One Comment About Taxation – Canada’s Alternative Minimum Tax Needs to Be Abolished

 

Canada’s alternative minimum tax – AMT – is an example of a silly taxation policy creating complexity.  It needs to be abolished.  Why?  Well, let me explain. 

 

In 1986, Canada implemented an alternative and mandatory way to calculate your personal tax liability, the AMT.  It was first proposed in the 1985 Federal Budget in response to the perception that some high-income earners were taking advantage of otherwise legitimate deductions / tax credits that were available to them and thus not paying a sufficient level of tax.  It was most certainly influenced by the fact that the United States had a similar AMT system.  

 

Without getting into the nitty-gritty of the mechanics, the basic concept is that you calculate your personal tax liability in two ways:  the “regular” way and the AMT way.  The AMT way adjusts the regular method by adding back certain deductions and tax credits, providing for a basic exemption and then applying an AMT tax rate.  To the extent the resulting liability is higher under the AMT way vs the regular way, you’ll end up paying the AMT tax liability.  The difference between the regular tax payable vs the AMT payable – which is the AMT – is refundable over a maximum 7-year period to the extent that AMT is not payable in any of those subsequent years.  

 

Yep, you read that right.  The AMT is a refundable tax.  In my experience, it is a very rare situation where an individual has to permanently pay AMT.  In other words, if an individual pays AMT, it is almost certainly later refunded within the 7-year maximum.  While I cannot find statistics to support my assertion, my practice experience does.  

 

As I’ve written previously, the AMT has not been materially amended since its introduction into Canadian tax law until recently.  In a purely political stunt, the Liberal Party announced during the 2021 election campaign that it was going to“create a minimum tax rule so that everyone who earns enough to qualify for the top bracket pays at least 15% each year”. Many were puzzled by this election promise since Canadian law already provided for an AMT.  Clearly, whoever was in charge of developing / writing the 2021 Liberal Party election party platform missed that point.  

 

After being re-elected in 2021, the Liberals doubled down on this promise. The 2022 Federal Budget stated the government’s “commitment to examine a new minimum tax regime, which will go further towards ensuring that all wealthy Canadians pay their fair share of tax.”

 

It wasn’t until 2023 that the 15% promise and “new regime” turned into broad-based amendments to the existing AMT instead.  The amendments are, as you would expect from this government, poorly thought out and even with recent amendments will have detrimental impacts on many high-income earners including those who are philanthropic.  The amendments, however, do not alter the basic refundable mechanism that has existed since 1986.

 

So, think about that for even 30 seconds.  If a government imposes a tax but will later refund it, what is the point?  Why waste the effort of charging such a tax which includes its related administration, collection, refund, and other related issues?  Does it appear to you, like it always has to me, that the imposition of the AMT is a simple smoke-and-mirrors game?  

 

While some left-leaning academics will most certainly disagree with me, such a tax only adds to the perception that the so-called “rich” are paying their “fair share” but ultimately if the AMT is refunded, how can one say that with a straight face? Even without the AMT, the so-called rich are already paying their fair share and a disproportionate amount thereof.  

 

I find the policy behind the AMT almost laughable. If a tax deduction and / or tax credit is introduced into the taxing statute, there is generally a policy reason – good or bad – for its introduction.  It is then legal for any person to take advantage of such laws. For example, if capital gains are only partially taxable and charitable deductions are wholly creditable, then Canadians can take advantage of such rules.  Why, then, should a separate taxing regime exist to deny part of those benefits to some people who are perceived to be rich?  Especially if the imposition of that extra tax will eventually be refunded?

 

The AMT is an obvious example of how the Income Tax Act becomes complex. Personal tax credits are another example. Ditto for the ridiculous anti-flipping tax and prohibition of deductions on certain short-term rentals.  Instead of taking a wise and methodical approach to amendments, the Act becomes cluttered with patchwork upon patchwork of political and technical amendments. Introducing silly provisions based upon flawed policy and then letting the Canada Revenue Agency and the tax practitioner / taxpayer community deal with its related administration generates complexity.

 

The consequences of tax complexity are not good and include reduced productivity, distorted economic results, average taxpayers being scared of our taxing system and a host of others. 

 

The obvious fix to this problem is for the country to engage in tax reform.  As I stated in a recent podcast of mine, a key objective of tax reform must be a simpler – not simple – tax statute and related administration. I don’t think it would ever be possible to make our taxing system “simple” given the large number of public policy objectives that a sophisticated tax system tries to achieve.  But I do think that Canada’s system can be made much simpler than it currently is.  

