INCOME TAX IS NOT FOR THE FAINT OF HEART

Taxation is a difficult topic. Albert Einstein has often been quoted as saying: The hardest thing in the world to understand is the income tax

Well, I think Mr. Einstein was correct. Income tax, and in particular taxation policy, is not for the faint of heart. It involves a multitude of disciplines include economics, public policy, numerous areas of law, accounting and, of course, politics. The Canadian Income Tax Act is a massive beast of a statute and it truly requires specialists to interpret its numerous complex provisions to make sense of it. With such a complex subject, it is not a surprise that tax has often become the subject of numerous misleading platitudes (more on that below) and mythology. It really is difficult and intimidating for the average person to make sense of the subject.

Notwithstanding, good taxation policy is very important for a functioning society / democracy.

Speaking of which, do you recall the “Alberta Advantage”? Many Albertans do not. What was it? The phrase was popularized by Premier Ralph Klein who was premier of Alberta from 1992 until his retirement in 2006. In 2019, esteemed Economist Jack Mintz described the phrase “Alberta Advantage” as: “No doubt, it is a combination of low taxes and good public services, especially education, health and infrastructure”. While other areas are also important, I’ll focus this article on my area of expertise: taxation. I’ve spent my entire career working at a specialist level in taxation and volunteering at a leadership level for virtually all of the prominent taxation bodies in Canada including the Canadian Tax Foundation. I’m concerned about the future of Alberta and whether or not we can ever return to an era of the Alberta Advantage.

During the heydays of the “Alberta Advantage”, Alberta had the lowest corporate and personal tax rates in Canada and such rates competed nicely with our gorilla neighbour to the south, the USA. The low taxation rates were an important factor in attracting significant investment and talent to Alberta. In 2015, that all changed. It started with a proposed personal tax rate increase by then-Premier Prentice. When the new socialist provincial government – the NDP – was unexpectedly elected under the leadership of new Premier Rachel Notley, they promptly increased personal and corporate tax rates significantly. When combined with a new federal tax for “high income” earners introduced by the newly elected Liberal government under Prime Minister Justin Trudeau, this pushed personal tax rates from a high of 39% to 48% almost overnight. Poof…there went the Alberta Advantage (from a tax perspective) and it hasn’t returned to date.

Many have argued that the Alberta Advantage couldn’t be sustained because of the long oil and gas slump from 2014 until 2021 and the nasty COVID period that put significant financial pressures on the Alberta government. No doubt those events caused major problems for the Alberta government. However, it is well known that Alberta’s public sector and spending had also become very expensive with recurring deficits occurring years before those events took place.

Socialist governments, like the provincial NDP’s reign from 2015 - 2019, are known for their strong emphasis on public ownership and control of the economy. In such a system, the government typically desires to own or control the means of production and distribution of goods and services. Private businesses and job creators, on the other hand, are often seen as a threat to the socialist model, and socialist governments tend to be hostile to them. This hostility is often reflected in tax policies, like the significant increases in personal and corporate tax rates that occurred in 2015 and 2016.

Such high tax rates quickly became an issue for Alberta entrepreneurs. Combine that with ever increasing regulations introduced by the NDP and inbound investment from the USA quickly diminished. Many entrepreneurs looked south to deploy their capital. As the old saying goes, capital is agnostic and will look to fertile grounds to invest. Friendly taxation policy is a critical element that investors and job creators look at carefully when deploying capital. The same goes for attracting the “best and the brightest”. High personal tax rates are an impediment when attracting skilled labour from outside of Canada. Alberta needs to compete in this space aggressively to attract many skilled people such as doctors, technology executives and many others.

Socialist governments, like that of the Alberta NDP from 2015 – 2019, tend to be more interested in achieving social / progressive goals rather than promoting sound economic policies. Socialism is based on the principle of social equality, and socialist governments often view economic growth as secondary to this goal. As a result, tax policies are often designed to redistribute wealth from the so-called “rich” to the poor, rather than to stimulate economic growth. An example of this would be the very poorly thought out carbon tax that was promptly introduced by the NDP once they came into power. Thankfully, such tax was promptly repealed when the UCP came to power in 2019.

In addition, the NDP corporate tax rate increases were promptly eliminated when the UCP got elected in 2019. Ultimately the corporate tax rate was reduced to the point of being the lowest in Canada (for companies that are not eligible for the small business deduction). Having the lowest corporate tax rate in the country – combined with significant reduction in business “red-tape” – has significantly improved in-bound foreign investment into Alberta and has definitely been a factor in attracting new business investment and jobs to Alberta. The corporate tax rate reductions have often been referred to by the NDP (while in opposition) as a “$4.7 billion no-jobs corporate giveaway”. Such a shallow comment reflects a complete lack of understanding of taxation, taxation policy, knowledge, overall reality and respect for the critical role that private business plays in contributing to the economy and well-being of each and every Albertan.

Socialist governments and taxation policy are an oxymoron and usually not a good recipe for economic well-being to help Albertan’s pay their bills and prosper. Instead of viewing private businesses as keys to success, the NDP view them as a threat to the socialist system. Alberta cannot afford a step backward after much progress – but admittedly much more to do – to return Alberta to the “Alberta Advantage”. I’m confident we can get there with a government that understands the importance of good taxation policies and the critical role that entrepreneurs play.

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