Saturday, December 29, 2018

Three Canadian tax loopholes that cost the Canadian government billions in revenue

New data released by Finance Canada shows that the amount of revenue the government lost through tax loopholes mostly benefiting the very rich has risen sharply since last year.

The annual Federal Report of the Department of Finance on tax expenditures shows the government is losing many billions of dollars in tax revenue through a number of tax loopholes. We look at three main loopholes. Five loopholes are discussed in this article.
Partial inclusion of capital gains
Capital gains are treated differently than wages for tax purposes. An article in National News explains: "Income from capital gains, usually made as profits from the sale of financial assets such as stocks and bonds as well as non-owner occupied real estate, is not treated in the same way for personal income tax purposes as income from employment. While 100% of wages is included in taxable income, just one half of capital gains income are taxable. The cost to the federal government of this special tax break is significant, almost $6 billion ($5.95 billion) in 2016 according to the Department of Finance. Provincial government revenues are also reduced."
Research published in the Canadian Tax Journal in 2015 found that 87 percent of all the benefits from this loophole went to people earning $200,000 or more. The latest data shows that this loophole cost the government $6.9 billion in 2017 up a whole billion from 2016. Finance Canada estimates that the amount will rise further to $7.07 billion by the end of 2018.
Dividend gross-up
This loophole compensates stockholders for taxes that are paid by companies they have invested in. According to the latest data a full 91 percent of benefits go to the richest ten percent of Canadians. Half of the amount goes just to the top one percent of richest Canadians. Given that Canadian corporate tax rates are at historic lows, it is hard to see the logic in the loophole. Perhaps, it is meant to encourage people to buy stocks.
This loophole lost Canada $5 billion in revenue in 2017. This was up from $4.4 billion in 2016. This year it is projected to reach $5.3 billion according to Finance Canada.
Stock Options
This loophole is much used by corporate executives and directors who compensate themselves in stocks rather than salary to take advantage of the lower tax rate. When employees of a company exercise their stock options, they are taxed only upon 50 percent of the total value of the stocks.
The Liberal government promised during the last election that it would close this loophole. The Liberal platform even cited Finance Canada's data which showed that three quarters of the benefits went to 8,000 very high income Canadians.
However, following the election the Finance Minister Bill Morneau announced that the government had changed its mind. He claimed that this was in response to small tech feedback. However, internal documents show that it was probably due to Bay Street lobbyists' influence.
Some claim that the stock options loophole is falling out of favor. However data shows that after a brief decline during the last election it is again increasing, no doubt because it still exists. The loophole saved $530 million in 2016 but $635 million in 2017. By 2019 it is expected it will cost Canada $740 million in lost revenue.
There are many other ways of avoiding taxes such as using tax havens as discussed in the appended video.

Previously published in Digital Journal

Tuesday, December 25, 2018

Bombardier to cut 5,000 jobs and also sell some assets

Bombardier, based in Montreal Quebec, has announced measures that will see it lose 5,000 jobs over the next year and a half. It will also sell its Q Series turboprop aircraft program to Longview Aviation Capital for a price of $300 million.

Technical training business to be sold to CAE
Bombardier will also sell its business aircraft flight and technical training business, run out of Montreal, Quebec City, and Dallas Texas to another prominent Montreal-based multinational CAE. The sale price for the services is $640 million. In total sales to CAE are $800 million and are expected to be finalized by the middle of next year.
The deals with Longview and CAE should net $900 million in income.
Bombardier estimates the job cuts and sales will save about $250 million annually.
Bombardier Chief Executive Officer(CEO) says the company is on track to meet turnaround goals
Bombardier's revenue for the third quarter was $3.6 billion US a drop of about five percent from the same period in 2017. However, the company did eke out a profit of $149 million US an improvement on a 100 million loss in the same quarter last year.
Alain Bellemare, Bombardier CEO claimed the cuts and sales were necessary and that the company would continue to streamline its business operations.
In a conference call with investors this morning, John Di Bert, the chief financial officer of Bombardier said that the announced actions were designed to show that the company's focus was on efforts to grow earning and cashflows saying: "We continue taking concrete actions to reshape Bombardier's portfolio."
Analyst judged that Bombardier's Q series would provide little or no profit
Before, Bombardier announced the sale of the turboprop division analyst George Ferguson of Bloomberg Intelligence said that he thought that the Q Series would generate little or no profit for the company this year. He claimed it made good sense to sell it.
Although most of the attention on Bombardier is on its jet planes, most of the money for the company comes from its rail transportation division. Ferguson said:"Transportation will generate almost all of cash flow as aerospace ... will be flat at best during 2018."
The company had received 66 firm orders for the Q400 turboprop jets as of the end of this September. That is up from just 45 last December.
Bombardier union calls the moves unfortunate and distressing
Simon Letendre a spokesperson for Bombardier, confirmed 500 jobs will be cut in Ontario. The company employs 6,500 people in the province. It will also cut even more 2,500 jobs in Quebec. Globally the company has 70,000 workers. The remaining job cuts about 2,000 will be in operations outside Canada not year identified.
Quebec government support questioned
In 2016 when it looked as if the C Series project was doubtful, the Quebec provincial government gave Bombardier $1 billion to keep the project going. The federal Canadian government also later presented the company with a $372 million interest free loan. The appended video by the inimitable Rex Murphy has a caustic commentary on the loan.
At the time many questioned the provincial expenditure obviously made to save jobs. Anthony Scilipotti, founder of Veritas Investment Research in Toronto said: "Bombardier is desperate and it's unfortunate that the unsuspecting taxpayer is shouldering the burden for management's awful decision making. What's the future? This aircraft isn't selling."
The future was that Bombardier virtually gave away the program to Airbus without charge about a year ago. With the company laying off thousands of workers again for the third time in three years, there will be even more questioning of the company's operations.
Analyst Ferguson claims that the company is committed to streamlining its operations and expects even more asset sales that will turn the company into a shadow of its former self. The companies argues that its shift of the C series to Airbus will allow it to focus on regional planes. Ferguson noted: "It's likely if C Series is a success, that Airbus will purchase the remaining at cost given their options. Bombardier seems ready to slim down to a business-jet and rail manufacturer."

