PwC's Tax Exchange blog

By: Nick Pantaleo

The Harper Government has made much of its pre-budget consultations sessions in prior years and 2013 is no exception.

Having not participated in one before, I have been curious as to how productive the sessions are. Not so much from the perspective of how many actual budget measures have come from such sessions – after all, the government is inundated with all sorts of proposals from all sorts of groups. Rather, I just wondered about the nature of the discussions.

So, when I was invited to attend a recent session I happily accepted. And I am glad I did.

It was good group of participants with different backgrounds. There was a social/community worker, a stay-at-home mom, an educator, a local politician and representatives from large and small businesses and the local chambers of commerce.

Each individual was impressive. Each showed an obvious passion for what they do, their community and the country. Their ideas were grounded and focused; aimed at improving conditions for businesses and for those less fortunate. For example, there was excellent input from the educator and business representatives as to how to improve the skills of Canadian workers and to better match them to job market opportunities.

The government MPs in attendance, which included one cabinet minister, seemed genuinely engaged and impressed. Being politicians, I expected to have to endure some chest-thumping but they were generally restrained and receptive to new ideas.

I was the only (tax) accountant in the group – at least I was the only one to admit to being one. But, no one admitted to being a lawyer!

Below is my opening statement to the group, which focused on our tax system and the challenge I see Canada having in the future to raise revenue. I thought my comment on relying more on consumption taxes would go over like a lead balloon....but, I was surprised that there were strong proponents of the idea in the group. However, it was also clear that there would have to be a lot more work on this – particularly in convincing the politicians.

All in all, it was a worthwhile session and one that you should participate in if you get the chance. If nothing else, having the chance to hear and speak to different people will give you a fresh perspective.

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Opening Statement – 2013 Pre-Budget Consultation

Good morning.

Thank you for inviting me to this pre-budget consultation.

My name is Nick Pantaleo. I am a chartered accountant and for over 25 years I have served as a corporate tax advisor.

From December 2007 to December 2008, I served as a member of Finance Minister Jim Flatherty’s Advisory Panel on Canada’s System of International Taxation.

I will speak briefly to suggested changes to Canada’s corporate and personal income tax and GST/HST systems, which I believe will help strengthen and grow Canada’s economy while protecting those who are most vulnerable.

Corporate income tax

Competitive corporate tax rates are fundamental to creating a globally competitive business environment. The government is to be congratulated for reducing the federal corporate tax rate to its current level and for encouraging the provinces to do the same.

Corporate income, capital and payroll-type taxes have a negative impact on business investment and hence, economic growth and job creation, and therefore should not be increased.

I support the recommendation made by the Canadian Institute of Chartered Accountants, to adjust the capital cost allowance rates of depreciation for all business assets to reflect their true economic life. This will encourage additional investment and increase productivity.

Some organizations recommend extending the temporary accelerated depreciation rates for manufacturing and processing beyond 2013, or making it permanent. In the current economic environment and in light of similar measures being taken in the U.S., this measure should be extended into 2014. However, other industries (for example, retail, telecommunications, etc.) should be considered for this as well.

In addition, depreciation classes should be updated to ensure they are properly capturing assets used in high value-added service sectors such as telecommunications.

The government has made a number of improvements to the corporate tax system, including introducing measures to broaden the corporate tax base.

Additional measures should be adopted to further enhance the competitiveness of the corporate tax system, simplify it to minimize compliance costs for large and small businesses and to facilitate the administration and enforcement by the Canada Revenue Agency.

For example, the government should:

adopt the remaining recommendations of the Advisory Panel on Canada’s System of International Taxation; and
work with the provinces to enact a formal system of group taxation.

Personal income tax

A comprehensive review of our personal income tax system is long overdue.

High personal tax rates have a negative impact on savings by Canadians - savings they will need in the future to offset the impact of reduced government spending in areas such as pensions and health care – and investment. It is also a disincentive to work and to upgrade job skills. Combined, these factors negatively impact productivity and growth.

Some, including Roger Martin and James Milway in their recent book, Canada: What it is, What it Can Be, also point out that low income families and retirees incur high marginal tax rates because financial assistance they receive under various government programs are “clawed back” as their income increases. Addressing this problem – by smoothing out the claw-back effect as well as looking at the design of the various programs, as Messrs Martin and Milway suggest – would help reduce poverty and reduce income inequality.

The current number of personal tax expenditures (i.e., deductions, rebates, tax credits, etc.) is in need of a review.

In a perfect world many would be eliminated and tax rates reduced accordingly. This would greatly simplify the tax system. While this may be too daunting a task, nonetheless, individual expenditures should be reviewed to ensure they are cost effective and properly targeted to those that need them the most.

For example, the Canada employment credit cost $2.0 billion in 2011. It is available to all employees regardless of their income level. Is it appropriate or affordable that this credit, and credits such as the fitness and public transit tax credit (costing $115M and $150M, respectively), be available to high income earners?

The savings in eliminating or reducing the cost of various expenditures could support lower personal tax rates, particularly for low-middle income families. It could also simplify the personal tax system.

Lower personal tax rates can be achieved by actually reducing rates or broadening the current income tax brackets (i.e., raising the threshold levels).

GST/HST

In today’s economic environment, including its changing demographics (for example, the decrease in the number of workers relative to retired individuals), the traditional response of increasing income tax to fund government spending is due for a re-evaluation.

Many countries place greater reliance on consumption taxes while Canada still relies more on income taxes – in 2010, about 47% of Canada’s total tax revenue came from corporate and personal taxes v. an average of 33% for all OECD countries.

A recent C.D. Howe Institute paper reveals that the marginal cost of raising revenue by increasing federal (and provincial) corporate and personal tax rates is very high in comparison to consumption taxes. This means that large economic gains could be obtained by changing Canada’s tax revenue mix to put a greater reliance on consumption taxes.

Greater reliance on consumption taxes would result in a more sustainable and less volatile revenue stream and would potentially be more robust in terms of being less susceptible to tax avoidance.

This does not mean that GST rates should or would have to be increased. The GST system also includes numerous tax expenditures. These expenditures are in the form of goods and services that are exempt from GST.

Many exemptions exist for a very good reason: to mitigate the burden on low-middle income families.

But, as the University of Toronto economist, Michael Smart, noted in a recent paper, there is a significant cost to such a policy, which is that most of the benefit of these expenditures accrues disproportionately to high income families because they spend a larger absolute amount on tax exempt items, such as food, than low income families.

Reducing some of these exemptions, while providing low-middle income families with enhanced GST income tax credits or rebates, would be a more effective alternative than increasing income tax rates to raise revenue.

Reducing such exemptions could also help reduce personal income tax rates.

Thank you for your attention.

I look forward to our discussion.

Nick Pantaleo, FCA

January 19, 2013