 

As journalist David Harsanyi has said:  Simplification of the tax code would not only unlock dormant economic potential, but, in the process, it would blunt the preferred weapon of social engineers, who reward favoured industries, punish success and distort economic incentives.

 

I totally agree with the caveat that “simplification” means simpler since, as I stated above, I think that is the better objective to strive for.  Included in that exercise should be an abolishment of the AMT.

 

One Comment About Leadership – Building Your “Leadership Muscles” Takes Continuous Practice

 

About 4 months ago, I hurt my knee during a 10 km run.  I didn’t notice it that much until I was finished but boy it sure hurt for a long time after.

 

It’s only been recently that the pain has somewhat gone away.  

 

But about 2 weeks after my knee injury, I was dancing a little too hard at my oldest son’s wedding and my heel has hurt ever since.  I’m sure I have a case of Plantar Fasciitis and I’ll need to get some treatment soon.  Because of my recent injuries, my morning routine has been out of whack since I normally get up very early and do some intense cardio and strength training.  I haven’t been able to do the intense cardio training and boy I can feel it.  I still do strength training which is awesome and certainly necessary at my age but I miss the intense cardio workouts. Given the less intense training and a summer filled with good food and wine, I’ve also noticed that I’ve put a few pounds on. It’s time to get back to my regular training with the necessary modifications to accommodate my nagging injuries, while still maintaining good results. Falling out of consistency is not good and the results show quickly.

 

Practicing leadership is like exercise and good nutrition.  Maintaining good habits and consistency is key.  The more you practice and “exercise” leadership, the more natural and practiced it becomes.  The results will appear.  I often get asked, “How did you know what to do in [Scenario X]?”  My answer is always the same: “My leadership muscles”.  

 

Leaders, find a way to continuously exercise and build your leadership muscles.  For me, the key is hanging around peers and learning from them.  Peer-to-peer learning groups – like MacKay CEO Forums of which I’m a Chair and I’d be happy to chat with you more about that if you’d like – are also key.  

 

Leaders…keep practicing. Be consistent. 

 

One Comment About Economics: Royal Bank of Canada CEO Says Canada is on the Wrong Path

 

Normally, large corporations and their leaders are famous for trying to pander to everyone, never criticizing government and attaching themselves to the flavour of the day (like the nonsense that is “diversity, equity and inclusion”).  

 

Lately, however, Royal Bank of Canada CEO, Dave MacKay has been pretty outspoken. Last week, Mr. MacKay stated in a lunchtime speech to a group of business executives that Canada is on the wrong path economically and needs to strengthen ties with the U.S.  

 

From the article as reported in the Financial Post:

 

“One very senior person said to us recently, in a group of CEOs, ‘You are not serious people,” he said in reference to addressing the issues facing the two countries.

 

The chief executive, speaking at the Canadian Club Toronto, added that Canada’s economic situation is “not bad now, but we’re definitely on the wrong path and we’ve got to start making some fundamental change to get back.”

 

Canada’s productivity levels and its gross domestic product (GDP) per capita have lagged in recent years.

 

McKay said it’s important for Canada to figure out “what the U.S. needs” and derive value through that process.

 

As an example, he said the U.S. would need to rely on Canada’s natural resources, such as the metals required for the energy transition. But Canada’s regulatory process is “slowing us down,” he said. It currently takes several years to build a mine in this country due to the checks and balances involved.

 

He also referenced the energy sector and the importance of Canada’s role in defending the Arctic.

 

“We are out of sync with the U.S.,” McKay said. “If you think about what the U.S. needs, it actually lines up really well with what we are good at; we are just not getting it done. The U.S. needs less rhetoric from Canada and just more getting stuff done.

 

Canada also needs a more competitive tax system, one that rewards risk-takers and encourages companies to grow big instead of selling out to the U.S., he said.

 

“Recent tax policy has penalized risk takers,” he said. “We start companies, but then we sell really early. We sell to the Americans, who come up and get this amazing intellectual property for free.”

 

I totally agree with everything Mr. MacKay said.  It’s time Canada becomes more serious and for us to take our economic challenges more seriously as well.  

 

Bonus Comment – Quote From John Wayne – Iconic American Actor – About Becoming Successful

  

“What’s the secret of success? Right decisions. How do you make right decisions? Experience. How do you get experience? Wrong decisions”.

 

Absolutely agree!  Leaders, are you getting experience and thus building your leadership muscles?  

 

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