Five Year Tax Average
Res #: 32-11A
Responses Received: No
Departments: Finance Canada
WHEREAS producers’ yearly gross and net income can vary greatly due to weather and volatile markets from one year to the next; and
WHEREAS weather conditions can vary from one area of the province to another, having a great impact on production; and
WHEREAS both Provincial and Federal Governments have a hard time coming up with programs to help offset these hardships, and no one program can fit all: and
WHEREAS a farmer’s income is not what a producer makes in any one year, but more or less over a five- or ten-year basis, if not over his total farming career;
BE IT RESOLVED that SARM lobby for the return of the financial tool of a five-year tax average would help a producer in managing his taxable income.
Response from Honourable James M. Flaherty, P.C., M.P., Minister of Finance:
Under the Income Tax Act, income is generally taxed in the year in which it is received. While the progressive nature of the tax system can result in a higher tax liability in a given year when large amounts are received, the income averaging measures used in the past to address this issue raised a number of concerns.
There are many difficulties associated with any form of income averaging, including concerns over complexity, fairness, and revenue costs. Any tax provision involving the re-computation of tax liabilities over several years is complex and can lead to unintended results.
The historical experience with general averaging and forward-averaging provisions helps illustrate these difficulties. Under the general-averaging mechanism available from 1972 to 1981, there was an automatic income averaging whenever income increased sufficiently from an earlier base. General averaging proved very costly for governments and often led to unintended benefits, especially for taxpayers whose income was rising from year to year.
General averaging was replaced by forward averaging in 1982. The forward-averaging election had the potential to reduce the overall tax liability for tax years in which income was unusually high but was very complex, benefited mostly higher-income taxpayers, and often produced unfavourable results for taxpayers who elected to use this approach.
Forward averaging was eliminated as part of the 1988 tax reform, since fewer tax brackets and smaller spreads between marginal tax rates reduced the need for such mechanisms.
This historical experience demonstrates the importance of keeping the tax system consistent regarding the reporting of income. Moreover, ad hoc measures to provide relief in particular cases would result in pressure for more general-averaging mechanisms from other groups with fluctuating incomes.
In conclusion, I would note that actions taken by our Government since 2006 will provide about $220 billion of tax relief for individuals, families and businesses over 2008-09 and the following five fiscal years. In particular, farmers can benefit from a preferential tax treatment on government contributions to AgriInvest accounts. AgriInvest accounts help agricultural producers manage small income declines, and mitigate market risks. Government contributions to AgriInvest accounts – in addition to the tax deferral accorded to these contributions and any earned interest- represent a substantial benefit to farmers.
I appreciate being made aware of your views on this matter. Tax policy is constantly under review by our Government, and your input contributes to our ongoing efforts to ensure that the tax system is as fair and effective as possible.