Four reasons behind Canada's tangled tax laws

Canada's tax code is riddled with credits, deductions, and transfers, says tax expert

Four reasons behind Canada's tangled tax laws

From 1971 to 2022, Canada’s tax act ballooned from fewer than 1,000 pages to 2,500 pages of complexity and confusion. Despite that increased volume of verbiage, government tax revenues edged up only slightly, with tax revenue as a share of GDP growing from about 30% to 34% during that time.

According to Allan Lanthier, a former advisor to both the Department of Finance and the Canada Revenue Agency, that inefficiency can be chalked up to the unique credits, deductions, and transfers that pepper the tax code.

Because of how complicated the rules are, more than half of Canadians hire a tax preparation service to complete their income tax returns, Lanthier wrote in a column published by the Financial Post. That complexity also contributes to there being more than 170,000 active tax disputes in Canada at any given time, including over 10,000 that are pending before the tax court.

The majority of tax complications, he said, can be chalked up to four main reasons.

First, politicians in search of votes have been more than happy to add special regulations that favor one sector of business or group of taxpayers over another. Citing figures from Finance Canada, he said there were over 260 tax breaks available to taxpayers in 2021, including non-taxation of lottery winnings, tax deductions for union dues (strike pay is not taxable), and tax credits for digital news subscriptions in Canada.

“What we really need is a level-playing field: one set of rules with as few exceptions and credits as possible,” he said.

He also took aim at often-misguided government initiatives. He held up the notion of small business support as an example; while small businesses are often held up as the backbone of the economy, he noted that only 22% of jobs in Canada are held by companies with fewer than 20 employees, while 58% are at companies with more than 100 employees, according to Statistics Canada.

In addition, he said major accounting and legal firms, along with their governing bodies, are enabling the situation. Because their bread and butter is in guiding clients through tax complexity – and charging rich fees in the process – they tend to make token pleas for tax simplification.

Finally, he blamed Finance Canada and its never-ending search for legislative perfection.

“For example, individuals who receive dividends from Canadian corporations receive credits for taxes the corporation is presumed to have paid on either ‘eligible’ or ‘non-eligible’ dividends,” Lanthier said. “But the shareholders receive these credits even if the corporation pays tax at a much lower rate than the headline rate or does not pay any tax at all!”

Aside from being an accounting headache, he said tax complexity and special breaks create real costs.

“Individuals and businesses spend too much time and money trying to comply. Investment decisions are distorted. And significant tax revenue becomes at risk when taxpayers cannot fully understand the rules,” Lanthier said.