Business Brief: Canada’s tax system needs an overhaul

Good morning. The Carney government has gone quiet about its election pledge to review the corporate tax system. But around the start of summer, Finance Minister François-Philippe Champagne told The Globe’s Bill Curry he was seeking suggestions for tax changes. We collected a few for a new special series that’s all about tax reform.

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In the news

Energy: Japan’s new envoy Masashi Nakagome says the country is keen to buy more energy from Canada, in part to boost its own economic security.

Artificial Intelligence: The first public details of the Tumbler Ridge shooter’s interactions with OpenAI’s ChatGPT show how she bypassed the tech giant’s own safeguards to plan the attack.

Investing: Blackstone has chosen Canada to debut a new fund that gives retail investors exposure to a broad swath of its private-market investments.

In focus

Listening to the winds of tax change

Hi, I’m Erica Alini, The Globe’s personal economics reporter. Canada hasn’t gone through a comprehensive review of its tax system in roughly 60 years. The Income Tax Act now runs at more than 3,300 pages, a tangle of measures that’s ensnaring taxpayers and contributing to Canada’s ho-hum productivity growth, which hurts economic growth and wages, critics say.

What the tax system needs isn’t a tune-up but an entire engine redesign, experts argue.

We’re launching a special series this weekend about what comprehensive tax reform should look like. You’ll find in-depth reporting alongside opinion and analysis, as well as an interactive calculator by my colleagues Jason Kirby and Jeremy Agius that lets you see exactly where your tax dollars go.

We asked business leaders and economists for their suggested fixes. We heard about assigning an expiration date to every tax break, trimming tax relief for seniors, and allowing provinces to raise tax to build local infrastructure, among many other recommendations.

Several experts welcomed Carney’s recent “productivity mega deduction” as a positive step. But the feedback also included a call on the federal government to go even further and include all kinds of investments. (If the government is looking for a naming suggestion here, we submit: the “cosmic deduction.”)

Another idea that’s been gaining traction among tax experts: cut personal income taxes across the board and raise sales taxes instead. That’s what I explored in my story.

Canada’s personal income taxes have crept upward for decades, to the point where in all provinces but Alberta and Saskatchewan, the combined federal-provincial top marginal tax rates are above 50 per cent. Such high taxes on income create perverse incentives, many economists warn, including discouraging work and incentivizing educated, talented people to move to lower-tax countries.

Cutting income taxes doesn’t need to leave a hole in government coffers, goes the argument. Canada can simply shift its tax mix to collect less through income taxes and more from sales tax. The straightforward way to do that – from an administrative point of view – would be for Ottawa to raise the goods and services tax, or GST.

Unlike income taxes, sales taxes have been drifting lower over the years. Today, Canada stands out among other rich economies for taxing consumption much less than income. Even countries with generous welfare systems, such as France, lean more heavily on sales taxes than income taxes.

But the obvious problem with proposals to raise Canada’s sales taxes is the politics of it. The GST is a highly visible tax that Canadians can spot on most sales receipts. And its introduction in 1991 came only after a major political showdown.

Brian Mulroney, then the prime minister, had to stuff the Senate with extra Tories to ram the measure through the chamber despite fierce Liberal opposition. But winning that battle might have ultimately cost him his job. By the 1993 federal elections, he was gone as prime minister and his party won just two seats in the House of Commons.

Still, there is another historical precedent that has some policy wonks feeling optimistic about a modern attempt to raise the GST, as I detail in the piece.

Charted

Ottawa is set to decide on whether to designate a new pipeline from Alberta to the West Coast as a project of national importance. But critics say the risk of an oil spill and broader climate concerns could affect marine life off the coast and fauna and flora along the route.

Quoted

Trump’s position on Chinese autos is as clear as mud. That’s a problem, including for Canada, writes Rita Trichur.

Up next

More files we’re following

In Parliament: A new report by the Parliamentary Budget Officer says the federal government’s plan to balance the operating budget is based on unclear and sometimes contradictory definitions.

At the pump: Gas loyalty programs are far more complicated than most people realize. These ones offer the easiest instant savings.

By the numbers: We’re watching for data on Canadian wholesale trade for August.

Morning update

Global markets were on the upswing as ⁠oil prices retreated, ​although investors remained cautious about developments in the Middle East and surging bond yields.

Wall Street futures were in positive territory, while TSX futures followed sentiment higher.

Overseas, the pan-European STOXX 600 was up 0.66 per cent in morning trading. Britain’s FTSE 100 rose 0.33 per cent, Germany’s DAX advanced 0.83 per cent and France’s CAC 40 climbed 0.21 per cent.

In Asia, Japan’s Nikkei closed 1.3 per cent higher, while Hong Kong’s Hang Seng dropped 1.01 per cent.

The Canadian dollar traded at 70.71 U.S. cents.