What do small-business owners, home buyers and parents of young children have in common? They are among the Canadians who pay more tax than they should. And most don’t seem to realize it.
This tax grab exists because the tax code is not fully adjusted for inflation. Some parts, such as income tax brackets, are indexed. Others are not—and this causes huge tax burdens to accumulate off the radar screens of most taxpayers.
The $30,000 threshold for the HST
Take the requirement that businesses with sales over $30,000 must register for the HST. That threshold has not been adjusted for inflation since it was established in 1991. If it had been indexed to consumer prices, it would be over $45,000 by now.
Businesses currently in the $30,000 to $45,000 range have thus been pushed by inflation into collecting the HST (13% in Ontario). Their customers are paying more tax than they should.
These small businesses have also been burdened with the administrative and compliance costs that come with HST participation. Such costs are relatively large for them compared to bigger businesses, creating a greater competitive disadvantage.
Other countries exempt a geater number of small businesses. A 2009 study by the Canadian Chamber of Commerce (CCC) found that registration thresholds for national sales taxes were two to three times higher in Australia, France, New Zealand, and the United Kingdom.
The CCC has recommended raising the GST/HST threshold to $75,000 and indexing it to the annual rate of inflation. There will be a loss in tax revenues, but it should be offset by lower administrative costs for the Canada Revenue Agency.
The GST/HST New Housing Rebate
For purchases of new houses below certain price points, the GST/HST New Housing Rebate refunds a part of the cost. These thresholds are not indexed to inflation rates. So as time passes, more and more buyers of new homes end up purchasing at prices above the limits, paying more HST than they should.
At the federal level, the rebate reduces the GST to 3.2% from 5% for purchases of new houses under $350,000. The rebate then progressively declines until it reaches zero for houses above $450,000. The provinces have their own thresholds: in Ontario, 75% of provincial sales tax is returned on the first $400,000 of a purchase, after which the rebate is zero.
The provincial thresholds are relatively recent. However, federal thresholds were established in 1991 and are lagging quite far behind.
The New Housing Price Index has climbed more than 65% since 1991; if the GST threshold of $350,000 had been adjusted for this increase, it would now be more than $585,000. A family that paid $500,000 for a new house in 2013 is paying $25,000 in GST when they should be paying $16,000. The extra tax is $9,000.
When the GST was introduced in 1991, the rebate was implemented to ensure housing remained affordable. In a mid-2012 briefing note, the Canadian Home Builders Association (CHBA) estimated that if the $350,000 threshold had moved up to $400,000 at the start of 2012, Canadians would have paid $400 million less in taxes during the year.
Child-care tax deduction
The child-care tax deduction allows parents to claim up to $7,000 of child-care expenses against income for tax purposes. This deduction is not adjusted for inflation and has not been changed since 1998.
The child-care component of the consumer price index has risen 56% in Ontario since 1998, as pointed out by Wilfrid Laurier University professor Tammy Schirle. If the child-care deduction had been adjusted for this increase, the limit would be near $11,000. A parent with a tax rate of 32% and one child in day care could be paying up to $1,280 in extra taxes per year.
Many other parts of the tax code are not adjusted for inflation, including the Universal Child Care Benefit, children’s fitness credits, RESP contributions and $3,500 annual basic exemption for Canada Pension Plan contributions. All in all, it would not be surprising if the un-indexed tax system generated a hidden tax burden on Canadians of well over a billion dollars a year.
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing,” said King Louis XIV’s finance minister, Jean-Baptiste Colbert. If he were alive today, Colbert might agree that a tax code written without regard for the eroding effects of inflation is a masterpiece in the art of taxation.
Larry MacDonald is a former economist who manages his own portfolio and writes on investment topics. He is the author of several business books and tweets at @Larry_MacDonald