- September 20, 2024
- Posted by: legaleseblogger
- Category: Related News
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The Urgent Need for Tax Reform in Canada
Recommendations from Stakeholders
Recently, various groups submitted recommendations to the Department of Finance as part of the 2025 pre-budget consultation process, which concluded last month. The input received has underscored the pressing need for scrutiny and reform regarding Canada’s convoluted tax system.
Challenges Faced by Small Business Owners
Kevin Wark, a tax advisor with CALU, highlighted the complexities confronting small business owners in today’s environment. "As a small business owner today, it’s hard to do anything without bringing in a tax lawyer and an accountant to confirm that what you’re doing will not create tax issues down the line,” he stated in an interview. This reliance on external professionals not only leads to increased costs but also adds layers of complexity that can stifle entrepreneurial endeavors.
The Impact of Family Business Transfer Rules
Wark elaborated on the specific challenge of navigating new family business transfer rules, warning that the benefits could easily be undermined if business owners misinterpret or incorrectly implement these complicated regulations.
Legislative Changes and Administrative Challenges
Recently, the proposed adjustment to the Capital Gains Inclusion Rate (CGIR)—from half to two-thirds—came into effect on June 25, though it hasn’t yet been codified into law. As John Oakey, Vice-President of Taxation for CPA Canada, pointed out in an interview, “How do we plan for what we’re doing when we have no idea what’s actually going to happen?” This uncertainty undermines the stability required for effective business planning.
Complications in Filing Tax Returns
Oakey also noted that this proposed change introduces significant administrative challenges. For example, a corporation with a fiscal year ending on June 30, which realizes a capital gain or loss on June 27, 2024, would face hurdles when it comes to timely filing its tax return, as the necessary guidelines for compliance are not yet established.
Software and Legislative Readiness
According to Oakey, the current tax filing software is not prepared for these anticipated changes. The Canada Revenue Agency (CRA) indicated to Investment Executive that the 2024 version of Schedule 3: Capital Gains (and Losses) for individuals remains "under development," as the CRA awaits final legislative details. The completion of this form is expected “by the end of January 2025.”
Increasing Regulatory Burden
In their submission, CPA Canada identified a range of significant and complex tax changes that are contributing to an ever-growing regulatory and compliance burden on individuals, businesses, and tax professionals alike. Oakey noted, "The pace is the biggest issue we have—there is so much coming through so fast that the system can’t keep up."
Appeals for Comprehensive Review
CALU has urged the government to establish an expert panel to examine the tax rules governing small businesses actively. They argue that the tax changes implemented since 2018, particularly regarding the tax on split income and passive investment rules, have created substantial barriers to starting and growing a small business in Canada. Wark emphasized this with the statement, “There has been a layering effect, over the years, that has now created a [tax] system that we think is somewhat unworkable.”
A Call for a Simpler Tax Structure
The Investment Industry Association of Canada (IIAC) has echoed these sentiments, advocating for an “independent and comprehensive examination of the federal tax system” in search of a “simpler tax system that is easier to administer, is fair and efficient, and reduces the potential for revenue shortfalls as economic circumstances change.” The Canadian Coalition for Small Business and Entrepreneurship (CCOC) also chimed in, stating that Canada’s tax system has turned into an intricate web that undermines innovation and growth.
The Lack of Comprehensive Review
Interestingly, the federal government has not conducted a thorough formal review of the tax system since the Carter Commission of the 1960s. Caroline Feggans, a spokesperson for the Department of Finance, maintained that the government consistently reviews the tax system to ensure fairness and efficiency but did not provide assurance of a formal review.
Voices for Change
Calls for tax reform are not limited to industry associations alone. In a July 3 episode of the Hub Dialogues podcast, University of Calgary economist Trevor Tombe noted that now is the critical moment for significant improvements to the federal and provincial tax systems. “This isn’t just about lowering taxes,” he explained. “It’s about addressing the underlying structure to ensure that [the tax system] doesn’t distort economic activity.”
Concerns from Major Financial Institutions
At the Scotiabank Financials Summit on September 4, Dave McKay, president and CEO of the Royal Bank of Canada, expressed his concerns that the current tax regime might be discouraging risk-taking in entrepreneurship across various sectors. He stated, “We need a tax structure that encourages risk-taking by everybody—not just entrepreneurs and start-up companies and tech firms.”
The Road Ahead: Commitment and Review Phases
Oakey believes that any review of Canada’s tax system will need to occur in stages due to the inherent complexity of the Income Tax Act. He indicated that while simpler issues might be addressed first, more intricate policy questions will necessitate additional time and consideration. “I think the biggest thing we need is commitment,” Oakey asserted. “We need whatever government is in power to say, ‘We need to have some level of review, we need to do it, and actually make it a priority.’ Until then, we can talk about it all we want.”
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