Our hot new prime minister says when Parliament resumes this week that slashing middle class taxes will be job one.
So, mirabile dictu, most working grunts think they’ll be paying less and getting more. It’s the change-hope thingy. Fortunately you have this blog to disabuse you of such things. Let’s begin, shall we?
First, the tax cut primarily affects those earning between $45,000 and $89,000 and for them (the folks at the top end of this range) the savings equal less than $13 a week. The average will be about eight bucks. However, 66% of Canadians who file tax returns earn less than forty-five grand, so no tax cut for them.
That leaves nine million people who will get those few extra dollars a week. Meanwhile everybody believes the rich – the top 1% of us – will be reamed. And they like that. The prime minister made a big deal of this on the campaign trail, saying people who already give up close to half their incomes, “should pay their fair share” – which to those on the left means paying more.
So how many rich guys are we talking about?
The new top tax bracket will click in at a taxable income of $217,000 (the existing 29% rate travels to 33%), and this will affect just 264,000 taxpayers, or 0.75% of citizens. The Libs claimed this would raise $2.6 billion in net new revenues, which works out to an average of almost $11,000 per rich guy in additional tax. This, logic tells us, is ridiculous.
In order to save eleven grand in taxes, all a rich guy need do in 2016 is max out his RRSP contribution, since there is $25,370 in new room available – which will net a refund greater than the additional tax burden. Of course, if the rich guy is a doctor (about a third are), then by putting his or her spouse and kids on the medical professional corporation payroll he can slice his taxable income. Or convert from salary to dividends. Meanwhile entrepreneurs can establish a holding company and flow up cash flow from the Opco without tax being triggered, then bring it home through a family trust or dividends, making use of the dividend tax credit.
Of course, a rich guy with a fancy accountant can also use flow-through shares and garner tax-saving investment credits. He can establish an Individual Pension Plan (IPP) or a Retirement Compensation Agreement (RCA) to actually salt more pension money away than RRSP rules allow. And he can earn unlimited income in the form of capital gains from investment portfolios, and reduce the tax rate by 50%.
In short, there’s no way the addition of the new tax bracket will raise $2.8 billion for the new government to spend (last week the hot one committed $2.6 billion more to developing countries in the name of climate change). And if you’re one of the chosen 264,000 people now in the crosshairs, I trust you’ll be giving serious consideration to the above strategies, plus a whole lot more.
Craig Alexander is a smart, reasonable fellow who impressed me when he was a big cheese economist at TD Bank. These days he’s helping run the CD Howe Institute, and his conclusion is that by increasing rich guy taxes Ottawa will actually erode the overall tax base – a phenon many other jurisdictions have seen develop. The extra tax burden will trigger more tax avoidance activity and result in the 240,000 people reporting about 5% less in taxable income than they do now. That will strip $7.3 billion from the tax base, and the Libs will end up with 70% less than they claimed. Worse, this decline in the tax base will cost the provinces about $1.4 billion in revenue.
Well, so much for the rich paying for a tax cut for the middle class – which is now down to 33% of the population. But there’s more. According to Alexander, here’s an actual danger of trying to soak the successful:
“The reduction in tax rates for middle-income households is desirable, but the heavy taxation ?of high-income Canadians is at odds with the desire for more entrepreneurial activity. Canada is in an international war for talent. Canada needs competitive tax rates for high-income earners, or we run the risk of a brain drain and the risk of being less able to attract foreign talent. Excessively taxing the talent that fuels a more innovative, creative and successful economy is ultimately self-defeating.”
Meanwhile there are other costs to paying for the eight bucks a week a third of taxpayers will save. The TFSA contribution limit will be slashed from $10,000 to just $5,500. Income-splitting is being erased, so couples with a stay-at-home parent will be impacted. And contributions to the public pension plan will, says the prime minister, be increased as part of reform. The estimate is by about a thousand dollars a year. BTW, the CBC has reported our wealthy PM has put two personal nannies on the government payroll. They’re with him in Paris this week.
You may or may not agree with what’s coming later in a few days. But you should at least know the context. If you’re a .75%er, then 2016 will be the year you get serious about tax avoidance. Lucky for you, it’s easy.