With the federal election campaign fully underway, the Liberals and Conservatives are trying to entice voters with promises of putting more money in their pockets, but arguably one of the most significant policy announcements to date is Andrew Scheer’s proposal to cut taxes for the lowest income bracket.
However, with both leading parties also focusing on pledging various niche tax credits and benefits, it appears comprehensive tax reform remains on the shelf.
The Liberals cut taxes for the middle class while partially offsetting it with a hike for the wealthiest Canadians. On the other hand, the Conservatives are targeting all taxpayers with their policy, calling it a universal tax cut.
“This means that every Canadian will see their income taxes go down, and those in the lowest tax bracket see the biggest benefit of all,” Scheer said in Surrey, B.C., on Sept. 15.
The Conservatives say a dual-income couple earning average salaries will save over $850 per year after their taxes drop from 15 percent to 13.75 percent on income under $47,630.
According to the Conservatives, nearly half of Canadian families are less than $200 away from insolvency at the end of each month.
Once fully implemented, the tax cut will reduce government revenue by about $6 billion a year. This is significant, says Bruce Ball, vice-president of taxation at CPA Canada, the national organization of chartered professional accountants. But how the cut fits into the bigger picture is an open question for now.
“It is a fairly major change in terms of the impact on tax revenue, so we would like to have that reviewed as part of a larger review,” Ball said. The last major tax review in Canada happened 50 years ago, dating back to the Carter Commission.
The Parliamentary Budget Officer said the Conservatives’ tax cuts would cost about $14 billion between 2020–21 and 2023–24. The tax cuts would be gradually phased in over 4 years.
Navdeep Bains, the Liberal government’s innovation, science, and economic development minister, countered Scheer’s announcement by saying that the Liberals’ 1.5 percent tax cut for the middle class put $2,000 in the pocket of the average Canadian family of four.
This tax cut was a Liberal campaign promise leading up to the 2015 election. Starting in January 2016, the tax rate dropped from 22 percent to 20.5 percent for earnings between $42,282 and $90,563.
The Liberals’ tax changes work part and parcel with the Canada Child Benefit. “So we could send more money every month, tax-free, to the families who need it most,” Bains said in a Sept. 15 statement.
Canada’s tax system is often described as complex. It has five tax brackets—a highly progressive system that reaches a top rate of 53.5 percent.
Ball suggests looking at the tax system holistically rather than making specific changes to tax brackets. For example, he questions what impact it might have that the jump to the next bracket would be steeper should the Conservatives’ proposed cut to the lowest bracket be implemented.
Aaron Wudrick, federal director of the Canadian Taxpayers Federation, said in a prior interview that reforming personal income tax is his top priority and that he advocates a flatter (fewer income brackets) tax structure.
Further complications arise from carve-outs and various credits. Many tax policy experts seek a simpler system.
Some of the other tax-related announcements from the Conservatives include reviving the public transit and children’s fitness tax credits.
Jamie Golombek, who works on tax and estate planning at CIBC Wealth Advisory Service, has been advocating for a simpler tax system for years.
“Get rid of some of the complicated nuance tax credits, some things here and there,” he told BNN Bloomberg, adding that they are an expensive way of trying to change people’s behaviours due to the administrative hassle in applying for the credits.
The Liberals propose eliminating swipe fees for credit card sales to help small and medium-sized businesses and boosting the Canada Child Benefit by up to $1,000 more to families for children under the age of 1.
Globally, the trend is toward lower personal income taxes and higher consumption taxes, according to a 2018 study by CPA Canada titled “International Trends in Tax Reform: Canada is Losing Ground.”
Canada and the United States get a much higher share of total tax revenue from personal income taxes compared to the OECD average, whose largest component is value-added/sales taxes. In Canada, 53 percent of the federal government’s revenue comes from personal taxes, while 15.4 percent comes from corporate taxes. Sales taxes comprise only 13.6 percent of revenues.
“We believe the best way forward is to take a look at the personal tax system as a whole as part of a comprehensive tax review as opposed to making a major change to one aspect of it,” Ball said.
The federal government’s annual financial report, released on Sept. 17, showed a budgetary deficit of $14.0 billion for the fiscal year ending March 31, 2019. Should any tax cuts be adopted, spending cuts would be obligatory if the growth of the deficit is to be stemmed.