Does response to 1966 Carter Commission report hold lessons for future revisions?
In the 100 years since Parliament passed the country’s first federal income tax law, a lot has changed.
The first income tax law, the 1917 Income War Tax Act, was only 11 printed pages, with 24 sections and four forms. Today, the Income Tax Act is over 3,000 pages (printed in English and French), with 281 sections and hundreds of forms and related documents.
A variety of organizations have criticized the current tax system. The Fraser Institute says it is overly complicated and expensive to administer, with high tax rates.
The Canadian Centre for Policy Alternatives complains that the tax system is unfair, with too many breaks for the wealthy.
In a Globe and Mail article last year, executives at the Conference Board of Canada said the country’s income tax system “is highly complex, cluttered and opaque to the average citizen.”
The federal Finance Department says it is making the tax system fairer by closing loopholes and eliminating measures that mostly benefit the wealthy. In addition, the department is carrying out a review of the Income Tax Act. A comprehensive review of the act is expected upon the study’s completion.
Those advocating for change say an examination is long overdue, with some pointing to the 1960s Royal Commission on Taxation, known as the Carter Commission, as the last major review of the legislation.
Prime Minister John Diefenbaker appointed accountant Kenneth Carter to head a commission examining Canada’s tax system in 1962. The commission’s work took close to five years, ending with a six-volume, 2,600-page report released in 1967.
A news release on the report said the commission was recommending a “complete transformation of the Canadian tax system designed mainly to achieve equity — taxation according to the ability to pay.”
The report suggested sweeping changes to income, corporate and sales tax. They included widening the tax base to include capital gains, taxing families as a single unit, shifting the tax burden away from those whose only income came from wages or salary, integrating personal and corporate income taxes, and expanding sales tax beyond the manufacturing level to include retail sales and some services.
It made a number of recommendations affecting employment income, including taxable benefits. While a number of employee benefits were already taxable, the commission said the wording of the rules meant that they could not be properly enforced.
“With literally millions of transactions taking place every month, general provisions such as those currently on the statute books are, to a substantial degree, an empty gesture,” the commission said. “The result is discrimination; some employees can arrange to receive part of their remuneration in the form of untaxed fringe benefits, while others cannot.”
To correct this, the commission recommended that the act include a provision that would tax “all forms of employment income and the value of all deemed benefits to the employee.”
It suggested making more employment benefits taxable, including employer-paid premiums for government health insurance plans, employer-paid fees or dues for employee membership in clubs, unions or associations, and employer-provided or subsidized meals, housing, loans, transportation passes, recreational facilities, and schooling for employees’ children.
Employers would be required to include the fair market value of the benefits they provided in employees’ income or pay a special tax equal to the fair market value of the benefits.
“Therefore, there would be no tax saving — and possibly an increase in the tax cost — if the employer provided non-cash benefits that were not taxed to the employee,” the commission said.
To deal with what it called lavish “expense account living” by some employees, it recommended that the government apply “tough new arbitrary limits” to employees’ travelling and entertainment expenses. It said meals and lodging should be limited to $25 a day per person and entertainment to $5 to $10 a day.
In addition, the commission recommended that lump-sum payments, such as retiring allowances, death benefits, bonuses, stock option benefits, and profit-sharing payments, be included in employee income.
To help reduce the tax burden for working Canadians, the report recommended that employees be allowed to either deduct from their income the actual expenses they incurred to earn a living or claim a standard deduction of three per cent of their income, up to a maximum of $500 per year.
Besides making the tax system more equitable, the commission said its proposals would lower taxes for most low- and middle-income families, increase Canadian investment, and provide greater economic efficiency without reducing federal tax revenues.
However, the commissioners knew they were suggesting significant changes that could be met with much opposition.
“We hope Canadians will accept the challenge implicit in our recommendations. And there can be no doubt that our recommendations constitute a great challenge,” the final report said.
The commissioners also warned against politicians cherry picking which recommendations to implement.
“(G)reat damage could be done by the espousal of all the popular measures recommended and rejection of others — without appreciating that the politically attractive changes are only feasible as part of an integrated programme. These and many other hurdles have to be overcome if Canada is going to obtain the best possible tax system,” the report said.
After releasing the report, the government received a lot of negative feedback, especially from industries, businesses and other stakeholders who believed the sweeping recommendations would hurt them.
In response, the government decided to do further study. It released a white paper on tax reform in 1969, which it said contained the “best practical proposals” for change. However, it too faced strong opposition.
In a 2002 article in the Canada Tax Journal, published by the Canadian Tax Foundation, tax law and policy professor Neil Brooks wrote that, “The white paper met with reactions that ranged from skepticism to outrage. Few other government documents in Canadian history have evoked such emotional reactions.”
While the white paper rejected some of the Carter Commission’s proposals to drastically shift the tax burden to higher-income Canadians and to tax families as a single unit, it recommended changes such as taxing capital gains and introducing new personal income tax rates and a higher basic personal exemption.
It also suggested implementing higher taxes for resource companies, and eliminating a special tax incentive for new and small businesses.
Payroll-related proposals included making unemployment insurance (UI) premiums deductible from income, limiting the amount employees could claim for travel, and implementing a minimum standby charge for an employee’s personal use of an employer’s car or aircraft.
The government did not end up including all of the white paper’s proposals in the income tax reform bill that it finally tabled in 1971 and enacted in 1972. However, the bill did contain widespread changes to Canada’s income tax system that still exist today, including taxing capital gains, introducing more personal income tax deductions, and establishing more rules for taxable benefits.
It proposed making moving expenses deductible for workers changing jobs, exempting from tax employer-paid benefits for board, lodging and transportation at distant worksites, and making UI premiums deductible (and UI benefits taxable).
It also established a taxable value for an employee’s personal use of an employer’s automobile: a minimum of one per cent per month of the original cost of the car or one-third of the rental cost.
As the response to the Carter Commission shows, significant tax reform is challenging. Only time will tell if the current government is prepared to head down that long road again.
