Steve Suarez is a partner at law firm Borden Ladner Gervais LLP, and the co-chair of the economics and taxation committee of the Canadian Chamber of Commerce.
The Toronto Maple Leafs still haven’t won another Stanley Cup, but so many things have changed since the late 1960s, when Canada’s tax system was last overhauled. Capital, people, goods and services (the things we tax) are all much more mobile; services and digital property play a much larger role in Canada’s economy; and it is far easier to sell goods without an in-Canada bricks-and-mortar presence. All of these have a profound impact on the efficacy of our tax system.
That’s important because its impact goes beyond just taxation. Study after study identifies poor productivity (labour and capital) as Canada’s most pressing economic ailment. The answer is innovation and capital investment, but we have a depressing record of attracting or achieving them, with the result that living standards have flatlined over the past several years. At the heart of the issue is our antiquated tax system.
We tax some things too much and others not enough. The allocation of taxing rights among different levels of government is completely dysfunctional, as Toronto’s current travails show (a city sales tax, which it is trying to introduce, is a fiscal “own goal” that will gut local businesses as shoppers drive 20 minutes to surrounding areas to avoid it). Our tax system is no longer competitive with other countries, many of whom (including the United States) have comprehensively redesigned theirs in the past decade. As a result, we discourage desired behaviours and fail to attract our share of foreign investment, while our domestic businesses compete on an uneven playing field with foreign counterparts.
Moreover, an outdated regime held together with decades of patches and bolt-ons becomes tremendously complex for both tax administrators and taxpayers. The resulting compliance costs increasingly leave taxpayers overwhelmed and throwing up their hands in despair (I frequently see my business clients receive lengthy information demands from three or four Canada Revenue Agency audit teams contemporaneously). The government’s answer to every problem is another reporting form to fill out and a penalty for not filing it on time, and disputes take years to resolve. The result is an expensive tax advisory industry to assist those who can afford it. The system has reached its breaking point.
Part of the problem is that the government allocates very limited resources to tax policy: A small number of excellent people do a huge amount of work. Sadly, much of that capacity is being used on well-intentioned but unhelpful ventures.
The government is proposing a retroactively-imposed digital services tax on certain online platforms that (despite raising little revenue) will provoke our largest trading partner – the United States, where those web companies are based – into damaging trade retaliation. The government is also participating in a quixotic attempt to create a worldwide system of taxation among dozens of disparate countries. Ostensibly designed to ensure companies do not jurisdiction-shop or use creative profit-shifting to avoid paying more taxes, this project is already stalling because of mammoth complexity and the Americans’ unwillingness to join.
To top it off, the government is introducing a new automatic 25-per-cent penalty on taxpayers who in its view are not paying enough but have complied with the letter of the law – just not what the government now says it really meant (but didn’t say) when enacting it (creating bona fide interpretational uncertainty). These are shiny chrome hubcaps for a reconditioned 1968 Ford Torino spewing smoke from under the hood and running on bald tires. Our priorities are misplaced.
To be sure, Canada’s huge public-sector COVID-19 debt overhang and rising interest rates mean government revenue needs are not going down any time soon. But rather than blindly groping for new areas to tax, we must grow our way out of the problem, by getting smarter about who and what we tax (and how much we tax them), and minimizing dead-weight public- and private-sector tax administration and compliance costs. This should be a shared objective for the benefit of all Canadians.
Fortunately, there is much we can learn from what other countries are doing in both tax policy and administration. For example, Estonia’s highly rated corporate income tax, levied not when companies make money but only when they distribute profits to shareholders, rewards and funds reinvestment in the business. And Australia’s move toward a digital-first small-business ecosystem will integrate the tax authority’s compliance systems with existing businesses processes and data feeds (for example, accounting software) to eliminate tax returns, making compliance much easier and cheaper.
By looking at what others have done and adapting it to our own circumstances, we can have the best of all worlds without starting from scratch. While there will be significant institutional resistance to major change from those with vested interests in the status quo, as a country we need to rise above the inertia of simply continuing to do whatever we’re doing just because that’s how we’ve always done it.
Deciding what to tax is a big part of the equation. Taxes come in many forms: For example, income taxes, sales taxes, land taxes, payroll taxes, excise taxes, customs and tariffs, carbon-related taxes and wealth taxes. Relative to other Group of Seven countries excluding the U.S., Canada is overly reliant on income taxes and underreliant on sales taxes – and this is where we must begin in reforming Canada’s tax regime. An Organization for Economic Co-operation and Development study shows corporate income tax in particular has the greatest negative effect on economic activity relative to other taxes. The International Monetary Fund has urged Canada to rethink its corporate tax regime to “improve efficiency and preserve Canada’s position in a rapidly changing international tax environment.”
It is also vitally important to understand that our tax regime is very much a piece in a much larger economic puzzle, not just a stand-alone revenue-raising system. This is illustrated by developments such as threatened U.S. trade retaliation for Canada’s proposed digital services tax, the European Union’s “carbon border adjustment mechanism” to penalize imports of carbon-emitting products (tariffs are simply taxes on certain imported goods), the immense gravitational pull of U.S. “green economy” tax credits on siphoning away clean energy capital investment, and the European Commission’s pursuit of multinationals accused of receiving “state aid” in the form of favourable tax incentives. Tax increasingly intersects with other areas of law such as trade, competition and the environment, and an overhaul of our tax system must incorporate these new and broader objectives beyond mere revenue generation.
Beyond the right objectives, we need practical and efficient design: Rigid adherence to perceived purity of tax policy ideology is counterproductive in a real-world environment.
In addition to raising sufficient revenue, key design elements to good tax policy include efficiency (minimizing discouragement of desired economic behaviour), simplicity (easy to compute, easy to collect, easy to comply), transparency (effects and who is paying what readily visible) and fairness. The term “fairness” includes linking the burden to ability to pay (or choice to pay, as for excise taxes or tariffs), but it should also extend beyond that to the fullest sense of the word.
This means putting Canadian business on a level playing field with foreign competitors; recognizing the cost-benefit trade-off of overburdening the compliant many in pursuit of the non-compliant few; having a dispute resolution process that does not favour deep-pocketed litigants; and avoiding both double taxation and unintended non-taxation. The most cost-effective way to ensure that everyone pays their fair share is creating a simpler tax regime which by design has fewer opportunities for avoidance, does not favour those who can afford expensive advisers, and is neither time-consuming nor costly to comply with and administer.
A better tax regime leads to a more productive economy, which leads to better and higher-paying jobs, which generates more tax revenue and stable funding for social programs and higher standards of living. It’s not rocket science.
If we want more doctors, nurses, engineers, teachers and other societally productive people and the revenue to pay for them, we need to be willing to rethink our tax regime from first principles. We could do so much better, just by looking around at what other countries are already doing and adapting it to our particular circumstances. What are we waiting for?