New directions in Canadian tax policy.

• Author: Bowman, Stephen W.

This article which is adapted from remarks delivered on May 13, 1991, at the 25th Annual Canadian Tax Conference of the Tax Executive Institute in Ottawa, presents some general thoughts on new directions that might be expected in Canadian tax policy through the 1990s. Although this may be an ambitious undertaking in light of the uncertainty that surrounds the current Canadian economic and political condition, certain broad policy directions can perhaps be forecast by examining past policy directions and the non-tax forces at play now and in the future.

THE PAST

It is useful to begin with a brief look at the direction of Canadian tax policy and the evolution of Canadian society over the twenty years since implementation of the major tax reforms of 1971.

Fairness in Canadian

Tax Policy

Perhaps the dominant recurrent theme in Canadian tax policy over this period has been the pursuit of fairness in taxation, not that fairness always means the same thing to all people. It is susceptible to many interpretations and applications. The term is used here only in its most general sense to capture the concept that in any given situation the tax system should not impose unduly greater burdens, or confer unduly greater benefits, on one taxpayer than on another.

Obviously many would argue that the Canadian tax system in not fair in its present form and perhaps never has been. Certainly the recent establishment of the Fair Tax Commission by the Ontario government reflects that view. Nevertheless, greater fairness in a variety of forms was a fundamental goal not only of the 1971 tax reform, but also of much Canadian tax policy adopted since that time.

Fairness has been sought in many ways. Policies have been adopted to ensure that the progressive personal income tax rate structure is fair in the sense of ensuring that taxation is not unfairly burdensome on the poor, and that those who are economically privileged pay back a fair portion of their income to society at large in the form of taxes.

Fairness has also been sought through minimum taxes, capital taxes, the elimination of tax incentives and preferences, and other measures designed to ensure that everyone pays a certain amount of tax. The growing burden of tax on capital gains reflects a continuing perception in some quarters that greater fairness is achieved by taxing income and capital gains to the same extent, on the theory that a dollar represents the same degree of wealth regardless of its income or capital source.

Measures aimed at restricting after-tax financing and loss trading have also been defended on the basis of fairness. The complex system of income integration for Canadian-controlled private corporations and their shareholders reflects a desire to be fair as between incorporated and unincorporated businesses while preventing potential abuses through the accumulation of untaxed, or undertaxed, income at the corporate level. Many would also no doubt characterize the relentless preoccupation with tax avoidance as reflecting the desire to stampt out unfairness resulting from the existence of so-called loopholes in the system.

Fairness in Canadian

Social Policy

It is not surprising that this preoccupation with fair taxation coincided with a general preoccupation with social justice in Canada. The 1970s and early 1980s marked a period of Canadian introspection during which issues of economic nationalism and social justice formed the dominant elements in the list of national preoccupations. During this period Canada came to identify itself largely in terms of its commitment to social justice as embodied in universal medical care, worker protection, old age security and a variety of other mechanisms designed to assist economically disadvantaged individuals and regions.

THE PRESENT AND IMMEDIATE FUTURE

This vision of Canada is now in a process of change as a result of a variety of external and domestic forces. At least until recently, inflation has been a persistent problem. Continuing government deficits reflect the inability of governments to deliver the desired social programs while maintaining acceptable levels of taxation. Federal transfer payments to the provinces have been among the victims, and there is every reason to believe that these transfers will be under continuing pressure in the future.

The strong Canadian dollar, combined with other external factors, has resulted in an erosion of the...