The middle class.
This phrase is shrouded in mystery but typically refers to ones occupation, income, education and social status in relation to others.
Depending on the political party using the term, the underlying definition can change.
The Liberal Party has an entire section of it's 2019 election platform dedicated to the middle class and people working hard to join it.
Unfortunately, the Minister of Middle-Class Prosperity has had difficulties defining the characteristics of the people she was elected to represent.
Excuse me if I'm a little concerned that the middle class might be forgotten as a result.
Making Life More Affordable
Any claims of government giving anything to citizens "tax free" should be met with scrutiny.
All government funding ultimately comes from taxpayers so to suggest that government can give you tax free funds is simply not accurate. Someone is being taxed in order to provide the benefits.
Effective for 2016 tax filings, the Liberal Government lowered the tax rate on income in the 2nd tax bracket by 1.5%. This bracket currently applies to income between $48,535 to $97,069. All other brackets have either remained the same or increased since that time.
For those earning up to the maximum of $97,069, this results in tax savings of $1,456.
In conjunction with the 1.5% tax drop, the Liberal Government removed the Family Tax Cut (FTC). This allowed families with children to notionally transfer income from the spouse with higher annual income to the other spouse.
Depending on your situation, this could result in a tax credit of up to $2,000.
Effective in 2019, the Liberal Government implemented an increase in the Canada Pension Plan annual rates. By 2023, this will result in additional annual employee contributions of $1,107 for those earning above the annual ceiling of $65,700.
The employer portion would increase in proportion, putting further pressure on small business cash flows.
While the Liberal Government may claim that they are "making life more affordable", the numbers above paint a different picture.
What should the government do?
The Canadian Income Tax Act (ITA) has not seen a major review since the late 1960's. It is now a patchwork of legislation that is difficult for even seasoned Chartered Professional Accountants to apply into practice.
Complexities within the ITA result in a significant added administrative burdens. Instead of focusing on growing your business, creating jobs or planning for retirement, significant time is lost navigating the ITA.
The government should immediately engage in a full scale review of the ITA. The review must consult the private sector and address all major industries across Canada. The revisions should be made in such a way as to allow for amendments in future as the economy continues to evolve.
Key areas that should be the focus of a review:
Simplify: The tax system needs to be fair, efficient and competitive.
Modernize: Tax policy needs to be able to keep up with the digital economy.
Be Supportive: Changes to Canada Revenue Agency (CRA) policies that will ease compliance for taxpayers.
Simple:
In Alberta, there are now nine personal tax brackets, a patch work of credits and numerous complexities to navigate in complying with regulations relating to owner-operator business.
Serious consideration should be given to shift away from taxing income and toward taxing consumption instead. It is far more beneficial to tax activities that reduce the wealth of society, ie. consumption, rather than tax the creation of wealth.
The simplest way to make the shift to a consumption based tax system would be to increase the rate of federal GST. This would be offset with reductions in personal tax rates. The personal tax rate drops could be implemented in a manner that preserves the progressive tax regime, but with significantly fewer tax brackets.
For those in the lower tax brackets, the majority of their annual income is spent on non-GST'able expenditures such as groceries, rent and health care. Those with higher disposable incomes would contribute more to government revenues as a result. This preserves the progressive tax regime, protects the vulnerable and doesn't penalize the creation of wealth.
More comprehensive reforms could also be analyzed to determine the best solution for Canadians.
Modernize:
In recent months, there has been a growing call for government to implement a "wealth tax". The New Democratic Party has suggested that a 1% on families with a net worth in excess of $20 million would generate net tax revenue of $5.6 billion in 2020-21.
As mentioned above, government should not introduce further tax on the creation of wealth. This tax policy will only further drive investment out of the country at a time that we can ill afford it.
Additionally, there have been calls to add an additional layer of tax on big tech companies, most notably Google, Amazon, Facebook and Apple. There is no doubt that these companies have seen record profits in 2020 but haphazardly implementing a 3% tax on the revenues of these companies will likely back fire.
The reason why large corporations are able to take advantage of low tax rates in foreign jurisdictions is due to varied rates across the globe. If one jurisdiction makes the decision to implement a tax increase, naturally, corporations will seek out lower tax jurisdictions.
If government is concerned with tech giants skirting federal taxes, they need to consult with all jurisdictions in which these companies operate. A unilateral tax will simply resulting in these corporations moving profits to lower tax jurisdictions.
Be Supportive:
The Canada Revenue Agency is typically thought of with disdain by many Canadian taxpayers. Some of these feelings are self induced, others are not.
Much like the difficulties that individuals and businesses have in navigating the Income Tax Act (ITA), the same can be said for CRA agents. While the senior agents typically have specific training and field experience, the majority of front line CRA agents simply do not have the necessary training to effectively help taxpayers navigate the complexities of the ITA.
In order for the CRA to provide more supportive service to taxpayers, they too need to see a reform in the ITA. It simply is not fair to ask agents to be able to interpret the ITA and how it applies to each taxpayer they speak with.
Secondly, the CRA needs to revise audit training procedures for their agents that considers materiality of each case. Far too often I see audit cases that request significant amounts of supporting documentation in response to a taxpayers nominal expense claim. Some of these being less than $100.
This places a significant administrative burden on taxpayers, specifically small business owners. It also leads to a great deal of frustration, which further damages the relationship between this government agency and the general public.
Final Thoughts
Canada's middle class has fallen on difficult times in recent years. This has only been exasperated by the impacts of COVID-19.
For far too long, Canada has lost investment and stymied growth due to its archaic tax regime.
The Liberal government has promised to "build back better" and create an economy that is just and equitable for all. Details of these plans remain to be seen.
Instead of grandiose plans stemming from pie-in-the-sky slogans, the government should immediately look to reform the tax system.
Focusing on simplicity, modernization and reducing administrative burden will give taxpayers the confidence to know that their hard work will translate into consistent after-tax earnings.
It's time to unleash the power of the Canadian worker, supported by a competitive and modern tax regime. Future generations depend on it.