It’s that time of year again. That time when Canadians struggling with their taxes find themselves singing along with pop-punk princess Avril Lavigne – Why’d you have to go and make things so complicated?
This year Ottawa outdid itself with needless complications and aggravations dumped upon innocent taxpayers. Chief among these was the debacle over “bare trusts”. Until the Canada Revenue Agency (CRA) finally backed down last month, the proposed rules meant anyone who co-signed a loan for their children or put money aside “in trust” for their grandkids had to file a Byzantine T3 return. By the time the rules were changed, many honest taxpayers had already spent good money hiring experts to figure it all out.
Then there’s Ottawa’s Underused Housing Tax – a policy innovation meant to demonstrate that the Justin Trudeau government is taking action on the housing crisis, but in this case by making things worse rather than better. The tax doesn’t actually apply to Canadians, but still requires every Canadian who owns property through a trust, partnership or other entity to file a complicated attestation form. The implementation of these rules has already been deferred several times because they’re so difficult to understand. Adding insult to injury, this tax costs more to administer ($59 million) than it is expected to collect in revenue ($49 million).
Every year brings a new crop of costly and time-consuming additions, restrictions and inanities that add to our country’s bloated and impenetrable 3,435-page tax code. And while these incremental frustrations are well-deserving of taxpayers’ ire, it is the longstanding injustices built into the core of the tax system that deserve the greater share of our attention. In particular, the fact Canada’s personal income tax rules deliberately punish millions of households for freely-made decisions about their own work/life balance. That these rules have been around forever doesn’t make them any less egregious. Or in need of correction.
In 2018, the Chartered Professional Accountants of Canada (CPAC) report Canada’s tax system: What’s so wrong and why it matters called for a dramatic rethink of the entirety of taxation in Canada to “reduce complexity and increase fairness.” It’s good advice that’s well past due. The last time a group of experts attempted a comprehensive reform of Canada’s screwed-up tax system was in the 1960s. And their recommendation on how to solve the inequity that confronts Canadian families at tax time was comprehensively ignored by the government of the day. It’s time we tried again.
A Buck is a Buck, etc.
In 1962, Prime Minister John Diefenbaker appointed accountant Kenneth Carter to head the Royal Commission on Taxation, popularly known as the Carter Commission. In the post-Second World War era, Canada’s once-simple and understandable tax system had become riddled with confusing inequities and loopholes. Diefenbaker gave Carter wide scope to reconsider everything, including the “distribution of burdens among taxpayers resulting from existing rates, exemptions, reliefs and allowances provided in the personal and corporation income taxes.” And the Commission embraced its task with exemplary thoroughness. By the time Carter finished writing in 1966, Diefenbaker was long gone, having been replaced as prime minister by Liberal Lester B. Pearson in 1963.
Carter’s six-volume final report proposed a single, overarching principle to guide Canada’s entire tax system – fairness. “The present system,” Carter wrote, “does not afford fair treatment for all Canadians. People in essentially similar circumstances do not bear the same taxes.” To correct these inequities, Carter proposed that Ottawa should treat all forms of income equally – a perspective summarized by his famous catch-phrase, “a buck is a buck is a buck.”
The Commission’s other important and closely-connected observation was that “the family is today, as it has been for many centuries, the basic economic unit in society.” Accordingly, the family should be the basis for all personal income tax calculations. “The family and the unattached individual should be recognized as the basic tax-paying units in the system,” the first volume of the report states as Principle #1. This was a significant change from the existing system that essentially taxed every taxpayer as if they were all unattached individuals.
“Taxation of the individual in almost total disregard for his inevitably close financial and economic ties with the other members of the basic social unit of which he is ordinarily a member, the family, is in our view another striking instance of the lack of a comprehensive and rational pattern in the present system,” the report explains in Volume 3. “We recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units.”
Carter’s common-sense and historically-accurate recommendations, unfortunately, proved unappealing to the politicians in ultimate charge of Canada’s tax system. By the time the Liberal government of Prime Minister Pierre Trudeau finally got around to revising the Income Tax Act in 1971, family-based taxation had been discarded altogether as an antiquated notion. In its place was an avant-garde $500-a-year childcare tax deduction. Many of Carter’s other innovations were similarly ignored.
