Published in the Globe and Mail
Throughout my career, the Income Tax Act has grown increasingly complex – complicating even the simplest transactions. This underscores the need for a thorough review of the ITA.
That’s a sentiment shared by CPA Canada in our 2024 pre-budget submission, which recommended prioritizing a principled approach to tax policy and administration that is driven by purpose and vision. After all, simplicity, fairness, efficiency and competitiveness are among the most basic principles of a good tax system.
Unfortunately, recent approaches to specific tax issues have created rules that escalate compliance costs and administrative burdens, often involving excessive and needless reporting. While tax rules aim to achieve policy objectives, their design is as crucial as the objectives themselves. This must be acknowledged to avoid unintended consequences.
In effect, new, well-meaning tax regulations have resulted in substantial administrative challenges or unfairness to taxpayers inadvertently swept up by these rules, despite not being the intended policy targets.
For instance, trusts must now report beneficial ownership to prevent money laundering, financing of terrorism and tax evasion. While the aim is clear, the broad scope of affected taxpayers (including bare trusts) with limited narrow exceptions, such as the $50,000 (asset specific) de minimis threshold, create excessive burdens.
That includes burdens for the tax collectors: The CRA was recently compelled to exempt bare trusts from the 2023 reporting obligation because of its inability to administer the breadth of bare trusts.
Meanwhile, the underused housing tax, aimed at addressing housing demand by focusing on vacant foreign-owned residential properties, is another casualty. The number of such properties is negligible, contrasting starkly with the actual shortage of homes.
Poorly executed, the UHT led to extensive reporting by Canadians who indirectly owned their residential property through a corporation, partnership or trust, necessitating deadline extensions. CPA Canada advocated for the exclusion of Canadians with indirect ownership, which eventually resulted in legislative changes.
Mandatory disclosure rules are another example. Its broad definition of “avoidance transaction” encompasses regular tax planning, causing significant anxiety over harsh non-compliance penalties. Despite being guided by three generic hallmarks, the vagueness of MDR leads to high administrative and compliance costs, pushing professionals to report extensively to avoid penalties. Given that vagueness, the CRA was forced to produce its own interpretive guidance to make the regime workable.
Proposed general anti-avoidance rule, or the GAAR, amendments also bring uncertainty, particularly around transactions significantly lacking economic substance. This ambiguity will likely compel over-reporting by taxpayers and practitioners seeking to sidestep possible penalties.
Timely guidance from the government is always welcome, and only two weeks after the budget, the CRA’s Income Tax Rulings Directorate said the “crystallization of an accrued gain, solely as a means of ensuring access to the current inclusion rate, would not, in itself, be subject to GAAR.” With the potential lack of economic substance in crystallization transactions, this statement may actually create further ambiguity with the general application of GAAR.
Finally, the revised alternative minimum tax regime, with a 100-per-cent capital gains inclusion rate and only half the allowable capital loss deductions, disrupts fundamental tax principles. This change can unfairly increase tax burdens during fluctuating investment years, contradicting the core concept of offsetting gains with losses.
These examples likely won’t surprise tax practitioners familiar with applying these rules. However, the increasing complexity of the ITA and regulations is reaching a point where even seasoned practitioners may struggle to navigate it with confidence.
The federal government plays a crucial role in shaping our tax system to meet various objectives and enforce reporting mandates. It is essential that these efforts are guided by fundamental tax principles: certainty, simplicity, effectiveness, fairness, efficiency, horizontal and vertical equity, neutrality, and flexibility.
Legislative drafts should urgently focus on accuracy and specificity in reporting requirements, rather than resorting to overly broad regulations.
John Oakey is vice-president, taxation at Chartered Professional Accountants of Canada and a member of C.D. Howe Institute’s Fiscal and Tax Competitiveness Council.
