On Monday 19 October Canadians go to the polls bringing to conclusion the longest, and arguably most interesting, election campaign in modern Canadian history. Tim Wach, Managing Director of Taxand, provides his views on the tax policy touted during the election campaign.
“Whilst taxation policy has taken an elevated position in a number of electoral campaigns across the globe, Canada has bucked the trend with both the Conservatives and the Liberals contemplating insignificant changes to the Canadian corporate tax system, other than a Conservative promise to cut the tax rate for privately held and Canadian controlled corporations, a policy which the Liberals and some economists believe will assist wealthy taxpayers to defer taxes.
“Understandably, when you’re appealing to the electorate, political rhetoric has focused more on the on personal taxes – with two diverging views. The Conservatives have pledged to move forward with their income splitting proposal and to introduce further targeted tax credits such as a home renovation tax credit. The Liberals on the other hand have promised to eliminate the income splitting proposal, arguing that it disproportionately advantages the wealthy. They go further by promising that they will reduce the top tax rate for middle income taxpayers, but will increase the top tax rate for income over C$200,000. When combined with provincial income taxes, the top marginal rate will exceed 50%, which some have suggested is a tipping point for taxpayers towards tax avoidance planning.
“Throughout the campaign, a large majority of Canadians have indicated their desire for change after almost 10 years of Conservative governments. But in the end however, no matter who wins on Monday, don’t expect radical changes in Canadian tax policy.”
For most of the past ten years Mr. Harper’s Minister of Finance was the late Jim Flaherty. The well-respected Mr. Flaherty resigned from that position on 18 March 2014. Canadians were shocked when Mr. Flaherty died unexpectedly only three weeks later.
Mr. Flaherty’s greatest legacy as finance minister was arguably the slow and deliberate effort to broaden the corporate tax base and eliminate ‘loopholes’ and tax preferences. This allowed for a reduction in corporate tax rates that, together with other changes to the tax system, made Canada’s tax system amongst the world’s most competitive. These efforts also enhanced the economic neutrality of Canada’s corporate tax system. Economic neutrality – minimising the extent to which tax considerations skew economic decision making – is widely seen as a key component of good tax policy.
Mr. Flaherty also pursued ‘fiscal integrity’ with almost religious fervour. In his 2013 budget, he included an unusual item – a pamphlet that touted more than 75 measures introduced since 2006 aimed at “improving integrity and closing tax loopholes.”
Together these efforts contributed to the ability to reduce the general federal corporate income tax rate from about 29 per cent in 2000 to 15 per cent in 2012, where it currently stands, and the establishment of a 25-per-cent target for the combined federal-provincial general corporate income tax rate, down from combined rates that exceeded 40 per cent a decade or so ago.
While Mr. Harper and Mr. Flaherty were generally commended for their corporate tax approaches, their changes to the personal tax system were not nearly as well received policy experts. Critics have suggested that the plethora of personal tax credits introduced by the Conservatives, ranging from credits for costs of children’s athletics and arts to credits for volunteer firefighters, were driven more by good politics than by good policy.
Perhaps the most interesting political debate in relation to the personal tax changes was one played out in part in public between Mr. Harper and Mr. Flaherty, being a promise made in the 2011 election campaign to introduce so-called ‘income splitting’ for families with a stay-at-home parent and a child (or children) under the age of 18. The mere fact that one of Mr. Harper’s cabinet ministers would suggest that a campaign promise should be rethought was news in itself, Mr. Harper being generally regarded as not countenancing such public displays of disagreement. Unfortunately, this debate was cut short by Mr. Flaherty’s premature death.
Although it is impossible to predict what result, it seems that Canadians will either re-elect Mr. Harper or, if the desire for change carries the day, elect Mr. Trudeau.
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At the start of the campaign the left of centre New Democratic Party (NDP) led a three way race, ahead of the incumbent Conservatives. The centrist Liberal Party, led by Justin Trudeau, son of late Prime Minister Pierre Trudeau, was a distant third. After nearly three months of campaigning, support for the NDP has faded and the Liberals have surged.
