One Comment About Taxation – Canada Needs to Take a Serious Look at Family Taxation Policies

In last week’s newsletter, I mentioned that family taxation policies would be a much fairer system than the current system of individual personal taxation. The present system is littered with anti-avoidance rules (like the poorly thought-out tax-on-split income rules) that add extreme complexity and unfairness to Canada’s taxation system.   Let’s dive into that a little bit.

Besides tax rates, there are many tools that governments use to tax you in ways that chip away at your ability to minimize taxation.  For example, eliminating indexation on personal credits and / or tax rate brackets (like some provinces have done historically) is an easy but effective way to increase tax revenues and taxation burdens on people (since inflation continues to grow, but your ability to shelter taxation from such increases does not when indexation is suspended).

Another way is to force you and your spouse / common-law partner to combine your income for eligibility for certain credits – like GST credits – but force you to report your income and pay the resulting tax separately from your spouse / common-law partner.  Such separate filings have the effect – especially if one spouse has a much lower income than the other – of increasing overall family taxation burdens since graduated taxation rates are not available on a combined family income basis.  Yes, there are some limited exceptions to shift income (commonly referred to as “income splitting”) to another spouse / common-law partner (such as pension income splitting, reasonable salaries paid to family members from a business and other limited abilities). In some cases – if the spouse / common-law partner’s income is very low – you can claim a small credit for such person. but overall, it is almost non-existent.

In 1966, The Royal Commission on Taxation – the first and only time Canada has ever had a complete and comprehensive review of its taxation system – stated, in Chapter 10 of its Report  – the following when dealing with individuals as the basic taxpaying unit:

“Taxation of the individual in almost total disregard for his inevitably close financial and economic ties with the other members of the basic social unit of which he is ordinarily a member, the family, is in our view another striking instance of the lack of a comprehensive and rational pattern in the present system…we recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units…We believe firmly that the family is today, as it has been for many centuries, the basic economic unit in society.”

Unfortunately, when significant taxation reform was implemented in Canada beginning January 1, 1972, the above recommendation was not adopted.  Instead, today, the Income Tax Act contains numerous technically complex anti-avoidance rules that attempt to prevent income splitting among family members.  Such rules are legal fictions that attempt to tax otherwise economic realities.  The result is extreme complexities with overall increased family tax burdens.  So, what’s the solution?  Canada should finally accept the recommendation of the Royal Commission from nearly 60 years ago and adopt the family as the basic taxing unit instead of the individual.  This would result in a much fairer system and eliminate a lot of the complexity in Canada’s Income Tax Act.

When my colleague Kenneth Keung, and I argued for such a new system when the expanded “tax-on-split income” rules were proposed to be expanded as a result of the debacle that was the July 18, 2017 private corporation tax proposals, we wrote about the above recommendation in this article. Unfortunately, as usual, it fell on deaf ears.  During that time, when I raised the recommendation, one of the counter-arguments brought forward by certain tax academics and bureaucrats was that family taxation had been proven to prevent women from entering the workforce.  I was surprised at such comments, and accordingly, I did some research.  Sure enough, there are academic papers written on such a topic, but, such papers and conclusions, in my opinion, lack practicality, substance and common sense.  In most families I know, it is rare that taxation policies – whether they are positive or negative – materially influence the ultimate decision for Mom and / or Dad to enter and / or stay in the workforce once children enter the scene.

It’s time for another serious look at family taxation.  From a policy perspective, I find it offensive that families’ incomes are combined to determine eligibility for various tax credits, but not so for the computation of regular personal income tax. Other countries, like the United States, have forms of family taxation.

In my view, good taxation policies should always follow the economic realities of life and / or business.  The reality is that the family is the basic economic unit for most.  Canada’s taxation policies should mirror those realities.

 

One Comment About Leadership – Transparent Leadership

One of my leadership styles is to ensure that I’m transparent in all facets of my leadership including decision making, values and behaviours.  This doesn’t mean, of course, that I’m completely transparent 100% of the time.  I simply cannot be.  For example, I am often in possession of confidential information that would be highly inappropriate to disclose.  So, of course, having a transparent leadership style does not mean being transparent 100% of the time, but in circumstances where you can, transparency can go a long way to building a trusting and long-standing relationship with peers and subordinates.

