In the first year of the federal Liberals’ mandate, the government has laid out a tax policy anchored by the notion of providing relief for middle-class taxpayers, ensuring tax fairness and promoting tax simplification. The feds have cut the middle-income tax rate, revamped the child benefit program to favour parents of modest means, closed loopholes and eliminated a handful of tax credits, among other initiatives.

In general, these early successes at making the tax system more progressive and less complex have been lauded by tax experts.

“People making, say, between $50,000 and $90,000 a year as a family are really going to get good cash benefits out of [these changes],” says Glen Hodgson, senior vice president and chief economist at the Conference Board of Canada in Ottawa. “And [taxpayers] will get those benefits as something visible – a cheque or transfer – as opposed to something [such as a tax credit] working out of the tax system.”

However, the Liberals’ best efforts to continue to pursue these themes in future budgets could be stymied by political, economic and fiscal realities.

The domestic economy’s growth rate remains sluggish, at best, despite the Liberals’ initiatives to stimulate the economy via spending. And the government’s projections, as outlined in the 2016 budget, will add $113.2 billion to the debt over the next five years, leaving the government with even less flexibility to borrow.

“The basic principle of directing money to people who need it is good,” says Aaron Wudrick, federal director of the Canadian Taxpayers Federation in Ottawa, speaking about the new, more expensive Canada child benefit program. “But the Liberals need to be mindful of the total cost.”

Tax rates for the wealthiest taxpayers, already hiked once by the Liberals to pay for the middle-class tax cut, probably can’t be raised much higher. Taxpayers in six of 10 provinces already face a top combined federal/provincial tax rate above the 50% threshold. In Nova Scotia, for example, the top combined tax rate is 54%; in Ontario, the top rate is 53.53%.

“With a marginal tax rate above 50%, you really have to wonder why you’re working for that extra dollar,” Hodgson says.

Experts such as Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont., suggest that the higher the tax rate, the more incentive a taxpayer has to engage in aggressive tax planning, to move to a different jurisdiction or to decide to withdraw his or her labour – the last strategy is a negative to both government revenue and the economy as a whole.

“We [may] take perhaps the most productive people and move them to the sidelines,” says Robertson.

The government is hoping to find extra revenue by identifying and closing what the feds deem to be unfair loopholes in the Income Tax Act. For example, in the 2016 budget, the Liberals proposed changes in the act to eliminate the tax-deferral benefit available in the corporate-class mutual fund structure (a.k.a. “switch” funds). The government also proposed changes to close loopholes associated with certain aspects of the taxation of life insurance policies, among other initiatives.

“[Closing loopholes] is well received by the public,” Robertson says, “but I’m not convinced that there are that many true loopholes. People do try to structure their affairs, legally, to pay the least amount of taxes.”

The Liberals also bolstered the Canada Revenue Agency‘s (CRA) resources to pursue offshore tax evasion and aggressive tax avoidance, providing the agency with an extra $444.4 million over the next five years.

“You get a big bang from your buck in terms of hiring auditors [and] highly specialized CRA auditors, and making sure folks are paying their fair share of taxes,” says David Macdonald, senior economist with the Canadian Centre for Policy Alternatives in Ottawa. “We’ll see benefit from that in terms of higher government revenue.”

In September, the CRA announced that it was conducting audits on more than 750 taxpayers, as well as criminal investigations into 20 cases of offshore tax evasion.

“Following the release of the Panama Papers [in April], there certainly has been extra emphasis on this,” says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce‘s wealth strategies group.

Most recently, the government focused its efforts on fighting aggressive tax avoidance and tax evasion in the domestic real estate sector, with the CRA increasing the number of audits in the booming Greater Toronto Area and Vancouver markets in particular.

The government also is studying how to estimate the “tax gap” – the difference between the taxes that would be paid if all tax obligations were met and the amount of taxes that actually are collected by the government – in different sectors of the tax system.

In June, the CRA published its first tax gap report, estimating that the agency had failed to collect $4.9 billion due to non-compliance in GST and HST payments over the 2000-14 period.

Other countries, including the U.K. and the U.S., also publish their estimates of their tax gap despite the inherent difficulties associated with determining that figure.

“The CRA now is doing its own work to try to estimate the tax gap, and that’s good,” Hodgson says, “because more information will fuel conversation on how to make improvements.”

Canada’s federal government also has undertaken a review of tax expenditures as part of a broader move to “eliminate targeted and inefficient programs, wasteful spending, and ineffective and obsolete government programs.” Earlier this year, a group of academics were engaged to provide advice to the government on ways to proceed.

While the government’s early efforts to reduce the number of boutique tax credits that add to the system’s complexity are laudable, Hodgson, for one, believes the review should be broadened.

“We’re probably at the point at which we need a serious review of the tax system as a whole,” Hodgson says, “to simplify it, to clarify it, to reduce compliance costs and to reduce incentives for people to avoid paying taxes. But [that effort] is a huge thing to take on.”

If the government does decide to tackle any big issues in the tax system, that is likely to happen in the upcoming budget, Robertson believes, or it won’t happen anytime soon: “After that, it’s going to be too close to the need for another [electoral] mandate.”

And yet, Hodgson hopes that the Liberals won’t miss out on their opportunity to boost economic growth by making the tax system simpler and fairer.

“Taxes can’t just be a political plaything anymore,” Hodgson says. “[The tax system] really has to be a tool for creating incentives to have your economy functioning at a high level.”

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