Canada’s taxation system is overly complex and needs to be overhauled if the country’s productivity and economic growth prospects are to improve, according to a new report from the Conference Board of Canada.
The first publication from the Ottawa-based think-tank’s new Centre on Tax Analysis, Fiscal Incentives and Competitiveness points to billions of dollars in inefficiencies that could be put toward funding actual services or stimulating innovation.
The need for reform is acute because the days of real gross domestic product growth of 3% or higher are almost certainly a thing of the past, says Glen Hodgson, the Conference Board’s senior vice president and chief economist: “Our expectation is Canada’s long-term [economic] growth potential will slow to 2% within the next two years – that’s the new reality. It used to be 3%. Politicians haven’t quite figured that out yet; they think it’s temporary.”
But there is one significant example of inefficiency that can be dealt with, Hodgson points out: the average business spends 2% of its overall business expenditures on tax compliance, which amounts to billions of dollars of wasted money.
“That’s a deadweight loss for the economy,” says Hodgson. “You’re spending a lot of money to comply with the current [tax] system. You could imagine a world with a simpler tax system, in which that 2% is captured in revenue.”
There also are inefficiencies for taxpayers. Some estimates suggest that 70% of Canadians hire a professional tax preparer to do their taxes every spring, which is a sure sign of excess complexity, says Hodgson: “That’s money we could all use on other things. Is this the best use of scarce resources for individuals?”
As with so many other demographic developments over the past 50-plus years, baby boomers are the ones driving the bus. Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario, says the baby-boomer cohort’s habits are having a two-pronged effect: as the boomers move into retirement, they’re making less money and paying less in taxes; at the same time, boomers also are starting to put a significant strain on the health-care system.
“[Boomers] are at the age, 67 or 69, at which,” he says, “you start to run into meaningful medical issues. It’s only going to get worse.”
Robertson agrees with Hodgson regarding the need to remove inefficiencies, but notes that sometimes the government can’t win for trying. Robertson points to the children’s fitness tax credit unveiled a couple of years ago: it means well, he says, but falls way short of its potential.
That $500 credit, which parents can claim for enrolling a child in a sport every year, works out to be a $75 tax savings. However, when you consider the work that needs to be done to accompany the claim for the credit – somebody has to provide the tax receipt to the consumer, track it in case the government wants to audit it and then the taxpayer has to submit the claim – the compliance cost of the child fitness tax credit is probably almost $75.
Canada’s inability to move the needle on productivity is a big concern for John McCallum, economics professor with the I.H. Asper School of Business at the University of Manitoba.
“We’re doing quite poorly on productivity,” says McCallum, “and we’re headed into a future in which labour force growth [will] be less than 1%.”
Hodgson agrees, saying Canada’s track record on productivity growth has been “terrible” since the 1980s: “It’s very rational to say, ‘If you want growth to accelerate, you need to feed growth and you can do that by getting rid of barriers between provinces.’ The tax system provides a lot of the incentives – and taxes are truly within [a government’s] control. We’ve never thought about it that way before.”
McCallum calls Canada’s tax system “mind-numbingly bewildering” and adds that there’s a reason that companies have small armies of advisors and internal staff working on taxes, write-off rules and deferral rules.
“Real clarity can be close to as important as the actual rates and the rules,” McCallum says. “Business [owners] really like low rates and liberal write-off policies, but they also like clarity. They don’t like it to come back and bite them in the rear end five years later.”
Financial advisors can add their voice to the debate on tax reform. The more inefficient and complex the tax system is, the more it costs businesses to comply – and that has an impact on corporate profits and, in turn, stock prices.
Thus, there are several innovative steps that could be taken that would be of great interest to advisors and their clients, McCallum says, such as increasing limits for RRSP and tax-free savings accounts and updating income-splitting rules so that people can be taxed more as a family than individuals.
Of course, a big part of the problem is that “taxation” is viewed as a four-letter word by politicians. Just ask Manitoba’s provincial government about the vitriol that was spewed its way after it raised the provincial sales tax by one percentage point in 2013.
“[Tax reform] is a huge political hot potato,” Hodgson says. “But to boost growth, you should be taxing consumption, which means sales taxes and reducing the taxation of investments.”
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