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Middle Class

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The Middle Class

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.

Tax Free

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.

Income Tax Act

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:

  1. Simplify: The tax system needs to be fair, efficient and competitive.

  2. Modernize: Tax policy needs to be able to keep up with the digital economy.

  3. Be Supportive: Changes to Canada Revenue Agency (CRA) policies that will ease compliance for taxpayers.

Keep it Simple

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.

Update

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.

Support

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

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.

https://www.jaredpilon.com/

I have recently made the decision to seek nomination as a candidate in the federal electoral district of Red Deer - Mountain View. As a Chartered Professional Accountant (CPA), I directly see the negative impacts of government policy on business owners and most notably, their families. This has never been more evident than in 2020. Through a common sense focus and a passion for bringing people together on common ground, I will work to help bring prosperity to the riding of Red Deer – Mountain View and Canada. I am hoping to be able to share my election campaign with your viewers/readers. Feel free to touch base with me at the email listed below or at jaredpilon.com. Thanks.

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The Digital Services Tax Q&A: “It was going to be complicated and messy”

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A tax expert on the departed Digital Services Tax, and the fiscal and policy holes it leaves behind

It’s fun, and fair, arguing whether Mark Carney “caved” in suspending the application of Canada’s Digital Services Tax to revive broader negotiations with the Trump administration. But I figure there are other dimensions to this issue besides tactics. So I got in touch with Allison Christians, a tax law professor at McGill University and the founding director of the Canadian Centre for Tax Policy.

In our talk, Christians discusses the policy landscape that led to the introduction of the DST; the pressure that contributed to its demise; and the ways other countries are addressing a central contradiction of the modern policy landscape: without some kind of digital tax, countries risk having to impose costs on their own digital industry that the overwhelmingly US-based multinationals can avoid.

I spoke to Christians on Friday. Her remarks are edited for length and clarity.


 

Paul Wells: I noticed in your social media that you express inordinate fondness for tax law.

Allison Christians: You will not find a more passionate adherent to the tax cult than me. Yes, I do. I love tax law. Of course I do. How could you not? How could you not love tax law?

PW: What’s to love about tax law?

Christians: Well, tax law is how we create our country. That’s how we build our society. That’s how we create the communities that we want to live in and the lifestyle that we want to share with our neighbours. That’s how: with tax law.

PW: I guess the goal [of tax policy] is to generate the largest amount of revenue with the smallest amount of grief? And to send social signals while you’re at it. Is that right?

Christians: I don’t think so. Tax is not about raising maximum revenue. Tax is about deciding what society you’re trying to build and what portions of that society need to be made public, and what can be left to private interests which then need to profit. So we have decided in Canada, as a country, that basic minimum healthcare cannot be a for-profit enterprise. It has to be a public enterprise in order to make sure that it works for everybody to a certain basic level. So tax is about making those decisions: are we going to privatize everything and everyone pays for their own health care, security, roads, insurance, fire department etc. And if they can’t pay, then too bad? Or are we going to have a certain minimum, and that minimum is going to be provided in a public way that harmonizes across the communities that we have. And that’s what tax is about. It’s not about extracting revenue at all. It’s about creating revenue. It’s about creating a market. It’s about investing in a community. So I just object to the whole idea that tax is about extracting something from me, because what tax is doing is creating a market for me to be able to thrive. Not just me, but all of my neighbours, as well.

PW: Let’s jump forward to the events of the past couple weeks. Were you surprised when the Prime Minister suspended the Digital Services Tax?

Christians: I think “surprise” is probably too strong of a word, because nothing any political leader does to cope with the volatility of the United States would surprise me. We are dealing with a major threat, a threat that is threatening to annex us, to take our resources, to take our sovereignty, to take our communities and rip them apart and turn them into a different way of being. And that’s a serious threat. So nothing would surprise me in response to that. Disappointed, of course. But not disappointed in our Canadian response. More disappointed in the juggernaut that Trump has been allowed to become by his base, and that they’re pulling the rug out from under everyone that’s cooperated with the US agenda for decades, including us.

PW: What’s your best understanding of what the Digital Services Tax was designed to accomplish? And is it unusual as taxes go?

Christians: So to understand this, you really have to be a policy wonk, which isn’t much fun. So I’m gonna give you an example that might make it clear from the perspective of Canada. Why we might have a Digital Service Tax or might want something like it.

