That, in the opinion of this House, the government should consider the advisability of introducing amendments to the Income Tax Act so that taxpayers whose income may fluctuate from one year to the next would be able to average their income over five years.
Madam Speaker, I introduced this motion some time ago and it was drawn within the last year. The reasons for the motion are fairly clear-cut. It is based on the assumption that the Canadian economy is much more diverse than what some of our policy makers perceive it to be over the last number of years.
We still have literally hundreds of thousands of individuals who are basically self-employed, who work to fulfil a dream of producing what they want to produce on the hope and the assumption that the price or the value of that production will go up or on the hope that they will eventually be able to produce enough of the product to make it an economically viable entity.
While the Canadian economy may have become more industrial and more global, there are still many people who work on this basis. They are farmers, fishermen, real estate brokers, builders, prospectors, architects, artists, musicians and a host of others who sometimes work years without any real remuneration. Eventually the big income year comes and they have in the past been encouraged in their activities which are useful to the whole of Canadian society with the concept of income averaging.
There is a great deal of income fluctuation in some of the sectors of our economy simply because of changes in production due to cyclical weather patterns whether it is in fishing, farming, forestry or a whole host of other businesses attached to those. There is also fluctuation as world prices go up and down. No matter how efficient a producer one is of wood products or agricultural products or fish products, when the world price is down one is going to show a loss.
However those people do not give up and quit simply because they have a loss in one year. They know that it will turn around. They hope that it will turn around. They realize that their activities are of use to society in general. People have to eat. People need wood for their houses and for their shelter and so they continue.
I brought the motion to the House because we once had three methods of averaging income for the diverse group of people who have up and down incomes. We had general averaging which was available to all taxpayers. At one point it was actually worked out by the department itself when incomes exceeded 120 per cent of the previous year. It was almost automatic.
We had for a while income averaging using annuity contracts which was introduced for a few years. We had five-year block averaging for farmers and fisherpeople.
I want to do a bit of past history of these with a brief explanation because in 20 minutes one cannot do justice to the issue. Prior to June 1992 general averaging, as I said, was available to all. We could go back five years and pay not only income but losses in those five years. This was finally replaced in 1982 with something called forward averaging.
However even tax experts admit this is only helpful when incomes decrease significantly so that a person can be put into a lower tax bracket. It is used by retirees, by athletes who are on their way out, by people who are pulling back rather than to encourage production which is what the original averaging plans did.
Tax experts like Beam and Laiken conclude that the forward averaging has not been a suitable replacement and has not done the job it was hoped it would do.
The income averaging annuity contracts which I mentioned were available as well were of very limited use. They were used for the collapsing of RRSPs when people reached the age of 70 or 71 years.
It was used for the utilization of capital gains provisions which were changed in 1982. It is probably not used very much
any more. It was basically a way of permitting people to adjust to the capital gains provisions in 1982 and some later budgets.
The five-year block averaging which had been available to farmers and fishermen lasted a bit longer. Although it was announced in the budget of 1982 it officially ended in 1987, which means that the last year most people could use it was 1991.
There are some exceptions to that such as in cases in which taxpayers had such low incomes they did not bother filing a return. That is not considered to be one of the years. If they did not file a return in 1988, for instance, they could go until 1992. If they happened to miss three or four years they might still be eligible to pick up on those last remnants of five-year block averaging simply because they have to use five years when they file on time. These could have high incomes or losses and they could all be averaged out.
We need to look at what the replacements for five-year block averaging were. The block averaging has been replaced with a form of forward averaging. There have been a couple of inventory rule changes that were supposed to pick up the slack for farmers and fishermen. While they are helpful in the short term they do not meet all of the advantages that were there for the five-year block averaging.
There is a mandatory inventory adjustment for people with off farm incomes. This is almost all farmers now. Last year we are told that the average family farm incomes were in the neighbourhood of $43,000, of which just over $30,000 came from off farm sources. Therefore on average on farm income was about $13,000 and roughly $30,000 came from off farm sources.
It is interesting to note that a lot of economists and government policy makers seem to think that the answer is to move to larger farms so that incomes can be generated from those larger farms. At least that is the theory. The reality is that when we look at the data the larger the farm, the larger the off farm income. It is virtually impossible to generate a family income from farms regardless of the size under the economic conditions that have existed for the last several years in Canada.
The second inventory adjustment program allows bringing in livestock, which seems to be defined by the courts as anything that is a living, sensate being, from rabbits to fish to ostriches and llamas as well as the usual horses, cows, pigs, sheep, et cetera.
Some difficulties with the program have been discovered, since a cash accounting method has been permitted. This is a good thing for most farm operators, especially individual operators who are not incorporated. That method of computing income is still available. It allows some transferring of income from one year to the next by selling in one year but collecting the money the following year for livestock sales and grains and oilseeds.
This is a possibility in most regions of the country. These provisions do not recognize the fact of wide income variations that were handled under the old five-year block averaging system. It might mitigate a sudden income surge at the end of a year and allow some of that income to be shoved into the following year. It does not take into account the large cyclical changes in prices which are then reflected in huge cyclical changes to income for farmers and fishermen which usually ride for three to five years.
The five-year averaging provision permitted people to hang in there. Perhaps they would lose money for five years, hoping they would recover in a subsequent five years. This allowed for a shifting of income over the five years and paying the tax accordingly.
The new provision does not permit that kind of flexibility and has provided some real horror stories where the lives of farmers or ranchers are interrupted. They leave an estate which can find itself paying unwarranted amounts of taxes because of the legal work that may not have been done in the proper sequence according to the department of revenue. If step a is taken before step b the department will double tax.
Paying taxes should not depend on a chance happening initiated unwittingly by so-called professionals acting on behalf of taxpayers or their estates. Rules should be as simple and as clear as is possible. The block averaging is relatively simple in its concept, in that it applies to the total income of the taxpayer and not just the part that exceeded a certain threshold amount. It permits a complete levelling of net incomes over the averaging period, including the offsetting of losses within the period against profits.
Prior to its demise in 1982 block averaging had existed since 1946. It had accomplished a fairly progressive and widespread growth in the economy. It should be used again in the 1990s in recognition of the continued need in our country for the recognition that there is a wide and diverse choice of economic activities that Canadians choose to be engaged in, or are sometimes forced into, which recognizes that some necessary and crucial economic activities have periods of poor returns but that society must permit some recognition through the tax system we continue to need that we need these people for the smooth and efficient working of our society in general.
Most of the groups I have mentioned in regard to tax averaging are not eligible for most of the so-called safety nets that our society takes pride in providing. Most of them are self-employed individuals ineligible for unemployment insurance benefits. Most do not quality for welfare even though their
incomes are definitely poverty level from parts of their income cycle, sometimes for three to five years.
I argue that the government should consider the advisability of reintroducing income averaging provisions once again to recognize that fluctuating incomes are a reality for a great many productive individuals in our Canadian system. Fair treatment demands that it be given a higher priority if Canada is once again to flourish.