COLUMN

Stranded on the road to reform

Diane Francis July 13 1987
COLUMN

Stranded on the road to reform

Diane Francis July 13 1987

Stranded on the road to reform

COLUMN

Diane Francis

For 10 hours on a Thursday last month the media were locked up in a dreary Ottawa hockey arena to study a six-inch stack of tax reform measures proposed by Michael Wilson. Fuelled by strong coffee and stale sandwiches laid on by the government, reporters quickly resorted to bad jokes. “How does a Canadian cross the street?” asked one press pundit. “He doesn’t. He only goes to the middle and may never cross,” was the reply.

Now that the hype is over, it is obvious that Wilson’s “reform” only goes halfway. He trimmed personal income taxes and promised dramatic cuts down the road. He promised to scrap a damaging manufacturers’ sales tax and replace it with a sweeping new federal tax on all goods and services. But by billing his documents as a bold new road map for reform, Wilson can’t hide the fact that the country is stalled at the median and may never make it across. “I’m awaiting tax reform,” quipped Merrill Lynch Canada Inc. chief economist Michael Manford.

In essence, the problem with Wilson’s proposals is that they aim to be all things to all people and end up being very little to very few. Many of the measures are complicated, inconsistent and inadequate. Loopholes live. And nobody believes the promises. “A guy wrote me a letter calling me an s.o.b. because of tax hikes, but his tax will actually go down. He doesn’t understand it. I don’t either because it’s too complicated,” said Tory MP Don Blenkarn, whose House of Commons finance committee is to hold public hearings on the proposals.

His puzzlement is widely shared. For instance, the switch from tax deductions to credits helps poorer Canadians, but the same goal could have been achieved more simply by dropping all deductions and lowering rates accordingly. Some of the other half-measures Wilson introduced:

• Rather than slashing lifetime capital gains exemptions to $100,000 from $500,000—and adjusting the tax so that it will apply to 75 per cent of subsequent gains by 1990, up from 50 per cent now—it would have been fairer to make all gains taxable, including the sale of principal residences. Of course, many people feel that gains that do not exceed the rate of inflation are not really gains. But rather than fiddle around adjusting the taxable portion of

gains, Wilson should follow Australia’s lead and add 100 per cent of capital gains dollars to income—while allowing taxpayers to deduct the percentage of the total that was eaten up by inflation during the years the asset was owned.

• No matter how productive, Canadians are doomed to work more for less. This time Wilson gave tax cuts effectively worth about $300 to families with a pretax income of $35,000—but NDP figures indicate that the same family is already paying $1,400 more annually now in steadily rising income and sales taxes than it was in 1984.

• Wilson and his government maintained all along that they wanted to scrap the federal sales tax that manufacturers and individuals pay on goods made in Canada—because it was economically damaging. And one of Wilson’s reform documents admitted that “Canada’s federal sales tax has the dubious distinction of being the only na-

Wilson cannot hide the fact that his country is stalled at the median and may never make it across the road

tional sales tax in the world known to favor imports over domestically manufactured products.” But Wilson has extended the current tax to more products, despite his condemnation of it. And it is Wilson himself who is largely to blame for its bite—revenues from the sales tax have gone up by 67 per cent, or $5.1 billion, since the Conservatives came to power in 1984, partly because of increased tax rates.

The tax is the reason why an Oshawa-built car is cheaper to buy in Montana than in nearby Alberta. Because there are no tariffs under the Auto Pact and the transportation distances are about the same, the cost of the car would be the same—except for the fact that we have to pay the federal sales tax on that car. And the tax costs Canadian jobs: some firms find it advantageous to send raw goods out of the country to be manufactured and then brought back in. Import taxes on the finished goods are one-third less than the sales tax would have been. But the federal sales tax will probably remain because it is a politicians’ dream: a hidden levy responsible for $1 out of every

$5 in tax that the government collected in 1986-1987.

• Equally cynical is the alleged tax attack on dividends from preferred shares which previously flowed from one corporation to another, earning dividends tax-free and helping Canada’s biggest empires to grow richer. Wilson’s measures nicely tiptoed around vested interests such as that of the Brascan-Hees empires of Peter and Edward Bronfman and their affiliated companies. Wilson has proposed a 25-per-cent tax on dividends going out and another 10 per cent on those coming in, but only if the recipient owns less than 25 per cent of the paying corporation—which makes most of the Brascan-Hees empire exempt. And Wilson capped it all by making existing shares exempt. The Brascan-Hees group had earmarked millions in case reform broke out. But their stocks rose the next day because the measures will actually leave their tax bills unaffected. “Well, we know one constituent they listened to,” commented Montreal investment counsellor Stephen Jarislowsky, whose firm, Jarislowsky, Fraser & Co., manages some $8 billion in Canadian savings.

The best of Wilson’s proposals is a draconian anti-avoidance measure that could theoretically disallow deals organized for no other purpose than to eliminate taxes. That some businessmen are upset by this new measure is a good sign. In essence, it means that federal tax officials will refuse to recognize, for tax purposes, any deal that fits within the letter, but not the spirit, of the law.

For instance, such a measure could have nixed the Reichmann family’s “Little Egypt Bump” 1985 tax manoeuvre, a clever method named after the moves of a famous exotic dancer. It involved creating paper partnerships to change asset values so that depreciation could be claimed twice, saving a staggering $500 million in taxes. Ottawa was forced to approve the manoeuvre because it was within the law, but later sewed up the loophole—after the Reichmanns had driven a multimillion-dollar truck through it.

“If you can go after these guys under a blanket law and fine them and charge interest, some will think twice. Why must we have our best brains in accounting, underwriting and law playing around with the tax act?” asked Jarislowsky. Unfortunately, it’s still a good question. Because we’re only halfway across the road.