Forget small business, the real beneficiaries of controversial tax loophole are very rich Canadians

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Minister Bill Morneau in the House of Commons in Ottawa

Twenty-five years ago, Brian Mulroney’s Conservative government introduced a tax change beneficial to wealthy families owning private trusts. One of the arguments used to justify the change was that it would help families with a trust support a disabled child.

The image of helping a disabled child certainly softened the image of what the government was doing — channelling hundreds of millions of dollars in tax savings to some of the wealthiest families in the country.

Of course, rather than foregoing hundreds of millions of dollars of tax revenue in the hope that somewhere, somehow a disabled child might be helped, another option would have been to properly tax private trusts and use the revenue to help all disabled children.

From time immemorial, those trying to justify tax boondoggles for the rich have hid the real story behind a gentler, more sympathetic tale.

So it’s not surprising that, in the current heated debate over the Trudeau government’s attempt to close a tax loophole favouring the rich, the rich are nowhere in sight. Instead, those fighting to preserve the tax loophole have kept the focus on small business owners and family farmers.

While small business owners and family farmers may not melt the public’s heart as much as disabled children, they present a more sympathetic image than the real beneficiaries of this tax loophole: high-flying corporate lawyers, businesspeople, accountants, doctors, dentists, insurance and real estate agents.

These high rollers are able to avoid substantial amounts of tax by setting up private corporations and then funnelling their incomes through these corporations.

The widespread use of this tax avoidance scheme only came to light because of a detailed 2014 study by public finance scholars Michael Wolfson, Michael Veall and Neil Brooks, who used previously unavailable data from tax returns to show that billions of dollars received by some of the richest Canadians had not been included in the calculation of their incomes.

Once this invisible income — amounting to an astonishing $48 billion in 2010 — is added to their reported personal incomes, Canada’s rich are considerably richer than we’ve been led to believe.

For instance, according to commonly used data (for 2011), the average income for those in Canada’s top 1 per cent was $359,000. But once the income they held in private corporations was added, the actual average annual income of these folks was a much heftier $500,200.

The higher up the income ladder, the more popular private corporations have become. Roughly 80 per cent of the richest .01 per cent of Canadians funnel income through private corporations and the amounts involved are substantial, the study found.

The average income for those in the top .01 per cent was $4.69 million a year — an enormous income. But once the income held in their private corporations was added, the average income in this privileged group actually jumped to a stunning $8 million a year.

We are clearly dealing with more than the struggling family farmer or Mom-and-Pop convenience store owner.

Some middle-income people also use private corporations, but the amounts involved are small, notes Wolfson, chief author of the study and a former assistant chief statistician at Statistics Canada.

Doctors have been among the main resistors. That’s because, in 2005, the Ontario government quietly made a legal change allowing doctors to use private corporations — thereby increasing their after-tax incomes without the public knowing.

Rather than such “backdoor tax breaks,” Wolfson argues that Queen’s Park should support closing the loophole and then, if it wants, use some of the extra revenue to pay doctors more.

The tax loophole for private corporations is, of course, just one of the loopholes benefiting the rich and we need a comprehensive examination of all of them, if we’re to begin addressing the growing inequality in our society.

But the skirmish over this loophole is an important battle. And it won’t be easily won, given the reluctance of the powerful to give up their tax breaks. Lined up with them is Conservative leader Andrew Scheer and the high-powered world of Bay Street tax practitioners, who are churning out technical arguments aimed at obscuring what’s at stake and leaving ordinary citizens inclined to leave such complex matters to the professionals.

That’s unfortunate, because what’s at stake here is vital in a democracy — a tax system that’s fair, with the ability to raise sufficient revenue to fund key public programs that benefit us all.

That’s not something I’d leave in the hands of a bunch of Bay Street tax practitioners.

Linda McQuaig is an author and journalist whose column appears monthly. Follow her on twitter @LindaMcQuaig.

A version of this column originally appeared in the Toronto Star.

Image: PMO/Adam Scotti

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