system. A study of the Organization for Economic Co-operation and Development shows that corporate income tax in particular has the largest negative effect on economic activity compared to other taxes. The International Monetary Fund has urged Canada to review its corporate tax regime „to improve efficiency and protect Canada’s position in a rapidly changing international tax environment.”

It is important to understand that our tax system is not just a separate revenue-raising system, but a piece of a much larger economic puzzle. This is illustrated by developments such as the threatened U.S. trade retaliation to Canada’s proposed digital services tax, the EU’s „carbon border adjustment mechanism” (tariffs are taxes on specific imported goods) that penalize imports of carbon-emitting goods, and immense gravity. US „green economy” tax credits for clean energy capital investment and the European Commission’s pursuit of multinationals as favorable tax breaks for receiving „government aid”. Tax increasingly intersects with other areas of law, such as business, competition and the environment, and the reform of our tax system must incorporate these new and broader objectives beyond mere revenue generation.

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Beyond sound intentions, we need pragmatic and efficient design: strict adherence to the perceived purity of tax policy ideology is counterproductive in real-world contexts.

In addition to raising adequate revenue, key design elements for good tax policy include efficiency (minimizing incentives for desirable economic behavior), simplicity (easy to calculate, easy to collect, easy to comply), and transparency (consequences and who pays easily visible). ) and honesty. The word „justice” includes linking the burden with the ability to pay (or willingness to pay, such as excise duties or fees), but it must extend beyond the full meaning of the word.

This means putting Canadian business on an equal footing with foreign competitors; recognizing the cost-benefit trade-off of burdening the compliant many with pursuing the non-compliant few; Having a dispute resolution process that does not favor deep litigation; and avoidance of both double taxation and unintended taxation. The most cost-effective way to ensure everyone pays their fair share is to create a simpler tax regime that is less likely to be evaded by design, does not favor those who can afford expensive consultants, and is not time-consuming or expensive to comply with. and administration.

A better tax system leads to a more productive economy, which leads to better and higher paying jobs, which in turn generates more tax revenue and sustainable funding for social programs and higher living standards. It’s not rocket science.

If we want more doctors, nurses, engineers, teachers and other social producers and income for them, we must be prepared to rethink our taxation from first principles. We can do better by looking around at what other countries are already doing and adapting it to our specific circumstances. What are we waiting for?

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