MEASURING DIFFERENCE
When we calculate things like income disparity in this country we don’t typically look at the difference between people’s incomes. (No, because that would make sense.) Instead, most journalists and researchers pull up tax data from Statistics Canada, like that found on the National Household Survey. Looking at this data then, folks tend to conclude and report that the top wage earners in the land make on average roughly ten times the national average, say. And it’s with a number like this that you get all of these rosy assessments of the fairness of our taxation system and the general economic health of our nation. However, because these reports exclude many critical details (like what people actually earn or have as assets, not just what they claim or what Revenue Canada tells us they pay tax on) their numbers are way off – and so too are their evaluations of Canada’s current economic divide.
Recently, Canada’s leading income and income inequality researchers came together for a tax symposium at the University of Waterloo. These researchers made clear that our present wealth and income reality here in Canada is actually rather dire. They showed how anyone with any wealth at all typically sets up what is called a Canadian-controlled private corporation (or CCPC). This CCPC scheme, they explained, allows people to “legally” (and entirely unethically) shelter their money from personal income tax rates, up to 45% for upper income earners, and instead pay the minuscule business tax rate. (For instance, a CCPC that claims small business deductions, as most do, could easily pay as low as 13%.) And, in this way, through this form of legal tax evasion, actual personal incomes – some of the highest in the land – fail to appear in Stats Can data sets and, as a result, in the income inequality breakdowns we read about and confidently cite.
So what happens to the incomes of Canada’s wealthiest when these same researchers crunch this new data, this time taking into account more of the relevant information? Not surprisingly, the wealth of the richest Canadians turns out to be significantly higher and, therefore, the nation’s income inequality drastically worse. In fact, these same researchers found that those with the highest incomes, the 0.01% of our population, those reporting an average income of $4.7 million, had personal incomes around 70% higher than what’s reported in our national income tax databases. So, for example, this means the actual income average for the above minority is closer to $8 million than $4.7 million. I think you’ll agree that’s no small difference.
Despite knowing this, corrections are not made and we don’t seek changes in reporting, data collection, or tax law. Over the last few years, across all media, researchers and reporters have continually claimed that the wealthiest 1% of Canadians saw a dramatic decline in their wealth with the engineered financial catastrophe of 2008. These folks, we are told, went from making 15% of all income in the country down to just 10%. And reports such as these also commonly suggest this figure has held steady since 2009, implying that income inequality has levelled off and that Canada’s economy is more equal today, in 2014, than before the big fall. (Hooray!) Sadly this most recent reveal exposes quite a different picture. In light of this new data, this same group (the top 1% of income earners in Canada) appears to have actually had their incomes rapidly re-grow since the big collapse. It is estimated they now hold closer to 14% of all income in the country.
If you dare to go looking for it you can find some scary reports of growing inequality in recent months and years. For instance, there was a major global income gap analysis that came out in September of 2013. This joint report by economists from Oxford, the Paris School of Economics, and U.C. Berkeley, found that the wealthiest 1% around the globe grew their income by 31% between 2009 and 2012 while everyone earning less than them (essentially all of humanity) saw upward movement of only 0.4%. However, given the light shed at Waterloo recently, if measures of income in Canada can be off by 70% or more it’s not hard to imagine that these already depressing numbers, showing greater income disparity today than ever, are way off too.
I’d be comfortable suggesting that such dramatic miscalculation and misrepresentation can only come about intentionally or through woeful incompetence; given that not only are these sheltering schemes well-known but they’re also, apparently, nearly ubiquitous. But we may have cause to be still more critical knowing most of the accounting and finance world fits into the upper tax bracket or is directly employed by members of this group. The reportage to date appears particularly bold (appalling) given that, by taking into account these CCPCs alone, the exact opposite of what is being presented is in fact true. Our post-implosion economy sees growing inequality and a much larger percentage of the wealth of this nation winding up in increasingly fewer hands. And Dr Michael Wolfson, a former statistician with Statistics Canada and lead author of the Waterloo report, says this is still only part of the picture; that further research is needed because top incomes likely continue to be underestimated, as there’s a lot more at play than just these very simple and visible CCPCs.
Of course some of this income funneling may be legitimate but we may wish to ask how much of it is so and how much is flagrant tax avoidance. If we’re being even more critical we might wonder how we can possibly pretend to have a legitimate system of taxation when figured into it are such tempting and convenient workarounds? The Waterloo report shows us that those who would gain the most from secreting their money away in private corporations, those in the upper tax bracket, are almost all (80% of them) taking advantage of these tax tricks while only 5% of the lower half of all income earners in Canada have CCPCs. And we can be sure only a few of the upper income earners in this country make their wealth as legitimate business owners. Instead, most of those holding CCPCs are accountants, lawyers, doctors, presidents of universities and crown corporations, and the like who are not actually operating a small businesses in their own name.
Given that the only reasons for setting up a private corporation in such a manner is to pay a lower tax rate, take corporate tax and small business credits, split income between people, and/or defer income to another year, it seems there is a direct incentive for those paying 45% in income tax to take full advantage of all that is legally available under the CCPC system. And no doubt anyone taking advantage of the system in this way would suggest that their money isn’t hidden away, as I’m suggesting, and that this behaviour doesn’t amount to anything dodgy at all. In their defence CCPC holders might argue that the money has to come out of these corporations to be used, obviously, and that when it is it’s taxed at personal income tax rates. Undoubtedly this would pacify some but ultimately this is false and misleading.
Dr Wolfson and his co-authors explain that every element of the CCPC system is exploitable. For instance, the CCPC structure allows a doctor or lawyer, say, to put money into their private corporation, sheltering it from higher taxation while fully employed in one year, then take a leave of absence, a year or two off work to sail around the world, let’s say, and extract money from their corporation at this time, in the year they’re earning no income at all. Doing so they would pay far less tax than they rightfully owe on these earnings. Similarly, they could pay a spouse or adult child a dividend from the corporation that would then get taxed commensurate with the tax bracket of the person accepting the money. (Maybe nothing.) Additionally, a CCPC could be used to provide free education to a child, if said child is an adult and is documented as an employee of the corporation. In this scenario the full cost of a university degree or three could be written off through provisions in the tax code that relieve corporations of the financial burden of employee training. And, on top of all this, personal technology, automobiles and watercraft, and even real estate are also commonly placed under the umbrella of private corporations.
Under our current tax system, a surgeon, say, could have a CCPC under her name, call it a “consulting firm”, employ her spouse and child, claim 40% of their home as their place of business, their Audi and Benz as company vehicles, and write off every coffee and dinner party and vacation they have as legitimate business expenses. And all of this is totally legal. (A business course I took brought in an accountant who mapped all of this out for us and explained in detail how he does this himself and has made a career out of organizing CCPCs for the wealthiest among us.)
So, at the very least, it seems clear that inequality has been designed into, and is in fact a key feature of, the Canadian tax system. Only by design do you get a system so distorted, so one-sided, where tax avoidance mechanisms are legally in place for those with the resources to benefit from them.
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