Recommendations:
1. Implement a permanent excess profits tax to raise revenue from corporations who profited off the pandemic and discourage future crisis profiteering
2. Implement a minimum tax on corporate book profits
3. Implement a progressive wealth tax
4. Close tax loopholes that benefit the wealthiest
5. End the REIT exemption to discourage the financialization of housing
6. Support international coordination on the taxation of multinationals and ultra-high net worth individuals
7. Increase transparency on the phaseout of fossil fuel subsidies
8. Require public country-by-country reporting of firm financial information
Introduction
In 2022, Canadian corporations raked in record levels of profits while the poverty rate increased by 34%. Corporations declared a record $308.6 billion in dividends, a sum that could have eliminated poverty in Canada in 2022. While corporate profits have finally begun to fall, the excess profits collected during the pandemic have been paid out to wealthy shareholders, instead of being reinvested in the economy. As of 2024, wealth and income inequality continue to rise.
At the same time, Canada is facing an urgent climate crisis and a housing crisis. In part due to the Bank of Canada’s significant interest rate increases throughout the past few years, inflation remains high for essential services like housing. According to the CMHC, average rents increased by 8% in 2023, the fastest rate observed on record. To address the climate and housing crises that Canada is facing, we need to tax the excess profits earned by corporations during the pandemic so they can be reinvested in critical public services, infrastructure, and a just transition.
Implement a permanent excess profits tax
The COVID-19 pandemic, and associated inflation, exposed that corporations are not merely price-takers. After experiencing some input price shocks, corporations used their market power to increase prices far higher than the increase in their input costs. This led to record corporate profits in 2021 and 2022, alongside the highest levels of inflation observed since the 1980s. Although corporate profits have come down slightly in 2023, margins remain 25% higher on average than the decade before the pandemic. There is no mechanism in place to prevent corporations from further increasing profit margins again during future crises. In fact, without further action, they will be emboldened to do so.
This is why a permanent excess profits tax is urgently needed. This would ensure that profits generated and sustained from a crisis are directed into public services, and discourage corporations from engaging in similar predatory pricing strategies in the future. This type of tax has received widespread global support since the pandemic, including from the IMF. Countries around the world have implemented excess profits taxes in response to the pandemic. If implemented correctly, excess profits taxes will not discourage investment. This is because they can be designed to target economic rents, which arise due to market power or unexpected events (like the COVID-19 pandemic), rather than normal returns on investment.
There are a variety of ways to design this mechanism. The tax could be applied on profits over and above a specified profit margin, such as the average profit margin in previous years. Many EU countries have implemented a tax on profits above 120% of average profits over 2018-2021 for energy companies. Tax rates on such profits range from 25% to 75%. During WWI and WWII, Canada imposed taxes of up to 100% on profits above a specified return on invested capital.
The tax could be applied to profits above a threshold. In 2022, Canada implemented an excess profits tax on banks and insurers,which included a one time 15% tax on pandemic profits over $1 billion and a permanent 1.5% surtax on profits over $100 million. Canada could take a similar approach across all sectors of the economy that have seen unprecedented profits. A permanent tax on profits above a certain threshold would have the added benefit of discouraging market consolidation through mergers.
The government should seriously consider all of these options and implement one that raises revenue from corporations who profited from the pandemic and continue to do so through sustained increased profit margins, and discourages future price-gouging. This could involve a two-prong mechanism; a permanent surtax and a one-time tax triggered during profit generating crises.
Minimum tax on corporate book profits
Large corporations are able to combine a wide range of tax loopholes to minimize their tax burden. The government should implement a minimum tax on book profits of large corporations to prevent the most extreme forms of tax avoidance. The United States implemented a minimum tax of 15% on book profits for companies with over $1 billion in profits in the Inflation Reduction Act (IRA), and proposed increasing it to 20% in its 2025 Budget. Canada recently implemented Pillar Two of the OECD Inclusive Framework, which imposes a minimum tax on multinational enterprises, but this does not apply to large domestic firms or project to bring in revenue before 2026/27. Like the United States, Canada should implement a minimum tax on corporate book profits that applies to all large corporations immediately.
