Report: Analysis of the 2022 Federal Budget

Budget 2022 took some steps in the right direction for tax fairness, especially for corporate transparency. However, it will raise only a fraction of potential revenue from the most profitable corporations, richest individuals and biggest polluters, while leaving major tax loopholes wide open.

Rather than fulfilling numerous Liberals promises on fair taxation made since 2015, Budget 2022 makes more promises to “review” and “study” ways to solve problems for which there are  obvious and effective solutions that could be implemented immediately.

1. Making corporations pay their fair share

WHAT’S IN THE BUDGET?

Pandemic profits tax on banks and insurance companies: Canada’s financial sector had record-breaking profit margins in 2021 at 22%, making a whopping $141 billion in profit.

• Budget 2022 proposes a temporary “Canada Recovery Dividend” of 15% on all banks and insurance companies with earnings over $1 billion, which would bring in an estimated $3.2 billion through 2025/6. That is notably $2.3 billion less than the measure promised by the Liberals during the 2021 election.

Small increase on income tax rate for banks and insurance companies: Corporate tax rates have gone from over 40% in the 1980s to an all-time low of 15% in 2022, costing Canadian governments $1.1 trillion dollars since the year 2000. Increasing the corporate tax rate to just 20% would raise an additional $8 billion a year. In 2021, the Liberals promised to raise the income tax rate on big banks and insurance companies from 15% to 18%, which would raise an estimated $1.2 billion per year.

• Budget 2022 only proposes half that increase, applying a 1.5% surtax on their income over $100 million. The original 3% surtax would have brought in an estimated $5.3 billion over the next five years. This reduced surtax, according to budget estimates, will bring in just $1.6 billion. 

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WHAT’S MISSING?

No pandemic profits tax on other large corporations: Big corporations had record profits across the board in 2021, in every sector of the economy. Applying an excess profits tax to all sectors with extraordinary pandemic profits would raise $8 billion, according to the PBO.

No general increase in the corporate income tax rate: The surtax on the banks and life insurance companies raises their overall tax rate to 16.5%. That is still historically low. The government needs to end the experiment with ultra-low corporate tax rates. An increase to 20% would raise an additional $8 billion in revenue per year.

No strong support for the digital services tax (DST): Some of the biggest, most profitable, digital giants like Amazon pay zero or almost zero corporate income tax in Canada. The Liberals promised a DST on digital giants with an estimated annual revenue of at least $1 billion.

• Budget 2022 defers imposing a DST in light of the government’s commitment to the 2021 OECD/G20 tax deal. Now, under Pillar 2 of the deal, corporations will pay at least 15% income tax, and countries will be able to “top up” the difference if they don’t. This is a good idea in principle, but will only raise about half as much money for Canada as the DST, while depriving developing countries of critical billions in corporate tax dollars. Furthermore, Pillar 1, which is designed specifically to increase the taxes paid by the global digital giants, would let Amazon off scot-free. 

2. Taxing the wealthiest in Canada

WHAT’S IN THE BUDGET?

Weakened luxury goods tax: There are lots of good ways to implement a tax on luxuries most of us can’t afford. The Liberals promised to tax sales of luxury vehicles over $100,000, bringing in an estimated annual revenue of around $650 million.

• Budget 2022 only provides for a watered-down luxury tax that will raise as little as $125 million annually, and deprive the government of an estimated $2.4 billion over 5 years.

WHAT’S MISSING?

No minimum effective tax on very high income: While almost everyone from nurses and teachers to small business owners pay at least 15% federal income tax, thousands of wealthy Canadians pay little to no income tax at all. The Liberals promised to impose a minimum 15% effective tax rate on the top 1% of earners (those making over $222,600), which would raise an estimated $400 million per year.

• Budget 2022 delivers nothing more than a vague “commitment to examine a new minimum tax regime,” with “details on a proposed approach” in the Fall.

No wealth tax:  C4TF has proposed an annual wealth tax that would raise an estimated $20 billion per year, and a number of other countries have effective wealth taxes.

• Despite 9 out of 10 Canadians supporting a wealth tax, Budget 2022 contains no discussion of one.

3. Closing tax loopholes

WHAT’S IN THE BUDGET?

Closing a few smaller loopholes: C4TF has identified $30 billion worth of loopholes used by the ultra-rich to avoid paying taxes that could be closed.

• Budget 2022 moves to close a couple of smaller loopholes regarding bank transactions, and cross-border interest payments, recouping a relatively meagre $300 million per year. That’s only 0.1% of the revenue that could be recouped if the top abused loopholes were closed.

“Reviewing” the tax exemption for real-estate investment trusts (REITs): REITs have been exempt from corporate income tax since 1995. This unfair tax advantage is distorting the housing market and making homes unaffordable. The Liberals promised to “review the tax treatments” of the “large corporate owners” of residential housing including REITs, and “curb excessive profits.”

