Federal budget continues to neglect our tax system

TORONTO—Budget 2022 has been criticized for its excessive spending and failure to forecast balance, with the government’s flawed “fiscal anchor” normalizing persistent deficits adding to the ever-increasing national debt. These deficiencies have overshadowed the budget’s disinterested treatment of our tax system, continuing the chronic neglect of tax policy matters under the current government. Credit is due to the hardworking and under-resourced Department of Finance for advancing several major tax initiatives in recent years, including the Organisation for Economic Co-operation's international tax reform project and redesigning Canada’s interest deductibility rules, all while managing the emergency fiscal response to the COVID pandemic. Budget 2022 contains the usual annex of tax measures providing background for some new proposals and technical amendments. However, by failing to address longstanding tax policy controversies and implementing ill-conceived Liberal election promises, Budget 2022 reveals a continued absence of determination at the political level to keep Canada’s tax system finely tuned and optimally functioning. Geoffrey Turner is a Toronto tax lawyer and was the 2021 Conservative candidate in Etobicoke Centre, Ont. Photograph courtesy of Geoffrey Turner Neglect of our tax system is exemplified by the budget’s further delayed response to Bill C-208, the private member's bill on intergenerational share transfers enacted in June 2021. Ministerial mismanagement of this file started with the government’s July 2017 consultation paper on private corporation tax planning issues, including deficiencies with the “surplus stripping” rule as it applied to sales of closely held businesses to related corporations owned by family members. Facing vigorous opposition, the government capitulated by withdrawing its intergenerational share transfer proposals in October 2017, promising improved rules over the following year. Yet nothing further was announced, and the difficulties with legitimate family business transfers persisted, unresolved. Years of inaction by the government culminated with the surprise passing of Bill C-208 to fill the void. The government’s botched initial response was to defer the effective date of the amended surplus stripping rule until 2022, even though it received royal assent in June 2021. This attempted override of Parliament was unlawful, so again the government backpedaled and undertook to amend the new surplus stripping rule by November 2021. But this deadline also passed without any clarifying proposals. Now Budget 2022 announces yet another consultation. Finance Minister Chrystia Freeland, and her predecessor Bill Morneau, have seemed politically spooked in their mishandling of this important tax policy issue. Other unfinished business languishes, including critical updates to the general anti-avoidance rule and transfer pricing regime. Budget 2022 tinkers with other stopgap measures, but these long-awaited tax reforms are merely added to a lengthy list of previously announced measures with no progress. The budget’s signature tax achievement is the rate increase for financial institutions promised in the 2021 Liberal election platform. This follows recent rate reductions for zero-emission technology manufacturing (ZETM). So now, instead of the simple corporate tax rate structure that has served us for decades—the general rate of 26.5 per cent and the small business deduction (SBD) rate of 12.2 per cent (as applicable in Ontario)—we will instead have five rates exacerbating complexity: 28 per cent for financial institutions, 26.5 per cent for general rate corporations, 19 per cent for ZETMs not SBD-eligible, 12.2 per cent for SBD-eligible Canadian-controlled private corporations, and 7.7 per cent for SBD-eligible ZETMs. These proposals discriminate by sector, ownership and corporation status, violate the tax policy criteria of neutrality and simplicity, compromise our competitiveness, and move our tax system in the wrong direction. Budget 2022 also ignores longstanding problems at the Tax Court of Canada, as highlighted by the chief justice at the Canadian Tax Foundation’s annual conference. The Tax Court requires more resources to accelerate digitization and expand its court space in several cities, particularly Toronto. And legislation is urgently required to ensure the Tax Court has jurisdiction to address all aspects of tax disputes. After years of entreaties to modernize the Tax Court, the government still has taken no action. Regrettably, taxation is a low priority for the current government. It views our tax system as a social engineering tool to generate maximum revenue for highly progressive redistribution and to fund massive spending programs advancing other priorities of the government. As long as high taxes are reliably extracted from Canadians, the government seems content to run our tax system on autopilot and allow longstanding issues to fester. Canada needs a more disciplined approach to our tax system that reprioritizes its core function of raising revenues in an efficient, neutral, and equitable manner. Our tax law should strive for simplicity and enhance our competitiveness, not impair it. The next government should elevate tax as a governing priority and replenish tax policy capabilities at the Department of Finance. It has been 56 years since the Carter Commission completed its comprehensive tax policy review. We are long overdue for a new tax reform panel to recommend structural improvements to our neglected tax system, and a government with the political will to make it happen. Geoffrey Turner is a Toronto tax lawyer and adjunct professor at the University of Toronto’s faculty of law and Osgoode Hall Law School. He was the 2021 Conservative candidate in Etobicoke Centre, Ont. The Hill Times