BRIEF FROM THE CERTIFIED GENERAL
ACCOUNTANTS ASSOCIATION OF CANADA
Executive Summary
While the Government of Canada has been making a determined effort
to bring tax rates down in recent years, Canada’s income tax system has grown
in volumes and become increasingly complex. Businesses and individuals are
subjected to hundreds of various taxes from all levels of government - taxes
that are unnecessarily complicated and difficult to understand, even
duplicative or contradictory from one jurisdiction to another, and often making compliance cumbersome and
labour-intensive.
On an international scale, Canada’s tax system is among the most
complicated in the world - this hurts our economy and adversely affects small
and medium size enterprises (SMEs) as well as individual taxpayers.
Faced with a tight fiscal situation and the requisite to control
public expenditures, the federal government will need to look for efficiencies
and revenue-neutral or low-cost initiatives as it manages its top priority -
the economy. Taking concrete steps to
address tax measures or policies that unnecessarily add complexity to the tax system
is an obvious solution.
The benefits of tax
simplification are clear. A simple tax system increases transparency and
reduces uncertainty and the likelihood
of aggressive tax planning. It means higher compliance rates and lower
compliance costs for taxpayers. It means less paperwork for business and
lower administrative costs for government. It means a stronger system with a more secure tax base and predictable revenue.
Tax simplification is good for taxpayers, businesses and government
- as well as Canada’s economy. In fact, a simple,
transparent and fair tax system with low, internationally competitive tax rates
encourages investment and job growth - both of which are integral to the
wellbeing and sustained revival of the Canadian economy.
Some of Canada’s trading partners - including Australia, the United
Kingdom and the United States - are realizing that inefficient tax systems
reduce their competitiveness, and they are now taking steps to strengthen and streamline their tax regimes.
Canada - with all its fiscal advantages - cannot afford to fall
behind its global neighbours and risk becoming a less attractive place to do
business. To help build a strong, competitive 21st century economy,
we believe the federal government should set a clear course to streamline and
modernize Canada’s tax regime.
Therefore, CGA-Canada recommends that the Government of Canada take
immediate steps to simplify Canada’s tax
legislation and tax regime.
Introduction
The Certified General Accountants Association of Canada
(CGA-Canada) welcomes the opportunity to once again participate in this
important public consultation process in advance of the 2012 federal budget. We
are pleased to share our comments and recommendations, and we look forward to
appearing before the House of Commons
Standing Committee on Finance in the fall of 2011.
Founded in 1908, CGA-Canada
serves 75,000 Certified General Accountants and students in Canada and more than
90 countries. Respected accounting and financial management professionals, CGAs
work in industry, finance, government and
public practice. CGA-Canada establishes the designation’s certification
requirements and professional standards, offers professional
development, conducts research and advocacy, and represents CGAs nationally and internationally.
The House of Commons Standing Committee on Finance has invited
Canadians to submit up to three recommendations that focus on federal tax or
program spending priorities. With this in mind, and in view of CGA-Canada’s
ongoing interest in Canada’s taxation policy, we submit the following
recommendation - specifically,
That the Government of Canada take immediate steps to simplify
Canada’s tax legislation and tax regime.
According to Benjamin Franklin, taxation is an absolute certainty.
To this day, taxation continues to be an inescapable
- and significant - fact of life in our modern global world. A study released
by the Fraser Institute in April
2011 found that the average Canadian family spent more than 41 per cent of its
annual income on taxes in 2010 - more
than it paid for food, clothing and shelter combined. More specifically, the
tax bill for a family with an average income has increased by an astounding
1,686 per cent since 1961 - to the point that taxes are now the largest
expenditure facing a family today, outweighing the cost of basic necessities -
which was not always the case.i Indeed, taxes matter.
The following brief to the House of Commons Standing Committee on
Finance is intended to build upon and complement
CGA-Canada’s work in the area of tax simplification, including its most
recently published Issue in Focus - The Need for Tax Simplification - A
Challenge and an Opportunity, which highlights some of the central issues
surrounding Canada’s tax system as well as the need for tax simplification.ii
The issue
While the Government of Canada has been making a concerted effort
to bring tax rates down in recent years, Canada’s income tax system has grown
in volumes and become increasingly complex. Businesses and individuals are
subjected to hundreds of various taxes from all levels of government - taxes
that are unnecessarily complicated and difficult to understand, even
duplicative or contradictory from one jurisdiction to another, and often making compliance cumbersome and
labour-intensive. At the other end of the spectrum, taxpayers are also eligible
for certain targeted tax relief measures - such as exemptions, deductions,
deferrals and credits - which are described
as “tax expenditures” by Finance Canada and have multiplied many-fold in the
past few years, adding further
complexity to Canada’s elaborate and intricate tax regime.
