Change tax structure, urges C.D. Howe boss

(September 20, 2004) Our tax structure badly needs revamping, and removal of the tax on investment income would be a good start, according to the president of the C.D. Howe Institute. Jack Mintz made the assertion Monday in a speech to the Economic Club of Toronto, while unveiling a “Tax Competitiveness Centre” on the institute’s Web site.

Ironically, the announcement came on the anniversary of passage of the Income Tax War Act of 1917, and Mintz says much has changed since then. “Canadians now live an average of 15 years longer than they did in 1917, (just) to get their taxes paid,” he quipped.

To Mintz, it’s not so much a case of lowering rates as administering the tax system more intelligently. He cites the example of a low-income RRSP contributor whose efforts are defeated by 22% tax rates on the plan’s withdrawal, with half of his Guaranteed Income Supplement being clawed back after age 65 for every RRSP dollar taken out. Throw in GST on what that 65-plus Canadian buys every day, and such withdrawals are then taxed around 80 cents on the dollar.

Why, Mintz concludes, would low-income Canadians put money aside for retirement, “when governments punitively confiscate most of their savings?”

The newly-launched C.D. Howe tax centre maintains that the answer lies in changes to a structure which has been fundamentally flawed since its birth in 1917, when governments “incorrectly defined income as the earnings a person receives plus investment income.”

Traditionally, drawing a salary has involved being taxed on that salary once. But, socking away funds for retirement has meant double-taxation — once, on income earned, later, on income derived from investments, so Mintz’s antidote is to eliminate taxes on investment income, besides raising RRSP contribution limits (and the age at which retirees must withdraw), exempting investments and ending the deduction of interest expenses from income.

Mintz tells Advisor.ca the idea of Tax Pre-Paid Savings Plans, a concept C.D. Howe has championed for years, is especially intriguing. Somewhat of a reverse of the RRSP, there’s no upfront deduction for contributions, but also, no tax on withdrawals. Such a plan was mentioned in the 2003 and 2004 federal budgets, with Liberals and Conservative expressing equal interest in pursuing it.

It’s called the expenditure approach to taxation, the same mentality that governs the GST. Mintz and his C.D. Howe colleagues swear by it for several reasons: more folks will be encouraged to save for retirement, especially at the low end of the income pole; complex rules (on interest deductibility, for example), could be done away with, and filing could be simplified. “With an expenditure tax, many Canadians could file their income taxes on a postcard,” Mintz says.

As for whether tax reform will soon climb the federal priority list under a minority government, Mintz is optimistic. “It’s more realistic than people think. As governments are feeling the pinch, in terms of more demands for money to be spent, and as pressures are brought on the tax system, they may start looking at tax reform, as opposed to tax cuts.”

And events south of the border may provide a special push, Mintz believes. “After the U.S. election next month, we may see major changes in the tax system in the United States that will certainly put a lot of pressure on Canada to improve its tax system, and I’d rather get ahead of the game than behind it.”

Investors, their advisors and anyone interested in this country’s fiscal health may view the proposed tax changes on the C.D. Howe Institute’s Web site.

Glenn Wilkins is a Toronto-based freelance writer.

(09/20/04)