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Kim G C Moody’s Musings – 1-1-1 Newsletter For March 27, 2024


One Comment About Taxation – It’s Time to Reconsider Income Averaging Again


There are a lot of good things about getting older.  One of the good things about it in my work life is I recall the “good old days” with respect to certain taxation matters.  Yes, indeed, there are many good things in taxation policy that have been eliminated over the years but as time has passed, one wonders if consideration should be given to thinking about the lessons learned and whether or not such lessons are worth another shot.

One of those lessons is in averaging income.  With a progressive taxation system that Canada has, one pays more personal income tax as your income increases.  In my view, that is generally fair.  But what happens if you have a “once in a lifetime” monetization event such as being fired from your job and you receive significant severance amounts?  Or you have received some sort of significant damages from a lawsuit and such amounts are taxable (some form of damages are not taxable and I’m not talking about those forms).  Or you have withdrawn, for a variety of financial reasons, a significant amount of money from your various registered pension funds? Or you received a “dream offer” for the sale of your business?

All of the above are examples of when you might pay significant income taxes during your lifetime for a short period of time, in many cases the one and only year, and then the following years your income will regress to more modest and normal levels.  Is it fair that those types of spikes in income will result in significant taxation to arise?  Some economists call this extra spike in tax the “fluctuation penalty”.

When Canada had its first first and only “Royal Commission on Taxation” from 1962 – 1966 (which studied Canada’s income tax system and published its Report and recommendations), the Commission spent significant time on this issue.  It recommended forms of income averaging be available so as to enable taxpayers to spread out their income over a period of time so as to normalize the tax liability and bring a measure of fairness into such situations.  In other words, to reduce the “fluctuation penalty”.

When Canada introduced major tax reform on January 1, 1972, a couple of forms of income averaging provisions were introduced.  However, they didn’t last very long and were eventually fully repealed by 1997.  In addition, “retiring allowances” paid to a person upon retirement from an employment position were able to be contributed to your RRSP (pursuant to a formula tied to years of service) in addition to normal RRSP contribution limits.  This was also a form of income averaging since it enabled extra deductions for such retiring allowances to the extent such amounts were timely contributed to your RRSP.  Those rules were also fully repealed for any years of service after 1995.

After all the repeals of income averaging, the government introduced a new provision (for tax geeks, it’s section 120.31 of the Income Tax Act) that is, and remains, a very ineffective attempt (because of its poor design) to provide retroactive averaging of certain kinds of lump-sum income payments. Its utilization has been almost non-existent since 1995 and should be repealed.

Proponents of the repeal of income averaging argued that the tax rate brackets were greatly simplified over the years and thus no need to average or normalize to take advantage of the lower brackets.  In addition, such parties argued that income averaging provisions failed to meet their objectives and were complex to administer.

In my view, and those of many other tax practitioners and economists, it’s time to re-think those criticisms in order to restore fairness and equity.

Let’s illustrate with a simple example.  Let’s say Ms. Apple, a resident of Ontario, has worked as an employee for OrangeCo for about 25 years.  She makes a modest income and her marginal personal tax rate is 20%.  Ms. Apple and OrangeCo have agreed to part ways and OrangeCo has offered Ms. Apple $500,000 as a lump sum payment in settlement of all of her employment rights.  Ms. Apple has agreed to accept such an offer.  It will be taxable to her in the year it is received and will push her marginal tax rate up significantly.  Let’s assume her new marginal rate is now 40% (these percentages are not verified and are only for illustrative purposes).  Ms. Apple already has another job offer but unfortunately it is for lower annual income.  If Ms. Apple’s marginal rate is now 40%, approximately $200,000 of her settlement will be exhausted for tax leaving only $300,000 to help her with her retirement needs.  This is a significant fluctuation penalty especially since she now has a lower paying job.

In Ms. Apple’s case, it won’t take much income to push her marginal rate up.  However, can such an increase be a little more reasonable so as to leave more money in her hands to assist her with retirement needs?  Yes, and that is the purpose of income averaging.

In my view, what’s old is often new again. It’s time to pull out the old lessons learned from income averaging provisions and make them new again.  It’s only equitable and fair.


One Comment About Leadership – Good Leaders Are Firm and Decisive


There are no shortage of pundits who state that:

·       Good leaders need to be empathetic (yes, I agree);

·       Good leaders need to be like “one of them” (totally disagree);

·       Good leaders focus on “diversity, equity and inclusion” (something I totally disagree with);

·       Good leaders need to be likable (I disagree); and

·       Good leaders need to “eat last” (yes, I agree with this concept).

The above list is significantly incomplete but one of the points I’m trying to illustrate here is that good leaders are firm, decisive and are resistant to “trendy” movements – like “diversity, equity and inclusion” nonsense.  Instead, good leaders understand the basics of leadership.  And one of the very basic foundations of leadership is that good leaders are firm and decisive.  They understand their organization’s vision clearly and have a plan to move towards achieving that strategically.

In doing so, they will inevitably not please everyone.  And that’s ok.  In fact, it’s almost a necessity.  If leaders spend their time trying to please everyone, they will most certainly fail at that objective and slow progress towards achieving their goals.

By being firm – in other words, the organization will not compromise on their vision and goals – and decisive (decisions are made quickly, but thoughtfully, without the need nor desire for bureaucratic slowdowns), leaders are serving their constituents well.

Leaders who think they need to respond to every trendy movement are like a fish swimming with no tail….the direction the fish swims in is not obvious and eventually that fish will go nowhere unless it is of a species that can regenerate its tail.  Instead of waiting for the tail to regenerate (in other words waiting for your leadership skills to improve for the benefit of all), be firm and decisive from the start and be that fish or dolphin or orca that has powerful swimming ability.

You and the people you serve will most certainly benefit.


One Comment About Economics: Canada’s Federal Government Spending is Up – Way Up.


A Financial Post article from last week about data released by the Department of Finance is eye popping but unfortunately not surprising with this government. From the article:


Canadian government spending is growing faster than revenue while interest payments are continuing to climb, as Finance Minister Chrystia Freeland prepares to deliver her budget next month. Program expenses excluding actuarial losses from April 2023 to January were 6.7 per cent higher than the same period during the previous year, “reflecting increases across all major categories of spending,” according to data released Friday by the Department of Finance. Interest payments have totalled $39.2 billion over that period, up 36 per cent compared to the previous year, while revenues were up three per cent. The deficit for the 2023-2024 fiscal year is $25.7 billion so far. Total tax revenues are up 1.1 per cent fiscal year-to-date, driven by personal income tax and other excise taxes. Corporate tax revenues are down 14.7 per cent, reflecting a slowing in economic growth…It’s the last glimpse of the fiscal position before Freeland delivers her budget on April 16. Freeland has pledged fiscal restraint, saying she plans to keep deficits contained to around $40 billion from the current fiscal year until 2026.


Any astute observer of this inept federal government will not be surprised by these horrible economic statistics. The last line of the article replicated above is what gets me.  The Finance Minister can put lipstick on a pig all she likes but under no reasonable definition of “fiscal restraint” is keeping budget deficits to “around $40 billion” met.  That is a significant amount of money.  Government spending needs to be reined in.  Unfortunately, that will not happen until we have a government change.  But the damage from inept fiscal policies will continue.

As a proud Canadian, I just hope the damage is not irreversible.


Bonus Comment – Quote From Sir Winston Churchill – British Statesman, Soldier and Writer – About Being Firm and Decisive


You have enemies?  Good.  That means you’ve stood up for something, sometime in your life.”


Yep, totally agree!  Leaders, be firm, decisive and continue to stand-up for your “something”.

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