Cut Top Personal Tax Rates And Fix Capital Gains Rules, Urges Cpa Ontario

Ontario’s Chartered Professional Accountants association is calling on the federal government to launch a Royal Commission on tax reform to kickstart a full and independent rethink of Canada’s tax system .

The last comprehensive review of Canada’s tax system, the Royal Commission on Taxation — often referred to as the Carter Commission — took place in the 1960s. Chaired by Kenneth Carter, the Commission undertook a massive, multi-year study into the fundamental principles that guide our tax system. The Commission’s multi-volume report set out a broad framework for tax reform that emphasized fairness, simplicity and economic efficiency.

CPA Ontario’s report, entitled, “ Tax reform for growth in Canada ,” runs 66 pages and contains 20 recommendations for tax reform. In the interest of transparency, I will note I was quoted in the report.

Let’s take a look at a few of the recommendations.

Shift the tax mix

The government’s reliance on personal taxes is too high. Income and profit-based taxes that tax individual and corporate incomes impose higher economic costs than consumption taxes such as the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST).

To enhance Canada’s competitiveness, CPA Ontario is calling for a rebalancing of our tax system because our governments currently rely too heavily on the types of taxes that hurt economic growth the most. International comparisons show that Canada leans more on both personal and corporate income taxes than other Organization for Economic Co-operation and Development (OECD) countries, yet at the same time underutilizes consumption taxes and other revenue sources with lower economic costs.

Moving away from high personal and corporate taxes and increasing consumption taxes can be done while still protecting vulnerable households through the use of consumption tax exemptions and payments. These exist today on housing, groceries and most significantly through tax-free quarterly GST/HST payments for eligible individuals and families that helps offset the GST or HST that they pay.

Cut top personal tax rates, increase thresholds

Our tax rates on the highest-income earners are too high. With the top marginal rates in eight out of 10 provinces exceeding 50 per cent, Canada’s highest income earners are contributing a disproportionate percentage of the total personal income tax collected. And, while there are sound arguments for progressivity in the tax system — meaning the more you make, the more you should pay —once your tax rate gets to be more than 50 per cent there is a disincentive to earn more money since you know you can’t even keep half of what you make.

Currently, Canada’s personal income tax system is “out of step with international best practices,” according to the report, as our personal tax rates are among the highest in the OECD, and top rates kick in at comparatively low income levels.

The CPA Ontario report is calling on the federal and provincial governments to work together to reduce the combined top marginal rate to ensure no province exceeds the 50 per cent threshold, and then aim to align Canada’s rates with the United States and its OECD peers.

Even if you were to argue that the top federal rate of 33 per cent is appropriate, it kicks in way too early, on income over $253,414 in 2025. Compare that with the top federal rate in the U.S. of 37 per cent, which only starts to apply with income over US$626,350 — equivalent to about $875,000 in Canadian dollars. And if you live in a state such as Florida with no state personal income tax, 37 per cent is your full top rate of tax, since Florida is one of nine states that doesn’t have state tax on employment and self-employment income.

The report is also calling on the government to flatten the system by reducing the number of tax brackets both federally and provincially, as a flatter system offers economic and administrative advantages, including lower compliance costs, minimized distortions and increased transparency.

Reform capital gains taxes

Readers of this column will no doubt be well-versed in the debacle of the recent capital gains tax proposal to bump up the inclusion rate to 66 2/3 per cent from the current rate of 50 per cent. While this proposal never actually transpired, CPA Ontario is calling on the government to maintain its commitment not to raise the inclusion rate, and even consider reducing it.

The report argues that high capital gains taxes discourage long-term investment and entrepreneurial activity, particularly in sectors reliant on venture capital and private equity. And taxes on capital tend to “lock in” capital instead of moving it to more productive investments, something I have discussed before in that investors are reluctant to sell an asset, even if it has performed well over the years, as they don’t want to pay the capital gains tax associated with a sale and reinvestment decision.

To this end, the report also recommended that Canada introduce a broad capital gains tax rollover provision, allowing investors to defer tax on realized capital gains if proceeds are reinvested in another qualifying asset. As the report notes, “This recognizes the economic value of reinvestment and removes disincentives to reallocate capital to more productive uses.”

Simplify the Income Tax Act

Finally, the tax law is too complex. My current print version of the federal Income Tax Act , just updated this summer, now comes in two volumes, and is more than 2,800 pages. CPA Ontario believes that tax reform in Canada must prioritize simplification. The current tax complexity leads to high compliance costs, especially for lower income households and smaller businesses. It also increases administration costs for government bodies, which often have to deal with the minutiae of the tax rules to determine whether someone qualifies for a specific credit or deduction.

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The report also suggests removing “ineffective tax expenditures,” such as the myriad boutique tax credits that are costly to administer and the benefits of which could be redistributed via a broad reduction of general tax rates.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com .

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