OTTAWA - As the Conservatives sell their latest budgetary plan at home and abroad, Finance Minister Jim Flaherty is touting the benefits of five consecutive years of corporate tax cuts on the government's bottom line.
Flaherty told reporters in New York and Edmonton this week that government revenues from corporations continue to rise even as Ottawa cuts taxes.
"What we're seeing, despite the fact that we've reduced business taxes, is we're seeing our corporate tax revenue continue to rise. And this is further proof, if anyone needed it, that reduction of taxation creates more economic activity, more investment, more jobs," Flaherty said in Edmonton on Thursday.
But the numbers to date don't bear out Flaherty's assertion.
Ottawa collected $40.6 billion in taxes from firms during the 2007-08 fiscal year, a record high. It was also the year the Harper government began a schedule of tax cuts that saw the federal rate fall from about 22.1 per cent to the current 15 per cent.
With the onset of the recession and cut to the tax rate, revenues have yet to recover, even in non-inflation adjusted dollars. The three years following 2007-08 saw corporate tax revenues fall to $29.5 billion, $30.4 billion and $29.9 billion.
By the government's projections in this spring's budget, corporate tax revenues will start to inch up but won't approach the $40-billion mark again until 2016-17, a full nine years later and without adjusting for inflation.
What has returned to pre-slump levels, and even more, is the amount of cash corporations are holding — about $250 billion more than in 2006.
Economist Jim Stanford of the Canadian Auto Workers says Flaherty is repeating the disproved Laffer curve argument popularized by President Ronald Reagan in the 1980s, that governments can raise revenues by cutting taxes.
"It's absolute statistical nonsense," he said. "The end result has been on one side a reduction in government revenue and on the other side, an additional increase in corporate cash hoarding."
Stanford does acknowledge that the tax cuts were not primarily responsible for the plunge in corporate tax revenues starting in 2009. He said the recession was the primary reason, but added without the cuts corporate tax revenues would be about $7.5 billion higher today.
Economist Jack Mintz, a respected expert on tax policy, said his research and others suggests that to maximize revenues, the effective corporate income tax rate should be somewhere between 26 and 28 per cent. With provincial rates included, it is at about 27 per cent today in Canada.
He argues that, discounting fluctuations for both booms and busts in the economy, corporate taxes as a share of the economy have not fallen or risen appreciably since 2000, even though the combined federal-provincial corporate rate was cut from 43 per cent to 27 per cent during the period.
"Why? Because multinationals are taking profits out of high tax countries like the U.S. and shifting into Canada," said Mintz, a professor of economics at the University of Calgary.
"We were on the wrong side of the Laffer curve — cutting the rate increased revenues, keeping all other factors constant."
According to Finance, even by that measure, revenues from firms have not risen as taxes have fallen, although the fall off in revenue is not as severe as the dollar figures suggest.
The data shows revenues increased from about 2.3 per cent of GDP in the late 1990s and early 2000s, to a high of 2.7 per cent in 2006-07 during the boom. When the recession hit, corporate tax revenues fell to a low of 1.8 per cent both in 2008-09 and 2010-11, the last year for which there is data.
When asked about the revenue picture to date, Flaherty's director of communications, Chisholm Pothier, said corporate tax revenues will increase going forward.
"We're leaving more money in the hands of entrepreneurs. This has made Canada the best place in the world to do business according to Forbes magazine," he said in an email response.
"Lower taxes make our economy stronger and create good, long-term jobs. What's more, corporate tax revenues will — as noted (in) Budget 2012 — increase by over 30 per cent between 2010-11 and 2016-17, even though we have reduced business taxes to 15 per cent."
This new credit was a budget measure that was designed to address criticism that the earlier Children's Fitness Tax Credit (which is still in effect) unfairly left out parents who paid for programs where the kids had to do more thinking than sweating. It provides a 15 per cent non-refundable federal tax credit on the first $500 spent on your kids' artistic, musical, recreational or cultural development in 2011. That means the tax credit is worth a maximum of $75 per child. Parents of disabled children can claim a 15 per cent tax credit on the first $1,000 of eligible spending, or a maximum of $150. To get the credit, children must be under 16 at the start of the year in which the program is taken (under 18 in the case of disabled children). To qualify, a program must be at least eight consecutive weeks in length, or, in the case of children's camps, at least five consecutive days. Receipts are a must.
