Taxpayers, you're the chumps

If Mr. Flaherty really thinks the average Canadian is "overtaxed" he would restore the balance between individual and corporate tax payments. Don't count on it. Corporations have lobbyists and PR people. You don't.

The Globe and Mail
September , 2006

Taxpayers, you're the chumps
Eric Reguly

If you had to guess the tax burden split between individuals and corporations, you might guess that corporations pay the most. That's because Corporate Canada is always whining about its tax load, which it claims is uncompetitive and sends jobs overseas.

You'd be wrong. The chump is you, not the corporations. The public accounts show that the total corporate tax revenue is about 30 per cent of the total personal tax revenue. In the early 1960s, it was 60 per cent. The tax burden on the individual has, relatively speaking, doubled since your parents' generation. Now you know why your parents could afford a house on one salary and you have trouble paying the mortgage on two.

But fear not. This week, Finance Minister Jim Flaherty said he's going to take care of you. He's swimming in surpluses — $13.2-billion, for the 2005-06 fiscal year. That amount will be thrown at the federal debt. He also promised to cut your taxes. "We think the people of Canada are overtaxed," he said.

They may or may not be, by international standards. What is absolutely certain is that "the people" are wildly overtaxed compared with corporations. So will Mr. Flaherty balance the equation and not just give individuals lower tax rates, but lower their share of the total tax burden?

Forget it. If anything, the pendulum is swinging even farther in corporations' favour. They will pay relatively less, you will pay relatively more. If it doesn't sound fair, it's because it isn't.

But look what's happening. Every week the corporate tax bill, proportionately speaking, becomes slightly smaller and it's not just because corporate tax rates have fallen in recent years (they have). It's because Canadian companies are turning into income trusts, which are structured to avoid paying tax, and because other companies are bought by foreigners and restructured to minimize the tax hit.

Let's start with the trusts. Earlier this month, Telus announced it would become a trust in January to "optimize its future taxable position." Optimize is another way of saying eliminate. Telus is on the verge of becoming taxable, because the $800-million of tax losses inherited from the 2000 Clearnet purchase are exhausted. Tax losses are used to offset profits. We don't know what Telus's Canadian tax bill would have been next year. But given the company's size (it's almost as big as BCE, owner of Bell Canada) and profitability, you can bet it would be a biggie — as high as $600-million, some analysts say. In effect, Telus will soon vanish from the tax rolls forever.

Unitholders pay tax on the trusts' distributions, so tax is still being paid. But there's some "leakage" (blame the pension funds and the foreigners who own trust units). University of Toronto tax guru Jack Mintz estimates trust conversions are depriving federal and provincial governments of about $500-million a year in revenue.

The figure is bound to rise as the trust wave swells. In 2000, the TSX was home to trusts worth $18-billion. Their collective value is now about $200-billion and rising rapidly. There are no political obstacles to their proliferation — the Tories have given no hint they will try to stop the runaway train. Investors are putting great pressure on companies of every description to convert. When a company turns into a trust, or announces its intention to do so, the equity value typically rises by a third.

The tax losses from foreign takeovers are much harder to quantify. But the losses are certainly real. Generally speaking, a foreign owner loads its new Canadian subsidiary with debt (though there have been times when foreign-owned companies in Canada carried less leverage than domestically owned rivals). Since interest payments are tax deductible, tax bills can plunge.

Cigarette maker JTI-Macdonald, owned by a Japanese company, is a case in point. Canadian bankruptcy court filings from 2002 show that JTI in 2002 made a surprisingly modest $10-million profit on sales of $404-million — modest because cigarettes are about the highest-margin business you can find. Apart from operating costs, the biggest drain on the bottom line was interest payments of $106-million, nearly all of which was paid to affiliated companies.

Foreign companies went on a hunting spree in Canada this year. Inco is about to disappear into the maw of Brazil's CVRD. Last year, Inco paid $241-million in Canadian taxes and deferred another $50-million. You can bet Inco's tax payments will drop next year as debt is shifted around the CVRD empire. Of course, Canadian-owned companies with funny Caribbean addresses play the same debt-shifting tricks. But they always have.

If Mr. Flaherty really thinks the average Canadian is "overtaxed" he would restore the balance between individual and corporate tax payments. Don't count on it. Corporations have lobbyists and PR people. You don't.

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