One Comment About Taxation –The August 12, 2024 Complicated Draft Tax Legislation Doesn’t Do Our Tax System Any Favours

 

This past week, on August 12, 2024, Canadian tax practitioners awoke from their summertime slumber to a mountain of new draft tax legislation to review.  The voluminous package of material contained complex new technical amendments to implement many new tax proposals.

 

The highlight provisions were amendments to clarify the new capital gains inclusion rate increase, clarifying whether “bare trusts” still need to be reported after the debacle that was the 2023 trust filing season (spoiler alert, yes they do but not for 2024 and now there are a bunch of new exclusions in an attempt to reduce the number of impacted trusts), various amendments to the new interest deductibility restriction rules, technical amendments to the alternative minimum tax, details on the new “Canadian Entrepreneurs Incentive” (another spoiler alert, despite some “improvements” to the original April 2024 Budget Day announcement on this, the “improvements” are not enough to make this a game changer and is mired in exceptions and complexity), amendments to the proposed “Global Minimum Tax” and a slew of other technical amendments (including a surprise and welcome amendment that should be helpful in administering estates of deceased persons).

 

Along with the Department of Finance being busy, the Canada Revenue Agency was too.  For example, this past week they released some amendments to the guidance for the complex and broad “mandatory disclosure” rules.  This guidance is a mandatory read for tax practitioners.

 

In the past week, I’ve chatted with a couple of dozen tax practitioners from across Canada about the materials being released by the government.  The conversations would put most Canadians to sleep in a hurry given the technical nature of the chatter.  Notwithstanding, such conversations are important to obtain an understanding of other practitioners’ views and interpretations of the proposed laws and related administrative guidance.

 

What was very apparent in the conversations, however, was that practitioners’ tolerance levels for the voluminous amounts of change and complexity is at a breaking point.  While complexity in tax is not new (in my view, the study of taxation and taxation policy is one of the most difficult subjects known to man), the combination of voluminous complex material released in such a short period of time is causing many in the accounting and legal profession to abandon the practice of taxation.

 

For example, when the mandatory disclosure rules were first introduced, many in the tax community were shocked by the breadth of its application, complexity and steep life-altering penalties for not complying (even in “foot-fault” scenarios).  Rather than sucking it up and moving on, some senior practitioners decided to call it a day and retire from active practice or significantly alter / reduce their practices.

 

I personally know about 15 very senior and great tax practitioners that did so.  I also know some youngsters who decided to specialize in other areas of law and / or accounting when they understood the breadth of some of the recent changes.  Some might argue that the new rules then achieved their objective.  In my view, that’s a cynical and short-sighted view of what’s happening.

 

In an era where there is a significant shortage of accountants, the country can ill afford to have tax practitioners abandoning / not having youngsters attracted to the profession.  In addition, our country can ill afford to have average Canadians not having a basic understanding of our country’s tax system and paying tremendous amounts of dollars in wasted productivity to simply comply.

 

I always like looking at how complex Canada’s tax system is compared to other countries and what it costs citizens to comply.  Some organizations that track this sort of thing put Canada towards the top of comparative complexity.  One study on this topic concludes Canada has a medium level of complexity but slightly higher complexity than the average of other OECD countries.

 

One recent report by the Fraser Institute concludes that the total compliance costs associated with the filing of 2022 Canadian personal income returns was $4.2 billion, equivalent to 0.15% of national GDP.  This obviously doesn’t include compliance costs for corporations and trusts.  A recent U.S. report estimates that tax complexity costs the U.S. economy $546 billion annually… a staggering figure.

 

Adam Smith, the Scottish economist and philosopher, laid out his four basic tenets of a sound taxation system in his 1776 landmark writing – The Wealth of Nations:

 

1. Equity – the taxation of persons should be proportional to their income;

2. Certainty – the system should be clear and transparent;

3. Convenience – the timing and system of payment should be convenient for taxpayers; and

4. Economy – the costs to administer and collect taxes should be minimized.

 

While Canada has significant work to do on all of the above tenets, it should be obvious to many that the fourth tenet is something that Canada needs to dramatically improve.

