When Finance Minister Jim Flaherty stood to deliver his budget speech and promised that the government would, "keep closing tax loopholes so every Canadian pays their fair share," tax fairness activists cheered. And when we found that Budget 2014 had a section titled, "Improving the Fairness and Integrity of the Tax System, and Strengthening Tax Compliance," things really did look promising.
But this budget was a $20-billion lost opportunity.
Careful reading of the document shows there were few specifics to back up the spin. A few small tax perks were closed. But the revenue resulting from tweaking non-resident trusts and a handful of other insider loopholes are estimated at only $50 to $80 million in 2015-16. It makes one wonder if Jim Flaherty is committed to the business of fair taxation.
The most expensive and most egregious tax loopholes such as the Stock Option Deduction, Capital Gain Deduction and Business Entertainment Deduction have not been touched. These three tax loopholes cost Canadians $5 billion a year. To add insult to injury they almost exclusively benefit the wealthy. They enable top corporate executives and rich investors to pay tax on only half their income received in the form of stock options and capital gains, while working people must pay tax on all their employment income.
There were also rumours that Federal Budget 2014 would tackle tax havens. It is perplexing that the minister avoided any concrete action on this file. Only a few months ago he got an all-party unanimous report recommending pro-active measures.
Instead we got a promise of "further public consultations" on potential measures, to combat "treaty shopping" and "international tax planning by multinational enterprises." Last year's budget had already made a call for input on the best ways to combat treaty shopping. A whole year later, it is not overly ambitious to expect some specific measures that would prevent corporations and rich individuals from abusing Canada's tax treaties to reduce taxes.
There are numerous gaps in the Canadian Tax Code that allow companies to shift their profits to low tax countries. Other countries such as the U.S, U.K and Australia have recognized the need to plug such gaps and stay a step ahead of the aggressive tax practices that have plagued the global economy. The amount of Canadian money in known tax havens is at an all-time high and the federal and provincial governments lose at least $10 billion from this each year. How high does that price tag have to get before Minister Flaherty acts?
To be fair, there were a few small positive steps taken. The Budget 2014 did promise to introduce legislation to crack down on tax avoidance using insurance swaps and offshore regulated banks. These measures could raise $300 million a year.
There was also a small but important nod to how the Canada Revenue Agency administers the GST/HST tax credit. If the proposed measure is approved, low-income individuals will no longer have to apply for credit. Instead the credit will be awarded based on filed tax returns. By using this opt-in method low income individuals who overlook the box, will no longer miss out of this very important tax credit that helps to mitigate what would otherwise be a very regressive tax.
A federal budget is an opportunity for vision and leadership and sends an important message to Canadians about fairness.
The lack of specific measures to close loopholes, clamp down on tax havens and modernize other tax measures means another year of lost revenues and lost opportunity.
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