Our tax system is riddled with unfair and ineffective loopholes that cost federal and provincial governments a lot of money, complicate the tax system and disproportionately benefit higher income taxpayers.
We should close these tax loopholes because they are:
Costly
Tax loopholes cost federal and provincial governments over $20 billion annually. That's money that could be invested in quality public services and prevent cuts to programs that make Canada a safe and healthy place to live.
Unfair
Loopholes undermine tax fairness by providing benefits to some taxpayers and not to others. Many of the loopholes or tax breaks disproportionately benefit the wealthiest and increase income inequality.
Complex
Tax loopholes also make the tax system difficult for ordinary taxpayers to navigate. You shouldn't have to pay for an expensive accountant or professional tax expert to figure out what deductions you are entitled to claim on your taxes.
Ineffective
Many tax loopholes do not achieve their stated purpose. The Public Transit Tax Credit, for example, did not increase ridership. The Children's Fitness Tax Credit does not help the poorer children who need help the most because it is a non-refundable tax credit and therefore only available to families with taxable income. Our taxes are better invested in building public transit or funding fitness programs in the community that would benefit all children.
We Need Tax Fairness
Top income earners with taxable income of over $135,000 are taxed at 29 per cent -- about average for an industrialized country. But because they have a lot more tax loopholes they can take advantage of, the average income tax rate paid by the richest 1 per cent was only 19.7 per cent. How is that fair?
What's worse is that when other taxes such as GST/HST and property taxes are taken into account, the richest 1 per cent actually pay a smaller share of their income in taxes than anyone else -- even the poorest 10 per cent!
It is time we closed these tax loopholes.
Let's start with the most outrageous:
1. The Stock Option Deduction costs federal government and provincial governments a total of over $1 billion annually. CEOs and directors of Canadians banks, oil and mining companies are paid millions each year in stock options -- and this loophole allows them to pay tax at half the rate the rest of use pay.
Over 90 per cent of this benefit goes to the top 1 per cent of income earners. This tax loophole isn't just costly and unfair: it's bad for the economy as it encourages short-term and risky speculation instead of productive long-term investments, as Roger Martin, former dean of the Rotman School of Management at the University of Toronto, has pointed out.
2. Capital Gains Deduction is the costliest tax loophole. This tax measure costs the federal government over $8 billion annually and provincial governments another $4 billion on top of that, with the benefits going primarily to corporations and upper-income individuals.
You pay taxes on every dollar of income from wages but if you get income from selling investments, you pay taxes on only half the amount you earn.
Allowance could be made for inflation in calculating capital gains income. This would significantly reduce the tax rate for those selling assets or properties held for a number of years. Those with investment income would still benefit from deferral of taxes in most cases and would benefit from not having to pay payroll taxes.
A buck is a buck, regardless of how it is earned, and should be taxed equally.
3. The Business Entertainment Expense Deduction is the most abused tax loophole. It allows businesses to deduct half the cost of meals and entertainment expenses from their taxable profits. The tax law stipulates that to be eligible for this deduction actual business must be conducted at these events. But a recent survey found that this tax measure was widely abused and almost impossible to police. Corporate boxes at professional sports events are the most blatant example. Osgoode Tax Law professor Neil Brooks once said: "There is more tax fraud taking place at one Blue Jays baseball game than all the welfare fraud in Ontario in a whole year."
While trades people cheating on HST/GST payments are dealt with harshly, little or no effort is made by tax authorities to police business entertainment expense fraud. Closing this loophole can save us $400 million a year.
Tax loopholes, or tax breaks are considered to be "tax expenditures" and deserve to get as much scrutiny as actual program spending. Many have long outlived their usefulness and should be phased out.
Canadians for Tax Fairness has identified over $10 billion in savings, if some of the most unfair and ineffective tax loopholes were closed.
Sign on to support the Close Tax Loopholes campaign, learn about actions you can take and get updates at: www.closetaxloopholes.ca