Canada’s income inequality may be much worse than statistics suggest, because Canada’s biggest earners are hiding their actual incomes by incorporating themselves, says a new study.
Recent measures of income inequality have shown an increase in Canada over the past few decades, but not nearly to the same extent as in the U.S.
According to StatsCan’s analysis of National Household Survey data, the average income among Canada’s top one per cent of earners was $381,300 in 2010.
But that number is actually closer to $500,200, according to a new study to be presented at a tax conference at the University of Waterloo this week.
The study, from University of Ottawa professor Michael Wolfson, McMaster University’s Mike Veall and York University’s Neil Brooks, says the biggest earners commonly set up what are known as Canadian-controlled private corporations (CCPCs), essentially taking advantage of lower business tax rates while sheltering their income from higher individual tax rates.
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Estimates of income inequality are drawn from tax collection data. If earnings are not reported as individual income, they won’t be reflected in inequality studies.
“As a result, it is possible that the widely publicized data on the share of the top one per cent in Canada, and its trend, are significantly biased,” the study concludes.
The study found incomes of the top one per cent were underestimated by one quarter. Incomes of the top 0.1 per cent were some 55 per cent higher when accounting for CCPCs. For the truly super-rich, the top 0.01 per cent, incomes were 71 per cent higher when taking private corporations into account.
The authors argue CCPCs distort comparisons of income inequality, because such corporations are less common elsewhere, such as the U.S., where “individual income tax returns provide a reasonably complete measure.”
Wolfson, Veall and Brooks compared anonymized individual income tax returns with those filers’ corporate tax returns to see how much of their income was paid indirectly through CCPCs.
The study found the higher one’s income, the likelier someone is to set up these corporations. Between 65 per cent and 80 per cent of income tax filers in the top 0.01 per cent of earners were CCPC owners between 2001 and 2011, the study found. Only 5 per cent of the bottom half of earners owned one.
While earlier research has suggested there has been little growth in income inequality since the Great Recession of half a decade ago, the new study finds the opposite.
“The trend in top income shares since the Great Recession using conventional data is rather flat, but is upwards when private corporation income” is added, the study said.