• Budget 2022 discusses studying the issue further with no timeline or course of action, while wealthy investors continue to benefit at the expense of millions of home-owners and renters.

WHAT’S MISSING?

No closing up billions of dollars in other tax loopholes: In 2015, the Liberals promised to eliminate $3 billion worth of tax loopholes. C4TF proposed ways to make that $30 billion. Budget 2022 needlessly leaves in place most of Canada’s worst tax loopholes, including:

• the capital gains exclusion loophole, which costs the government $22 billion every year,
• the corporate dividend tax credit; which costs us $5 billion a year,
• a whole slew of perks for the very rich, such as the stock option deduction loophole (which only received a weak cap in 2021), the business deduction for executive pay, and the business meals and entertainment expense deduction…

4. Tackling tax havens & tax-dodging

WHAT’S IN THE BUDGET?

Strengthening Canada’s anti-avoidance rules: Huge corporations have been dodging millions in tax while making a mockery of Canada’s tax laws. There’s a “general anti-avoidance rule” (GAAR) to stop that abuse, but it’s weak. In 2021, the Liberals promised to modernise the GAAR regime.

• Budget 2022 will make changes that allow the CRA to more proactively pursue companies that avoid tax on technicalities like changing where they’re registered, or what type of company they are.

Making sure foreign holding companies are taxed like Canadian holding companies: Some wealthy individuals avoid taxes on investment income by shifting holding companies to a foreign jurisdiction.  

• As of Budget 2022, the government will treat these foreign companies the same as domestic holding companies, increasing federal revenues by an estimated $4.2 billion over five years starting in 2022-23.

WHAT’S MISSING?

No action on tax-dodging by the big banks: Budget 2022 acknowledges that federally regulated financial institutions use corporate structures in tax havens to engage in aggressive tax avoidance.

• Budget 2022 proposes merely to “examine potential changes” to the financial transaction approval process.

Less effective funding for the CRA: From 2016-2021, funding for the CRA to fight tax-dodging has earned a whopping 5 to 1 return on investment. In 2021, the Liberals promised to invest $2.5 billion in the CRA over 4 years, which would recover an estimated $11.9 billion.

• Budget 2022 proposes to provide only $916 million over four years, which the government estimates would only recover $2.2 billion over that time period (with additional benefits for the revenues of provinces and territories).

5. Ending Snow-Washing

WHAT’S IN THE BUDGET?

Establishing registries of beneficial owners of companies and real-estate: – VICTORY – C4TF and our allies Publish What You Pay Canada and Transparency International Canada have spent years doing detailed research and campaigning to shed light on the owners of anonymous shell companies. Anonymity facilitates tax-dodging and financial crime, allows oligarchs and criminal regimes to avoid sanctions, and contributes to social ills like an inflated housing market and the opioid crisis.

• Budget 2022 a) confirmed an accelerated timeline for a company beneficial ownership registry, and b) made a new announcement for a registry of real property.
• Next steps: A) Ensure that these registries have a strong registrar, with penalties, meaningful data validation and verification mechanisms in the registry itself. B) Ensure that Canada’s large provinces, especially British Columbia and Ontario, participate in a federal-led scaled registry that is publicly accessible.

6. Making polluters pay

WHAT’S IN THE BUDGET?

Carbon tax & rebate: The budget also continues to increase the carbon tax and rebate, delivering on the 2021 Liberal promise.

Incentives to reduce carbon pollution: With Budget 2022, the government continues to use tax credits in hopes that it will entice greater private sector investment in green technologies. Tax credits are a poor substitute for the direct government action that’s urgently needed to achieve a sustainable economy. Not only are they insufficient to deal with our multiple environmental crises, tax credits introduce into our tax system more complexity and opportunities for tax avoidance. 

• Tax credits for carbon capture technologies are effectively a hand-out to the fossil fuel sector, which bears the greatest responsibility for our climate crisis, and continues to be incredibly profitable

WHAT’S MISSING?

No increased royalties for natural resources: Budget 2022 fails to address crown royalty reductions for large carbon emitters, which could result in over $1 billion in revenue in Alberta alone.

No timeline for a carbon tariff: Last year, the government began consultations on implementing a carbon tariff—usually called a border carbon adjustment—as part of imposing the carbon tax on high emission industries exposed to trade. A tariff on high emission imports is long overdue and the government needs to act.

CONCLUSION

Canada is facing numerous challenges that cannot be solved without government support and intervention. This intervention is impossible without substantial revenue. Canada can avoid taking on unnecessary debt. The government has the capacity to immediately and quickly raise the money needed for important priorities like dental care, pharmacare, First Nations reconciliation, and the transition to a green economy.

What’s missing from this Budget is the courage to reverse the under-taxation of record corporate profits, of individuals with enormous and growing fortunes, and of polluters profiting by the billions while destroying the planet.