Canada’s tax system has not been overhauled significantly for decades. After having experienced a tax season like no other, there are indications it may no longer be synchronized with Canadians’ long-term wealth management goals.
Financial advisors are positioned perfectly to represent the real financial concerns of their clients and advocate for reforms to modernize the tax system in a big way.
As such, there are several issues to consider in the quest for a fairer tax system.
The burden of responsibility
Taxpayers bear an onerous burden of proof in filing their tax returns, subject to heavy fines, penalties, and even jail in severe cases. The Canada Revenue Agency (CRA) also has the power to seize assets and garnishee wages to collect on tax debt.
But tax law must be understood for taxpayers to comply with it. Unfortunately, this tax season was one of the worst for getting the right answers from the tax department and it often took long wait times averaging many hours. The complexity has become increasingly unmanageable.
Furthermore, the absence of a federal budget resulted in a new phenomenon: tax law announced “on the fly” or, worse, applied retroactively to the tax year 2020. These usual circumstances present a barrier to Canadians’ rights to prepare their family’s tax returns to their household’s best advantage, avoid costly tax-filing errors, and plan investments for their future.
Advisors have the unique experience to advocate for more client-centric tax reforms that better enable tax literacy and problem-free compliance.
Should households be taxed instead of individuals?
Family life is much more complex than it was 50 years ago, when lawmakers determined the basic unit of taxation should be the individual. But financial decisions, increasingly, are made by households. In addition, certain income-tested benefits, like the Canada Child Benefit, require the calculation of combined family net income. Income splitting in retirement is also complex.
Advisors can use their expertise and leadership to consult with governments to remove barriers of complexity emerging from ancient tax law that was sole-earner focused. Taxing households would align the tax system with the real financial decision-making families require. Planning for multi-stakeholder life events – such as births, post-secondary education, marriage, divorce, retirement, illness, and death – depends on joint tax-filing outcomes.
How much tax is too much?
Facing unprecedented levels of national debt, Canada needs to broaden its tax base, rebuild the economy with increased productivity and, above all, avoid “brain drain.” However, talented and highly educated taxpayers who invest their time and money in this country can give up more than 50 per cent of their income to taxation.
In the name of fairness, governments’ heavy reliance on personal income taxes may no longer be the most efficient way to raise the funds needed for societal goals. It may well be that sales taxes on high-end consumption provide a fairer approach. The government has started to move in this direction by introducing a luxury tax on boats, cars, and aircraft in this year’s budget.
Still, the feds have also contemplated an additional and potentially lucrative measure: a new annual tax on net wealth accumulation. The measure is being considered only on wealth of more than $20-million, at least for now; yet, its implementation could set an unwelcome precedent. The big concern is the murky waters of valuating net worth, which the CRA can and likely will challenge.
Even for high-net-worth clients, wealth can be fleeting. Advisors are in a unique position to weigh in on the holistic effects of all taxes paid – on income, spending, and wealth – on the ability of future generations to accumulate required financial resources while accommodating the taxes they will need to pay to manage the highest societal debt burden in Canadian history.
Stewarding rights to privacy, confidentiality, and self-assessment
Digitization is reforming the tax system at an unprecedented speed. But that comes with risk for taxpayers. Fraud and identity theft require the safeguarding of confidential financial data. That’s a joint responsibility between taxpayers, the CRA, advisors, and their firms.
As a sentinel for taxpayer rights in this new world, financial professionals who are prepared to bolster their clients’ digital relationship with the tax authorities will establish audit-ready documentation as an increasingly important part of the know-your-client process and present a solid shield against digital fraud with proper planning.
Big data also enables the CRA with big audit and collection powers. In such an environment, taxpayers increasingly require their advisors’ help and advocacy in exercising rights to arrange financial affairs within the framework of the law and pay only the correct amount of tax.
Advisors can also help level power imbalances between taxpayers and tax authorities by becoming actively involved in a call for a modern tax system that fairly reflects our changing future in a digital world.
Evelyn Jacks is founder and president of Knowledge Bureau Inc. She has written 55 books on tax and family wealth management.