As identified in the interim
report of the Review of tax reliefs, released by the Office of Tax
Simplification in the United Kingdom in December 2010, tax complexity has many
dimensions.iii It can be a case of simple language, or in
this case the lack there-of, or the drafting style or way the tax code is
ordered or arranged which makes it difficult
for the average taxpayer to follow and understand. It can also relate to the
underlying rules themselves, or the diversity of the tax system, that is the
number and range of taxes, or even the frequency at which the rules change.
Moreover, even with the simplest tax rule, complexity can arise in its
implementation.
In The Report on Tax Reform Options, conducted by President Obama’s
Economic Recovery Advisory Board and published
in August 2010, two additional factors are flagged as being big contributors to
tax complexity. First, new provisions have been added to achieve a particular
policy goal, but with insufficient attention being paid to how they interact with existing provisions -
resulting in duplicative and overlapping provisions, multiple definitions of concepts, different phase-outs and
expiration dates. Second, somewhat like Canada, the tax code has become
more complex because legislators have increasingly used targeted tax provisions
to achieve social policy objectives
normally achieved by spending programs.iv
Moreover, complexity arises from the simple fact that the tax
system serves a number of conflicting purposes. First, the tax system must
respond to changing financial and economic circumstances. Second, the tax
system should ensure fairness for taxpayers.
Third, the tax system should provide taxpayers with a reasonable degree of
certainty. Finally, and perhaps most importantly, the tax system should
preserve revenue for the government.
From the viewpoint of the Auditor General of Canada, complexity
appears to be synonymous with the lack of clarity, predictability and certainty
inherent in Canada’s Income Tax Act (ITA). In the Fall 2009 Report of the
Auditor General, attention was drawn to the backlog of more than 400 technical
changes needed to the Income Tax Act - proposed draft changes announced by the
government but not yet enacted by Parliament. The vast majority of these
amendments remain outstanding and, in the interim, taxpayers, professional accountants
and even the Canada Revenue Agency (CRA) prepare for this new government policy
and maintain records and forms for compliance purposes, not knowing if or when
these legislative amendments will pass. Canada’s Auditor General concluded that
the Income Tax Act is one of the longest and most complex pieces of federal
legislation.v
In a national poll concerning Canadians’ views on tax
simplification, commissioned by CGA-Canada and conducted by Nanos Research in
June 2011, only one in ten Canadians involved in preparing or reviewing tax
returns for a business thought the tax system for businesses is less complex
than it was ten years ago. In addition, only one in seven respondents said that
the personal income tax system is less complex than it was 10 years ago.
Now is the time
There is no better time than present to modernize Canada’s tax
regime.
For the average taxpayer,
Canada’s tax legislation - which includes a multitude of targeted tax measures
- can be challenging to understand
and impose unforeseen costs in terms of time, effort and money. Determining
which credits or deductions apply to a particular situation, or how much
money is owed to the Government of Canada, is not always straightforward - and
often requires the services of professional accountants and lawyers. In that
same Nanos Research survey, seven out of ten
Canadians reported they do not complete their own personal income tax returns.
In an April 2010 study, the Fraser Institute pegged the costs of preparing and
filing personal income tax returns between $4 billion to $5.8 billion
annually.vi
Even for tax practitioners and other professionals, there is a
strong belief that filing requirements are unnecessarily complicated and that
decisions and interpretations are difficult to obtain on a timely basis. In a national
online survey conducted with CGAs in July and August 2010, they overwhelmingly
agreed that tax simplification as well as fair and equitable tax administration
were their uppermost concerns.
For the SME sector, Canada’s tax system is inefficient, full of red
tape, laborious and costly. Businesses in Canada pay a whopping $12.6 billion a
year to meet their compliance requirements - in addition to their taxes
remitted - according to the Canadian Federation of Independent Business.vii In addition to the costs associated with
this compliance burden, businesses often pay an even greater price in terms of
lost opportunities - time and money that could be better spent on much more
productive endeavours instead of determining how much tax to pay. It is
important to note that the issues faced by the SME sector in relation to tax
complexity - such as the compliance burden - also affect the not-for profit
sector, including charities.
For the government, the system is costly to administer and
maintain. Faced with a tight fiscal situation and the requisite to control
public expenditures, the federal government will need to look for efficiencies
and revenue-neutral or low-cost initiatives as it manages its top priority -
the economy. Taking concrete steps to address tax measures or policies that
unnecessarily add complexity to the tax system is an obvious solution.
The benefits of tax simplification are clear. A simple tax system
increases transparency and reduces uncertainty and the likelihood of aggressive
tax planning. It means higher compliance rates and lower compliance costs for taxpayers.
