Reflections on a Tax Decade

Evelyn Jacks

A year-end reflection on the evolution of Canada’s tax system has brought some sobering observations and a special wish. Despite a dramatic shift in our economic landscape, our tax system is neither simpler or more competitive, nor is it necessarily fairer. There is much work to do.

This begins with making sure that important and generous tax credits are accessible and delivered to vulnerable families. It also requires that those who prepared well with savings of their own do not have to continue to worry, “will I have enough?” as an $810 billion projected deficit casts the potential for high taxation far into the future.

To that end, it is interesting to note that after decades of tweaking by successive government budgets one-third of all tax filers pay no taxes at all.  That leaves the burden of looking after all the important social programs Canadians value so much, to two-thirds of tax filers.

Since 2010, federal and provincial governments have been increasing income tax rates. The result has been that out of 61 Canadian and US jurisdictions, three provinces have the highest combined top statutory marginal tax rates (Nova Scotia, Ontario and Quebec) and nine have a new personal tax rate that applies to high-income earners.

These stats come from an interesting study by The Fraser Institute which notes that Nova Scotia started this trend of increasing tax rates on high-income earners, which was quickly followed by Ontario and Quebec. Recently, the largest tax hike, has occurred in Alberta. “These increases have important consequences for Canada’s economy,” the Institute notes. “High and increasing marginal tax rates – that is, the tax rate on the next dollar earned – discourage people from engaging in productive economic activity, ultimately hindering economic growth and prosperity.”

Put another way, when taxpayers are required to pay over 50% of the next dollar they earn, they often decide to work fewer days and invest less in labour and capital. High marginal tax rates not only reduce the rewards of earning income, they put a tax on higher education, innovation and risk taking.         

These reflections come not just from recent studies and this week’s Fall Economic Update (December 16, 2019), but a deep dive into the tax burden of entrepreneurship, as I took on the completion of the fifth edition of Make Sure It’s Deductible. It’s a book focused on the relationship between entrepreneurs and the CRA.   

Since its last update a decade ago, the compliance burden on small business has significantly increased, not just because business owners face a greater burden of proof when family members receive distributions from the business. Their unpaid role in collecting and/or remitting four different types of taxes – sales, payroll, personal and corporate - is increasingly complex, time consuming, and fraught with compliance headaches that include the potential for high penalties and interest. 

As we head into what looks like an economic downturn, it is possible more people will take up self-employment, especially if there are more job losses. In fact, the entrepreneurial spirit, and the innovation, creativity and risk-taking that comes with this, may very well be the catalyst for the next economic recovery. Recent shifts to the “gig” economy and incorporation of professionals has been a major trend.

A final observation: most Canadians don’t mind paying their taxes and consider it a privilege to do so, given that we live the best country in the world on so many levels. However, when people try hard to comply, and to contribute to their economy and those most in need, a tax system based on self-assessment and voluntary compliance cannot be so punitive as to thwart productivity and competitiveness.

As we move into a new decade, it is my hope that we can embrace what in my view is a much-needed tax reform – an overhaul of our tax system to perfect the ideals of fairness, equity, simplicity and compliance.

Happy holidays, everyone!