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Canada’s top-end personal income tax rates are too high and they must come down, but there are many other tools that governments have to tax you in ways that chip away at your ability to minimize taxation.
For example, eliminating indexation on personal credits and/or tax rate brackets — as some provinces have historically done — is an easy and effective way to increase tax revenues and taxation burdens on people since inflation continues to increase, but your ability to shelter taxation from such increases does not when indexation is suspended.
Another way is to force you and your spouse/common-law partner to combine your income for purposes of eligibility of certain credits — such as GST credits — but force you to report your income and pay the resulting tax separately from your partner.
Such separate filings have the effect — especially if one spouse has a much lower income than the other — of increasing overall family taxation burdens since graduated taxation rates are not available on a combined family income basis.
Yes, there are some limited exceptions to shift income (commonly referred to as income splitting) to another spouse/common-law partner (such as pension-income splitting, paying reasonable salaries to family members from a business and other limited abilities), and in some cases — if your partner’s income is very low — you can claim a small credit for them, but, overall, it is almost non-existent.
In 1966, the Royal Commission on Taxation — the first and only time Canada has ever had a complete and comprehensive review of its taxation system — stated the following in chapter 10 of its report:
“Taxation of the individual in almost total disregard for his inevitably close financial and economic ties with the other members of the basic social unit of which he is ordinarily a member, the family, is in our view another striking instance of the lack of a comprehensive and rational pattern in the present system … we recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units … We believe firmly that the family is today, as it has been for many centuries, the basic economic unit in society.”
Unfortunately, the above recommendation was not adopted when significant taxation reform was implemented on Jan. 1, 1972. Instead, the Income Tax Act today contains numerous and technically complex anti-avoidance rules that attempt to prevent income splitting among family members. Such rules are legal fictions that try to tax otherwise economic realities. The result is an extremely complex tax act with overall increased family tax burdens.
So, what’s the solution? Canada should finally accept the recommendation of the Royal Commission from almost 60 years ago and adopt the family as the basic taxing unit instead of the individual. This would result in a much fairer system and eliminate a lot of the complexity in the Income Tax Act.
My colleague Kenneth Keung and I argued for such a new system when expanded “tax on split income” rules were proposed on July 18, 2017 as a result of the private corporation tax proposal debacle. Unfortunately, as usual, it fell on deaf ears.
During that time, one of the counter-arguments brought forward by certain tax academics and bureaucrats was that family taxation has been proven to prevent women from entering the workforce. I was surprised at such comments and, accordingly, I did some research. Sure enough, there are academic papers written on such a topic, but, with respect, such papers and conclusions lack practicality, substance and common sense.
In most families I know, taxation policies — whether they are positive or negative — do not materially influence the ultimate decision for a mom and/or dad to enter and/or stay in the workforce once children enter the scene.
It’s time for another serious look at family taxation. From a policy perspective, I find it offensive that families’ incomes are combined for the purposes of determining eligibility for various tax credits, but not so for the computation of regular personal income tax. Other countries, such as the United States, have forms of family taxation.
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Good taxation policies should always follow the economic realities of life and/or business. The reality is that the family is the basic economic unit for most. Canada’s taxation policies should mirror those realities.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at email@example.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.