01/05/2017 11:47 EST | Updated 01/05/2017 11:53 EST

Close Loophole Bankrolling CEO Salaries With Taxpayers' Money

There's been a lot of outrage over a new report that shows that Canada's wealthiest CEOs are paid 193 times more than the average Canadian. But there's an even darker side to the story. Ordinary taxpayers are subsidizing those multimillion-dollar salaries, courtesy of loopholes in our tax system.

The stock option loophole is the most blatant example of how this happens. It gives tax-free status to half of all income earned when a CEO or corporate board member cashes in stocks options. And according to the report by the Canadian Centre for Policy Alternatives, many of those CEOs look to million-dollar stock option payouts to fatten their contracts.

Not surprisingly, it is a popular practice in Canada's top publicly traded companies. Nearly a quarter of executive compensation is tied to some kind of stock option deal and it leads to payouts that high-profile money manager Stephen Jarislowsky calls "absolutely obscene."

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Michael Pearson, CEO of Valeant Pharmaceuticals International, is Canada's top-paid CEO according to a Canadian Centre for Policy Alternatives' January 2017 report. (Photo: Andrew Harrer/Bloomberg via Getty Images)

The Canadian government continues to forfeit hundreds of millions in tax revenue by keeping this loophole on the books. Paying for the stock option loophole is considered a government expenditure. It is a budgeting decision, just like money spent on health care, building bridges or funding Old Age Security.

And while the Liberal government continues to shield stock option rules, we are told that pharmacare, child care or free tuition are beyond what Canada can afford. No one questions the economic returns of investing in our children and our health. But what's the return on investment for the stock option rule? It screams double standard.

Ottawa has come close to getting rid of this tax perk.

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Finance Minister Bill Morneau on Oct. 31, 2016. (Photo: REUTERS/Chris Wattie)

During the last election, the Liberals promised to fully tax individual stock options gains exceeding $100,000. They branded it as their commitment to increase taxes on the wealthiest Canadians. Voters believed them. But then a flurry of lobbying just before the 2016 budget broke Finance Minister Bill Morneau's resolve.

Those lobbyists claimed that stock options are a key tool for successful start-ups. A new enterprise is more likely to attract and retain high-powered talent, they said, if it can offer stock options in its early years, when it's unable to pay high salaries.

Maybe. But hold on a moment...

For them and their accountants, this is simply a tool to avoid paying tax on what they earn.

The top users of the stock option loophole are not Canada's next big tech innovators or job creators. Instead, the list reads like the who's who of the one per cent, including real estate developers, the head of Canadian Pacific Railways and an energy firm heavily involved in pipeline development.

The CEO of Cameco, a corporation currently being taken to court by the Canada Revenue Agency for using a tax haven to avoid corporate tax, is also the owner of $1.3 million in stock options.

The heads of Canada's five big banks have $6 million in options among them. There's nothing remotely "start-up" about any of those operations. These are long-established millionaires who are not taking money out of their pockets to invest in a new idea. For them and their accountants, this is simply a tool to avoid paying tax on what they earn.

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Tax loopholes help CEOs like Cameco's Hunter Harrison get rich. (Photo: REUTERS/David Stobbe)

And guess who makes up the difference?

It isn't just the stock options backtracking that is hurting regular taxpayers. Last year the finance minister hiked the top marginal tax rate for those with taxable income over $200,000. It was branded as the fulfillment of a Liberal promise to end tax breaks for the wealthy. It made some headlines. But did it really change anything?

When a government changes the tax rate but protects a multitude of loopholes that only the wealthy can access, it changes nothing.

Most of Canada's very wealthy find all sorts of ways to avoid paying the top marginal rate on their income. And the very wealthy get much of their income from investments, which also benefit from the 50 per cent capital gains discount on taxes owed.

When a government changes the tax rate but protects a multitude of loopholes that only the wealthy can access, it changes nothing. And it sends a message to Canadians about its commitment to fairness, transparency and just plain common sense. If a $400-an-hour tax lawyer can make it worthwhile to take advantage of loopholes, tax havens and other dodges, there is something seriously wrong.

Experts and citizens' groups alike have urged the government to conduct a serious review of the tax code so that it can be modernized, simplified and made fairer. It will take years.

In the meantime, how about taxing the stock option loophole for CEOs who earn more in three days than the rest of us earn in a year? It would be a good start.

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