If you performed at least 200 hours of service as a volunteer firefighter in 2011, you can see your tax bill reduced by up to $450 - another new non-refundable tax credit introduced in last year's federal budget. That's the net effect of a 15 per cent tax credit on the $3,000 volunteer firefighters' amount. The 200 hours doesn't have to be entirely spent fighting fires. Attending required meetings and training also qualify. Be aware that there's a big wrinkle in this tax credit for those who get an honorarium for their volunteer efforts. Currently, the first $1,000 of that honorarium is exempt from tax. But if you claim that income exemption, you won't be eligible for the volunteer firefighter's tax credit. No documents need to be filed, but the CRA says it may require claimants to provide certified proof that they actually do qualify.
This measure doesn't actually take effect until the 2012 tax year, so you won't benefit from it when filing this year. But people who will eventually benefit can file a new TD1 Personal Tax Credits Return with their employers now to reduce their withholding tax for the remainder of 2012. This credit amounts to an increase of $2,000 in the claim when a taxpayer's dependent is physically or mentally infirm. So the spouse, common-law partner or other eligible dependent claim becomes $12,780 instead of $10,780. Similarly, the claim for a disabled child becomes $4,191 rather than $2,191. The caregiver amount claim for looking after an infirm relative also goes up by $2,000.
Tax-free savings accounts were first unveiled in the 2008 federal budget and have continued to grow in popularity - in part because Canadians can put more money into them each year. If you haven't yet contributed to a "Tiff-sa," the available contribution room rose by $5,000 on Jan. 1, 2012 and now stands at $20,000. TFSA contributions can go into GICs, mutual funds, bonds, stocks or savings accounts and earn profit tax-free, but keep in mind they don't work like a bank account with a maximum balance. When you withdraw funds in one year, TFSA rules don't let you redeposit that amount until the next. In 2009, about 70,000 people withdrew money from one of their TFSA accounts and then redeposited it the same year, so the Canada Revenue Agency levied penalties of one per cent per month on redeposits that were classed as excess contributions. The government eventually relented because of the widespread confusion, and rescinded the penalties in 2010 for people who accidentally put too much into their accounts during the TFSA's debut year. The amnesty is over now, however, and savers can't expect that kind of pity from the tax collector anymore. If you want to move your money from one account or institution to another within the same calendar year, you have to use a formal transfer process that requires filling out forms and, with most banks, paying a fee.
As of the 2011 tax year, examination fees now qualify for the tuition tax credit. That is, as long as the total fees, including exam fees, amount to at least $100 and the exam is required to obtain professional status or to be licensed or certified in a profession or trade. For students enrolled full-time in a university outside Canada, the minimum length of course that qualifies for tuition, education and textbook tax credits has been lowered from 13 weeks to three weeks. The 2011 budget also loosened the restrictions on transferring investments held in one sibling's Registered Education Savings Plans (RESP) to another sibling's RESP. Under the old rules, transferring RESP investments property from one sibling's plan to another's could trigger a repayment of the Canada Education Savings Grant unless the sibling receiving the transferred investment is under the age of 21. But transfers occurring in 2011 and after will not trigger grant repayments as long as the receiving RESP was set up before the beneficiary turned 21.
As of 2011, the maximum medical expense claim of $10,000 for a dependant relative (other than for a spouse, common-law partner or a minor child) has been eliminated. Now, there's no limit. The last budget also made a change to the rules governing Registered Disability Savings Plans (RDSPs). Under the old rules, all grants and bonds paid into the plans in the previous 10 years had to be returned to Ottawa if a disability assistance payment was made to an RDSP beneficiary. Now, no repayment is necessary if a doctor certifies that a plan recipient isn't likely to survive for five years
Most tax brackets and credit amounts were raised in 2011 to account for inflation. In the case of federal tax brackets, they have been raised by 1.4 per cent from 2010's levels. Most of the basic personal amount claims have also been boosted by 1.4 per cent. The 2011 TD 1 tax forms and all of the software and online tax programs reflect the new amounts. Similarly, the thresholds at which some benefits begin to get clawed back (like Old Age Security payments) have been raised by 1.4 per cent. Some refundable tax credits, like the Canada Child Tax Benefit, have also been boosted by 1.4 per cent. Many provinces and territories have also boosted their personal tax credits by indexing factors ranging from 0.8 per cent to 2.0 per cent. But two provinces - Nova Scotia and Prince Edward Island - made no changes in their personal tax credit amounts.