Canada’s unions are welcoming the federal government’s plan to close tax loopholes for very high-income earners, saying it’s an important first step toward bringing more fairness to Canada’s tax system.

“Today’s tax rules make it possible for someone earning $300,000 to save more on their taxes than the average Canadian worker makes in a year, and that is fundamentally unfair,” said CLC president Hassan Yussuff.

Current tax rules allow wealthy Canadians, especially self-employed professionals, many of whom are lawyers, doctors, dentists and accountants, to pay less in personal income taxes by setting up CCPCs – Canadian-controlled private corporations. The federal government wants to address three ways CCPCs are used to avoid higher tax rates:

• Income “sprinkling”: High-wage earners who own CCPCs can split – or “sprinkle” – their income among lower-income family members, paying them salaries or dividends (even though they often don’t actually work for the company) to take advantage of their lower tax rates. This is not something other working families can do.
• Exploiting capital gains: High-income earners who own CCPCs can pay themselves in capital gains – only 50 percent of which are taxed at the personal tax rate – instead of dividends, which face higher taxes.
• “Passive” investing: CCPCs offer the wealthiest Canadians another tax advantage others don’t have access to: more capital for their investment portfolio. Many CCPC owners are parking income in their business so it’s taxed at the lower business rate, leaving them more capital to invest in “passive” investments like mutual funds. But lower tax rates for businesses are meant to encourage reinvestment and job creation, not to help the wealthiest Canadians make more out of their retirement portfolios.

“This kind of tax avoidance is costing the federal government as much as $500 million a year,” said Yussuff. “Taxes pay for the vital services that we all rely on, from physical security and food safety, to health care and education and disaster relief, and Canadians expect everyone to pay their fair share.”

Further reforms are needed

These measures are an important first step, said Yussuff, but he hopes more are in the works to make Canada’s tax system truly fair.

“We need to ensure that the the top one percent and corporations pay their fair share too, which means a more aggressive clamp-down on tax havens and corporate tax dodging,” he said.

That would include:

• Eliminating regressive and ineffective tax loopholes by cancelling stock option deductions, fully including capital gains in taxable income, and cancelling the flow-through shares deduction.
• Taxing foreign e-commerce companies to level the playing field for Canadian providers.
• Increasing taxes on banks and finance, which have received windfall profits from corporate income tax cuts over the last decade and a half.
• Introducing wealth taxes and making income taxes more progressive.