It means less paperwork for business and lower administrative costs for
government. It means a stronger system with a more secure tax base and predictable
revenue.
Tax simplification is good for taxpayers, businesses and government
- as well as Canada’s economy. In fact, a simple,
transparent and fair tax system with low, internationally competitive tax rates
encourages investment and job growth - both of which are integral to the
wellbeing and sustained revival of the Canadian economy.
International context
Some of Canada’s trading partners - including Australia, the United
Kingdom and the United States - are realizing that inefficient tax systems
reduce competitiveness, and they are taking steps to strengthen and streamline their tax regimes.
The Government of Australia launched an independent review process
in 2008 (the “Henry Tax Review”) to help position
Australia to address 21st century challenges and - in the process -
provide a framework to make the tax system simpler, fairer and more efficient
for Australian working families and businesses. The two-year review brought
forward 138 recommendations and in May 2010 the Australian government announced
its preliminary response to the report and the “first wave” of its reform
agenda. The government has committed to implementing these measures over the
next 10 years, which are primarily related to company and small business taxes,
superannuation, infrastructure and resources. A full second term agenda will
follow and will focus on making tax time simpler, improving savings incentives,
and strengthening the governance and transparency of the tax system.viii
In the United Kingdom, the Office of Tax Simplification (OTS) was
launched in July 2010 to provide the government
with independent advice on simplifying the UK tax system. The OTS was mandated
to undertake two reviews - first, a review of all tax reliefs to provide
recommendations as to whether a relief should be retained in its current state,
simplified to ease administrative burdens, or be abolished altogether; and
second, a review of small business taxation to provide advice on how to
simplify the tax system, ease administration and reduce uncertainty for small
business. In its review and consultation on tax reliefsix, the OTS
examined 155 different reliefs - including
ones relating to Income Tax, Capital Gains Tax and Inheritance Tax - and
measured these against a consistent set of criteria to evaluate their
effectiveness and relevance, such as evidence of a continuing policy rationale, taxpayer take-up and awareness, and the
likely impact of changing or repealing the relief or exemption. In its final report, the OTS found that eight
reliefs had expired and should be removed from legislation, and
recommended 45 reliefs be abolished, 17 reliefs be simplified and 54 reliefs be
retained.x The British government
announced in its 2011 budget that it will abolish the 43 tax measures whose
rationale was no longer valid - which will result in less complexity and over
100 fewer pages of tax legislation.xi With the interim report
of the review of small business taxation in hand, and a final report pending,
the British government has also publicly declared its intention to follow up on
other specific recommendations advanced by the OTS to help achieve a simpler tax system.
In the United States, President Barack Obama - who made tax
overhaul part of his platform during the 2008 presidential election campaign -
appointed former Federal Reserve Chairman Paul Volcker to lead the President’s Economic
Recovery Advisory Board (PERAB), with a mandate to provide ideas and options to
achieve tax simplification, greater tax
compliance and corporate tax reform. In August 2010, the PERAB came forward
with a 118-page report on potential tax reform options, documenting the
advantages and disadvantages to a wide range of proposals - including
simplification options for family benefits, savings and retirement incentives,
capital gains, tax filing, small businesses
and the Alternative Minimum Tax (AMT)xii. In his State of the Union
address to Congress in January 2011, President Obama demonstrated his
full support for tax reform and his willingness to work with Democratic and Republican
members when he said “the best thing we could do on taxes for all Americans is
to simplify the individual tax code”xiii. As acknowledged, this will
not be an easy job, and will require political leadership, vision and resolve,
especially in view of the U.S. debt crisis and fragile economy.
Canada - with all its fiscal advantages - cannot afford to fall
behind its global neighbours and risk becoming a less attractive place to do
business. We believe the federal government should look at how Canada’s tax
regime could be streamlined and modernized to help build a strong, competitive
21st century economy.
Next steps
CGA-Canada recommends that the Government of Canada take immediate
steps to simplify Canada’s tax legislation
and tax regime by:
Tackling the backlog of hundreds of unlegislated tax proposals. For
various reasons, the last income tax technical
bill passed by Parliament was over 10 years ago. Now that the government has
consulted extensively over the last year on a series of draft legislative
proposals, it should introduce a technical tax bill before Parliament this fall.
Implementing a “sunset provision” for unlegislated tax proposals.
CGA-Canada believes this approach is the most
effective way to address unlegislated tax proposals. With this policy, if a tax
change is announced and not incorporated into legislation within a reasonable
amount of time, the measure would be deemed to have lapsed - as is the
case in Britain. This would bring greater clarity, certainty and predictability
to tax legislation, reduce the compliance and paperwork burden, and deal with
the ever-present backlog of unlegislated tax proposals.
