Trudeau’s Sprinkle Spin
Proposed Tax Changes - Perspective One
As Trudeau’s government unveils new tax reforms, I’m reminded of a recent ATV interview with former Prime Minister Paul Martin. I’m not sure if it was good manners or the insulating aura of wealth and power that prevented anchor Steve Murphy from inquiring about Martin’s history of perfectly legal tax avoidance. Instead of witnessing Martin’s ill-concealed annoyance, viewers were treated to his musings on politics and business. Although Cape Bretoners frequently see Martin’s Canada Steamship Lines Inc. (CSL) ships loading gravel at the Canso Causeway, they might be surprised at how few Canadians serve on those vessels.
Like many Canadian firms, CSL is partly registered in Barbados. The corporation is controlled by a Bermudan holding company, and since Bermuda is a tax haven, CSL outmaneuvers the Canada Revenue Agency (CRA) with perfect legality. Trudeau’s recent empowerment of CRA, and sudden enthusiasm for loophole closures, has ignored tax losses caused by the foreign registration of “Canadian” companies like CSL and Irving.
The Martin example provides context for Trudeau’s recent tax changes which may eliminate an exemption employed by professionals, like doctors and lawyers, who incorporate their practices and “sprinkle” the profits among family members to reduce their tax bills. This practice works because spouses and younger family members usually have lower tax rates. According to the federal government, approximately 50,000 Canadian families engage in this practice.
While Canada’s taxation system certainly needs reform, Trudeau’s focus on income sprinkling provides a great distraction from more significant taxation issues like offshore corporate registration and the uncollected billions sitting in sheltered tax havens (see the Cayman Islands and the Isle of Man). Official Canada’s enthusiasm for collecting illegal tax haven deposits remains largely rhetorical.
Finance Minister Bill Morneau recently ordered CRA to aggressively prosecute tax delinquents. This is quite a departure from the former policy of lenient self-disclosure deals offered to Brian Mulroney and others. Aside from the possibility of criminal convictions, Trudeau’s public commitment to big league tax evasion is similar to Harper’s timid approach. Former Conservative Finance Minister Jim Flaherty warned about the risks of an over-zealous approach to tardy tax collection - capital flight being chief among these hazards.
Morneau recently confided that his consulting business will probably face a higher tax bill under the proposed changes. However, it is reasonable to question Morneau’s commitment to tax fairness knowing his family business Morneau Shepell figures prominently in an ongoing CRA investigation of KPMG’S alleged Isle of Man tax evasion schemes for wealthy Canadians. Like his boss, Justin Trudeau, Morneau suffers from the challenge of managing inherited wealth; in this case, his father’s firm.
Unfortunately for the Finance Minister, Morneau Shepell’s auditor KPMG was named in the inflammatory Panama Papers, and is currently under U.S. investigation for its role in the 2008 financial crisis. KPMG is also auditor to BMO Burns Nesbitt where Justin Trudeau parks his inheritance. Never mind the Liberal Party of Canada’s decision to hire KPMG executive John Herhalt as financial manager of political donation funds.
In good times or bad, it seems Canada’s corporate tax rate is never low enough for the Canadian Council of Chief Executives (CCCE); a group dedicated to the ‘private profit at public risk’ business model. Formerly known as the Business Council on National Issues, CCCE spent the 1970’s, 80’s and 90’s lobbying the federal government to alter business and tax law to favour the wealthy while creating deficit hysteria amongst the public.
Gradually, and with great subtly, Canada’s corporate elite and advocates for the super-wealthy rearranged the rules to their benefit. During the mid-1990s, the Chretien/martin Liberals imposed ruthless social program cuts that frayed Canada’s social fabric and popularized ugly euphemisms like downsizing, rationalization and human capital. Former NDP leader Ed Broadbent explained that the exaggerated deficit problem could have been resolved gradually, but the Chretien government favored political glory and foreign bond holders over working Canadians.
While political and economic awareness does require some research, it’s not difficult to discredit a general tax policy that shifts responsibility to those who can least afford it. While tax lawyers and bureaucrats have invented complex terminology to confuse and discourage people, they’re ultimately just describing human behaviour, which never really changes. Perhaps we’ll learn more by noting what’s left unsaid when politicians reveal new taxation policies.