Finance Minister Chrystia Freeland on Tuesday will unveil the 2024 federal budget. And, while I’ve already speculated about what may appear in the official budget, if I were the minister of finance, here are a few of the tax changes that would be in my federal budget.
Tax rate on highest-income earners
Our tax rates on the highest-income earners are simply too high. With the top marginal rates in seven out of 10 provinces exceeding 50 per cent, Canada’s highest income earners are contributing a highly disproportionate percentage of the total personal income tax collected.
Canadians reported a total of $1.7 trillion of income on our collective 30.1 million personal T1 tax returns, based on the most recent income statistics released by the Canada Revenue Agency for the 2021 tax filing season. The top one per cent of income earners, with a cut-off of approximately $250,000 or more of income, earned 15 per cent of this income, yet were responsible for paying 29.4 per cent of the $284 billion in personal income taxes paid that year.
There are very sound arguments for progressivity in the tax system — meaning the more you make, the more you should pay — but once your tax rate gets to be more than 50 per cent, there is a disincentive to earn more money since you know you can’t even keep half of what you make.
Even if you were to argue that the top federal rate of 33 per cent is the right rate, it kicks in way too early, on income over $246,752 in 2024. Contrast that with the top federal rate in the United States of 37 per cent, which only starts to apply with income over US$609,350 — equivalent to about $834,000 in Canadian dollars. And if you’re, say, a medical specialist or executive with mobility and can take a job in Miami, 37 per cent is the final top rate of tax, since Florida is one of nine states that doesn’t have state personal income tax on (self-)employment income.
AMT on donations
The Alternative Minimum Tax (AMT) imposes a minimum level of tax on taxpayers who claim certain deductions, exemptions or credits to reduce the tax they owe to very low levels. In last year’s federal budget, the government announced that changes to the AMT were coming for 2024 “to better target the AMT to high-income individuals.”
Among the proposed changes, which are not yet law, are two that specifically target charitable giving. First, only 50 per cent of the donation tax credit is permitted when calculating the AMT. For donors with tax-preferred income, such as significant capital gains or employee stock option benefits, this adjustment to the permitted donation credit could be costly.
The second AMT adjustment is related to in-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity. Under the current rules, if you donate appreciated securities or funds to charity, you do not pay capital gains tax on the appreciation when you make a gift. This is meant to encourage large charitable gifts and it’s been quite successful in doing so by providing a significant benefit to donors who choose to donate in-kind.
The draft AMT legislation calls for 30 per cent of the capital gains on securities that are donated in-kind to be included in income for AMT purposes. Since only 50 per cent of the donation credit is now allowed for AMT purposes (as explained above), the result is that the AMT may result on some significant donations of publicly listed securities in 2024 and beyond.
These two changes should be eliminated from the draft AMT rules in order to encourage, not discourage, large charitable gifts, which ultimately benefit all Canadians in the main charitable sectors of higher education, health care and the arts.
Tax simplification
I am adding my name to the long list of pundits who have been calling for comprehensive tax reform. Our tax system is simply too complex. The latest version of the federal Income Tax Act, which arrived on my doorstep last week, is now too large to fit in one volume. Running some 2,935 pages (including the index) over two volumes, it’s filled with mind-numbingly complex verbiage to catch ridiculously obscure tax manoeuvres.
A starting point for tax reform would be the elimination of most so-called boutique tax credits. This term is used by tax geeks to describe government spending, via the tax system, to promote certain programs or target various segments of the population.
Proponents of boutique credits argue that if a particular tax credit nudges a taxpayer into socially beneficial behaviour, such as taking public transit or staying fit, then it’s worthwhile. Those who oppose such credits don’t believe the tax system is the best way to achieve these desired outcomes, and instead encourage the government to institute its desired policies through directed program spending.
The real problem with the myriad boutique credits is that they are complicated to administer and, even more so, to enforce. In many cases, the effort needed by taxpayers to make a successful claim can outweigh the value of the tax credit or deduction being sought. You may recall my personal 10-month fight with the tax man back in 2016 to get my $112 public transit credit approved.
Some of the boutique credits are so obscure and target such a small portion of the population that they’re hardly worth cluttering up the tax form. For example, consider the Teacher and Early Childhood Educator School Supply Tax Credit. Worth a maximum of $250, there’s a prescribed list of durable goods that qualify for this credit, and you’ve got to hang on to your receipts in case the CRA decides to audit your claim. Only 80,000 teachers took advantage of this credit in 2021.
My solution is to start the tax simplification process by scrapping most of our boutique credits and replacing them with a combination of a higher basic personal amount (BPA), and lowering the tax rate for the first federal income bracket (for income under $55,867 in 2024). This could be done by calculating the average tax benefit each Canadian gets from the various boutique tax credits being eliminated, and then tweaking the BPA and lower bracket rate to achieve a revenue-neutral result.