John Oakey is Vice President of Tax at the Canadian Institute of Certified Public Accountants and a member of the CD Howe Institute's Fiscal and Tax Competitiveness Council.
Throughout my career, income tax laws have become increasingly complex, complicating even the simplest transactions. This highlights the need for a thorough review of the ITA.
This is a sentiment shared by Chartered Accountants of Canada in its 2024 pre-budget submission, which recommended prioritizing a principled approach to tax policy and management based on purpose and vision. After all, simplicity, fairness, efficiency and competitiveness are among the most fundamental principles of a good tax system.
Unfortunately, modern approaches to certain tax issues have created rules that increase compliance costs and administrative burdens, and are often accompanied by excessive and unnecessary reporting. Although tax rules are intended to achieve policy goals, their design is as important as the purpose itself. You need to be aware of this to avoid unintended consequences.
In effect, new well-intentioned tax regulations are inadvertently caught up in these rules, creating significant administrative challenges and inequities for taxpayers, even though this was not their intended policy goal.
For example, trusts are now required to report beneficial ownership to prevent money laundering, terrorist financing and tax evasion. While the intent is clear, the range of affected taxpayers (including bare trusts) is broad, and the limited and narrow exceptions, such as the $50,000 (asset-specific) minimum threshold, make it unduly burdensome. It is occurring.
This includes the burden on tax collectors. The CRA was recently forced to exempt bare trusts from reporting requirements in 2023 due to its inability to control a wide range of bare trusts.
Meanwhile, the underutilization of the housing tax, which is meant to address housing demand by focusing on vacant foreign-owned homes, has also become a new casualty. The number of such properties is negligible, in sharp contrast to the actual housing shortage.
Poor implementation of the UHT resulted in large-scale reporting by Canadians who owned residential real estate indirectly through corporations, partnerships, and trusts, necessitating the deadline extension. Chartered Accountants of Canada advocated for the exclusion of Canadians with indirect ownership, which ultimately led to a change in the law.
Mandatory disclosure rules are another example. Broadly defined, “avoidance trading” involves routine tax planning and raises significant concerns about severe penalties for non-compliance. Although MDR is guided by three general characteristics, its ambiguity leads to high administrative and compliance costs, and requires professionals to conduct extensive reporting to avoid penalties. Given that ambiguity, the CRA was forced to develop its own interpretive guidance to make the regime work.
Proposed amendments to the General Anti-Avoidance Regulation (GAAR) also create uncertainty, particularly with respect to transactions that lack significant economic substance. This ambiguity is likely to force over-reporting by taxpayers and practitioners seeking to avoid possible penalties.
Timely guidance from government is always welcomed and just two weeks after the Budget, the CRA’s Income Tax Decision Directorate issued a statement stating that “crystallization of accrued profits should only be done as a means of ensuring access to the current comprehensive tax rate”. itself is not subject to the GAAR. ” Because crystallization transactions may lack economic substance, this statement may actually create further ambiguity regarding the general application of the GAAR.
Finally, the revised alternative minimum tax regime confuses basic tax principles by establishing a 100 percent capital gain inclusion rate and only half of the allowable capital loss deduction. This change could unduly increase tax liability in variable investment years and contradicts the core concept of offsetting gains with losses.
These examples will come as no surprise to tax professionals who are accustomed to applying these rules. However, ITAs and regulations are becoming increasingly complex and are reaching a stage where even experienced professionals find it difficult to navigate them with confidence.
The federal government plays an important role in shaping the tax system to achieve various objectives and enforce reporting requirements. It is essential that these efforts are based on the fundamental tax principles of certainty, simplicity, effectiveness, fairness, efficiency, horizontal and vertical equity, neutrality and flexibility.
The bill urgently needs to focus on precision and specificity of reporting requirements, rather than relying on overly broad regulations.
