This analysis of Federal Budget 2017 was prepared by Dennis Howlett, Executive Director, Canadians for Tax Fairness
Closing Tax Loopholes deferred
Spooked by what 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, the Finance Minister 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 $800million to Canada's wealthy CEOs by giving them a 50 per cent tax discount on their cashed stocks. During the election campaign, the Prime Minister 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 including 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% 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.
Budgets are about priorities. When 92% of the benefit of this protected loophole goes to the top 10% it makes one question their stated commitment to tax fairness and 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 melt down. 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. according to a new congressional report 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% are one of the lowest rates in the OECD and 10 points below US 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 US 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. The stock market generates very little new productive investment. Stock options encourage CEOs to manipulate stock prices and buy-backs and discourage longer-term investment. So, while raising Canadian corporate taxes may be problematic in terms of Trump, making changes to capital gains and stock options would actually be good for the economy because the revenue raised, if invested by government in social and physical infrastructure would do the economy a lot more good.
Budget 2017 shows neither vision nor commitment to the government's promise for simpler and fairer tax system.
Levelling 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. Levelling 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 $521 million 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 advisors 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 go after.
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.
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 5 years. It is a tax policy that Canadians deserve.
But they failed to take any meaningful action on closing tax loopholes or levelling 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?