The High Cost of Low Corporate Taxes

For every dollar corporations pay to the Canadian government in income tax, people pay $3.50. The proportion of the public budget funded by personal income taxes has never been greater.

At a time when Prime Minister Justin Trudeau has made tax fairness a centrepiece of his government, the Toronto Star and Corporate Knights magazine spent six months poring over tax data to determine how much income tax corporations are really paying.

We found the amount of tax most big companies pay has been dropping as a proportion of their profits for years, and not only because the corporate tax rate has been cut repeatedly. Canada’s largest corporations use complex techniques and tax loopholes to reduce their taxes significantly below the official corporate tax rate set by the government.

With some exceptions, Australia charges a levy of 0.015 per cent every three months on banks’ riskier borrowing, “ensuring that the banking sector makes a fair contribution to the economy,” the government states on its website.

The same levy in Canada would have brought in up to $2 billion in 2016, bumping up the tax rate for the Big Five banks to 18 per cent from 14 per cent. A modified bank levy could also be applied more broadly to the financial sector. And since the financial sector accounts for more than two-thirds of the avoided taxes by all large Canadian corporations, a bank levy would go a long way toward ensuring corporations pay taxes closer to the official rate.

It’s a solution that the Mintz report, commissioned in 1996 by then-finance minister Paul Martin, recommended for Canada. The measure was to be called a “temporary increase in financial institution surtaxes” and was projected to bring in up to $300 million each year at the time.

The temporary surtax was to be phased out as taxes for the financial sector were brought into line with the rest of the economy.

Twenty years later, corporations – and especially banks – continue to pay less than the rest of us.

How we calculated the tax gap

We define the “corporate income tax gap” as the difference between total income taxes owed (official tax rate multiplied by pre-tax profits) and cash taxes paid from 2011 to 2016. This measurement is intentionally broad – it captures any form of tax reduction whether through tax sheltering, income shifting, tax preferences within the tax code, or rule changes. It also captures deferred tax: income that is not currently included in taxable income but may be at some later date. This is a methodology used by academics, the New York Times in a 2013 piece that looked at American companies and Canadian Business magazine in similar comparative studies.

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