Implementing the change

Implementation will require making some tough choices. The competing considerations are revenue sufficiency, economic efficiency and progressivity. ImpIementing change also calls for an orderly transition period, and co-operation with the provinces.

1. Making Tough Choices

The basic problem is ensuring sufficient revenues, social equity, and healthy economic activity. Every extra tax credit either reduces revenues or raises the effective tax burden for everyone.

Helping those with special needs is important, but it is not often best achieved through the tax system. The best way to help most low-income Canadians, whatever their other circumstances, is to remove as many of them from the tax rolls as possible. Within the context of revenue neutrality, the size of the basic tax credit varies with the tax rate. Provided the tax rate is set at a competitive level that would reduce underground activity and generate growth, extra revenues would be generated. It should be a priority to use these revenues, at least in part, to provide more help for low-income Canadians by increasing the basic tax credit.

However, some special needs, currently addressed through the tax system, might need more direct support if eliminated.

A Seniors Tax Credit?

We believe it is better to target low income seniors (as well as other low-income Canadians) by having the largest basic tax credit possible. Many seniors have voiced their worry about the future of their grandchildren and would rather see resources going toward reducing child poverty than to a universal tax credit for seniors. The government has already recognized this and the 1994 budget effectively eliminated the age tax credit for high income seniors, phasing it out for seniors with income over $25,921.

A Child Care Tax Credit?

The Single Tax system has increased the amount allowed for the child benefit payment. It was felt that it was better to use all available funds to increase the child benefit payment and have the tax system remain neutral in decisions about family economic activity. If low-income Canadians need extra help with child care costs, this must be factored into any reforms of the social welfare system.

Spousal/Equivalent Tax Credit?

The absence of these credits would have a financial impact for various families in relation to the status quo. But it also has the effect of bringing tax neutrality to family economic decisions. Low-income single parents who need extra help should be provided with this directly, rather than through tax breaks that are universal and not targeted to those most in need.

Attendant Care Tax Credit?

The disabled tax credit under the Single Tax Proposal recognizes that disabled Canadians incur much higher costs than non-disabled Canadians in living an independent and productive life. Is the Single Tax Disabled tax credit (which is included always at 50% of the basic tax credit) considered sufficient? If not, can this need be better served outside the tax system?

Manufacturing/Processing Tax Credit?

The Single Tax at a 20% rate would not pose a significant problem in relation to the status quo treatment of manufacturing, but at a higher rate this would be more of a problem, and the fast write-off of assets is also an outstanding item to be considered.

Research and Development Tax Credit?

Does the Single Tax rate reduction offset the special treatment of R&D under the status quo? An important consideration here in relation to special treatment is the question of how many companies undertake R&D in Canada and claim the tax credit, but go on to manufacture elsewhere.

Regional/Sectoral Tax Credits?

Will the Single Tax rate make up for the current special treatment of regions and industry sectors under the status quo? If not, special needs should be dealt with outside the tax system by enhanced regional or industrial programs.

The Treatment of Capital Assets

The Single Tax proposes using book depreciation for all public companies and a -simplified CCA for small businesses. How will this affect industry sectors? Is any special treatment still required that is not offset by the lower Single Tax rate?

Companies or industry sectors that seek help under the tax system should be able to demonstrate clear need. Will the special treatment result in jobs for Canadians or provide a level playing field in which Canadian companies can compete? The other basic question to be answered is: Is the tax system the best mechanism for providing help, or is this best achieved through a direct funding program?

2. Making the Transition to the Single Tax System

We have begun to consider the transitional issues that would arise in the event of the implementation of the changes proposed under the Single Tax initiative. Some of these issues are canvassed below.

Capital Gains

The increase in the inclusion rate for individuals would be effected without transitional relief. This is consistent with the increase in the inclusion rate from 50% to 66-2/3% and from 66-2/3% to 75% in earlier rounds of tax reform.

For corporate taxation years that straddle the implementation date, an appropriate proportion of capital gains would be pro-rated, based on number of days in the year that fall on either side of the implementation date.

Complex transitional rules (such as introduction of a valuation day) should be rejected in order to avoid complexity. Moreover, the Single Tax rate (especially at 20%) will not significantly distort the current marginal rate on taxation of capital gains.

With the proposed changes to dividend taxation, changes to the taxation of capital gains will not create an adverse discrepancy between effective rates of tax on dividends and capital gains, which has been noted as a concern in previous discussions of an increased inclusion rate.

Corporate Tax Integration

Non-deduction of dividends paid to non-residents is not in contravention of Article XXV of Canada-US Tax Convention or OECD Model Treaty. Non-deduction of dividends paid to non-residents is consistent with denial of the dividend tax credit under existing law.

Grandfathering of preferred share issues (i.e., no deduction to payer, dividend deduction to recipient).

Grandfathering of current capital dividend account balances.

Grandfathering of current Refundable Dividend Tax-on-Hand account balances.

Removal of Part IV. I and Part VI. 1 dividend tax regimes.

Depreciation

Proposed book depreciation rate changes would apply only to assets acquired after implementation date.

Assets purchased before implementation date may continue to be written off at existing scheduled rates.

Grandfathering for property acquired pursuant to obligations in writing entered into by taxpayers before implementation date.

3. Working with the Provinces

Consideration would need to be given to ensuring that, upon implementation of the Single Tax System, provincial governments are encouraged not to assume "tax room" created through the base broadening measures that permit reduction of tax rates under the Single Tax System.

Measures which might be considered to

ensure this result could include for example:

• Federal revenue guarantees on transfer payments in return for provincial guarantees on tax rates
• Introduction of provincial tax "bands" (e.g., assuming a Single Tax rate of 20%, provincial governments would be permitted to impose combined rates of 30% - 34% (i.e. 50% to 70% of federal tax). Rates in excess of the top "band" could result in a revenue equivalent clawback" of transfers by the federal government.

4. Making Sure Your Voice is Heard

If you would like more information about the Single Tax System, or if you want to comment on it, please write or phone: