Rankings report: Canada

Canadian tax legislation proves more burden than blessing

Canada is finding itself bogged down by staff shortages and an increasingly complex tax system. Some creative thinking and radical reform will be required to make it agile again. Che Golden reports.

In 2022, the Canadian accounting industry was stretched to its limit. Demand for accounting services was at an all-time high, yet there were few staff to meet the demand as the skills shortage created massive problems.  Firms were starting to see reverse fee pressure, which meant that low profit clients were being hit with large fee increases or told to find new auditors. Salaries skyrocketed and retention was becoming as big a focus for firms as recruitment.

Apart from wage inflation cooling, none of these problems have gone away, with the added burden of an increasingly complex tax system, a stagnating economy and a government push to open new markets such as ESG, with no new accountants to meet the demand.

One of the most shocking stories in Canada in 2023 was Ontario and Quebec splitting from CPA Canada, a move that CPA Canada says puts the profession at risk.

CPA Canada was created in 2013 to unify the various professional accounting organisations. It is responsible for standards and co-ordinating professional education and exams. In June 2023, CPA Ontario and the Quebec CPA Order announced they would be exiting their agreement with CPA Canada, blaming disagreements over governance.

One key issue raised by CPA Ontario and the Quebec CPA Order was a concern about CPA Canada’s financial transparency regarding education programs. CPA Ontario also cited concerns over the review after a 2019 technological failure that disrupted the common final exams and said CPA Canada had challenged their legislative role.

Both organisations have said that the unification of the CPA profession is not at risk, but there is currently no agreement on how the exams and educational programs will work after the split. The materials for both are the intellectual property of CPA Canada.

While the Canadian accounting industry waits to see how the split will affect regulation, the skills shortage continues to be the biggest immediate problem.

“The business environment is very healthy other than it is getting harder to sell practices,” said Frank Fazzari, partner at Fazzari and Partners LLP, an MGI Worldwide member firm. “Fee increases have slowed. There is no fee pressures given that it is so hard to find accountants to take on new work. Demand is very good, but special work has slowed down. Fees are stable and we are hesitant to give big increases this year.”

While a skills shortage has dogged the accountancy industry for a number of years, growing discontent amongst the Canadian workforce looks set to create a perfect storm across a wide range of sectors. A new report says 71% of Canadian workers want to leave their jobs this year and look for better opportunities.

The report by recruitment firm Hays found that more than half of Canadian employees feel more stressed this year than last year, and nearly half are unmotivated to work. Hays says the survey revealed growing discontent among workers over pay, roles and benefits.

It says employers are struggling to retain and motivate a demoralised and disengaged workforce fed up with wages that lag behind inflation. Hays says workers need more than a raise to stay engaged — they also want other benefits and incentives such as vacation days, professional development and promotions.

It is not enough to offer better salaries to accounting recruits. Companies need to change their approach to how their staff work if they want to attract the right people. The Robert Half 2024 Salary Guide found that firms that are successful in recruiting financial and accounting staff are offering flexibility in when and where employees work, as more professionals look to improve their work-life balance. Forty three per cent of managers said a strong job candidate turned down their offer because the company could not accommodate their remote work expectations.

Frank Fazzari, Partner at Fazzari and Partners LLP, an MGI Worldwide member firm

While firms in other countries have seen a number of new growth areas, tax dominates in Canada. “Our priorities are tax, tax and tax,” said Fazarri. “Compliance is more difficult and requires more of our time - good for accountants who are prepared and can provide that service.”

Canada over the past few years has released quite a lot of new tax legislation, making the system more complicated and restricted. Recent examples include the split income rules, restrictions on the use of the small business deduction, complex restrictions on the ability to deduct interest and numerous changes to taxing foreign sourced income.

