In a recent commentary, Canadian tax expert Kim Moody delves into the motivations behind tax evasion, arguing that the system itself often drives a small minority of citizens underground. His analysis stems from a personal experience at a favourite "cash-only" restaurant, which prompted him to consider the signals such policies send and the broader reasons some Canadians risk serious penalties.
The Psychology of High Marginal Tax Rates
Moody identifies excessively high personal tax rates as a primary motivator for evasion. He notes that eight of Canada's thirteen provinces and territories have top marginal rates exceeding 50 percent. To support his argument, he references the landmark 1966 Royal Commission on Taxation, which warned that rates above 50 percent create a "psychological barrier" to greater effort, saving, and profitable investment.
"That almost 60-year-old comment is just as valid today as it was back then," Moody asserts, suggesting that when the state claims more than half of a potential gain, it can incentivize hiding income.
Onerous Compliance and Poorly Targeted Rules
Beyond high rates, Moody points to a complex and burdensome compliance regime that exhausts average taxpayers and professionals alike. He criticizes sprawling foreign reporting requirements and new mandatory disclosure rules, arguing they primarily burden compliant taxpayers rather than deter determined evaders.
He also highlights specific policies that he believes encourage non-compliance. These include punitive measures like the short-term rental rules that disallow expense deductions for some owners, and the notoriously complex Tax on Split Income (TOSI) rules. Moody contends that TOSI, aimed at preventing income splitting, often ensnares legitimate family business arrangements and is too complicated for many advisors, leading to underreporting or informal workarounds.
A Call for Simplicity and Systemic Reform
As a solution, Moody advocates for a simpler tax filing system, potentially including automatic filing for many Canadians. Given that the government already possesses data like employment and pension earnings, he questions why taxpayers must navigate a complex system that can inadvertently encourage omitting other income.
Moody emphasizes that tax evasion is not a pervasive issue in Canada, estimating that likely less than three percent of taxpayers willingly engage in such criminal behaviour. However, understanding the motivations—high rates, complexity, and poorly designed rules—is crucial for designing better policy. The goal, he concludes, should be a system that rewards effort and contribution, rather than one that pushes people toward cash-only shadows.
