Closing Tax Loopholes deferred
Spooked by what U.S. President Donald Trump might do on taxes in the United States, the Liberal government has deferred meaningful action on closing unfair and ineffective tax loopholes in this year's federal budget.
Several months ago, Finance Minister Bill Morneau said he planned to close at least $3 billion worth of tax loopholes. Canadians for Tax Fairness had identified $16 billion worth of unfair and ineffective tax loopholes that could be axed.
Perhaps the most outrageous was the stock option loophole which annually hives off $800 million to Canada's wealthy CEOs by giving them a 50 per cent tax discount on their cashed stocks. During the election campaign, Prime Minister Justin Trudeau repeatedly promised to get rid of it. That did not happen -- for the second year in a row.
Instead, Federal Budget 2017 closed a few small loopholes such as the Public Transit Tax Credit. The total savings amounts to $215 million -- compare that to the $16 billion that could have been raised.
Neither did they act on the capital gains loophole that provides a 50 per cent tax discount to those with investment income. This costs the government $10 billion that could have boosted their inadequate investment in child care. It would have had the added benefit of creating more jobs, boosting participation of women in the labour force and increasing tax revenue over time.
Budget 2017 shows neither vision nor commitment to the government's promise for a simpler and fairer tax system.
Budgets are about priorities. When 92 per cent of the benefit of this protected loophole goes to the top 10 per cent, it makes one question their stated commitment to helping the middle class.
It is true that Trump's protectionist trade policies could set off a global trade war. His elimination of financial regulation could precipitate another financial meltdown. Both could trigger a global recession that would hit Canada's economy and tax revenue. But the threat of Trump's tax-cut agenda is over-blown, and it is questionable whether the Trump administration will be able to get them through a divided congress given his failed efforts so far to replace Obamacare.
Canada's statutory corporate tax rates are 13 points lower than the U.S. and our effective corporate tax rate (or the taxes corporations pay after taking advantage of all the generous depreciation allowances and tax credits) at only 8.5 per cent are one of the lowest rates in the OECD and 10 points below U.S. rates. With big increases in military spending that Trump wants to do and the cost of building a wall to pay for, he will not be able to lower corporate taxes in the U.S. below Canadian rates.
Changes in tax treatment of capital gains or stock options would not have a significant impact on Canadian corporate competitiveness. This is a lame excuse for inaction on this issue.
Budget 2017 shows neither vision nor commitment to the government's promise for a simpler and fairer tax system.
Finance Minister Bill Morneau speaks to journalists after announcing the date of the federal budget on Parliament Hill in Ottawa, March 7, 2017. (Photo: Chris Wattie/Reuters)
Leveling the playing field on e-commerce
It seems random that Uber is the only e-commerce company to be affected by the budget. Google, Facebook, Airbnb and other foreign e-commerce giants continue to be exempted from collecting GST/HST on advertising sales or sales of services in Canada. Uber will be required to do so.
Canadian media outlets are required to collect HST/GST. They are losing advertising revenue and it has caused job losses in the Canadian media and cultural sectors. Leveling the digital playing field by requiring Google and Facebook and other foreign online companies to collect HST/GST and pay corporate income taxes would have enabled Canadian media companies to compete on an equal playing field and stem the loss of jobs in media and the cultural sector. It would have also raised $ 1 billion a year.
More on Tackling Tax Havens
The one area where the Liberal government continues to move forward is in tackling tax havens. The Canada Revenue Agency got $521M for tax-haven enforcement efforts. This is in addition to $444 million earmarked in 2016. Almost $2 billion in new revenue is expected from these efforts over five years.
The government will require that tax facilitators and advisers disclose tax avoidance transactions to the CRA. This was one of the recommendations from the Parliamentary Finance Committee hearings on the KPMG tax scam. This will hopefully prevent tax scams such as KPMG's Isle of Man scandal.
Budget 2017 also commits the government to strengthening corporate and beneficial ownership transparency. This would provide safeguards against money laundering, terrorist financing, and tax evasion. It moves Canada closer to its commitment to international standards.
Morneau has also committed that "The government will collaborate with provinces and territories to put in place a national strategy to strengthen the transparency of legal persons and legal arrangements and improve the availability of beneficial ownership information."
Corporate Tax Dodging
This government is to be commended for targeting wealthy individuals using tax havens. The measures to date are paying off so they have decided to do more.
But individual tax dodging comprises only a third of the tax-haven problem. Most of that activity is blatantly illegal and easier to track.
