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

Liberals break promise to plug tax loophole for the rich

The loophole involves executives taking remuneration in stock options rather than cash. If the price of the stock is lower than the market the difference is taken as remuneration. An executive can claim a 50 percent tax deduction. when selling the stock.

The decision to not plug the loophole was made after pressure on Finance Minister Bill Morneau by bigwigs from the financial elite. Liberal campaign literature from the 1915 election proposed that as many as 8,000 people were claiming an average of $400,000 a year through the loophole. In the campaign the party platform called the loophole a disproportionate benefit for the wealthy and promised to cap the benefit at $50,000.

One of those who contacted the new Liberal government was John Manley himself a former Liberal finance minister who now heads the Business Council of Canada. In November of 2015 Manley wrote: “Doubling the tax rate with a retroactive impact on existing options would be unfair. Allow for a gradual phase-in of the changes.” Just a few weeks later Morneau announced that the changes would not be retroactive.

However, last March Morneau went even further and said that closing the loophole was completely off the table. The concern about wealthy executives profiting from the loophole is now replaced by concern that "small firms and innovators" will find their businesses hurt by blocking the loophole. When asked why Morneau never mentioned messages from larger firms and others, he replies that the Liberals are concerned to strengthen the middle class through broad consultation and notes that the department gets a large range of correspondence.

NDP finance critic Guy Caron noted: “There are many problems. I think that shows the influence Bay Street has over the Liberal Party. That’s something we knew in the past and it’s still very much like this nowadays. I think this is a perfect example of this.” The move shows a cynical attitude on the part of the government according to Caron.

Dennis Howlett, president of Canadians for Tax Fairness, noted: “The prime minister campaigned on a promise to get rid of the stock option loophole which has put billions back into the pockets of wealthy CEOs, including bank presidents, real estate moguls, and heads of powerful multinationals. Those guys send their lobbyists to talk to the Finance Minister and — just like that — their commitment disappeared.” The group also criticized the Liberal government for having private dinners with Liberal cabinet ministers and even Prime Minister Trudeau for a high fee. A ticket can cost over $1500. At first Trudeau denied that there was any lobbying at these cash-for-access events. Just before Christmas, Trudeau admitted that lobbying did take place but did not affect his decisions.

By the end of October this year, 16 fundraisers were reportedly held by Trudeau. But he had reportedly held 16 such fundraisers by the end of October. The Tyee has reported on two dinners in private homes — one in Toronto, one in Vancouver — attended by a combined 120 people. Some might have not been paying guests, but if 90 per cent were, the haul from those two nights would be about $165,000. Trudeau’s cash-for-access events to the end of October could easily have pulled in $1.3 million. Cabinet ministers and officials had held more than 70 similar fundraisers by the end of October. t=_blank]The Tyee reported on two dinners, one in Toronto and the other in Vancouver attended by about 120 people in all. Even if only 90 percent were paying guests the take from the two nights would be around $165,000. For all 16 the take could be up to $1.3 million. During the same period cabinet ministers and government officials held more than 70 similar fundraising dinners.

The tax loophole deprives Canada of about $750 million in lost revenue each year. It is now the little guys and struggling startups that are going to be hurt by the change even though most of the benefits go to executives who are already doing well. Canada's top CEOs earn 193 times what the average worker earns. They earn so much that they benefit greatly by taking much of their compensation as stock options which are taxed at half the rate of regular salaries. Yet Morneau justifies his refusal to act by saying: "I heard from many small firms and innovators that they use stock options as a legitimate form of compensation, so we decided not to put that in our budget." The Liberals and Conservatives agree on promoting policies that make the rich richer while the burden of taxes is placed squarely on less wealthy taxpayers. Some industry representatives suggested different ways of closing the loopholed that would have a less drastic effect on the wealthy. The Liberal government decided that they simply would not bother even to try to close the loophole at all. Maybe Stephen Harper the former Conservative Prime Minister suggested that idea to Morneau.