May 25, 2017
Archived - Paying Our Fair Share: Taxes and a Competitive Economy
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Speech by the Honourable Bill Morneau, P.C., M.P.
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Thank you to the Toronto Region Board of Trade for hosting.
Special thanks to Professor Jinyan Li for agreeing to moderate.
I am here today to talk to you about taxes.
So you have been warned.
When I look at the stacks of five-inch-thick tax binders on my desk, I'm reminded that this is the hard work of government.
When it comes to our tax system, I want to enhance competitiveness so that Canadian businesses create meaningful, well-paying middle class jobs.
My job is to ensure that we have a healthy and growing economy, and that Canadians can have the confidence their tax system is working for them.
So that's the lens.
Now here's the context.
Right now, Canada has one of the most competitive corporate tax systems in the G7 and the Organisation for Economic Co-operation and Development (OECD).
Now, we have been hearing a lot of chatter about taxes and the United States.
So, to compare, the United States has a combined statutory corporate tax rate of 38.9%.
Canada has a combined corporate tax rate of 26.7%.
Of course, we need to pay close attention to what's happening south of the border—and I am.
I have a very good relationship with my U.S. counterpart, Steven Mnuchin.
I understand the basic principles that are driving the United States administration's plan for tax reform.
Their plan, from what we know at this moment, is striving to be more like Canada, not less.
So one of my first messages to you about the tax expenditure review we are undergoing is that it is not a reaction to what may or may not happen in the United States.
It's about making sure that the rules—as they were intended—are being followed and that people are paying their fair share.
Here's an early example of what we've done:
The Canada Child Benefit: an average increase in benefits for families of almost $2,300 this year.
Middle class tax cut; raising taxes on the wealthiest 1%.
These things—on top of investing in our communities and doing things like strengthening the Canada Pension Plan and promoting lifelong learning—help give people confidence in their future.
People deserve to know we're on their side.
You filed your taxes—in full and on time.
But did your neighbour get a better deal?
Right now, the answer is: maybe.
And that can undermine people's confidence in the whole system.
We want to make sure the answer is: no.
On an ongoing basis, we are taking action to close tax loopholes that give unintended advantages to some at the expense of others.
It's part of our plan to build confidence among Canada's middle class and drive economic growth.
That's why last year, we launched a review of tax expenditures.
And we found a number of issues around tax planning strategies by people using private corporations.
In fact, the number of corporations in professional services has tripled over the last 15 years.
While there are good reasons to incorporate, there is a concern that, in some cases, people, usually high-income people, may be gaining an unfair tax advantage. Legal as it may be.
We need to better understand this trend, and we are studying its implications closely.
We have identified three areas of concern.
The first is what is known as income sprinkling.
Take this example: if you are an employee living in Ontario and you make $220,000 a year, you would pay roughly $80,000 in income tax.
Now, your neighbour owns a private corporation and sprinkles that same amount between themselves, their spouse and their adult child.
In many cases, the family is involved in the business and it's completely legitimate.
But in cases where the spouse or child have no role in the business, suddenly your neighbour is paying roughly $30,000 less tax than you do.
And we see no good reason why that should be the case.
The second example is passive investment income.
That's when people hold money inside a corporation, not to grow the business by investing in it, but simply to shield it from the higher personal rate.
Again, this sort of arrangement is not available to someone who collects a paycheque every two weeks.
The third and last example relates to capital gains.
Converting a private corporation's regular income into capital gains can reduce income taxes—again, by taking advantage of the lower tax rates.
Again, we want to make sure people understand that their Government is working for them.
That the tax system is fair to them.
When people feel the deck is stacked against them, they are understandably frustrated.
If we want strong, long-term growth that is shared widely, we need to have a tax system that works fairly for everyone, especially the middle class, the beating heart of our economy.
So in the coming weeks our Government intends to release a discussion paper looking at these tax planning schemes in more detail, and laying out potential policy responses.
That's sure to create some debate. That's good. That's what I'm after.
I look forward to that debate very much, because this is a very important debate for us to have, one that we all have a stake in.
I'm on the side of doing what's fair.
And what's fair is that neighbours in similar circumstances pay similar amounts of tax.
But of course the problem isn't just here at home.
There is a whole complex web of international tax evasion and avoidance that we need to address.
We want to make sure that all Canadians are paying their fair share.
But we don't always know where they keep their money.
That is a blind spot.
Tax information exchange agreements and the Common Reporting Standard help us reduce that blind spot.
That's why Canada has developed an extensive network of bilateral tax treaties and tax information exchange agreements with our international partners and has recently passed legislation to adopt the Common Reporting Standard.
So, if a Canadian resident has a bank account in Luxembourg and they are investing that money, the Luxembourg tax authority will now have to report back to us who the owner is so we can ensure that that person is paying the appropriate level of tax in Canada on all their income.
We—meaning Canada—also actively participate in the Financial Action Task Force on Money Laundering and the Global Forum on Transparency and Exchange of Information for Tax Purposes to set and promote international standards.
Back to blind spots for a minute: We know we need to improve the availability of beneficial ownership information here at home to ensure law enforcement and tax authorities have timely access to this information to combat money laundering, terrorist financing, tax evasion and tax avoidance.
We can't sit back and wait for another "Panama Papers" to tell us whether or not someone may be trying to hide their income from taxation.
But to get to the bottom of this we need coordinated action with the provinces—remember, only 10% of Canadian companies are federally incorporated—I intend to lead that charge, in collaboration with my colleague Minister Navdeep Bains.
We are also working with partners around the world to support tax fairness and reduce aggressive tax planning as it relates to base erosion and profit shifting, or BEPS.
That is when multinationals find ways to reduce their taxes by exploiting the interaction between domestic and international tax rules.
For instance, if a company manufactures something in a low-tax country, and sells it to an affiliate in a high-tax country, they might be tempted to inflate the price of the goods being transferred in an attempt to shift profits to the low-tax country.
The BEPS work provides guidelines that will help limit this kind of aggressive tax planning.
In fact, on the topic of BEPS, I am pleased to announce that my Parliamentary Secretary, Ginette Petitpas Taylor, will be in Paris at the OECD next month to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on behalf of Canada.
There you have it—the tax system as we see it, and some of our early thinking about the challenges and opportunities ahead.
There's more work to be done, and I look forward to your feedback and input as we move forward.
As I said, dry as it may be, this is a big part of how we are bringing confidence back to our middle class.
And I want to stop my critics before they get started: what we are after is fairness and competitiveness, not revenue.
I also want to make it clear that we appreciate and support the important role and contribution of business—including small business—to the very fabric of our country.
We want to encourage businesses to create jobs, grow and continue to support economic growth.
The rules under which businesses operate are intended to help businesses invest in themselves and prosper.
What we want to avoid is people exploiting those rules to gain an unfair advantage for themselves, at the expense of others.
When some—in many cases the very wealthy—are not paying their fair share, that leaves less money for health care, housing, child benefits, the Coast Guard and other essential services and programs.
We all benefit from these things and so we should all pay for them as we are able.
Fairness breeds confidence. And that's what I'm after.
And I look forward to getting into a little more detail in my discussion with Professor Li.