THE BLOG

Let's Hope Tax Fairness Is on the Federal Budget's Horizon

02/09/2014 11:23 EST | Updated 04/11/2014 05:59 EDT

The contents of the federal budget is an annual guessing game. This year the Conservative government has deliberately set out to lower expectations, preferring to save their goodies for next year's pre-election budget.

But a recent KPMG report has suggested there might be further measures to close tax loopholes and curb abuse of tax havens.

Analysts at KPMG and the tax fairness watchdogs have both cited recent recommendations of the House of Commons Finance Committee which unanimously urged Finance Minister Jim Flaherty to "close tax loopholes that allow select taxpayers to avoid paying their fair share of tax" and called for identifying ways that would "better equip the Canada Revenue Agency to combat tax evasion."

A recommendation like that does not usually get all-party endorsement without a signal from the Finance Minister that it is something that he takes seriously.

It is about time.

Federal and provincial budgets lose $20 billion a year from to tax havens and tax loopholes. That $20 billion could be paying for education, health care, rail and food inspections. Instead it has found its way into offshore bank accounts and the pockets of the super-rich who have the resources to play the tax loophole game.

Canada may have one of the lowest corporate tax rates in the G8, but this hasn't stopped multinationals from shifting profits to tax havens to lower their taxes even further. High profile Canadian companies like Cameco, the Royal Bank and Canadian Tire are part of a global trend of shifting profits to subsidiaries in tax havens. Countries like Barbados and the Cayman Islands now receive 25 per cent of all Canadian direct investment abroad. It's a complicated shell game that sometimes crosses the line on what is allowed by tax law.

But the existing tax laws provide plenty of room for those who choose to game the system. And the chances of getting caught are slim given the lay-off decimated Canada Revenue Agency's limited ability to go after tax cheats using tax havens.

Trouble is, corporate tax cuts and tax avoidance has become counter-productive, even for Canadian business. Quality education and training, health care, the legal system and infrastructure are key to Canadian business' global competitiveness. Reduced government revenue, at all levels, means we are falling behind other countries, undermining Canadian business' ability to compete on the global stage.

Last year's budget included several measures to combat tax haven abuses, including setting up a snitch line and rewards for information on those using tax havens to avoid paying their taxes. Good first steps, but far behind what other countries are doing.

Canada has to step up its game.

While some of the measures needed will require international action, there are further steps Canada could take on its own.

The government could boost the capacity of the Canada Revenue Agency's International Audit Program and the Aggressive Tax Planning Program. It could provide information needed by the Parliamentary Budget Office to complete a tax gap estimate that could help inform the government on how best to deploy tax enforcement efforts. And it could tighten the tax law by amending the General Anti-Avoidance Rule to require that courts take into account the economic substance of any tax haven based subsidiary.

Tax havens aren't the only challenge that Flaherty needs to address. The Income Tax Act is nearly 2,700 pages long -- filled with special tax credits and loopholes geared towards specific groups. Many of these tax loopholes have outlived their usefulness and most of them unfairly favour the rich.

One of the most outrageous is the stock option deduction. A quick look at the portfolios of five of Canada's top CEOs shows they stand to collect $327 million by using this deduction which effectively makes 50 per cent of their stock option income tax free. Stock options account for nearly 25 per cent of CEO compensation at Canada's top 60 publicly-traded companies. It not only costs federal and provincial governments over a billion dollars a year in lost revenue, it is patently unfair. Those of us living paycheque to paycheque owe tax on every dollar earned.

Canada's business, regulatory and academic circles are starting to admit that rewarding executives for driving up stock values is a mistake. There's ample evidence that those short-term demands are wreaking havoc on the long-term health of companies and on the economy.

Finance Minister Flaherty knows that special treatment for the few undermines public confidence in the tax system. A look at the tax revenue crisis in Greece and Italy reminds us what happens when this happens.

Flaherty has said the government is committed to tax fairness. The few timid measures in last year's budget and the belated support of the G8 Tax Haven Action Plan are not enough to convince us that they are serious. But further measures to close unfair tax loopholes and tackle tax havens this year could show us that they mean business.