‘You need a system that is more approachable and less complex for the average Canadian,’ Moody says in an interview. And a good place to start would be to accept the Carter Commission’s 68-year-old advice and put the focus of the tax system on fairness and families.
It would be another two decades, for example, before the Progressive Conservative government of Prime Minister Brian Mulroney finally adopted Carter’s advice and replaced Canada’s old Manufacturer’s Sales Tax with a national, retail-based value-added tax in 1991, the GST. And while there have been numerous reports and investigations into particular aspects of Canada’s tax system since 1966 – and the Income Tax Act itself has been tweaked, fiddled with, revised and expanded on an annual basis – there has never been another Carter-like attempt to make the whole system simpler, fairer and more coherent.
Tax Reality
“Do we need another Carter Commission today? Yes, we do,” asks and answers Kim Moody, one of Canada’s foremost tax experts. Moody is the founder of Moody’s Private Client and Moody’s Tax advisory firms, former chair of the Board of Governors of the Canadian Tax Foundation and, through his regular National Post columns, a frequent critic of Canada’s metastasizing tax structure. “You need a system that is more approachable and less complex for the average Canadian,” Moody says in an interview. And a good place to start would be to accept the Commission’s 68-year-old advice to focus the tax system on fairness and families.
“Tax policy should recognize economic realities,” says Moody. “And one of the basic realities is that married couples – whether a husband and wife or same-sex couple – combine their incomes in order to pay their bills and run their household. That is real life for the vast majority of Canadians. But our tax system chooses to ignore that reality.” This refusal to accept objective truth creates several significant and longstanding injustices and incoherencies for taxpayers.
The most obvious problem is that while personal income taxes are still calculated individually, eligibility for many tax credits and other social programs is now dependent on combined family income. The Canada Child Benefit (CCB), the Canada Workers Benefit (CWB), the GST credit and Ottawa’s new national dental care program, among many other examples, are all handed out on the basis of how much an entire household earns. In other words, families don’t exist when paying taxes to government, but they do matter when trying to get tax-related benefits from government.
The Professional Accountants’ 2018 report makes a similar point. “Many entitlements are delivered by the tax system through a complex mix of federal and provincial programs with similar goals but different rules,” it notes. “Many tax credits and benefits, such as the spousal, age and caregiver credits, are income-tested and subject to thresholds and clawbacks based on family net income, which complicates tax credit claims.” According to CPAC, these complexities prevent some low-income Canadians from accessing the financial support they deserve, either because it’s too hard to figure out how to do it, or because they simply choose not to file a tax return at all; more than $1.2 billion in social benefits go unclaimed every year as a result.
Moody points out that other government legislation accepts the logic that households operate as a single unit. Divorcing couples, for example, must split their property evenly under the assumption it was jointly acquired during marriage, regardless of who earned what. But that assumption is in direct conflict with how each spouse would have paid their own income taxes during the marriage. “It makes no sense to me to tax the individuals within a family as opposed to looking at the overall family unit and seeing how much income they’re making and expenses they’re paying,” he says.
Family Tax à la Mode
In addition to being inconsistent and overly-complicated, Ottawa’s blindness towards families at tax time imposes real financial costs on many families. When Carter complained that, “People in essentially similar circumstances do not bear the same taxes,” he was referring to what economists call “horizontal equity”. This entails treating people the same when their circumstances are the same. Two families with identical overall income should therefore pay identical taxes, regardless of how that income is shared between earners. Yet Canada’s individual-based tax system, together with our steeply progressive tax rate structure, violates this fundamental measure of fairness.
Consider two families in Ontario, each consisting of two parents and two young children. In the first family, one spouse earns $120,000 and the other stays at home and earns zero income. In the second, each spouse earns $60,000. These two families have the same resources to support their households. Yet the first family will pay over $7,000 more per year in federal and provincial taxes, mainly because the single-income earner falls into a higher tax bracket than the dual-earners. A similar example with total annual family income of $100,000 yields a $5,500 difference. (See accompanying chart.) Any couple with significantly unequal earnings between spouses will face this sort of inequity when compared to a couple earning identical amounts – a clear conflict of Carter’s dictum that a “buck is a buck is a buck.”
