The last comprehensive changes were made in the 1960s, and we live in a much different world today
I’ve been a tax professional for more than 50 years and I believe the need for a comprehensive reform of our tax system was obvious before COVID-19 hit. Now, the responses to the pandemic here and around the world are forcing us to consider how we can best manage what is becoming a new world order. This includes a serious discussion about tax reform.
Canada’s last comprehensive review of the tax system was done in the 1960s and reflected the economic, social and cultural realities of that time. The subsequent attempts at piecemeal reforms illustrate how really difficult it is to successfully tweak a particular rule when the underlying problem is a basic policy assumption rather than a technical glitch. As just one example, consider the rules for taxing shareholders in private corporations. These rules were designed to eliminate any tax penalty associated with carrying on business through a corporation. While admirable in theory, this concept has been very difficult to implement in practice. We now have the equivalent of a 1,000-piece jigsaw puzzle to solve before a dividend is paid by a private corporation. The bookkeeping required to stay onside all the rules for calculating the status of any dividend, the balances on hand in the various refundable tax accounts — not to mention the potential traps in the safe income and capital dividend account balances — are truly over the top for a majority of small corporation owners. This really makes no sense.
The primary objectives of a good tax system haven’t changed: we want it to be efficient in raising revenues, conducive to promoting economic growth and fair to all in the way it operates. However, over time, we have allowed ancillary objectives to intrude on our system and frankly, to unduly complicate it. Increasingly, we use it to implement various social policies, industrial policies, redistribution policies, overtly political policies, environmental policies and recently, gender-based policies.
But more important, the current Income Tax Act just doesn’t take account of the economic, social and cultural realities of today. This is not the 1960s. We do business differently, our social interactions are different, our cultural values have evolved, and we deal digitally with the rest of the world in ways unimagined in the 1960s. We need a tax regime that reflects these new realities. People will have differing views on how we ought to go about achieving this but the important point is that we have put off discussing this in any serious way for far too long.
This was the state of play as I saw it up to the middle of March. Then the COVID-19 pandemic hit. It hasn’t changed the need for tax reform. Rather, our evolving responses to it have brought into sharper focus the critical need for a comprehensive examination of the changing economic environment, of which the tax system is an important part. In response to the fallout from shutting down the economy, the government is taking unprecedented short-run fiscal measures to assist individuals and businesses hurt by the shutdown. At the same time, the Bank of Canada is taking extraordinary measures on the monetary side. Among other questions, how will the private sector respond to these steps? How are the provinces and municipalities going to manage in this new world? We are just starting to realize the significance of the problems we are going to face.
We are just starting to realize the significance of the problems we are going to face
We need a thorough examination of our economic and social prospects in light of changing world conditions — of which the COVID-19 crisis is only the most immediate part. We undertook such a review in 1982 when the Macdonald Commission was appointed to examine the state of the economic union in Canada and the associated prospects for development. We need a similar approach now.
Our political institutions have changed dramatically in 50 years. The role formerly played in decision-making by cabinet ministers and the senior civil service has been significantly downplayed by the Prime Minister’s Office. We are faced with a crisis and ought to address it by engaging the brightest minds in the country. We will still require politicians to make — and be responsible for — the necessary choices between alternatives. But we need to give our politicians the best possible options from which to choose. I hope the pandemic will encourage us to take on what has been missing: an overall review of Canada’s economic prospects and the role comprehensive tax reform can play as we work our way out of the economic and social crisis we are experiencing.
Thomas McDonnell is a retired tax lawyer who has advised private- and public-sector clients, the federal and Ontario governments, and the Auditor General of Canada on a wide range of matters involving domestic and international tax issues.