Tax Simplification Suggestions
By Jason Fleming CPA, CA, M.Acc | October 16, 2019
With our 2019 federal election in full swing it is clear that none of the major parties are interested in simplifying our tax system. The biggest problem with our tax system is complexity and yet the parties are all proposing complex new tax credits to win votes.
This article contains suggestions to simplify and improve our tax system. Hopefully our political leaders will wake up to the fact that our tax system is too complicated and needs to be simplified.
Eliminate Personal Tax Credits
Instead of proposing new tax credits, a real leader would eliminate most personal tax credits. In order to be revenue neutral (which is important) we could dramatically increase the basic personal amount tax credit [Income Tax Act (ITA) s. 118(1)(c)]. A revised Schedule 1, from the 2018 T1 Personal Tax Return, is below showing the results of this change with the basic personal amount tax credit increased from $12,069 (in 2019) to $25,000.
Simplicity helps all taxpayers and helps the Canada Revenue Agency (CRA). Raising the basic personal amount tax credit also helps all taxpayers.
Spousal, Charitable and Disability Tax Credits
Removing credits is controversial and obviously there will be complaints. However, if the change is revenue neutral then complaints can be neutralized. For example, if you eliminate the spousal credit [ITA s. 118(1)(a)] some will say, “You are making married people pay more tax”. However, why should a married person pay less tax than a widow?
If the charitable donation tax credit [ITA s. 118.1] is removed people will say, “You are making it less beneficial to contribute to charity”. However, people should contribute for charitable reasons and not to get a tax credit. Also, with a higher basic personal amount tax credit some individuals will have more cash for charitable donations. Removing the charitable donation tax credit will also dramatically simplify CRA audits of both registered charities and donors. Simplifying the system is worth the risk of less donations.
If the disability tax credit [ITA s. 118.3] is removed people will say, “You are harming the disabled”. However, tax credits currently only help taxpayers with more than $12,069 (in 2019) of income. Very low-income disabled people do not pay income tax and do not benefit from this credit. The tax system should not be used to help people; the tax system should collect taxes in a fair and simple manner.
Government funds, programs, and laws should be used to help people. Directly giving government funds to low-income disabled people will help them much more than a tax credit. Also, medical professionals’ time is wasted filling out tax forms. Doctors should focus on patients’ health not on getting tax credits for patients.
Similar logic can be used for most other tax credits; they should be eliminated to simplify the system. The one tax credit that all taxpayers get, the basic personal amount tax credit, should be increased (to a round number) in a revenue neutral fashion.
Use Round Numbers
The following would also simplify our tax system:
(1) Annual indexing for inflation should be eliminated and replaced with increases to tax brackets and the basic personal amount tax credit approximately every 5 years to account for inflation. This way round numbers can always be used and inflation can be taken into account periodically; and
(2) The year can be left blank on the tax form(s) so that tax forms can be used for multiple years. This can only work if annual indexing is eliminated and it allows for less waste of paper (and less ink and less delivery costs) since the forms will remain current for approximately 5 years. While most taxpayers use computer software, some, including many low-income taxpayers, still use paper forms and these forms should be simplified.
Most Canadian corporations effectively pay a 15% federal corporate income tax. They pay a 38% federal tax, then get a 10% federal rate abatement and a 13% general rate reduction (or 13% M&P) tax credit which lowers the rate down to 15%. We should eliminate the abatement and tax credits and just lower the 38% federal corporate rate to 15%. This will both simplify the T2 Corporate Tax Return and make us more competitive versus the U.S (without much loss in tax revenue).
The Small Business Deduction
This tax credit should be eliminated since it rewards “smallness” and is not fair. It is not fair to lower the federal corporate tax on up to $500k of business income earned by CCPCs to 9% and charge even smaller businesses earning just over $210k (in 2019) as a sole-proprietorship a 33% federal personal tax rate.
