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Kim G C Moody’s Musings – 1-1-1 Newsletter For September 25, 2024

 

One Comment About Taxation – Canada Needs to Do Better When Releasing Tax Proposals So As to Reduce Tax Uncertainty

 

A core principle of taxation is that taxpayers have the right to pay no more—and no less—than what is required by law. Makes sense and sounds simple, right?

 

But what happens if the government proposes new taxation law to be effective immediately (or at a later date) and the proposed law itself is in flux, or worse, hasn’t even been fully drafted? Or if draft legislation has been released, it is flawed and will require significant changes? In situations like those, how are Canadians supposed to plan their financial affairs when the rules they are expected to follow are unclear or incomplete?

 

In order to provide taxpayers with the ability to effectively plan their affairs it has been common and tradition for decades that most new tax proposals are accompanied by detailed draft legislation when first proposed.  In most cases, the draft legislation is well crafted but might need some tinkering to fix unintended consequences, correct errors or other adjustments.  By doing this, the government is providing taxpayers with a detailed roadmap so as to enable them to proactively plan their affairs.

 

Lately, however, it has become common for many new tax proposals announced in the annual Budget or the Fall Economic Statement to not be accompanied by draft legislation.  The announcement simply states that draft legislation will be released later.

 

Many of the tax proposals in the April 2024 Federal Budget are a good example of this.

 

For example, the capital gains inclusion rate increase was first proposed in the April 16, 2024 Budget to be effective roughly ten weeks later on June 25, 2024.  However, the announcement did not contain any draft legislation thus not enabling taxpayers to effectively plan their affairs.  The first batch of draft legislation was released on June 10, 2024, approximately two weeks before the implementation date.  The material was imperfect despite the best efforts of the bureaucrats of the Department of Finance who acknowledged such imperfections and promised that another version would be released no later than the end of July.

 

That promise was not kept and instead the second round of draft legislation was released almost two weeks late on August 12, 2024.  It contained many corrections to the June 10 draft.  But, after much review, the draft legislation is still far from perfect and will need many more corrections.  (As a side note, Jay Goodis of Tax Templates Inc and myself will be instructing a webinar on this material on October 2, 2024 through our Canadian Tax Matters platform to try to put this very complex material into as plain English as possible for taxpayers and professionals).

 

The result of all of this is uncertainty for taxpayers.  This uncertainty is not just an inconvenience—it’s a failure of government accountability. Canadians deserve better than vague promises and half-baked proposals. When a new tax proposal is announced, it is not unreasonable to expect clear and detailed draft legislation. Yet lately, as described, these new proposals lack those essential details.

 

The ripple effect of this uncertainty extends far beyond individual taxpayers. Tax software businesses rely on clear tax rules to update their systems and remain compliant. Without concrete legislation, these companies cannot make necessary updates, leading to incorrect filings (for those taxpayers who rely on that software to file appropriate returns) and potentially costly interest and penalties for businesses with corporate year-ends from June 25th until Royal Assent of the proposed law.

 

Combine the above story with the “always-on” political risk.  Is it possible that Canada will have an election soon and the capital gains legislation will not get passed before that time?  And if a new government is elected, would they be required to pass the new tax proposals?  The short answers are yes, it is possible that the proposals could die and a new government would not be required to re-introduce them.  In my opinion, it’s unlikely to happen but it is still possible.

 

Some of my international tax colleagues who understand the overall concerns about this topic have suggested that Canada should revert to a system where tax proposals only become effective when they become law.  Sounds like a simple fix but unfortunately that is much easier said than done in Canada and not likely practical for a variety of reasons.

 

Canadian taxpayers should demand better. The government must return to its historical practice / tradition of releasing detailed legislation when new tax rules are announced—giving people the tools they need to plan their lives with better certainty.

 

Effective tax planning allows individuals and businesses to minimize uncertainty, align their finances with their long-term goals, and make informed decisions. Without the ability to plan, taxpayers are at the mercy of an unpredictable tax regime, which could harm economic stability and personal financial security.

 

Having said that, we all know that life is uncertain, and one needs to deal with that fact in order to be successful in life.  As the 18th century English politician, Richard Brinsley Sheridan said: “The glorious uncertainty of the law was a thing well known and complained of, by all ignorant people, but a learned gentleman considered it as its greatest excellency”.

 

Very true. But constant uncertainty in taxation matters that affect the masses needs to be minimized.

 

It’s time to hold our government accountable for the growing gap between tax announcements and the implementation of the necessary legislation. It is crucial to recognize the real cost of these delays. Families, businesses, and the broader economy pay the price for governmental inefficiencies.

 

Until Canada returns to its tradition of transparency and accountability in tax legislation, taxpayers will continue to live in tax uncertainty in an already crazy uncertain world—paying the price for governmental delay. And not knowing if they are paying no more – and no less – than what is required by law.

 

One Comment About Leadership – Leaders Need to Get Comfortable Dealing With Uncertainty

 

One of the common elements of being a good leader is the fact that leaders need to learn how to deal with uncertainty.  Like Richard Brinsley Sheridan’s quote above, a “….learned gentlemen considered it [uncertainty in the law] as its greatest excellency”.  That quote is open to a lot of interpretations, but for me what resonates is that uncertainty can be a great opportunity for leaders to place their focus and efforts.

 

For many, however, uncertainty can often lead to negative emotions and results like fear.  Fear can cause people to behave irrationally.  And poor leaders can use fear to manipulate such people to behave in ways they normally wouldn’t.  That type of embracement of uncertainty is simply evil and misguided.

 

Instead, leaders should embrace the fact that uncertainty is a fact of life.  It can be used to capture opportunities. And provide a calming and steady influence to those you lead who cannot or will not embrace uncertainty.

 

One Comment About Economics: The Canadian Government Authorizes Extended Mortgage Amortization Periods for Mortgages

 

Last week, the federal government of Canada announced changes to maximum mortgage amortization periods.  Thirty-year amortization periods (instead of the previous maximum of 25 years) will now be authorized for all first-time homebuyers and all buyers of new builds, regardless of whether it is their first home.

 

Is this a good thing?  Will more buyers enter the market?  Will this help solve Canada’s affordability and housing shortage?

 

I’m not a housing expert but my simple observation is that this might encourage more buyers into the market but certainly won’t do anything to solve Canada’s housing shortage.

 

I am concerned, however, that some buyers might get in over their heads with debt.  While some – like our country’s Prime Minister – have lauded the longer amortization period since people who take advantage of these new rules will be making lower minimum mortgage payments, this is obviously not encompassing the whole picture.  It is simple logic that if you make the debt period longer, the result is more interest payments will arise on the overall debt and, of course, the debt will be held onto longer.  In most cases, debt is not a good thing when considered at the household level.  Especially with high interest rates.

 

In the extreme, one could certainly make monthly payments lower by making the amortization period say 100 years but is that encouraging Canadians to pay off debt sooner to give them more financial freedom?  No.

 

I think Canadians should not applaud this move too strongly. Yes, it will lower monthly payments for some but all that is doing is deferring the ultimate payment of the debt to a later day.  Deferral is not always a good thing.

 

Bonus Comment – Quote From Sir Winston Churchill – Former British Prime Minister – About Dealing With Uncertainty

  

“Difficulties mastered are opportunities won”.

 

Absolutely agree!  Leaders, are you effectively dealing with uncertainty?

 

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