Canada gets a variety of tax cuts

Canadian coinsThe Canadian government released a mini-budget this past week that featured serious tax cuts. The GST goes down another point to 5% and the lowest bracket of personal tax is lowered back down to 15%. Corporate taxes continued their downward trajectory.

The CICA focused first on the reduction to corporate taxes:

“The government’s commitment to reduce the general corporate tax to a rate of 15% by 2012 is a positive step toward making Canadian companies more competitive,” said Kevin Dancey, FCA, President and CEO of the CICA.

Their media release about the announcement actually doesn’t even mention the GST or personal tax. That’s a little strange. I hope they’re just working on something really special and it’s taking longer than expected, because they would be remiss to miss out on commenting on these topics as well.

Clearly we as a profession should have something official to say about personal and consumption taxes. I know I do, as an individual member.

The Basic Personal tax credit amount was raised to $9,600 in 2007 and is scheduled to rise further to $10,100 in 2009. This is a positive step and smart policy, as a strong argument can be made to increase the limit to the poverty line. Any increase here is progressive and ought to be well received.

The cut to the GST from 6 to 5% as of January 1, 2008 is essentially regressive and rewards increased consumption. Shifting the savings here to the Basic Personal credit or lowering the general rate on income tax would have been better and greener.

Canada is riding high on a wave of prosperity, the loonie has reached levels not seen since before the 20th century, and unemployment is reaching all-time lows. It is only fitting that the Federal government return some of its surplus to Canadians.


Simplifying VAT in the UK compared to GST in Canada

This recent post on the SME Blog talks about the recent changes the UK has made to VAT, in that they are now offering small businesses the ability to account for and remit VAT on a cash basis, rather than accrual:

The VAT cash accounting scheme allows you to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier.

This is good news for businesses with large trade debtors and good news generally for cashflow.

The equivalent value-added tax in Canada, the GST, requires businesses use only the accrual method, which means even if you haven’t collected the tax on sales, you have to remit. That being said, you still get to claim the GST you haven’t yet paid on purchases against those credit sales, minimizing the timing difference impact.

In Canada, small businesses are also able to use the quick method to calculate their remittance, or the simplified method to calculate their GST owed (known as input tax credits).

Both methods simplify the accounting but do not address the cash flow problems in the same way the UK has done with their cash scheme.

So what is better? Helping small businesses save time and money accounting for their tax remittances, or helping small businesses match the timing of their cash inflows and outflows from sales and purchases to tax remittances? I’m inclined to think the latter is more helpful.


Love tax theory, hate tax application

Tax is a subject that is near and dear to my heart, but not because I occasionally fill out a tax return. Tax theory is fascinating and relevant stuff, but I won’t ask you to take my word for it.

I think the reason why I like tax theory but hate applying tax law, is because it combines my love of accounting with my love of politics. Taxes are an intensely political subject. And I don’t mean office politics, I mean the good kind.

But the politicization of taxes if often detrimental to constructing a truly successful tax system. Witness the recent Canadian federal election, when the Conservatives won, partly on their promise to reduce the GST by 2%.

The GST is a consumption tax, which is the most efficient type of tax. Instead of cutting the GST, we should be cutting income tax or capital tax. Income tax discourages work, and tax codes across the globe have become convoluted with various tax credits and deductions, increasing compliance costs for everyone.

The US is even worse than Canada, because it doesn’t even have a consumption tax. But Europe is ahead of us with their VAT, which ranges from 18-25%. The GST in Canada is now 6%, with a further reduction to 5% coming. We’re headed in the wrong direction.

I’m convinced we need to do away with income taxes entirely, and replace it with a consumption tax. It would be fairer and would encourage saving and investment. A credit for low income earners could be employed to maintain the progressive nature of most income taxes.

What are we waiting for? Politics, as usual.


Bank of Canada chief pushes smarter provincial sales tax

David Dodge, the governor of the Bank of Canada and the current architect of our monetary policy, suggested the province of Ontario should revamp the provincial sales tax (PST) to more closely resemble the value-added federal GST in a rare appearance before the Commons industry committee.

The suggestion is a solid one, as it would allow producers some relief from their tax burden and still tax ultimate consumption by end users. The GST is an interesting tax in that producers deduct the GST they pay on inputs from the GST they collect on outputs, hence they are only taxed on the value they add to their product. Turning Ontario’s 8% PST into a value-added tax would help producers compete in the global economy.


Keep the income tax cuts, ditch the GST cut

I read in the Star yesterday that the income tax cuts enacted by the Liberals before their fall from power and effective January 1, 2006 may be kept by the Conservative government, which has all along threatened to reinstate them to make room for their GST cut.

I have always been in favor of income tax cuts before consumption tax cuts. Income tax cuts encourage saving and investment, and put more of our earnings in our pockets (at least initially). The only way I save money from the GST cut is by spending money, which is a weird way to think about saving. With an income tax cut, the saving is built right in.

The Liberals love telling you the Conservative GST cut will help the rich more than the poor, where their income tax cuts help the poorest first. This is just wrong.

The very poorest members of our society already pay no income tax due to the basic personal exemption. Cutting the rate on the lowest bracket has no effect on them, and they pay the 7% GST just like the rest of us. The GST cut reduces taxes for everyone, including those who make so little they aren’t paying income tax, and the GST is the more regressive tax so cutting it makes the system theoretically more progressive.