A buck should be a buck: Canadian families with a single dominant earner pay thousands of dollars more in income tax than families earning the same amount via two incomes, a deeply unfair feature of Canada’s tax code that violates the principle of “horizontal equity”.This is not a minor inconvenience for a few well-off households. According to Statistics Canada, there are 2.1 million couples in Canada who rely on one income (with and without children), compared to over 5 million dual-earner families. Of the dual-earners, however, the data doesn’t reveal how many have dramatically unequal incomes that will also trigger some degree of tax inequity. The tax penalty is thus pervasive and substantial. And the solution to this inequity is to follow Carter’s timeless advice and tax the family unit as a whole.
Many countries have tax systems that recognize the logic and necessity of family-based taxation. Allowing married couples to combine their earnings and jointly file a single tax return typically results in a lower overall tax burden when the two spouses have unequal incomes. Moody recommends the U.S. system that allows married couples to file their taxes jointly or separately, depending on what is most advantageous. “There are some great lessons there for Canada,” he says. Many European countries including Sweden, Denmark and Germany also allow for joint filing.
A more refined version of family-based taxation can be found in France’s “quotient system”. Personal income tax in France is calculated on a household basis depending on family size: a husband and wife are assigned two adult shares and their first two children receive a half share each. Subsequent children count for a full adult share. Taxes are then computed by dividing total household income from all sources by the total number of family shares. In this way, a family of four can expect a lower overall tax rate than a two-person or three-person household with the same income.
In 2014 Harper broadened his income-splitting proposal with the Family Tax Cut. This offered up to $2,000 in tax savings to some families by allowing couples to shift income between spouses. It did not, however, involve a substantial re-imagining of the entire tax system.
The French system thus allows for joint filing and also reduces the tax burden for families based on how many children they have. Jack Mintz, President’s Fellow at the University of Calgary’s School of Public Policy and another of Canada’s top tax experts, is a strong proponent of the quotient method. Mintz has prepared numerous reports and commentaries on the issue of family-based taxation. “France has the most sophisticated system. I like it the most,” he once explained on TVO’s The Agenda. “You don’t have to deal with rules and other complexities in the income tax system. If [the government] gives money to the child, it’s included in income.”
Income Splitting, Canadian-style
Canada had a brief fling with family-friendly tax law during Conservative Prime Minister Stephen Harper’s government. In 2007 seniors were allowed to split pension income. Pensioners could average their earnings with a lower-earning spouse and, by dropping tax brackets, lower their overall taxes payable. This seemed a clear, if belated, acceptance of the Carter Commission’s logic that households are the relevant tax unit. But why stop at retirees?
In 2014 Harper broadened his income-splitting proposal with the Family Tax Cut. This policy innovation offered up to $2,000 in tax savings to some families by allowing couples to shift income between spouses. It did not, however, involve a substantial re-imagining of the entire tax system. Rather, it was another of Harper’s many boutique tax credits that targeted specific segments of the voting public and that simply augmented the existing system, adding incrementally to its overall complexity. “A nice try,” Moody says politely. “But it was very complicated and limiting,” since it only applied to a narrow slice of families. And it only lasted two years. Prime Minister Justin Trudeau’s Liberal government removed the Family Tax Cut in the first budget following the 2015 election.
In fact, the animosity shown by Pierre Trudeau’s Liberal government towards the Carter Commission’s family taxation proposal has apparently carried over to the current Trudeau administration as well. In addition to removing the Family Tax Cut, Trudeau fils also cracked down on entrepreneurs who were splitting business income with family members for tax purposes using methods contained in existing tax legislation.
Although this was derisively called “income sprinkling” by the government, it was really just a Do-It-Yourself version of joint filing. And to put a stop to it, federal Finance Minister Bill Morneau introduced the Tax on Split Income (TOSI), an extremely complicated set of new rules imposed on business owners. TOSI, says Moody, “was an attempt by the government to ensure the Canadian tax system is not based on family taxation.” Unwilling to anger the seniors’ vote, however, the Trudeau government left pension splitting alone.
