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Future Tax Predictions for 2013

19/03/2013


It might be a bit soon to speculate on the tax related content of the 2013 Federal budget but because I enjoy trivial pursuits I am going to give my thoughts to the future direction of tax rates in Canada. I don’t think that tax policy will change significantly in Canada in the coming budget but this is rather a speculation on the shape of things to come in the coming two to five years.

The only thing we know with certainty is that the size of both Federal and Provincial current and projected budget deficits is staggering. It seems to me that there is some political struggle playing out within both levels of government. Despite knowing that they must raise taxes to balance budgets in the short term, it seems that deficit spending is the easier choice. One might think there is a “hold on and hope it gets better on its own” approach taking shape.

What are the options?

There are a few major ways for governments to eliminate deficits. Spending could be reigned in or taxes could be increased. From the tax perspective, corporate personal and value added tax rates are all going to be on the table for discussion in coming years. Now I would not go as far as to condone tax hikes but I will point out that we have (at least for the past decade) been enjoying a period of declining and historically low tax rates in Canada.

Increasing Corporate Tax Rates

I predict that this is the most likely outcome of the current fiscal situation. While a tax on business productivity is counter-intuitive, it is at the very least, palatable to many individual Canadians. Business owners will understand that taxing profits that would otherwise be reinvested in the business and the economy can lead to reduced productivity and a negative effect on the tax base. But, it is a quick fix and the problem is seen to be shouldered by “big corporations”. We are not alone - most developed countries do levy corporate level taxes and Canada comes in at the low end of most G7 countries so presumably there is some political room to move tax rates up. I predict that the general corporate tax rate (payable by larger private and public corporations) will be increased while the preferential tax rate applicable to incorporated small businesses will remain untouched, at least in the short term.

Increasing Personal Tax Rates

Despite the economic drag, governments often increase taxes payable on the highest income earners (see BC budget 2013-2014). However, because many high income individuals have access to advanced tax planning options that typical Canadians do not, much of the anticipated increase in government revenue might never be realized. In order to implement effective revenue generating tax increases, Canada would have to increase the personal tax rates payable by everyday Canadians. This would affect take home pay for the average Canadian. Although politically unpopular it is seemingly justifiable. Governments often do rely on person tax measures because it can have a powerful impact on the redistributive effect of taxes within an economy i.e. it can be used both as a stable revenue generator as well as a political tool.

Increasing the GST/HST

Many economists suggest that a value added tax (“VAT”) such as the GST in Canada can be an effective and stable way to raise government revenues. This discussion is even going on in Alberta at a provincial level right now. Furthermore it has been suggested that VAT taxes are more economically efficient – especially ones that effectively tax only the final product or service only, offering business refund of any incremental taxes paid throughout the production process. The GST in Canada does just this and many provinces have harmonized provincial sales taxes with the introduction of HST. One must only recall the recent BC referendum on the subject to evidence that these taxes are unpopular with some Canadians. Raising the GST would be a tough political move, although it may be one of the more appropriate options available.

Bottom Line

Unless the economy strongly and quickly rebounds, unsustainable budget deficits are bound to be met with future tax increases. These are mere predictions but it may be prudent for the everyday Canadian and businessperson to come to grips with the possibility that we could be looking at near-term tax increases.