The Department of Finance on Dec. 20, 2023, released the short-term rental draft legislation as part of a small package of taxation proposals. For those who need a reminder, short-term rental owners/operators that are operating in a municipality that prohibits such rentals are apparently evil and need to be punished to the extreme from an income tax perspective.

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These 5 Income Tax Act provisions need to be amended or eliminated altogether Back to video

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The legislative proposals confirm the fall economic statement that expense deductions for such operators will be denied. These operators, from an income tax perspective, are apparently worse than criminal drug dealers who do not have such an expense deduction prohibition (if they choose to report their taxable criminal receipts at all).

How this will solve or mitigate Canada’s housing woes is a mystery to me. Instead, I believe it will encourage some operators to not report their income for tax purposes (the vast majority report currently do).

Sigh. Canada needs a much better way to introduce sound income tax policy rather than knee-jerk political responses that complicate the Income Tax Act and pander to the governing party’s voter base.

It got me thinking, again, that if I had my way, what other silly provisions in the Income Tax Act would I eliminate?

Well, there’s too many to document here, but, ideally, Canada would undergo comprehensive tax review/reform that would make cherry-picking amendments or eliminations unnecessary. Unfortunately, our current government has no interest in comprehensive tax review/reform, notwithstanding it is necessary and overdue.

With that in mind, here are the Top 5 Income Tax Act provisions I would eliminate or amend.

Small business deduction

Some of my colleagues and peers will likely disagree with me on this one. The small business deduction is the provision that reduces the tax rate for certain Canadian-controlled private corporations that carry on an active business in Canada, but it creates unnecessary economic distortions and complexity.

An overall corporate tax rate reduction to a target federal/provincial rate of approximately 20 per cent would be very competitive with the United States and the United Kingdom, and would certainly reduce income tax complexity.

Anti-family income-splitting rules

These rules are known as the “tax on split income rules” and were introduced as part of the July 18, 2017, private corporation debacle. They are horrifically complex and unfair. They need to be eliminated.

Many personal tax credits

The proliferation of personal tax credits started years ago with credits such as the children’s fitness and arts credits, transit credit, search-and-rescue credit, etc. Introducing these credits is just a simple “feel good” move that complicates the tax system, both from legislative and administrative perspectives, have low-dollar impacts and are simple political vote pandering.

Thankfully, many of the silly credits have been eliminated, but they keep creeping back in with each federal budget. An example is the Teacher School Supply Tax Credit. These need to be fully and permanently eliminated.

Alternative Minimum Tax

First introduced in 1986 as a response to cries that the so-called rich were not paying their fair share, this tax is an alternative regime that calculates income tax in a different way by denying/adjusting certain deductions and credits that are normally allowed and then applies a basic exemption.

To the extent this alternative way of calculating income tax results in higher taxes payable, then the excess over the normal way is payable. However, such AMT can be applied against future income taxes payable (to a maximum of seven future years) to the extent AMT is not payable in those future years.

It is a horribly complex and an unnecessary system. The recent amendments that attack high-income earners — which will greatly impact charitable giving — further highlight the need to eliminate this regime.

A hodgepodge of other provisions

The anti-flipping tax, which taxes dispositions of residential properties if they were held for less than a year (with some exceptions for “life events”), needs to go. It is duplicative and unnecessary.

As mentioned above, the silly short-term rental proposals need to be eliminated. A recent proposal to deny the dividend deduction for financial institutions needs to be eliminated. There’s a whole bunch of other provisions that need to be reviewed or eliminated, but that’s a topic for another day.

So, there you have it. Would the above amendments improve our tax system? Sure. But it barely scratches the surface. Canadians need an income tax system that is more comprehensible and approachable from an administrative perspective, not one that is filled with simple and silly political gestures.

Albert Einstein is attributed as saying that “the hardest thing in the world to understand is the income tax.” While one can debate the context of why he said this, there is a lot of truth in this statement.

It is unrealistic to think Canada — and other modern countries — can ever get its income tax system to be “simple.” But there are always good results when attempts are made to simplify. That’s a big difference with a distinction. Canada needs to make those attempts.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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