For better or worse, I have been practicing as a Canadian tax accountant for eight years now. The focus of my practice is filing personal and corporate tax returns for individuals and small business owners. During the past eight years, I have come to understand many ridiculous and illogical aspects of the Canadian tax system. Accountants, in my experience, tend to be grumpy. When I started working I couldn’t understand why! But as one becomes more and more knowledgeable about how our tax system works, I have become quite grumpy myself. Below I describe the top three most frustrating and inconsistent aspects of our tax system, but remember, by no means is this a complete list.
# 1 – Paying more taxes out of after-tax income
Canadians know they pay a lot of income tax. Whether the tax is deducted at source as for most employees, or whether someone is self-employed and remits their taxes to the Canada Revenue Agency themselves, we all know we pay a lot of income tax directly from our employment and self-employment income. After we pay our federal and provincial income taxes from this income, we now have after-tax funds which we should be able to use to pay for the goods and services we require to live and to invest and save for our future. However, don’t be fooled. Even with our after-tax income, we have to pay more taxes. For example, if you own a home, you pay property taxes. If you do not own a home and you rent your home, you are still paying rent from your after-tax income and that rental income is used by your landlord to pay the property taxes on the property you are living in. So whether you own or rent, you pay property taxes or rent from your after-tax income. The federal and provincial government taxes their share of your income and then you must spend more income to pay municipal taxes. So remember whatever income tax rate you think you are paying based on your tax return, remember that rate is only taking into account your federal and provincial taxes, but not municipal taxes. If you want to calculate your real actual tax rate, you need to add property taxes to your total taxes paid and then re-calculate the rate! Another tax we pay out of our after-tax employment income is sales taxes. Every time we purchase pretty much anything except groceries and some other basic goods, depending on the province we live in, we must pay sales tax. In Ontario, the HST is 13%, so if you’ve already paid tax on all your employment or self-employment income, and now you think you’re free from more taxes, think again.
# 2 – Married couples are being taxed as individuals for SOME things but not others
Currently in the Canadian tax system, if someone is married or common-law, the two spouses each file their own individual tax return and cannot ‘share’ or ‘split’ their income with each other. However, some aspects of the tax system are ‘shared’ with one’s spouse. For example, all family medical expenses can be combined and claimed on the lower income spouse’s return to provide the greater benefit. Similarly, all donation receipts can be combined and claimed on the higher income spouse’s tax return to provide the greater benefit. Senior citizens with certain types but not all types of pension income can split that pension income from the higher income spouse to the lower income spouse in order to minimize tax. GST credits and Ontario Trillium Benefits provided by the federal and provincial governments, respectively, are calculated based on family net income, combining the income of both spouses. Canada Child Benefits are also calculated based on combined family net income. It simply makes no sense to me that for these aspects of the tax system, the government DOES allow the family to be taxed together as one family unit. However, when it comes to actual employment, self-employment income, most types of investment income, then all of a sudden each individual is taxed individually, resulting in much higher tax bills. What really bothers me about this is that it is totally inconsistent and irrational. Most reasonable people would agree, I would think, that a married couple, especially married couples with children, combine their family finances. They pay their mortgage and property taxes or rent, insurance, utilities, food and groceries, and expenses for their children TOGETHER as a family unit. Most married couples will combine their finances and have a family budget. So why are married couples taxed as individuals? Other countries tax married couples as a family unit instead of two individuals. For example, in France, which is very progressive and has very high taxes, families are taxed as a family unit instead of as two separate individuals. That would make much more sense to me. If I could re-design our tax system, a married couple would file one tax return instead of two separate tax returns, all income, deductions and credits would be combined and tax would be calculated on a combined basis. I should also mention that if I could re-design our tax system, I would make extremely significant changes in order to vastly simplify the entire system. I will write about that topic in another article.
# 3 – CRA interest is taxable!
This one really drives me crazy. If someone is charged penalties and interest on late-filed tax returns or late payments to the CRA, the interest and the penalties are NOT tax deductible in any way, shape or form. However, (even as I type this I can feel my heart rate increasing and blood pressure rising) if the CRA delays paying you your tax refund or amount it owes you, and they pay you interest on the amount, you MUST include the interest in your taxable income! So when the CRA pays you interest, you must declare interest income and pay tax on that interest income. However, when you must pay interest to the CRA it is not permitted to claim the interest as an interest expense on your tax return. I simply cannot understand this for the life of me. Why would interest received from the CRA be taxable but interest paid to the CRA NOT be tax deductible? If someone can explain the rationale for this, I would be extremely grateful.
Canadians need to become more politically active in order to effect changes in this system. Canadians need to start writing to their members of parliament and members of provincial parliament and support organizations like the Canadian Taxpayers Federation that are fighting for Canadian taxpayers.
Neal Winokur is a CPA, CA practicing tax accounting in the Greater Toronto Area, servicing small business owners and their families. His website and video blog can be found at www.winokur.ca and he can be reached at firstname.lastname@example.org.