One of the ways that I try hard to be transparent is in my communications.  In my opinion, there is nothing worse than a leader trying to pander to a wide audience where the ultimate communication is so watered down – or worse yet, a “word salad” – that the communication basically says nothing.  Or it leaves the audience wondering what you actually said and / or stand for.  Politicians are famous for this and thus the phrase “politically correct”.  (As an aside, the history of the phrase “politically correct” is interesting, and I’d encourage you to look at Wikipedia’s entry about it here).  In some cases, the communication is so watered down or confusing that it can result in equivocation, which is the use of ambiguous language to conceal the truth or to avoid committing oneself.

As a leader, transparency requires committing to a message and position. Your audience should know where you stand and / or what you stand for.  For example, this past weekend’s atrocities in Israel perpetrated by the terrorist group Hamas is a shocking escalation of violence, brutality and evilness.  Israel has every right to defend itself unequivocally.  You see how that message by me is transparent?  Now compare this message by the mayor of Edmonton, who posted a message about the events in Israel here. You see the difference?  My message is clear and transparent.  The other is simple equivocation which can lead to confusion, anger and divisiveness with audiences.

Transparency is a critical leadership function. Practicing it daily is important.  A good short article on the importance of transparent leadership recently published by the Harvard Business Review can be accessed here.

Leaders, practice transparent leadership. Stand for something. And effectively communicate it regularly.

 

One Comment About Economics – Government Funding of Stadiums, “Event Centres”

Last week, in my hometown of Calgary, it was announced that the final legal agreements were signed to build a new “event centre” (the politicians just can’t bring themselves to use the word “arena” or something similar since apparently the politics of funding a Calgary Flames “arena” doesn’t look so good…very silly).  The project will also feature a community rink and overall upgrades to the surrounding area.  The total “investment” (code for “cost”) will be $1.22 billion. The City of Calgary will put up $537 million, the Flames ownership group will put up $356 million over time and the Province of Alberta will put up $330 million.

I’m a long-time season ticket holder for the Calgary Flames.  As a fan, I’m excited that construction will begin soon on a new arena.  While the Saddledome is iconic and has lots of good history, there is no question that it is old by today’s standards (it opened 40 years ago in 1983).  Calgary has also lost out on several entertainment acts over the last decade as the Saddledome is not equipped to handle the intricate staging demands of numerous performers.

Obviously, however, the “investment” is a large number.  Will the economics of such “investments” by taxpayers (via the City of Calgary and the Province of Alberta contributions) make sense?  In other words, will the returns to the community be worth the cost?  Will the spin-off economic benefits, jobs created, ongoing revenues to the Flames and any spin-off jobs and benefits be worth it?

The answers to the above questions are not easy to pin down.  There is a fair amount written on this subject.  But I would suggest to you that none of the writings are definitive, and ultimately such writings / “studies” tend to get political very quickly.  For example, the left-leaning UC Berkeley Economic Review wrote this back in 2019:

Over the last 30 years, building sports stadiums has served as a profitable undertaking for large sports teams, at the expense of the general public. While there are some short-term benefits, the inescapable truth is that the economic impact of these projects on their communities is minimal, while they can be an obstacle to real development in local neighborhoods.

 However, this short article that can be accessed here suggests that:

…one can make a reasonable economic argument that the optimal level of sports facility funding may be higher than zero percent.

So, what is my two cents?  Tough one since I’m no economic expert when it comes to this subject.  Having said that, there is certainly a role to play for provincial and municipal governments to make community “investments” that support its residents.  Governments don’t always need to make an economic return on their investments since part of their raison d’etre is to support the overall community and provide for residents.  Of course, such a statement should not be viewed in the context that I support wasteful spending.  I do not.  With public funding of sports facilities, and in this case, the Calgary “event centre,” I’m hopeful and confident that such an “investment” by the province and city will pay long-term intangible benefits by increasing the value of the surrounding community and helping secure civic pride in its professional sport teams.

Time will tell if I’m right…in the meantime, Go Flames Go!!

 

Bonus Comment – Quote From Jack Welch – Famous American Business Executive and Former Chairman / CEO of GE – About Transparent Leadership

 

“Trust happens when leaders are transparent.”

 

Yep…totally agree!

 

Hope you enjoyed this edition of 1-1-1…please sign up to my mailing list today.