Toby Sanger says these tax loopholes — which have grown more generous since the late 1990s — have increased inequality and led to greater financial instability.
The loopholes have “actually slowed down economic growth,” Sanger told HuffPost Canada, because rising inequality depresses consumer demand.
The federal Liberal government will release its first budget March 22. Finance Minister Bill Morneau predicted this week that Canada’s deficit for next fiscal year will be $18.4 billion. That’s five times as large as the previous estimate made just three months ago.
The largest tax loophole — costing the feds upwards of $12 billion a year — is the fact that capital gains (profits from investments) are only partially included in income taxes. This means investment gains are taxed at half the rate as wage income, Sanger says.
Sanger estimates 90 per cent of the benefits of this loophole accrue to the top 10 per cent of earners.
Using calculations from earlier research, the study found the use of tax havens costs Canada about $2 billion annually; stock option deductions cost some $800 million a year; and corporate meal and entertainment deductions cost $460 million.
Sanger’s study estimates misuse of the small-business tax credit costs the feds $500 million annually.
The small-business tax credit is “widely abused by higher income professionals including doctors, dentists and small business owners,” Sanger asserted. Individuals who incorporate themselves pay an 11-per-cent tax rate, compared to a personal income tax rate of up to 33 per cent.
While campaigning last fall, Prime Minister Justin Trudeau waded into controversy by making the same assertion. The Canadian Federation of Independent Business said it saw “no evidence” that individuals were incorporating themselves to save on taxes.
Sanger says capital gains tax reform should be the priority for the Liberals, and he wants to see investment profits taxed at the same rate as “income from working.” He suggests raising the tax rate on investments gradually, and paring back the tax rate on investments to account for inflation.
Here is Sanger's breakdown of what he calls the top five regressive tax loopholes in Canada.
Who’s got guts enough to go after Canada’s tax-dodging corporations?
So it wasn’t a surprise to hear that a federal cabinet committee is reviewing Irving’s $26 billion sole-source (but still unsigned) contract to build a fleet of warships for the Royal Canadian Navy.
If the committee truly wants to do right by the rest of us, it should consider two questions. Should a corporation that pursues aggressive offshore tax avoidance tactics be eligible for a government procurement contract? Can a government deliver a fair tax system while closing deals with companies whose business models include dodging what is already the second-lowest corporate tax rate in the G7?
K.C Irving was the granddaddy of Canadian tax haven abusers. He stashed at least $3 billion of his assets in Bermuda as far back as the late 1960s. His progeny still follow that tradition. But they aren’t the only Canadian CEOs with more than a holiday interest in Barbados, the Cayman Islands and Liechtenstein. The Irving style of tax-dodging seems downright quaint when compared to the complicated tax setups behind today’s pharmaceutical manufacturers, mining companies, tech companies and banks.
Tax avoidance has become a multi-billion-dollar industry on its own. Canada’s prime ministers and finance ministers have known all about it for decades. They love to give speeches about tackling tax havens — but seem to lack the nerve to make it happen.
We live in a world where multinationals buy companies for the sole purpose of reducing their taxes, where a lawyer can set up a foreign shell company in less than a day, where foreign subsidiaries are set up on tiny islands thousands of miles away from their real markets.
So there’s much to be done on that front. But what if, in the meantime, the government used its purchasing power to encourage better behaviour from its larger suppliers? It already disqualifies potential contractors who fail to follow labour codes and environmental standards. A responsible, ethical attitude to tax practices should be no different.
Britain and the EU have raised the bar on dealing with tax dodgers, with varying degrees of success. They persist despite massive corporate pushback from the likes of Google, Amazon, Starbucks and Ikea. We live in a world where multinationals buy companies for the sole purpose of reducing their taxes, where a lawyer can set up a foreign shell company in less than a day, where foreign subsidiaries are set up on tiny islands thousands of miles away from their real markets.
It is clever, cynical and constant. Globally, it costs governments trillions. And at least $199 billion Canadian is stashed offshore, untaxed, an annual loss of at least $8 billion a year to government revenues.
Anti-taxers argue that it is their right to use every means possible to pay bargain-basement tax rates — or no tax at all. They used to argue that they invested that money back into their companies. But there’s little evidence of that happening.
Canadian taxpayers want their money spent wisely. They have a right to expect the best value for their money — and that extends to the expectation that their governments will only do business with good corporate citizens.
Many Canadian businesses pull their weight in the country where they live and profit. They deserve our respect. More than that, they deserve our business and to be considered as key players in an industrial strategy. That should be the ‘sniff test’ as Prime Minister Trudeau’s cabinet lays out changes in how Canada deals with suppliers.
Dennis Howlett is the executive director of Canadians for Tax Fairness
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