The 2018 federal budget added complexity by reducing this tax credit for CCPC’s with passive income above $50k. It is simpler and fairer to just remove the credit.
How to Best Help Businesses: Eliminate Payroll Tax
Lowering corporate tax is not the best way to help business. The best way to help business and encourage jobs is to eliminate payroll tax; i.e., eliminate the employer portion of CPP and EI.
When businesses lose money they don’t pay income tax. All employers must always pay payroll tax. Why are we taxing employers for hiring people and paying salaries?
When people complain about removing the small business deduction we can counter by saying, “We’re eliminating payroll tax, which is even better for jobs.”
Where to Increase Funds to Balance the Budget
To raise additional revenue we should start taxing robots. Robots are taking Canadian jobs and there are no payroll taxes on robots. Why should businesses be rewarded (with less payroll tax) when they fire employees and replace them with robots?
(See Tax Robots Not Payroll A Robot Tax Proposal, available on CanadaOne.com, for more information).
We should also make foreign high-tech companies pay/charge the same taxes (e.g. GST/HST) as Canadian companies. It’s not fair to only tax Canadian companies and let foreign tech companies skirt paying tax. If we do not want to charge GST/HST on technology to keep prices low, then eliminate the GST/HST on all tech companies. If you have a GST/HST then it should be charged by both Canadian and foreign businesses.
We should also expand section 19 of the ITA so that foreign internet advertising aimed at Canadians is not deductible for tax purposes. This rule (ITA s. 19) currently makes foreign advertising on T.V., in newspapers and magazines (aimed at Canadians) not deductible, but strangely it doesn’t apply to foreign internet advertising.
Revised Schedule 1 Federal Tax
Schedule 1 (Federal Tax) which in 2018 was 61 lines and complex will simplify to the following 17 line schedule with these suggested changes:
|Year ___________ Federal Tax Schedule 1|
|Enter your taxable income from line 260 of your return||___________ (1)|
|Tax on first $50,000 of income x 15%||___________ (2)|
|Tax on income over $50,000 and up to $100,000 x 20.5%||___________ (3)|
|Tax on income over $100,000 and up to $150,000 x 26%||___________ (4)|
|Tax on income over $150,000 and up to $200,000 x 29%||___________ (5)|
|Tax on income over $200,000 x 33%||___________ (6)|
|Add lines 2 to 6||___________ (7)|
|Federal tax on split income (Get and complete Form T1206)||___________ (8)|
|Add lines 7 and 8||___________ (9)|
|Basic personal amount tax credit $25,000 x 15% = $3,750 (10)|
|Basic federal tax (Line 9 minus 10; if negative, enter “0”)||___________ (11)|
|Federal foreign tax credit (Get and complete Form T2209)||___________ (12)|
|Investment tax credit (Get and complete Form T2038 (IND))||___________ (13)|
|Federal tax (Line 11 minus lines 12 and 13; if negative, enter “0”)||___________ (14)|
|Working income tax benefit advance payments received|
|(box 10 of the RC210 slip)||___________ (15)|
|Special taxes (see line 418 in the guide)||___________ (16)|
|Net federal tax (Add lines 14, 15, and 16)|
|Enter this amount on line 420 of your return||___________ (17)|
Note: current tax rates and the 2018 T1 Schedule 1 has been used but the following has changed:
Tax brackets have been changed to round numbers. Most tax credits have been eliminated and replaced with 1 much larger basic personal amount tax credit of $25,000.
If we want to provide a tax advantage to Canadian dividends then we should only include a portion of the dividend in income similar to capital gains, e.g., ½ taxable.
The foreign tax credit has been kept to avoid double taxation on foreign income and the investment tax credit has been kept to encourage scientific research and experimental development.
The alternate minimum tax should also be eliminated due to complexity (and limited applicability) and hence it is also removed.
CPP and EI paid by taxpayers should be allowed as a deduction from income and should not be a tax credit.