I want to preface this by saying that the Digital Service Tax is by no means the only way to do the underlying things we want to accomplish. Certainly other countries have been collecting DSTs and have been collecting billions of dollars, and US companies have had reserves for paying that Digital Service Tax. So we just left money on the table. But let me try to explain why we want to do the thing without getting too “tax nerdy” on you.

So I’m sure you can come up with the one Canadian company that’s streaming content on television or on digital devices.

PWCrave?

Christians: Yeah, that’s the one. Crave is owned by Bell Media and is a Canadian company. And Crave pays taxes in Canada. Crave has to compete against Netflix, which does not have to pay tax in Canada. Netflix just simply doesn’t have to pay the same way that Crave does unless we force them to pay. Crave has to compete with US and foreign content streamers. We may get to a point where we can get Netflix to collect some sales tax on the GST, for example. But if Netflix itself stays out of Canada, physically, but it’s still getting all those customers that otherwise Crave would have access to, then Crave is at a structural disadvantage.

Now tell me which Canadian provider competes with Google.

PW: I can’t think of one.

Christians: Exactly. There isn’t one. How are we supposed to get a homegrown competitor when our competition simply does not pay taxes, and any one we would grow here in Canada has to pay tax here? So we have to understand the Digital Service Tax as simply our response to the fact that we normally do not tax a company unless they are physically located in Canada. But now we’ve got to go into this digital space and say: you’re still here, even if we can’t see you and talk to you, you’re still here. You’re doing something in our market. And that’s what the Digital Service Tax was trying to deal with.

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PW: Now, how are companies likely to respond to this Digital Services Tax? It seems to me the likeliest outcome would be that they would pass those costs on to their customers.

Christians: Yes, that is what companies have said they would do. Google talked about passing those costs on to the customers. And their customers obviously are advertisers. I want to point out that advertisers in Canada used to advertise in local newspapers and media. Now they advertise on Facebook, owned by an American-headquartered Company, Meta. Right now, they advertise on those foreign platforms, so we don’t have those advertising dollars here. Advertisers might have had to pay the Digital Service Tax if Google, or whoever, had passed it on to them. I think it’s fair to say, that Canadians advertising on those foreign platforms would have faced a gross-up to cover that tax.

PW: So, the net effect is that it just becomes more expensive for Canadian consumers. I’ve seen it argued that all this tax would have succeeded in doing is making Netflix more expensive.

Christians: Okay, that’s possible. I mean, that assumes the supply is totally elastic: you can increase the price of Netflix, and people will still pay it indefinitely. Right? So that’s the assumption in the short term. But the long-term assumption is that Crave becomes more competitive — because its competitors are paying the same tax that it is paying. The Crave subscription price may or may not respond, but if you put pressure on the foreign service providers in the same manner that’s on the Canadian providers, it might cost more, but we’re also getting the tax.

PW: I believe the Prime Minister, in an interview with the CBC said that he was thinking of getting rid of this thing, anyway. [The quote I’m reaching for here is: “Look, what we did this week is something that I think we were going to do anyways, in the end, for the deal.” At 1:07 in this video. — pw] Why do you think he would have been leaning in that direction? And do you think that absent a Truth Social post by President Trump, he actually would have gotten rid of the thing?

Christians: I can’t speculate too much about the politics of this, because I’m not talking to many of the people that make policy, but I know the complaints about the DST, and I don’t dispute them. It was going to be a complicated tax to collect and it was going to be messy in terms of compliance. There’s a lot of uncertainty around the tax and I know there’s always an enormous amount of pressure to reduce all taxes. There’s always going to be that segment of society that sees taxes being thrown down the drain and not as an investment in the society that we want to live in.

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American companies are famous for investing their money on lobbying and not in taxes. They spend their money convincing us that it would be bad for us to tax them, and they can spend a much smaller percentage of their money on lobbying and get us to believe that narrative. And the narrative is that somehow, if we tax Google, Google will go away and we won’t be able to use it. That Google won’t innovate. It’s nonsense, but it’s a story that resonates nonetheless. Was Prime Minister Carney pressured to get rid of the DST? Undoubtedly. And maybe he personally thinks there’s a better way to tax these companies than with an excise tax. I don’t fault him for thinking that. I have even written that there are better ways for Canada to collect this tax than the Digital Services Tax.