Previously published in Digital Journal

Friday, December 7, 2018

More Canadians disappointed with USMCA the NAFTA replacement than are pleased

More Canadians say they are disappointed with the USMCA, the US, Mexico, Canada Agreement that replaces NAFTA than pleased with the new agreement.

 1 of 2 
Poll taken by Angus Reid
Just three weeks after the new NAFTA deal renamed the USMCA who rejected to the old name, Canadians are split on their feelings about the pact. The latest poll by Angus Reid shows that more Canadians are disappointed by the deal than pleased.
The attitudes are split along party lines with supporters of the ruling Liberal party having a more favorable view. Those supporting the Liberals are twice as likely to have a favorable view of the agreement as are either the right-leaning Conservative party supporters or those of the leftist New Democratic Party.
Half of Canadians think that Canada's negotiating team were too soft in dealing with their US counterparts, and they gave up too much to get a deal. Just over a third, 35 percent, felt that the agreement reached was better than nothing. About the same number, 34 percent, felt it would be worse.
Canadian view of US becoming more negative
The survey found that Canadians are feeling more negative about the US than in almost 40 years. 49 percent of Canadians say they have a very favorable or mostly favorable view of the US. That's a big drop from their views in June 2016 when 62 percent had a favorable view and the lowest since 1980. Previously, 59 per cent represented the low-mark, during the turmoil of the Bush administration’s war in Iraq.
Quebec province least favorable towards the new deal
Regionally, residents of Quebec had the least favorable view of the USMCA, no doubt because the Liberals sold out on their promise not to touch the Canadian supply managed markets for dairy poultry, and eggs. The US has now increased access to Canadian markets. While many of the largest dairy farms are in Quebec producers in other provinces as well were angry that Trudeau broke his promise not to touch the area.
Trump viewed negatively
After the USMCA was signed, half of Canadians view of Trump and Co. was negative, while only 11 percent have a very positive view. 64 percent of Canadians viewed the Trump administration negatively. In contrast to the declining view of the US, the favorable view of Mexico by Canadians is up 7 percent with almost 6 in 10 Canadians saying they have a favorable view of Mexico.
USMCA still a deal to advance global corporate interests
A recent Digital Journal article points out that in spite of some significant improvements compared to the original NAFTA the entire deal is still in the interests of global corporations and there are even new negative features including more access to Canadian markets where there is supply management.
An article in Rabble also points out a new negative feature: "In Article 32.10 Canada agreed not to negotiate commercial agreements with non-market countries. That would be China. Should Canada decide to sign a trade agreement with China, the non-market country, it would be booted out of USMCA. For trade expert Peter Clark this amounts to Canada being treated as a vassal state by the U.S". This provision is discussed on the appended video.
Crown corporations have been one of the key instruments in economic development in Canada. Now they are defined as State-Owned Enterprises. Their activities must be restricted to non-competition with private sector companies. There are even penalties spelled out for non-compliance. This is just one of many provisions that protect private corporations and their profits.
The new deal also provides a two year extension to patents on biologic drugs. This will prevent lower cost generic drugs from entering the market. This will make it difficult for Liberals to keep their promise of a national pharmacare program as it will now be said to be too expensive.


Previously published in Digital Journal