Progressive tax on wealth over $10 million
Since wealth tends to grow faster than the economy as a whole, wealth and power can become more and more concentrated in the hands of a few. This trend accelerated during the pandemic, when billionaire wealth increased by over 51%. As of July 2024, the 20 richest Canadians have over $214 billion in wealth, equivalent to over 10% of Canada’s GDP. This level of wealth concentration gives individuals outsize influence over our society. A progressive wealth tax on net wealth over $10 million would redistribute wealth and power, while raising over $32 billion in the first year. 99.5% of Canadians would not be affected by this tax. Exit taxes should be applied to discourage the wealthiest from leaving the country.
Close tax loopholes that benefit the wealthiest
There are many loopholes in the tax code that disproportionately benefit the wealthiest. For example, about half of the lost tax revenue ($5.5B in 2021) from the dividend gross-up and tax credit (DTC) goes to the top 1%. Although it is now argued that this credit prevents double taxation, this argument has been repeatedly debunked. Furthermore, given that corporations do not actually pay the full statutory corporate income tax rate, the DTC is much too large to offset the taxes actually paid by corporations. The DTC should be removed, or, at minimum, linked to the actual amount of taxes paid by corporations.
In 2022, the average salary of the top 100 CEOs hit a new record, $14.9 million, 246 times the pay of the average worker. Corporations are encouraged to pay their executives exorbitant salaries by the fact that all executive pay can be deducted from their taxable income, no matter how high it is. Canada should follow the lead of the U.S. and limit executive pay deductibility to $1 million.
End the REIT exemption
Real Estate Investment Trusts (REITs) are trusts that operate like investment firms yet are not subject to corporate income tax. This is supposedly to incentivize real estate investment but REITs are much more likely to acquire existing stock than to build new housing stock that could help address the housing affordability crisis. Instead, the financial logic of REITs encourages them to raise rents as much as possible on existing units. There is no reason to continue to allow REITs to receive favourable tax treatment while they contribute to the housing affordability crisis. Eliminating this loophole would bring in over $55 million per year in net revenue. Yet, in 2024, the government abandoned its review of REIT tax treatment.
Support international coordination on tax policy
Led by the Africa Group, terms of reference have been drafted to begin the development of a UN Tax Convention. A UN process has the potential to be more democratic and inclusive than the OECD/G20 process, which tends to favour rich countries. Canada should wholeheartedly support this process and advocate for policies that deter international tax avoidance and effectively tax ultra-high net worth individuals through international coordination. Canada should also support the G20 idea to impose a global minimum tax on billionaires.
Increase transparency on the phaseout of fossil fuel subsidies
Canada published a framework to phaseout “inefficient” fossil fuel subsidies in 2023. However, to date no details have been published about which specific subsidies fall under this designation and when they will be phased out. All subsidies to the fossil fuel industry are not compatible with Canada’s climate targets and should be ended as soon as possible.
Public country-by-country reporting
Large, powerful institutions must be accountable to the people whose lives they affect. Multinational enterprises are required to provide tax authorities with country-by-country reporting of their financial data as part of improving their accountability. This information should be made available to the public to further increase transparency and accountability. Currently, we cannot tell how much revenue, profit, or tax large multinational enterprises claim in Canada. Corporate opponents of public country-by-country reporting claim it would expose trade secrets. However, tax planning should not be considered a legitimate trade secret. Any MNE doing legitimate business and reporting legitimate financial information should have nothing to hide.
As a member of the Alternative Federal Budget (AFB) working group, Canadians for Tax Fairness supports a range of other tax policies outlined in the 2024 AFB chapter on taxation, and in the soon-to-be released 2025 AFB.
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