While Morneau’s crusade against income splitting/sprinkling for everyone but pensioners was presented to the public as a righteous attack on wealthy fat-cats and tax cheats, Moody says it was actually small business owners – particularly those in the trades and retail – who were hardest hit. And in a way that again ignored economic reality. “Starting a business or becoming an entrepreneur is almost always a family exercise,” he says. When one spouse dedicates themselves to running a business, his or her partner will inevitably find themselves deeply involved as well – either by helping out directly, by providing ideas and advice or by taking on more household tasks to free up the time their partner needs to make their business succeed.
“I wouldn’t have been able to be as successful as I am if my wife and I both worked,” says Moody, speaking of his own career as a tax advisor and entrepreneur. “When one spouse stays home, the other has to work harder to support the family. It is a team effort.” DIY-income splitting by small business owners was therefore entirely justified and should have been formally recognized in Canada’s tax code rather than prohibited.
The Sexist Foes of Family Taxation
While the benefits of family-based taxation seem legion and obvious, opposition tends to centre on the belief that it is sexist to allow spouses to split their income, since it reinforces traditional gender roles. During the debate over family taxation in the Harper era, for example, progressive economist Jonathan Rhys Kesselman of Simon Fraser University offered an academic critique of family taxation in a lengthy report for the Institute for Research on Public Policy. Kesselman, who recently passed away, claimed that income splitting would
“distort cohabitation and marital incentives, create disincentives for women to enter the labour force and bias spouses’ choices of the mix of household production and market work — tending to keep women in the home and performing most household work. The gender effects of splitting would also carry over from women’s short-run decisions into their longer-run life paths. Joint taxation and income splitting would pose hurdles to women’s taking part-time work and thereby tend to make their choice between work and home all-or-nothing.”
Making Canada’s tax system fairer for one-income families is, in other words, regarded as an impediment to gender equality. Unless the federal government deliberately punishes single-income families with higher effective tax rates, such thinking holds, women will presumably be unable to resist the lure of staying home to look after the kids while their husbands go off to work every day – a contemporary reimagining of the old “barefoot and pregnant in the kitchen” trope.
Yet the argument that women are unable to make appropriate work/life decisions for themselves seems a far more objectionable – and sexist – concept than allowing couples to pool their incomes for tax purposes. It also presupposes that women can’t be the higher-earning spouse. Of the 2.2 million single-earners in Canada, however, more than a third are female. Kesselman’s line of logic also suggests it is legitimate for Ottawa to use the tax system as a political tool to manipulate household behaviour in a way that matches the ideology of the government of the day. This is the exact opposite of a neutral and fair tax system as proposed by the Carter Commission.
Given that pensioners have been able to keep their right to split income for tax purposes, Smith sees no reason why the rest of the Canadian taxpaying public should be denied the same thing. ‘We should tax people as they actually live their lives,’ she says.
Beverley Smith, a long-time campaigner for family-based taxation, objects to the notion that Canada’s tax system should actively force women into the labour market. “That may serve the government’s purposes,” she says in an interview from her home in Calgary. “But what if a woman wants to be at home? Maybe it is liberating for some women to be at home looking after their children and not being nudged out into the work force.” And if that’s the case, Smith opines, it is unfair to punish these families for their own freely-made decisions by making them pay more tax. Moody agrees. “To suggest that a woman, or any stay-at-home parent, is not participating in the economy because they do not have a job is offensive,” he says. “It ignores the existence of the basic economic unit of the family.”
Given that pensioners have been able to keep their right to split income for tax purposes, Smith sees no reason why the rest of the Canadian taxpaying public should be denied the same thing. “We should tax people as they actually live their lives,” she says. “If they share income to run their household, then the tax system should recognize that.” In 1997, Smith went to the United Nations charging that Canada discriminated against stay-at-home mothers through government policies that promoted centre-based childcare and ignored the value of the work done by at-home mothers. “I consider myself a super-feminist,” the retired high school teacher says proudly.