 

While the August 12, 2024 Department of Finance releases indeed had clarifying provisions that are helpful to Canadian tax practitioners, the bigger picture needs to be front and center.  Such clarifying provisions are horribly complex that are added on to already horribly complex tax legislation.  Such additional provisions do nothing to improve Canadians’ ability to comply with the tax system.

 

I think John Oakey, Vice-President of Taxation for CPA Canada, put it aptly in a LinkedIn post last week about the August 12, 2024 package of draft legislation: “complicated rules to mitigate the impact of complicated rules does not do our tax system any favors”.

 

John is bang-on.  The solution, of course, is for our country to purposely engage in meaningful efforts to simplify our system and to introduce what Jack Mintz calls “big-bang tax reform to wake up the economy”.

 

In other words, as I’ve beat this drum for years, it’s time for a significant re-think and reform to our country’s tax system.

 

With a government change, that just might be possible.

  

One Comment About Leadership – Leaders, Are You Helping Those You Serve Attain Their “Purpose”?

 

One of the most powerful books I have ever read was the 1946 landmark book by Viktor Frankl, “Man’s Search For Meaning”.  I’ve written about that book previously in this newsletter.  Here’s an excerpt of what I wrote:

 

Viktor Frankl was a psychiatrist who survived the Auschwitz Concentration Camps.  Besides being a memoir, the book discusses, from a psychiatric perspective, why some prisoners quickly died upon entering the camps vs others who lived much longer or survived.  The conclusion: those that created a purpose upon entering the camps – no matter how small the purpose – had a much better chance of surviving and maintaining hope.  Leaders, read the book….it changed my life and helped me to be a better and more empathetic leader.

 

I can’t state enough how powerful that book is and I encourage every human being to read it. Simply put, without purpose a human being will suffer tremendously.

 

If leaders understand how powerful and necessary “purpose” is, then they should use such knowledge to carefully appreciate what their teammates’ purpose is, individually.  When you lead a small group of people, that can be much more manageable and intentional. When you lead a large group of people, then the people that assist you or are delegated to lead sub-groups can certainly help with this task.  With such understanding, job roles and tasks can be intentionally developed to help team members live-out their purpose.

 

People who understand their purpose and are living it are much happier, loyal and intentional.

 

Leaders, help the people you lead live their purpose.

 

One Comment About Economics: Estonia’s Economic Success is Inspiring 

 

Recently, I wrote about a taxation model that Estonia has deployed to help their country become a powerhouse in productivity and economic success.  The Fraser Institute also recently wrote about how their purposeful policy choices have led to their country outperforming many others in the world.

 

From the article:

 

Since leaving the Soviet Union in 1991, Estonia has grown faster than any other former Soviet state. Today, the average Estonian earns nearly 40 per cent more than the average Russian. The share of Estonians living in poverty is one-sixth the share in Russia. Relative to its population, Estonia has 50 times (!) as many business startups as Russia and the highest percentage of any European country.

Estonia’s greater wealth has yielded greater health. The average Estonian can expect to live nearly eight years longer than the average Russian. Estonian infants die at less than half the rate of Russian infants.

 

Estonians are far more likely to report satisfaction with their lives (ranking 38 slots ahead of Russia) and with their government services. Estonia has one of the lowest perceptions of corruption in the world (tied with Canada, Iceland and Uruguay at 14th while Russia ranks 137th out of 180 countries).

 

All of this helps explain the net migration flows between the two countries. Since 1990, for every Estonian moving to Russia, three Russians have moved to Estonia.

…

Adopting the capitalistic slogan, “just do it,” Estonia’s leaders privatized every business they could. They reduced government spending and consistently balanced the budget. They introduced the world’s first flat personal income tax at half the rate of other industrialized countries. They stabilized the growth rate of their money supply to bring inflation under control. They reduced regulations and made it easier to start businesses. Almost unprecedented in the modern era, they unilaterally eliminated all tariffs and barriers to trade, giving their people true access to the global marketplace.

 

Wow…that is truly an inspiring success story and obviously lots for Canada to learn from.  Let’s hope our next government is serious about better economic policies for all and takes a page from Estonia.

 

Bonus Comment – Quote From John C Maxwell – American Author, Speaker and Pastor – About Servant Leadership 

  

“Before you are a leader, success is all about growing yourself. When you become a leader, success is all about growing others”

 

Absolutely agree!  

 

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