Will Recent and Proposed Tax Reforms Hurt the Canadian Economy?

The federal government’s “hurry up” approach to major tax reforms in Canada needs to slow down to allow for careful analysis of the proposals and changes from all stakeholders,

if the intended result is to modernize the tax system to align with a rapidly changing global economy, including potential change in trade agreements.

Recent changes to tax rate structure, principal residence reporting, the Voluntary Disclosures Program, the use of trusts in tax and estate planning and the taxation of income and capital in private family businesses, to name just a few, have the potential for significant economic impact.

The government also needs to allow tax experts, financial advisors and economists enough time to analyze the implications of the various proposals tabled to date, including the practical, long-term effects of change on Canadian taxpayers and investors from all walks of life.

By ramming through changes that have the potential to hurt private business and professionals in particular, the unintended results may, in fact, be detrimental to government, business and individual households alike over the long term as we face increased uncertainty, inflation and potential job losses.

In his typically insightful commentary, Dr. Jack Mintz struck a cautionary tone in the Financial Post and advocated for thoughtful, strategic tax reforms that will position the Canadian economy for a dramatically changing future. This was months before the latest mid-summer proposals on the taxation of private corporations, which have caused an uproar among most organizations and financial professionals who are in a position to decipher the complexity of these reforms and interpret them for Canadians.

In his piece, Dr. Mintz recounts briefly the recent evolution of the tax system and its positive role in economic development in Canada to date. However, he notes, “Even though an economic strategy to attract business to Canada still prevails, federal and provincial governments have increased taxes on new investment since 2012 by either raising corporate tax rates or reducing incentives. Today, the tax burden on new investment is almost one-sixth higher than it was five years ago.”

Bear in mind, this comment came before the most recent tax proposals. Dr. Mintz goes on to comment about the impressiveness of Canadian tax reforms from 1985 to 2012. “To remove taxes on business costs that impaired our ability to export, Canada adopted the GST in 1991 to replace the antiquated manufacturer’s sales tax. . . personal income rates [were cut] in 1987 in response to Reagan tax reforms in the U.S. in 1986. Later, from 1997 to 2005, personal and corporate taxes [were cut], after years of relentless tax increases to fight Canada’s deficit. 

He argues that the underlying basis of this economic strategy was access to the U.S. market and increased competitiveness. But now, he warns, this strategy is being compromised, just at a time when our U.S. neighbor is focused on economic nationalism and trade agreements are being renegotiated. Lower tax rates in the U.S. — or for that matter any other attractive jurisdiction — may incentivize Canadian companies and professionals to move in order to achieve more attractive after-tax outcomes.

This potential brain-drain and loss of investment dollars would be unfortunate, given the government’s impressive vision in the March 22, 2017, budget. “Mr. Speaker,” the Finance Minister said, “as we look to the coming decades, we see the potential of new innovations to transform our lives . . . Canada can be a world leader in digital innovation . . . and . . . we can’t afford not to be.” All of this will be more difficult to do without the investment of capital — both human and financial — from private businesses and professionals.

Few Canadians disagree with the concept that all Canadians must pay their fair share of taxes. The problem is that the economic contribution of various segments our tax base differs and, for a variety of reasons, there are even times when not all Canadians pay taxes. That includes businesspeople who apply devastating business losses to their now recovered revenues, professionals who invest in their education to better serve Canadians in the future and families who draw on their investments in times of lifecycle change.

That’s why ongoing tax reforms must be able to test the ideals of the tax system against a framework of four elements: fairness, equity, simplicity and compliance, as they relate to each contributor in our economy. The tax changes proposed for private businesses and professionals may compromise all of these ideals by causing unnecessary complexity and uncertainty. Worse, they may in fact zap the incentive required to invest time and money into building innovative solutions for a new digital economy. For some of the best and brightest, the cost of that investment in this country will simply be too expensive.

When smart, experienced experts advise caution in proceeding with complex proposals that may compromise fairness and equity of one important sector of the economic ecosystem over another, governments need to take pause. By taking advantage of experienced thought leadership, and collaborating on the right outcomes for the long term, the payoff will be the intended results: great jobs for all classes of taxpayers.

Two additional responsibilities arise in the meantime. First, those affected by the change have a responsibility to be more proactive about educating themselves on the implications of tax change on their businesses, their investments and their individual after-tax income. This is where the advice of insightful professionals is extremely valuable.

Tax and financial advisors, in turn, have an opportunity to shine in their role as educators, advocates and stewards of their clients’ financial resources, by challenging themselves to get involved and learn more about the impact of tax change on Canadians from all walks of life. In short, a commitment to continuing professional development in the financial services has never been more important.

Evelyn Jacks is President of Knowledge Bureau and author of 52 books on the subject of tax preparation, planning and family wealth management. She is pleased to be speaking on this subject at the Advocis Banff School this week. She tweets @evelynjacks

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