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Increased Costs, Less Efficiency and why the Legislative Gap on Taxation needs to be Addressed
Budget day brings to mind Benjamin Franklin's quotation that there are only two certainties in life: death and taxes. While one cannot take issue with the first part of that statement, the second is increasingly coming into question. The fact that we have to pay tax is no less certain, but certainty in the detail of Canada's tax laws arguably has been decreasing. This results from the increasing "legislative backlog" - the gap between the announcement of changes to the tax system and the legislative enactment of those changes.
This gap is making it increasingly difficult for Canadians to plan their affairs with confidence and certainty and to comply with their tax obligations. When taxpayers are uncertain about their obligations, their trust and faith in the system diminishes.
The need to address the legislative gap was a subject of comment by then Auditor-General Sheila Fraser in her autumn 2009 report. In it, she stated that "taxpayers will not know the exact nature of ... proposed changes until they are enacted," with the result that taxpayers "may be uncertain when they file [their] tax returns," and that the negative effects of the legislative gap include higher costs of complying with tax laws, less efficiency in business transactions, and difficulties for publicly traded corporations in their financial reporting.
Taxand Canada looks at the reasons for the legislative gap, and why a tax technical bill is overdue.
The legislative gap has two sources. The first is the time between when a change to the tax system is announced (usually in a federal budget) and when the legislation is enacted. A glaring example is changes to the tax treatment of foreign investment entities and non-resident trusts. First proposed by Liberal finance minister Paul Martin in his 1999 budget, these changes have yet to be enacted, even though they will have an impact on many aspects of Canadian economic activity. What's worse is that these proposals have been modified significantly several times since being first announced, leaving taxpayers uncertain about to how to comply with the law and plan their affairs.
A more recent example is the many significant proposals from the 2010 budget, tabled some 15 months ago, that have not yet been enacted. Draft legislation was released last August, but taxpayers have to govern their actions based upon only that draft, not actual law. Included among these yet-to-be-enacted proposals is a new reporting regimen aimed at aggressive tax planning; it is supposed to be effect as of the beginning of 2011, even though the final legislation has not been released publicly.
The second source of the legislative gap is technical deficiencies in the tax laws. This arises when the policy objectives of particular tax rules are fairly clear, but the legislation fails to fully achieve them. These deficiencies may be identified by taxpayers, their financial advisers, Canada Revenue Agency, or the Department of Finance. This source of the legislative gap was also reviewed in the Auditor-General's fall 2009 report. The practice, at least since about the 1980s, has been for technical deficiencies to be addressed in "tax technical bills." Ms. Fraser quite rightly noted that there has not been a tax technical bill enacted since 2001. The tax laws are 10 years out of date in terms of technical updates.
There are a number of reasons that we are so badly overdue for a tax technical bill, but one of the most significant is the fact that the last attempt at such a bill failed only inches from the finish line. This was the infamous (at least in the Canadian tax community) Bill C-10, which followed a long and tortuous path to ignominy. It started as a package of technical amendments released for public comments in December, 2002. It was introduced in Parliament on Nov. 22, 2006, as Bill C-33, but died on the order paper when Parliament was prorogued on Sept. 14, 2007. The bill was reintroduced by Finance Minister Jim Flaherty on Oct. 29, 2007, as Bill C-10; it was passed by the House of Commons and progressed as far as second reading in the Senate but died when Parliament was dissolved on Sept. 7, 2008, before that fall's election.
One reason Bill C-10 died was that it spent more than six months mired in Senate committee review. Parliamentary committees are an important part of the democratic process and do important work, but they can become overly politicised. The Bill C-10 changes have yet to be reintroduced.
Our new parliamentarians can bring a higher degree of certainty to our tax laws by moving forward swiftly, in a non-partisan, non-politicised manner, to enact outstanding changes. Let's hope they do just that.
Your Taxand contact for further queries is:
Timothy S. Wach
T. +1 416 369 4645
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Accreditation: This article originally appeared in the 6 June 2011 edition of the Globe and Mail, a leading Canadian daily newspaper. Reproduced with permission of The Globe and Mail.