TD notes in a new report that there is “a powerful disincentive to save resulting from the capping of the amount people can tax defer on registered retirement income savings”. TD says that the limit needs to be substantially raised now. “In fact, removing the limit would go a long way toward moving Canada’s tax system to a more growth-friendly consumption base, rather than its current emphasis on taxing income, savings and capital. Governments are concerned about the revenue impact. However, it is simply a deferral of revenue, with the flows coming back into the public coffers at precisely the time the retirement of the baby boomers will be exerting the most pressure on public debt.”

TD observes that the incentive to invest has been given a boost by the lowering of the inclusion rate of capital gains. “This puts Canadian taxation from this investment source on par with, or in many cases below, the U.S. rate. There is now a tax advantage to capital gains income over dividends, which needs to be addressed, possibly through raising the dividend credit’s gross-up factor.” It also recommends that pension plan contributions be cut for the CPP/QPP system.

The revenues from all levels of government amount to 44% of income in Canada, TD says. “This ratio has been on a steady rise in recent decades. The Canadian overall tax burden is about in the middle of the pack relative to the other G-7 nations. But it is appreciably higher than that of our main competitor, the United States. Another distinguishing feature of the Canadian system is a high reliance on income taxes.”

“The major remaining obstacle to competitiveness from the corporate tax side is the direct and relatively heavy tax the federal government and some provinces put on capital. If the rumors are true that Canada and the United States may eliminate withholding taxes, at least for interest income, the cost of borrowing in Canada would be lowered and Canada’s attractiveness to foreign investment would be further enhanced.”

“In conclusion, Canadians pay a high burden in taxes. The main culprit is the relatively high (historically and internationally) debt burdens of our federal and provincial governments. The overall tax burden needs to be brought down over time. As well, reform is in order to shift the tax base away from income, savings and capital and toward consumption,” TD concludes.