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Tax system review will boost business, better serve Canadians

CPA Canada calls for review and possible overhaul of system in latest tax report. Huge complexity and a lack of access to social benefits are key concerns.

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Young family having debt problems, not able to pay out their loan. Couple studying paper form bank while managing domestic budget together in kitchen“Despite the ongoing efforts of CRA, many low-income and other vulnerable Canadians continue to face challenges in accessing the social benefits they are entitled to through the existing tax system,” says Doretta Thompson, CPA Canada’s financial literacy leader. (WAYHOME Studio)

Canada’s tax system is hurting Canadians, impeding business success and stifling our global competitive position, a recent report by CPA Canada asserts. 

The second of three CPA Canada reports focusing on our country’s “complex” approach to taxationCanada’s Tax System: What’s so Wrong and Why it Matterscalls for a review and possible overhaul to an “outdated” system, last examined in full during the 1960s, when businesses and society functioned quite differently.

Released in December, following the Fall Economic Statement by Finance Minister Bill Morneau (See Fall fiscal update earmarks in excess of $17-billion in new spending over six years), the report highlights key issues, using case studies to illustrate their true impact on Canadians and our businesses.

“While the new measures introduced in the Fall Economic Statement to help accelerate business investment have been welcomed by business groups, these measures are temporary and do not reduce the need for a more comprehensive review of the entire tax system,” says Bruce Ball, vice-president, tax, with CPA Canada. “A sound tax system is essential to Canada’s competitiveness.” 

DOWN TO BUSINESS

Canada’s global competitiveness is at stake, with a tax system that is negatively impacting foreign investment and how our businesses position themselves.

Failing to keep up with international trends, corporate tax rates sit above what is recommended by the Organisation for Economic Cooperation and Development (OECD), lagging behind other G7 countries including the U.K., the U.S. and France, which have lowered their tax rates in recent years. 

A federal government policy that withholds tax on dividends may also be deterring foreign investment, says the report. In 2016, the Conference Board of Canada estimated that this withholding tax cost Canada up to $2.6 billion in foreign investment annually. An alarming stat when foreign-owned companies employ two million Canadians and are responsible for about half of our exports, according to the report. 

Even before the recent U.S. corporate tax cuts, business investment into Canada has also dropped from $40.6 billion in 2013 to $23.1 billion in 2017. In contrast, Canadian business investment into the U.S. has increased from $25.7 billion in 2013 to $81.9 billion in 2017. Recent CPA Canada Business Monitor findings show that uncertainty about the Canadian economy lingers among professional accounting in leadership positions.

“Domestically, our small- and medium-sized enterprises (SMEs)which contributed more than 30 per cent to their respective province’s GDP in 2014 and employed just over 70 per cent of Canada’s total private sector workforce in 2015are feeling the brunt of an overly complex tax system,” Ball says.

Though the system’s design is set up to stimulate business activity, job creation and growth, recent changes affecting how SMEs and their owners are taxed have increased complexity, hiking the costs of compliance. The recently implemented private corporation tax changes and anti-avoidance rules for the small business deduction are two areas causing such grief to SMEs and their tax practitioners, highlights the report. 

Incentive programs including the Small Business Deduction (SBD) and the Scientific Research and Experimental Development (SR&ED) programCanada’s largest investment into R&Dare also in need of review to see if they are effective today and when compared to possible alternative approaches.

According to the report, the SBD program will have an estimated tax expenditure cost of more than $6.3 billion this year alone. Meanwhile, SR&ED tax payout credits dropped by an estimated $5.3 billion from 2009 to 2016. With U.S. tax reform, Canada must review and possibly revise these programs and others to ensure they support innovation, commercialization and help the country remain competitive in the most cost-effective manner, adds the report.

“Our report makes clear that it’s time to move the conversation beyond the need for a comprehensive review of the country’s tax system to how to conduct such an undertaking,” stresses Ball. 

Overall, a simplified, more supportive, tax system, would increase capital and open up investment opportunities for entrepreneurs, allow businesses to take full advantage of the credits available to them, and improve our competitiveness, suggests the report. 

IMPACTS ON THE CANADIAN TAXPAYER

A modernized systemwith simpler rules and better guidancewill build confidence and improve compliance, suggests the report. The results? Tax gap closure, an increase in tax revenues, with reduced enforcement and its associated costs.

Though Canada Revenue Agency (CRA) efforts are on the right path, easing the personal income tax process with automated systems allowing for electronic filing and payment services, the system continues to work in favour of those with straightforward tax affairs including simple filings and credits. 

Common complaints include inefficient verification practices such as time-sensitive requests for receipts on things like charitable donations and medical expense credits, and unreliable customer support services, such as the perennially backed-up CRA call centre. 

Between March 2016 and March 2017, CRA call centres failed to answer 64 per cent of calls and, of the inquiries that got through, call centre agents gave incorrect or incomplete information 30 per cent of the time, according to the auditor general. Reducing complexity and making it easier for taxpayers and their advisers to comply will increase trust and compliance, ultimately reducing Canada’s tax gap. 

That tax gapthe difference between the amount of tax that should be collected versus how much actually was collectedwas estimated by the CRA to be $8.7 billion, or 6.4 per cent of personal income tax revenues in 2014.

“Despite the ongoing efforts of CRA, many low-income and other vulnerable Canadians continue to face challenges in accessing the social benefits they are entitled to through the existing tax system,” says Doretta Thompson, CPA Canada’s financial literacy leader. “This includes a mix of federal and provincial programs with different and sometimes complex rules and processes.”

Cautious estimates suggest that more than $1.2 billion in federal benefits (including the Guaranteed Income Supplement, the Canada Learning Bond and the Canada Child Benefit) are unclaimed by low-income families each year, says the report. Other limitations include tax credits and benefitssuch as spousal, age and caregiver creditswhich are subject to limits and claw backs depending on the household net income.

The disability tax credit (DTC) is one such benefit where many more Canadians are eligible than are recipients. According to a 2018 study by the Standing Senate Committee on Social Affairs, Science and Technology, fewer than 40 per cent of the more than 1.8 million adults who report qualifying disabilities claimed the credit in 2012. 

Qualifying for the DTC has restrictions. Not only must an applicant file a personal income tax return and meet income thresholds, but there are limitations on the health conditions that qualify, with applications generally requiring certification from a medical professional. Children under 18 have the DTC amount adjusted based on receipt of other tax credits, such as childcare and medical expenses.

Hindering its appeal, the DTC is also non-refundable, must be reapplied for periodically, and includes a costly and complicated appeals process, posing significant barriers for those living with serious disabilities.

“More assistance, along with simpler rules and application processes, would increase the likelihood of social benefits being received by those who most need them,” says Ball. “The system, as it stands now, is challenging for Canadians to find answers and receive support, encouraging distrust and non-compliance. This, in the end, negatively impacts Canada’s economic health and prosperity.

“Overall, we need a tax system that helps create jobs, attracts investment and keeps the Canadian economy competitive. Unfortunately, the current system is falling short on those vital measures.” 

READ THE FIRST REPORT

CPA Canada has long called for a comprehensive review of our country’s tax system to eliminate inefficiencies, improve fairness and ensure economic competitiveness. Read the first of three reports, International Trends in Tax Reform: Canada is Losing Ground.