Social Policy in Ontario

On the same day that the Minister of Finance, Bill Morneau, clarified the federal government’s proposals to limit “income sprinkling” as a way for high-income owners of private companies to reduce their taxes, the Senate Finance Committee released its report recommending that all the tax changes should be scrapped. Instead, the Senate Committee recommended the government of Canada undertake an independent and comprehensive review of the tax system with the purpose of “reducing complexity, ensuring economic competitiveness and enhancing overall fairness.”

The last time Canada had such a comprehensive review was the Carter Royal Commission on Taxation, which reported in 1966, with many but not all of its recommendations finally implemented in legislation in 1972. This process took a decade from the start of the Royal Commission. The Senate Committee’s proposal, if taken seriously, looks very much like the proverbial “kicking the can down the road” – a massive delaying tactic.

This is not to say that a more in-depth review of Canada’s income tax system would be wrong. But it would be too much to accomplish if the objective were a review as extensive as that of Carter. Instead, it would be more prudent to focus on a few priority areas, or even better put in place the kind of regular analysis that the Auditor-General has been calling for.

So what should be the focus of tax reform? Let’s look at five possibilities.

First, the firestorm of protest that has dogged Minister Morneau over the proposed changes in the taxation of private companies raises the question of just how individual and corporate income taxes should relate to one another. In tax jargon, the topic is corporate-personal income tax integration.

On the one hand, basic principles of income taxation require that incomes not be taxed twice: once when received by a corporation, and again when the income is paid out as salary or a dividend to individual shareholders.

On the other hand, income flowed through a corporation should not be undertaxed, compared to the way this income would be treated if it were received directly by individuals in the first place – precisely the concern being addressed by the controversial proposals recently detailed by the Finance Minister.

A second possible focus for tax reform could be the tax incentives for retirement savings in RRSPs and workplace registered pension plans (RPPs). The Carter Royal Commission recommended major reform. The key idea was that it should make no difference whether the retirement savings were contributed to a RRSP or a RPP, nor whether the individual was self-employed or an employee. This “comprehensive limits” proposal was never implemented in the 1972 reforms.

Shortly after I joined the Tax Policy Branch of the Department of Finance in 1977, I had the opportunity to talk with Bob Bryce, who had been deputy minister of finance during and for two years after the Carter Royal Commission. I recall asking him what ever happened to this Carter proposal. He replied that the department was too busy trying to implement other, higher priority recommendations, especially to include capital gains in income. (Recall the famous phrase from the Carter Commission, “A buck is a buck is a buck.”)