The $40-billion reason Canada needs real corporate tax reform
In June 2019, a report on international tax avoidance by multinational corporations was generated by PBO or Parliamentary Budget Office of Canada. According to this report, Canadian corporations are not paying about $25 billion of federal income taxes every year. After adding that amount with provincial tax amounts, Canada is facing a tax loss of $40 billion annually. After this report was made public, different Corporate Tax Consultants in Toronto observed the reactions of common citizens and different management bosses.
Some reactions & facts
The report created by PBO drew outrage almost immediately after its publication. A strong reaction came from the Executive Director of the organization Canadians for Tax Fairness, Mr. Toby Sanger. According to him, citizens are losing investments meant for healthcare, childcare, education and a few other services.
While researching important facts, it has been found that most of the unpaid corporate tax revenue is not the result of high tax-avoidance rates and undocumented business activities. Instead, the blame must be passed on to the tax policies of the Canadian Government.
Factors & limitations
After generating the report, PBO admitted that due to data limitations, it couldn’t calculate the total amount of tax losses originated from international tax avoidance activities. Thus, it was forced to mention preliminary data and some hypothetical results calculated from the percentage of electronic fund transfers from Canada to low-taxed administrative areas in 2018. It has been found that these hypothetical results are higher than the real numbers generated by Canadian corporations in their annual financial audits for 2018.
In 2018, the average tax rate was approximately 16% for the 30 largest companies listed in the Toronto Stock Exchange. This rate was much lower than the 27% rate of Canada’s federal-provincial tax rule. However, the financial statements of these companies stated that there were only 2.5 percentage points of differential and it was the result of lower taxes from international business activities.
Keep in mind that 2.5% differential point loss is not so much important or abnormal. This point loss indicates that big Canadian Business Houses caused about $11 billion of tax loss per year. This amount is very much different from the hypothetical amount calculated by PBO. You can also consider the fact that US corporate tax rates have been lower than those of Canada since 2018.
Probable reasons of $40 billion tax loss
Many experts believe that government tax preferences and handouts need to be blamed. With an actual 16% tax rate, federal and provincial governments could collect approximately $70 billion. This amount is $50 billion lower than the amount that could be collected at a rate of 27%. A part of this deficit (around $11 billion) happened due to international business activities. But, the remaining shortfall is the result of corporate tax preferences undoubtedly.
As a responsible Canadian Tax Consulting Service, at The Accounting & Tax, we don’t recommend any unethical way to avoid corporate taxes.