The bigger problem is Canadian multinationals shifting profits to subsidiaries in tax havens. This accounts for two-thirds of haven-related tax loss. Much of what corporations get away with is technically legal. Tackling this challenge requires changes to weak corporate tax laws. Canada should start by requiring that corporations prove economic substance for any subsidiary in a tax haven to qualify as a separate corporate entity for tax purposes. This is a critical step if this government is serious about tackling tax havens.
How long before regular taxpayers conclude that the promise of fair system was an empty one?
One Step Forward, Two Steps Back
It is commendable that the Liberal government has taken steps to tackle tax havens. Their efforts are producing results and they are on track to raise almost $2 billion over five years. It is a tax policy that Canadians deserve.
But they failed to take any meaningful action on closing tax loopholes or leveling the digital playing field.
Closing unfair and ineffective tax loopholes could have raised $16 billion. They failed to deliver, again, on their election promise to end the stock options deduction that gives almost a billion dollars to some of the richest people in Canada. They failed to make the tax system simpler or fairer.
The finance minister did promise to study, and possibly act, on loopholes sometime in the future. But just how long should Canadians be expected to wait? How long before regular taxpayers conclude that the promise of fair system was an empty one?
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Highlights from the 2017 federal budget tabled Wednesday, March 22 by Finance Minister Bill Morneau: (Source: The Canadian Press)
Employment insurance premiums are going up five cents to $1.68 per every $100 of insurable earnings, up from $1.63 — the maximum allowable increase under the Employment Insurance Act. Read more here. (Source: The Canadian Press)
The deficit is at $23 billion, down from $25.1 billion in the last fiscal update, and is projected to reach $28.5 billion for 2017-18 — including a $3 billion contingency fund — before declining to $18.8 billion in 2021-22. Read more here. (Source: The Canadian Press)
The 71-year-old Canada Savings Bond program, first established in 1946, is no longer cost effective and is being phased out. Read more here. (Source: The Canadian Press)
Higher taxes on alcohol and tobacco products: the excise duty rate on cigarettes goes up to $21.56 per carton of smokes from $21.03, while the rates on alcohol are going up two per cent. Both will be adjusted every April 1 starting next year, based on the consumer price index. Read more here. (Source: The Canadian Press)
The public transit tax credit, which allows the cost of transit passes to be deducted, is being eliminated effective July 1. Read more here. (Source: The Canadian Press)
The budget dedicates $11.2 billion to cities and provinces for affordable housing over 10 years as part of the second wave of the government's infrastructure program, $5 billion of which is to encourage housing providers to pool their resources with private partners to pay for new projects. Read more here. (Source: The Canadian Press)
An "innovation and skills plan'' to foster high-tech growth in six sectors: advanced manufacturing, agri-food, clean technology, digital industries, health/bio-sciences and clean resources Read more here. (Source: The Canadian Press)
$523.9 million over five years to prevent tax evasion and improve tax compliance, including more auditors, a crackdown on high-risk avoidance cases and better investigative efforts. Read more here. (Source: The Canadian Press)
$7 billion in spending over 10 years for Canadian families, including 40,000 new subsidized daycare spaces across Canada by 2019, extended parental leave and allowing expectant mothers to claim maternity benefits 12 weeks before their due date. Read more here. (Source: The Canadian Press)
$2.7 billion over six years for labour market transfer agreements with the provinces and territories to modernize training and job supports, to help those looking for work to upgrade skills, gain experience, start a business or get employment counselling. Read more here. (Source: The Canadian Press)
$59.8 million over four years, beginning in 2018-19, to make student loans and grants more readily available for part-time students, and $107.4 million over the same period for assist students with dependent children. $287.2 million over three years, starting in 2018-19, for a pilot project to facilitate adult-student access to student loans and grants. Read more here. (Source: The Canadian Press)
A national database of all housing properties in Canada, known as the Housing Statistics Framework, to track details on purchases, sales, demographics and financing, as well as foreign ownership. Read more here. (Source: The Canadian Press)
$400 million over three years through the Business Development Bank of Canada for a "venture capital catalyst initiative'' to make more venture capital available to Canadian entrepreneurs. Read more here. (Source: The Canadian Press)
A comprehensive spending review of "at least three federal departments,'' to be named later, to eliminate waste and inefficiencies, as well as a three-year review of federal assets and an audit of existing innovation and clean-tech programs. Read more here. (Source: The Canadian Press)
$225 million over four years, starting in 2018-19, for a new organization to support skills development and measurement. Read more here. (Source: The Canadian Press)
$395.5 million over three years for the youth employment strategy. Read more here. (Source: The Canadian Press)
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