While you might think that a complex system would result in a windfall for accountants, whose services are in high demand from clients who need guiding through the labyrinth, these changes have been placing unnecessary stress on accounting professionals. For instance, the new trust reporting rules require tax preparers to assess various legal relationships, which many accountants are not trained to do, to determine if reporting is required. The new Underused Housing Tax Act also requires tax preparers to assess various legal relationships and file returns that can be complex to prepare.

According to Kim Moody, a former chair of the Canadian Tax Foundation, the Canadian tax system is very close to a tipping point of massive non-compliance in a number of areas of tax law, because accountants and their clients find it difficult to make sense of new legislation. Moody is calling for wide scale tax reform, fearing that the current system, coupled with a decline in the number of accountants, will eventually break down completely.

Aaron Wudrick, domestic policy director at the Macdonald-Laurier Institute, also supports immediate tax reform, as he feels it is one of the best ways to protect a sluggish Canadian economy.

He argues that the any reform to the current system needs to be based on two things – competitiveness and neutrality.  A competitive tax code is one that maintains low marginal tax rates - countries with lower tax rates on investments will attract more capital, leading to accelerated economic growth.

High tax rates drive investment away. He has pointed out that research from the OECD reinforces the idea that corporate taxes have the most negative impact on economic growth, with personal income taxes and consumption taxes being somewhat less harmful.

A neutral tax code aims to generate the most revenue with minimal economic distortions. As tax systems become more complex, as Canada’s has, they become less neutral. Wudrick argues that a competitive, neutral and simple tax code can nurture sustainable economic growth and investment while simultaneously funding essential government priorities.

As in the US, recruitment drove Canadian M&A activity in 2023. Large firms are acquiring talent by acquiring smaller firms, while smaller firms are trying to do the same thing at their level.  “Larger and regional firms getting larger,” said Fazarri. “Smaller firms like ours with about 35 people are getting fewer and fewer.”

Dealmaking in Canada will pick up this year as private equity funds look to deploy capital, family-owned businesses look to find new partners and economic pressures begin to ease, says KPMG Canada.

According to KPMG, M&A activity slowed down in 2023 as high interest rates dented confidence. Interest rates are starting to come down, but the company predicted that one of the biggest drivers this year will be private equity activity. Neil Blair, president of KPMG Corporate Finance, claims that a combination of a slower pace of portfolio company exits and a slower rate of capital deployment in 2023 in the private equity world will drive activity in 2024. Private equity funds continue to sit on record amounts of capital and are under increasing pressure to return capital to investors through the sale of portfolio companies.

Blair predicts that private equity funds and corporates will be looking for opportunities in the middle market in particular, as an increasing number of business owners retire.

ESG has become a big focus for the Canadian government over the last year, opening a new market for local accounting firms. In March 2023, the Sustainable Finance Action Council (SFAC) in the Department of Finance Canda released its Taxonomy Roadmap Report, featuring a framework to establish standardised definitions of climate-compatible investments, similar to the EU Taxonomy on Sustainable Activities. The Canadian Green and Transition Financial Taxonomy framework, backed by Canada’s 25 largest financial institutions, is being designed to help align capital flows and investments with Canada’s climate targets.

Climate investment has become a matter of urgency for Canada. According to the Department of Finance, Canada needs to scale up climate investment rapidly to achieve a net-zero economy by 2050. By some estimates, Canada’s climate investment gap is as high as CA 115 billion annually.

Canada's CSA (Canadian Standards Association) plans to start requiring ESG reporting and climate disclosures from large Canadian banks, insurance companies, and federally regulated financial institutions in 2024. Canadian listed companies also need to comply with certain ESG-related provisions, such as gender diversity disclosure related to board composition.

From 2024 onward, eligible banks, insurance companies, and federally regulated financial institutions will need to provide ESG disclosures on their climate-related risk.

While demand is good for now, Canada seems to be at a crossroads. It is going to take a lot of effort to keep the country on track for growth – now is not a good time for its accountants to be divided. 

Main Image: Toronto, Canada. Credit: V.Ben via Shutterstock