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article imageThree Canadian tax loopholes that mean billions in lost revenue

By Ken Hanly     Nov 11, 2018 in Business
Ottawa - New data released by Finance Canada shows that the amount of revenue the government lost through tax loopholes mostly benefiting the very rich has risen sharply since last year.
The annual Federal Report of the Department of Finance on tax expenditures shows the government is losing many billions of dollars in tax revenue through a number of tax loopholes. We look at three main loopholes. Five loopholes are discussed in this article.
Partial inclusion of capital gains
Capital gains are treated differently than wages for tax purposes. An article in National News explains: "Income from capital gains, usually made as profits from the sale of financial assets such as stocks and bonds as well as non-owner occupied real estate, is not treated in the same way for personal income tax purposes as income from employment. While 100% of wages is included in taxable income, just one half of capital gains income are taxable. The cost to the federal government of this special tax break is significant, almost $6 billion ($5.95 billion) in 2016 according to the Department of Finance. Provincial government revenues are also reduced."
Research published in the Canadian Tax Journal in 2015 found that 87 percent of all the benefits from this loophole went to people earning $200,000 or more. The latest data shows that this loophole cost the government $6.9 billion in 2017 up a whole billion from 2016. Finance Canada estimates that the amount will rise further to $7.07 billion by the end of 2018.
Dividend gross-up
This loophole compensates stockholders for taxes that are paid by companies they have invested in. According to the latest data a full 91 percent of benefits go to the richest ten percent of Canadians. Half of the amount goes just to the top one percent of richest Canadians. Given that Canadian corporate tax rates are at historic lows, it is hard to see the logic in the loophole. Perhaps, it is meant to encourage people to buy stocks.
This loophole lost Canada $5 billion in revenue in 2017. This was up from $4.4 billion in 2016. This year it is projected to reach $5.3 billion according to Finance Canada.
Stock Options
This loophole is much used by corporate executives and directors who compensate themselves in stocks rather than salary to take advantage of the lower tax rate. When employees of a company exercise their stock options, they are taxed only upon 50 percent of the total value of the stocks.
The Liberal government promised during the last election that it would close this loophole. The Liberal platform even cited Finance Canada's data which showed that three quarters of the benefits went to 8,000 very high income Canadians.
However, following the election the Finance Minister Bill Morneau announced that the government had changed its mind. He claimed that this was in response to small tech feedback. However, internal documents show that it was probably due to Bay Street lobbyists' influence.
Some claim that the stock options loophole is falling out of favor. However data shows that after a brief decline during the last election it is again increasing, no doubt because it still exists. The loophole saved $530 million in 2016 but $635 million in 2017. By 2019 it is expected it will cost Canada $740 million in lost revenue.
There are many other ways of avoiding taxes such as using tax havens as discussed in the appended video.
More about Canada, tax loopholes, finance canada
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