Avoiding the introduction of any further targeted tax relief
measures. Targeted taxes have been criticized by some as being economically
inefficient, unfair by singling out one specific group or activity for
preferential treatment, costly in terms of
administrative and compliance requirements, and more complicated - compared to
broad-based tax reductions. In the June 2011 Nanos Research national poll
regarding Canadians’ views on tax simplification, a majority of
Canadians (seven out of ten) said they preferred having a lower overall tax
rate as opposed to the government
preserving special tax credits. Moreover, one of the main messages emanating
from the U.K. OTS review of tax reliefs was “in the interests of
fairness, tax reliefs should be avoided where these satisfy special interest groups or industry sectors”.xiv CGA-Canada agrees with this finding and submits that the federal government should go even further by
reviewing and evaluating the effectiveness of existing targeted tax measures and other revenue sources such as
licensing fees and levies, borrowing some of the methodology from the U.K. experience.
Keeping tax rates low. Personal income tax rates and thresholds
have been adjusted in recent years, and the general
corporate income tax rate will fall to 15 per cent by 2012. Low tax rates
facilitate compliance. In effect, low
tax rates lessen the possibility of aggressive tax planning, as well as the
likelihood of further and even more complicated
legislative measures to close loopholes.
Strengthening enforcement efforts on existing tax rules instead of
adding new rules and regulations. One of the ideas put forward by the U.S.
PERAB in its Report on Tax Reform Options was that of dedicating more resources
to enforcement and enhancing enforcement tools to reduce the tax gap - which is
defined as the difference between the amount
of taxpayers’ tax obligations for a given year and the amount that is actually
paid on time.xv Although compliance statistics for Canada’s
federal tax system appear difficult to locate, an OECD study examining a number
of member countries noted that in Canada, individual taxpayers paid their taxes
in a timely manner more than 90 per cent of the time between 2002-03 and
2006-07, taxable corporations ranged from
93.1 per cent falling to 85.4
per cent over that period, and the rate of employers varied from 90.4 per cent
to 87.7 per cent over that same time frame.xvi While it is
clearly apparent that the vast majority of taxes are paid on time, these uncollected taxes add up significantly.
According to the Auditor General of Canada, at the end of March 2005,
the undisputed and growing tax debt totaled over $18 billion, including
penalties and interest.xvii Were the CRA to strengthen its enforcement efforts - through additional training
and resources - to collect the taxes owed, it is likely that these
potential extra costs could be offset by the additional revenue derived from
its improved detection capabilities.
Expanding on harmonization
efforts. The federal government should continue to work with the three “hold-out” provinces (Saskatchewan, Manitoba and Prince
Edward Island) to help facilitate the transition to provincial value-added
sales taxes harmonized with the GST. Under a Harmonized Sales Tax (HST),
consumers and businesses deal with only one tax rate, one tax base, one set of
rules and one administrative body instead of two of each. It follows that all
the benefits associated with a simplified tax system would apply to a single
sales tax system. Furthermore, sales tax
harmonization on a national scale would give Canada the strong tax advantage it seeks in all provinces - helping to improve business competitiveness,
attract new investment, and increase Canada’s
productivity.
Increasing parliamentary
scrutiny on federal tax expenditures. A list of “ten tenets for a better tax
system”, compiled by the Tax Faculty of the Institute of Chartered Accountants
in England and Wales (ICAEW), purports that “tax legislation should be
enacted by statute and subject to proper democratic scrutiny by Parliament”.xviii Given that federal tax expenditures in Canada exceeded $100 billion in
2009, CGA-Canada would support the Parliamentary
Budget Officer’s suggestion to “consider establishing a process of review for
existing tax expenditures similar to that provided for all other public
expenditures.”xix With increased scrutiny from parliamentarians, it is hoped that these tax
measures would be exposed to more rigorous review and evaluation to ensure
they meet certain established principles - such as simplicity, transparency,
certainty, efficiency, fairness and whether
they serve a valid policy rationale.
Seeking advice from subject
matter experts. One aspect that Australia, the United Kingdom and the United States
share in common is their reliance on independent experts to conduct a review of
the tax system, consult widely, and provide
third party advice to legislators and policy-makers. Canada is well poised to
learn from the experiences of its global counterparts. CGA-Canada also
believes that the House of Commons Standing Committee
on Finance has an instrumental role to play in this process, as it could assist
in drafting the Terms of Reference, framing the issues and defining the
scope of study for an expert panel that has been mandated to review Canada’s tax legislation and tax regime.
Concluding Remarks
CGA-Canada thanks members of the
House of Commons Standing Committee on Finance for the opportunity to provide
its views and recommendations on how Canada’s tax regime could be simplified
and modernized to help build a strong, competitive 21st century economy. We remain available for further comment or questions, and wish you well in your deliberations.
REFERENCES