PW: I’m going to want you to tell me about these other ways. But I assume that if a Canadian government attempts any of these other ways, then the companies we’re talking about know that all they have to do is hit the Trump button and the pressure will be right back on.

Christians: That’s correct. There are a couple of [alternatives to the DST]. We could, like some other countries have done, redefine the types of income that we subject to withholding taxes in Canada. It’s a complicated technical idea, but basically any payments that go from our advertisers to Google, we could impose a withholding tax simply by expanding a couple of definitions in the Income Tax Act that would then carry over into our treaty. Now, people will push back on that, and say that you’re changing a deal, and people will object to that. And we can have an argument about that, but that possibility exists. That withholding tax is the most straightforward way to do this and we should probably already be thinking about it.

Another one that’s kind of fun, which I really enjoyed learning about when I came to Canada, is Section 19 in the Income Tax Act. So, Canadian advertisers are paying Google now, instead of a Canadian newspaper. Well, Section 19 basically says that whenever someone makes a payment for advertising to a foreign, non-Canadian media, that payment’s not deductible.

Now that provision seems to violate Free Trade rules because it changes, depending on who you make the payment to. But it’s a provision in law. The US objected to it when we adopted it by imposing a reciprocal tax on US advertisers paying Canadian outlets, which doesn’t seem to bother anybody.

PW: But the application of that will be very asymmetrical, right?

Christians: Yes, for sure. And I’ll tell you what the Canadian media noticed when we started paying for digital newspapers online: that they’re not subject to Section 19 — only print and traditional media are subject to this denial of deduction — and Canadian media advocated for this denial of deduction for online publications as well.

All you have to do is look at the wording of Section 19 — and you don’t even have to change the words — and all of a sudden all those payments to Google are not deductible. But if the payments were to Crave, they would be deductible, and if they are to the Globe and Mail, or other Canadian companies, they would be deductible. That is a different kind of advantage for the Canadian competitor that’s a little less susceptible to Trump’s understanding, and a little less susceptible to the politics that surround the Digital Services Tax. But it’s technical. You have to explain it to people, and they don’t believe you. It’s hard to understand it.

PW: Theoretically a two-time central-bank governor could wrap his head around it.

Christians: Yes, I think he could fully understand it, for sure. You’re absolutely right. Will he want to do it, though? I just don’t know.

PW: You said that there are other jurisdictions that continue, today, to successfully tax the web giants. Who are you thinking of?

Christians: Well, Austria’s been doing the Digital Service Tax since the beginning. The UK has the Diverted Profits Tax that they’ve been using. Australia has one that’s been enforced. Austria stands out because I think it was 2017, in Trump’s 1st term, and it was part of a group that Trump threatened to retaliate against, but they just quietly kept going and they’re still collecting it. Part of the narrative is that we, Canada, came too late to the DST party. We just weren’t part of that initial negotiation. We came in too late, and then it was too obvious, and people were able to isolate us from the pack.

PW: My understanding is we’re looking at a hypothetical $7.2 billion in revenue over 5 years. And that represents a shortfall that’s going to have to be found either in other revenue sources or in spending cuts, or in greater debt. Aside from the DST, do you think Canada could use a general overhaul of its tax code?

Christians: Always. Yes, absolutely! Taxes are funny, right? Because they come into every single political battle, and what ends up happening is that politicians treat the Tax Act and the tax system as a present-giving machinery, and not as a clear policy deliverance system.

I am, every day, surprised at how complicated the Canadian tax system is. It’s way too complicated. You can’t even fill out your own tax return in this country. You’re going to make mistakes because it’s just too ridiculously written. It’s too confusing. It’s too messy. So it’s time to take another look. But you need a commission [like the 1962 Carter royal commission on taxation]. You need to be bipartisan. You need to spend money on that. You need to think that the things that you do have long-term effects, and this takes political courage. And basically it requires upsetting a bunch of people and resetting things, and we just might not be at the right time politically to be doing that because people feel vulnerable to volatility from abroad. So it may not be the time to push that.

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Alberta

Pierre Poilievre – Per Capita, Hardisty, Alberta Is the Most Important Little Town In Canada

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From Pierre Poilievre

The tiny town of Hardisty, Alberta (623 people) moves $90 billion in energy a year—that’s more than the GDP of some countries.

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