For the federal government, tax policy over the past three years has largely been an exercise in caution, as Ottawa has focused on fiscal stimulus to support a fragile economy while trying to keep the deficit down. But, like most other governments in the world, global economic uncertainty is likely to remain the No. 1 concern in Ottawa, affecting all other fiscal and tax policy decisions.
In fact, it could be argued that the Conservatives’ most significant tax policy moves came in the first few years of its minority government, when it cut the GST twice — each time, by a percentage point — and, in 2008, when it introduced the tax-free savings account.
Since the financial crisis of the autumn of 2008, Ottawa has confined much of its personal income tax policy to giving individual taxpayers targeted relief via a host of tax credit programs.
“They’ve had no choice but to [settle for] tinkering,” says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “When you’re bur-dened with such a large deficit, you really can’t do too much.”
On the tax revenue side, the government has also established a pattern of closing down tax-planning strategies and opportunities it deems too aggressive or conferring too great a tax benefit. That pattern was evident in the 2011 budget’s new rules for individual pension plans and in the announcement that the government would be studying employee profit-sharing plans.
Says Adam Salahudeen, director of taxation advisory services, wealth-management division, with Bank of Nova Scotia in Toronto: “The government has been saying, ‘We’re not just going to give you a tax benefit because you want a tax benefit’.”
The government needs to maximize tax revenue, some tax experts say, in part to provide help for families, including breaks for a middle class feeling squeezed by the economy. In the 2011 budget, those breaks included the introduction of the children’s art tax credit and taxpayer-favourable changes to the family caregiver tax credit and the medical expense tax credit.
There were also key changes to registered education savings plans and registered disability savings plans to give more flexibility.
These types of targeted changes allow the federal government to give help to families with children or other dependents. They also represent a form of economic stimulus.
“They are responding to families in need, to the economic problems we’re having,” says Salahudeen. “I think, quite honestly, they’ve had no choice.”
But some tax experts say the myriad tax credits needlessly complicate the Income Tax Act and that relief could be more efficiently delivered through lower income tax rates.
“I wonder if they’re really worth it,” says Robertson of the tax credit programs. The children’s arts credit, as an example, he says, amounts to a modest $75 tax credit, calculated on 15% of a maximum of $500 in eligible expenses. “Think of the paperwork to administer that program.”
However, it can be argued that tax credits make good politics, as they’re more visible to most taxpayers than changes in rates, and they fit with the Conservatives’ preference of introducing incentives in order to achieve a policy goal rather than funding a national program.
Says Robertson: “It’s a political philosophy. That is, the government will provide the incentive, but it’s up to the marketplace to decide if they wish to buy it.”
At the same time that the government is looking to help families and stimulate the economy, it is also seeking to close what it considers to be “loopholes.” Because raising taxes is politically difficult for any government today, it’s easier to try to enforce tax rules already on the books or to close tax-planning strategies the government regards as being too generous.
In the past several years, the Canada Revenue Agency has also launched a number of audit programs with a focus on high net-worth taxpayers, particularly those who hold trusts and other complex tax-planning structures. The CRA’s goal is obvious: collect all the tax revenue it can.
“Every competent tax authority in the world is looking for dollars,” Salahudeen says. South of the border, he points out, the U.S. government is using all the tools at its disposal to deter its wealthy citizens from hiding money in low-tax jurisdictions, as well as using new incentives designed to compel non-resident citizens, including those in Canada, to get onside with their U.S. tax-filing obligations.
However, the Conservatives, with a majority and in power for at least the next several years, now have the benefit of knowing they have the flexibility to pursue a longer-term plan. That plan centres on reducing the deficit to zero by 2014-15. In order to accomplish that, tax experts suggest, Ottawa will have to cut spending significantly and hope for better economic times ahead.
“That’ll be a challenging task when you have the financial problems we have,” Robertson says. “The government’s not in a position to turn off the taps [on spending]. It has to provide some support.”
During the 2011 election campaign, the Conservatives made several tax-policy promises — the two biggest were increasing the TFSA contribution room to $10,000 per year per adult and allowing families with children to split up to $50,000 in income — if Canada can balance its books.
If the feds find it difficult to stay on track with its deficit-cutting schedule, it may decide to implement some of its tax policies earlier, Robertson says: “I think they’ll have to pass out at least a few goodies.”
The government has indicated that it will hold the line on its corporate tax cuts — the final scheduled rate change, down to 15%, is slated for 2012 — and some experts believe that Ottawa will have no choice but to try to ease tax administration, compliance and cost burdens on corporations in the years to come.
Says Wally Conway, senior tax advisor in the Canadian national technical services group at Pricewaterhouse Coopers LLP in Toronto: “To attract businesses, you need to have a globally competitive business environment — including a globally competitive tax environment.” IE