The Trudeau government’s unpopular reforms for small business won’t level the playing field in Canada. But these ones will

By Evelyn Jacks –
Evelyn Jacks is Founder and President of Knowledge Bureau, a national educational institute for the continuing professional development of tax and financial advisors and author of 52 books on the subject of tax preparation, planning and wealth management for Canadian families.

Finance Minister Morneau wants to help the middle class prosper and make the tax system fairer. As we have seen, many Canadians don’t believe the Liberals’ current plan to remove small business tax loopholes will make things fairer. I explained why these proposed changes are getting a negative reaction in an earlier column. Now it’s time to suggest some specific alternatives Morneau could consider that would bring more immediate results:

  1. Collect only the right amount of tax, but no more. It was not so many years ago that the average tax refund was under $500.  But today, it’s over $1,700 per person per year.  That’s $3,400 per household, assuming two adult workers.  By reducing the amount of taxes taken at the source, the government would accomplish something remarkable: more milk money would flow through to middle class wallets every two weeks.  There would also be more after-tax cash flow to fund RRSPs, which, in turn, would increase available tax credits.
  2. Tax only discretionary income. Increasing the basic personal amount to truly reflect non-discretionary spending on necessities would immediately take some low income earners off the tax roles, while providing tax relief to the working poor.
  3. Put a surtax on high income. For all taxable incomes over $250,000, a surtax would make simple sense, especially to offset the effects of a higher basic personal amount.
  4. Allow for income averaging. One-time windfalls should not be subject to high marginal rate taxes; rather by averaging income over three to five years, people who work hard and earn a bonus at the peak of an economic cycle, won’t lose half of it  —or more— to taxes.
  5. Reduce clawbacks.  Marginal tax rates as high as 60% to 80% result when middle-income earners find their refundable or non-refundable tax credits are being clawed back.  Income thresholds for clawbacks should be higher, to help more middle class families benefit from income redistribution.
  6. Provide a tax credit for children under 18. Discretionary income —and standards of living— are affected when there are dependants to feed and put through school.  Our tax system should have a tax credit for the cost of raising children; it doesn’t at this time.
  7. Adjust capital gains for inflation. Governments win by taxing inflationary gains on capital assets. That’s not fair. Cost bases should be adjusted to account for only real gains, after inflation is taken into account for the holding period.
  8. Tax a single income source only once. Private business owners should not be subject to tax more than once on income earned in the corporation and then flowed through to individual hands.  A better option is to use the tax system to incent smaller companies and start-ups to invest to grow, and add a surtax onto the incomes of mature companies with high retained earnings.  Governments should never be able to reach back and recharacterize income sources – or second guess business acumen – to extract more tax dollars from enterprises that have managed to survive the difficult years.
  9. Address family income splitting. Families make financial decisions as an economic unit; this should also be the taxing unit.  The current round of tax reforms don’t address this.  It’s a missed opportunity that would also eliminate the distortions the “reasonableness tests” on family labour and capital contributions and “income sprinkling” proposals will foist on the efforts of Canadian small business owners.
  10. Raise the GST/HST Tax Credit and perhaps the GST/HST. High income taxpayers have more discretionary income to spend than lower earners, who use most of their income to fund non-discretionary costs.  Sales taxes are a great way to make high-income earners pay more, especially on luxury goods.  However, to avoid regressive taxes for low- and middle-income earners, any increase in sales taxes should be offset by a raise in the refundable tax credit for GST/HST.

And a bonus:
Allow for the deduction of tax and financial planning fees from all income. With the storm of complexity and uncertainty that appears to be coming at us, it’s the least the government can do.