By Allan Lanthier

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Opinion: Canada’s fiscal policies need a big dose of common sense Back to video

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Do you feel you are paying too much tax and receiving too little from governments in return? Well, join the club. According to a recent Ipsos survey for the Montreal Economic Institute, 77 per cent of Canadians feel the same.

But here’s the odd part: taxes are not particularly high in Canada. As a share of GDP they are about 33 per cent, slightly below the OECD average of 34 per cent. True, our closest neighbour, with whom we’re always comparing ourselves, is the tax-averse United States, a conspicuous outlier with a ratio of only 28 per cent. Even so, 22 of the 38 OECD countries have higher taxes than Canada.

So, why do we feel over-taxed? For two reasons. Increasingly, instead of simply raising revenue to finance essential services, the federal government has been using tax revenue to redistribute income from higher- to lower-income earners. And, on the spending side, we see too many examples of incompetence, waste and, at times, possible corruption.

Let’s take the recent increase in the capital gains tax as an example of taxation gone awry. Two-thirds of capital gains must now be included in income rather than one-half: however, for individuals this only applies to gains of more than $250,000 a year.

Why the $250,000 annual exemption? Because the government didn’t just want to raise tax revenue: it wanted the wealthy to pay for everything. Although there are more than 31 million tax filers in Canada, the government said just 40,000 people with annual incomes of at least $1.4 million would pay the entire tax. And the government’s rhetoric was extraordinarily divisive. In one particularly unhinged address, Finance Minister Chrystia Freeland warned that the masses would rise up against the privileged few unless the tax increase was enacted, going so far as to suggest that, without the new tax, children would go to school hungry and teenage girls who couldn’t afford birth control would become pregnant.

To make matters worse, the government missed its intended target, that narrow band of supposedly super-rich Canadians, and missed it badly. There is no annual exemption for corporations — the tax hike hits the first dollar of their capital gains — so tens of thousands of small businesses and professional corporations will therefore be caught in the crosshairs. In addition, many people who are not at all ultra-rich own investment portfolios as nest eggs for retirement or secondary residences such as cottages: the capital gain realized on a disposition of such assets will often exceed $250,000. The government’s claim that only a small sliver of Canadians will pay the tax has now been thoroughly de-bunked (by Jack Mintz, writing on this site, among others).

If the government truly believes that a buck is a buck is a buck and all income should be taxed, no matter its source, it should have raised the capital gains inclusion rate across the board for everyone, without any exemptions. People in lower tax brackets would have paid modest amounts of additional tax, and those with higher incomes would have paid much more. That is how a progressive tax regime — and sensible tax policy — works.

And what about spending? Again, Canadian government spending as a percentage of GDP is not particularly high by international standards. But Canadians want their tax dollars to be spent wisely and, increasingly, they believe that’s not happening.

The federal government continues to add to a bloated civil service — more than 10,000 new employees just last year. There are now about 368,000 federal employees, a 42 per cent increase since Justin Trudeau was elected in 2015. Yet it is difficult to renew a passport or get someone to answer the phone at the Canada Revenue Agency. And even with all these employees, the government is increasingly turning to highly-paid outside consultants to help out, at a cost of about $18 billion in 2022. The government even paid consulting firm KPMG $670,000 to provide advice on how to save money on consultants!

Where else are our hard-earned tax dollars going? Well, how about the $46 billion of “investments” for electric vehicles, to corporate giants like Honda, Northvolt, Volkswagen and Stellantis-LGES. The government says this will create thousands of jobs in Canada. But most economists say these corporate hand-outs are more likely to replace existing jobs than create new ones.

In short, we are not receiving enough value for our tax dollars. Add concerns about possible corruption — the ArriveCan scandal is only one example of many — and it is easy to see why taxpayers have had enough.

It is time for a return to common sense. We need to raise taxes to fund essential services — including social safety nets — not to pursue pet projects or engage in massive amounts of income redistribution. And we need to bring competence, discipline and integrity back to our public spending.

Allan Lanthier is a retired partner of an international accounting firm and has been an adviser to both the Department of Finance and the Canada Revenue Agency.

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