03/23/2017 09:24 EDT | Updated 03/23/2017 09:24 EDT

Liberals Fall Short On Promise To Close Tax Loopholes, Again

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.

federal budget morneau

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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Canada Budget 2017 Highlights