As for complaints that family-based taxation is “old fashioned” because it reinforces the traditional nuclear family, Smith says she promotes a robust definition of households that includes a wide range of mutually supportive, legal relationships. Even two elderly spinsters living together ought to be allowed to file jointly in some circumstances, she says. Smith also points admiringly to how the French quotient system allows a single parent to designate their eldest child as equivalent-to-spouse for tax purposes.
Re-focusing the tax system on families might even be a matter of national survival, warns Smith. Pointing to Canada’s falling birth rates, she argues that creating a more family-friendly tax system could help convince young Canadian couples to have more children. “We are penalizing families and making it harder for them to have children,” she observes. Evidence of this is easy to come by. A 2022 Statistics Canada survey revealed that more than one-third of young Canadian adults aged 20 to 29 don’t believe they can afford to have a child in the next three years, while other research shows that Canadian women plan to have more children than they actually do. This suggests there’s plenty of room for governments to accommodate diverse family needs beyond the massive childcare subsidies and other “national programs” that have lately become a fixation for the federal Liberals.
Waiting for the Next Carter Commission. And Waiting…
Making Canada’s tax system more family-friendly is admittedly a big task that will require plenty of time and effort to get right. Recall that it took the Carter Commission four years just to draw up its recommendations. With this in mind, simply tacking a few ad hoc fixes, however well-intentioned, onto the existing system risks adding complexity without delivering any permanent benefit. The lesson of Harper’s transitory Family Tax Cut is relevant here. This is not the time for small shovels. As Carter proposed nearly seven decades ago, the goal should be a comprehensive re-working of Canada’s entire tax structure to make it fairer and simpler. And the first step is to recognize that households are the essential foundation and decision-making component of the Canadian economy.
Even the family-friendly French quotient method, which appears to be rather more complex than our existing system, could be part of an overall simplification process. A simpler tax system might even begin to mitigate Canada’s overlooked productivity crisis.
The benefits of such a change would affect the full gamut of Canadian taxpayers. “If you think tax reform is only for the rich, you simply don’t understand how things work,” Moody observes. A shift to family taxation would allow for the removal of much of the clutter that currently makes our tax system so awkward and frustrating across all tax brackets. “We have this alphabet soup of credits and benefits that must be applied for through the tax system,” says Moody, referring to programs such as the CCB, CWB and GST credit that are allocated on the basis of combined family income. “A simpler system would get rid of all these tax credits, reduce personal tax rates and simplify the administration of our tax laws.”
A streamlined system would also make it easier for lower-income Canadians to receive all the social supports they are due, as the CPAC report pointed out. As well, ending the government’s animosity towards income-splitting would allow for the repeal of the TOSI rules and the myriad other restrictions and requirements that add to the length and complexity of the tax code. Even the family-friendly French quotient method, which appears on the surface to be rather more complex than our existing system, could be part of an overall simplification process if it was combined with an overall lowering of rates and the elimination of Moody’s alphabet soup of tax credits and benefits. A simpler tax system might even begin to mitigate Canada’s overlooked productivity crisis.
So what are the odds that Canada will see a 21st century Royal Commission on Taxation? Moody is not optimistic, at least in the short-term. The Carter Commission retains its relevance today, he observes, because it was given such wide latitude by Diefenbaker and because Carter was prepared to think carefully and comprehensively about the future. “The political environment today just isn’t conducive to long-term thinking,” Moody says resignedly. And any clean-sheet review of Canada’s tax system would upend the status quo and create political winners and losers; accordingly, Moody worries that without proper leadership and direction a Carter-style review of taxation could get bogged down in picayune turf fights and lose sight of the bigger picture.
“I don’t see the current government recognizing that tax reform is a solution to our problems,” says Moody. “That will require a government change. And even then, a whole lot of political courage to do the right thing.” Fingers crossed.
Peter Shawn Taylor is senior features editor at C2C Journal. He lives in Waterloo, Ontario.
Source of main image: Oasisamuel/Shutterstock.
