Last month, Canada’s Parliamentary Budget Office (PBO) released a report on international tax avoidance by multinational corporations. The report stated that Canadian corporations may be avoiding up to $25 billion a year in federal income taxes. After adding provincial taxes, this would mean an annual tax loss of $45 billion.
The report drew the anticipated howls of outrage. Toby Sanger, executive director of the organization Canadians for Tax Fairness, stated that “Canadians are being robbed of investments to health care, childcare, education and green infrastructure.” But the PBO number is greatly exaggerated. The inconvenient truth is that most of our annual loss of corporate tax revenue is not the result of aggressive tax avoidance or trillions of dollars stashed away in tax havens: it is due to Canadian government tax preferences and handouts. That is where our focus should be.
The PBO stated that, due to data limitations, it could not provide an estimate of tax losses from international tax avoidance. Instead, it presented “preliminary findings,” and a hypothetical amount based on a percentage of electronic fund transfers from Canada to low-taxed jurisdictions in 2018. Not only is the amount hypothetical, it is far higher than the real numbers reported by Canadian corporations in their audited financial statements for 2018.
The average tax rate in 2018 for the 30 largest companies listed on the Toronto Stock Exchange was about 16 per cent, much lower than the Canadian federal-provincial rate of approximately 27 per cent. However, according to the companies’ financial statements, only 2.5 percentage points of the differential was due to lower taxes from international activities.
A 2.5 percentage point loss from international operations is not inconsequential. It translates into a tax loss of about $11 billion a year for all large Canadian business. That is a far cry, however, from the PBO’s hypothetical amount. In addition, for Canadian multinationals with significant operations in the United States, a good part of the $11 billion “loss” is simply due to the fact that, starting in 2018, U.S. corporate tax rates have been lower than Canadian rates.
The fact is that Canada is losing much more corporate tax revenue as a result of government tax preferences and handouts than it is from international tax avoidance. At a rate of 27 per cent, corporate tax revenue from large businesses should have been close to $120 billion in 2018. But at the 16 per cent rate that actually applied, the federal and provincial governments would only have collected about $70 billion — a shortfall of $50 billion.
($40 billion) remained in the coffers of large business, due to corporate tax preferences built into our tax code by successive governments
Part of this shortfall (about $11 billion) was the result of international activities. But where did the rest of the money — $40 billion — go? It remained in the coffers of large business, primarily due to corporate tax preferences built into our tax code by successive governments over many years.
For example, banks and other financial institutions receive significant amounts of tax-exempt dividends every year. There are credits for research and development. And there are many Canadian tax rules that allow corporations to claim greater deductions than those permitted in computing earnings under accounting principles. Tax depreciation, for instance, is almost always greater than accounting depreciation, and that differential is about to get a lot larger. The government has introduced immediate expensing and accelerated write-offs for most capital expenditures until the year 2027 — an absolute windfall for those corporations that were planning on making capital expenditures in any event.
And what about small and medium-size businesses (SMEs)? Not to worry, the government has taken care of them as well. SMEs receive special, rock-bottom income tax rates, with little if any economic evidence that these rates contribute to job creation in any meaningful way. The annual federal tax cost of this one measure is close to $6 billion a year. And SMEs and their owners benefit from other tax preferences as well, including the lifetime capital gains exemption.
In short, Canada is losing tens of billions of dollars of corporate tax revenue every year — the lion’s share being the result of politically expedient, corporate tax handouts. It is time for corporate tax reform in Canada. Eliminate many of these tax preferences, increase the tax rate for SMEs, and modestly reduce the general corporate rate of 27 per cent.
• Allan Lanthier is a retired partner of a major international accounting firm. He has been an advisor to the Canadian federal government on taxation and fiscal policy matters.