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Canada's Outdated Income Tax Act Begs A Top-To-Bottom Review

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CANADA TAXES
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As the federal government considers its options for spending on the structures and systems that keep our economy humming, one piece of infrastructure urgently needs repair -- Canada's Income Tax Act.

Chartered Professional Accountants of Canada (CPA Canada) is encouraged by the announcement in Budget 2016 that the government "will undertake a review of the tax system to determine whether it works well for Canadians, with a view to eliminating poorly targeted and inefficient tax measures."

While the extent of the review is uncertain, the timing is definitely right. The Royal Commission on Taxation conducted the most recent review back in 1966, and Canadian society and our economy have changed markedly since then.

It is an ideal time to address pressing issues -- like tax reform -- that call for vision, commitment and focus.

CPA Canada has long been calling for a review to modernize the country's tax system.

Indeed, there is a growing consensus for tax simplification and reform -- from major national organizations, economists and think-tanks, and the House of Commons finance committee.

For example, the Canadian Chamber of Commerce, the Business Council of Canada, the Conference Board of Canada and the CD Howe Institute have called for a top-to-bottom review of the tax system with a view to simplifying it and supporting economic growth.

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Needed: A tax system for the 21st century

Canada's tax system is a key lever for economic prosperity, so a review is squarely in line with the government's agenda for growth.

As the Business Council of Canada said in its October 2015 open letter to the prime minister-designate, "Canada needs a tax system for the 21st century, one that reduces compliance costs and increases transparency while promoting growth, investment, entrepreneurship and job creation... the fundamental goal of tax reform should be to achieve the broadest base possible, with lower rates and fewer preferences."

In 2015, PwC released a survey of 80 Canadian companies represented by the Canadian Council of Chief Executives (now known as the Business Council of Canada).

The report showed that on average these companies employed 17 full-time employees and spent $3.9 million in 2013 fiscal periods to comply with all of their tax legislation and compliance activities in Canada.

The World Economic Forum's Global Competitiveness Report 2015-16 ranked tax rates and the complexity of tax regulations as two of the most problematic factors for doing business in Canada.

And the Fraser Institute has estimated that "taxpayers and businesses spent up to $25 billion in 2011 to comply with Canada's tax code -- representing 1.4 per cent of Canada's GDP. The report also estimated the government cost of tax administration (e.g. collecting taxes, maintaining records, and managing appeals at the federal, provincial, and municipal levels) to be $6.6 billion in 2011."

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Tax reform would benefit individuals, business and government

Tax reform could promote a fairer and less complex system and provide an internationally competitive tax system that benefits Canadian individuals and Canadian businesses. A simpler tax system brings lower compliance costs, sparks investment and provides administrative savings to government.

By making it easier to navigate the tax rules and meet their obligations, Canadians will spend less time and less of their money on preparing their taxes, leaving more in their pockets.

For Canadian businesses, productivity could improve as they spend less time, effort and capital dealing with tax compliance and red tape.

For small and mid-sized business, the costs associated with an unsustainable compliance burden come with an even greater price in terms of opportunities lost -- time and resources that could be better spent on making their businesses grow instead of determining how much tax to pay.

In short, Canada's tax system is one of the most important policy mechanisms available for ensuring that its business environment remains competitive and for promoting economic growth. With a majority government in place and an election unlikely for the next four years, it is an ideal time to address pressing issues -- like tax reform -- that call for vision, commitment and focus.

Read more of our views on this year's budget in CPA Canada's Budget Brief 2016.

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