Tax season is upon us, which is wonderful news for lovers of Norwegian composer Christian Sinding, whose 1896 work Rustle of Spring is the Canada Revenue Agency’s hold music. For those philistines who choose to receive a call back, I have no words of comfort.
It’s also a good time to reflect on why we pay the taxes that we do. Two such questions landed in my inbox recently, and both went in interesting directions.
I received a T5 reporting income from MCAN Mortgage (MKP-T) as distributions and not dividends, which of course are treated differently from a tax perspective. I’d appreciate your insights.
The issue here appears to be one of corporate structure. MCAN Mortgage is not your garden-variety eligible-dividend-paying Canadian corporation. It’s structured as a Mortgage Investment Corporation and that means dividends are taxed as if they were bond interest payments.
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So while it’s not inaccurate to call these dividends, they will show up in Box 13 of your T5 slips (“Interest from Canadian Sources”) and are taxed as income. Any dividends from capital gains earned by MCAN will appear in Box 18. MCAN has a useful breakdown of historical dividends on the Investor Resources section of its website.
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But this brings up another question: What if your T slips are wrong?
It doesn’t happen often, but it does happen. Tristan Bagri, founder of TSB Chartered Professional Accountant Inc. in Surrey, B.C., told me that these errors can be difficult to spot because not everyone reviews their slips in detail.
Other errors he has seen include the wrong SIN being reported, which prevents the slip from showing up in an individual’s online CRA account.
Remember to read your slips carefully and contact the responsible financial institution to amend any errors.
Why is the capital gains tax not indexed to inflation? It would seem fairer to only tax capital gains beyond inflation, regardless of the inclusion rate, certainly for capital gains on or about the inflation rate.
The quick answer to your question – which is older than Canada’s capital gains tax itself – is that it would be too complicated and hasn’t been consistently necessary.
In an opinion attached to the 1966 Carter commission report that recommended the introduction of a capital gains tax in Canada, Commissioner Donald G. Grant argued against taxing such gains at full rates.
“The inflationary element is ever present in gains in securities and real estate, and to tax capital gains that resulted from a general increase in price levels at full rates would be inequitable,” he wrote, suggesting instead taxation “depending on a time element and the nature of the undertaking.”
Capital gains eventually became taxable in 1972, without Mr. Grant’s suggested modifications but with a 50-per-cent inclusion rate. The question of indexing nevertheless stayed relevant because of high inflation. A 1986 paper by Douglas G. Hartle for the Economic Council of Canada noted several moves to index the tax system to inflation in the 1970s, including personal income tax exemptions and brackets, and deductions for interest, dividends and capital gains.
The issue was still relevant enough in 1982 to prompt the finance minister to issue a discussion paper, which led to the formation of an ad hoc parliamentary committee, which led to legislation creating an Indexed Securities Investment Plan. All of this just in time for lower inflation to reduce demand for complex plans aimed at combatting it. Brian Mulroney’s Progressive Conservative government abolished ISIP a few years later.
“The introduction of ISIP … demonstrates, perhaps, the political wisdom of doing as little as possible as late as possible with maximum consultation,” Mr. Hartle wrote, pointedly.
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Other attempts at tweaking capital gains taxes have come and gone with different governments and different priorities (most recently, cancelled plans for raising the inclusion rate). Indexing pops up regularly, but is consistently seen as creating unnecessarily complicated calculations for both taxpayers and tax authorities, especially when inflation isn’t that high.
There is still a lifetime capital gains exemption – the indexation of which resumes this year – that applies to certain private corporations and qualified farm or fishing property.
But Mr. Hartle argued that part of the problem with pushing technical tax reform is people like me.
“Partly because of the lack of expertise by mass media journalists and partly because of the presumed (probably correctly) lack of interest by readers and viewers, reform is a media non-event after the immediate announcement,” he wrote.
So thank you, dear reader, for doing your part! I’ll get to work on doing mine.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Editor’s note: An earlier version of this article misstated the name of Tristan Bagri's firm. It is TSB Chartered Professional Accountant Inc., not TSB Chartered Public Accountant Inc.