Monday, September 12, 2022

How tax fairness measures get watered down

The current federal government has promised to make the tax system fairer, but what is being implemented doesn't match what was promised. Several measures that sounded like major steps towards tax fairness when they were announced have had relatively little impact in practice.

Recently, Canadians for Tax Fairness released an analysis of two of these measures – a proposed surtax on finance company profits above $1 billion and the Canada Recovery Dividend. The analysis is useful for showing why Canadians aren’t getting the tax fairness measures they were promised and how tax fairness measures get watered down.

What was promised
The Liberal platform in the 2021 election campaign promised a permanent three per cent increase in the corporate income tax rate for finance company profits over $1 billion and a one-time Canada Recovery Dividend aimed at companies that “recovered faster and stronger than many other industries.”

The two measures were supposed to produce $10.8 billion in revenue over five years.

2022 federal budget significantly weaker than what was proposed
What was announced in the 2022 federal budget was considerably weaker than what had been promised a few months earlier. The rate for the surtax was lowered, and the Canada Recovery Dividend only applied to “banks and life insurers” as opposed to all “financial institutions.”

The changes meant that the projected revenue from the two measures was only $4.9 billion, or 55 per cent less than the revenue that the original proposals would have generated.

Draft legislation for Canadian Recovery Dividend further weakens the measure
When the draft legislation for the Canadian Recovery Dividend was introduced, it became clear, yet again, the proposed measure had been watered down. Instead of the Canadian Recovery Dividend being levied on 2021 profits, it will now be levied on an average of 2020 and 2021 profits. Based on calculations by Canadians for Tax Fairness, this will allow some of the largest corporations in Canada to save hundreds of millions of dollars in taxes.

Details important when it comes to tax fairness
What the Canadians for Tax Fairness analysis also shows is how what appear to be relatively minor changes can have a significant impact on the effectiveness of tax fairness measures. What goes into legislation or regulations can turn a measure that looked like a major step towards tax fairness into an insignificant gesture.

That’s why, instead of attacking tax fairness measures head on, business lobbyists will focus on the details – particularly when elected officials have trouble distinguishing between what’s good for large corporations and what’s good for Canada. And it’s why, when politicians appear to be taking steps to make the tax system fairer, we must monitor the process carefully until all the details are settled.