Estonia has a way Canada can implement better tax policies #CanadaFinance

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Despite an outlier report released by the International Monetary Fund earlier this month that suggested Canada will be a leader in economic growth next year — which had many Liberal MPs crowing that their “economic plans are working” — the overwhelming view of most suggests otherwise, especially when it comes to productivity.

Our federal government doesn’t want to reduce its spending and interest costs on the country’s debt are continuing to rise, so it has to look for ways to finance such spending. In plain English, if spending doesn’t materially decrease, then new sources of tax revenues need to arise.

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That’s why it’s not surprising, although it is disturbing, that Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland have been hanging out with so-called think-tanks that promote a home equity tax to apparently solve housing affordability issues for youth. The idea is simple nonsense and has many problems, such as attacking seniors who may be house rich, but also cash poor.

In the past nine years since the Liberal government came to power, they have introduced a bevy of taxes to finance their out-of-control spending. Examples include the four per cent increased tax on the so-called wealthy in 2016; the revised “tax on split income” regime in 2018 that had — and continues to have — small-business owners square in its sights; the poorly thought-out Underused Housing Tax, which is estimated to raise paltry amounts of tax; a new luxury tax applied against the sale of certain automobiles, aircraft and boats (also estimated to raise a paltry amount of tax); adjustments to the Alternative Minimum Tax, which will, even after some recent amendments, greatly impact charitable donations); and, of course, the increase to the capital gains inclusion rate two-thirds from 50 per cent, which apparently is necessary to deal with “inter-generational fairness” and to prevent the rich from living in ever increasing “high walls” while the commoners are envious at their gates.

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Additional examples include adjustments to the deduction of interest costs, which will harm many capital-intensive businesses that rely on debt financing; the ridiculous flipping tax for dispositions of residential property; the very poor prohibition of expenses on short-term rental property income when that income is generated in a municipality that prohibits such activity; and, of course, the carbon tax.

Virtually all the above examples of direct and indirect tax increases (except for the very technical tax on split income and interest deduction regimes) have one thing in common: They are all showy and devoid of good taxation policies, but are intended to display to the Liberal voter base that it is going after the rich, shutting down loopholes, dealing with bogeymen that are apparently causing housing shortages or pushing their ideology.

They are also not big tax revenue generators, but without significant attempts to get government spending under control, Canadians should expect a lot more of these fluffy and poor policy tax measures.

Instead, we need some big and bold new thinking when it comes to taxation policy. Ideally, such a rethink would simplify our taxation statute and related administration. Our country’s immediate priorities, however, need taxation policies to help reverse our sagging economic results and poor productivity.

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It starts with the easy targets. Significant and deep spending cuts should assist in providing personal tax rate reductions for all Canadians to make us much more competitive with our southern neighbour and other countries. Scrapping all the showy tax provisions above is also an easy target.

However, Canada needs bold thinking on how to attract investment (and re-investment), encourage entrepreneurship, and entice and retain talent.

One such idea, a “distributed profits tax” approach modelled after what the small Baltic country of Estonia has implemented, was written about by tax policy expert Jack Mintz in a 2022 paper. University of Calgary professor Trevor Tombes and the Fraser Institute also recently wrote about it.

Overly simplified, a corporation in Estonia pays zero corporate tax unless and until profits are distributed to its shareholders. This encourages significant investment and re-investment, including many entrepreneurial startups. It also encourages much simpler administration.

Unlike Estonia’s system, however, Mintz advocates for no deferral on passive income and capital gains realized by a corporation, and instead calls for immediate taxation to discourage the use of the corporation to avoid personal income taxes. That idea has merit.

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Estonia implemented its new system in the year 2000 and its economic growth and related statistics are very impressive. Estonia had 17.8 business startups for every 1,000 people in 2023, while Canada had only 4.9, the Fraser Institute pointed out. It further noted that Estonians start 45 times more information, communication and technology businesses than Canadians on a per-capita basis. Wow.

There are a lot of other good ideas besides the distributed profits tax that are worthy of discussion to help Canada get back on track.

As the ancient Roman poet Horace said, “Begin, be bold and venture to be wise.”

It’s time to scrap the silliness and divisiveness of the past nine years. Now is the time to begin thinking of other bold ideas for significant tax reform for the benefit of all Canadians. Canada would also be wise to, once again, get back to encouraging and celebrating success.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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