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The budget contains no details except to say that more is to come this fall, but tax experts say this is a very interesting move by the Liberals to address inequalities in the tax system

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OTTAWA Over one quarter of Canadians who made over $400,000 in 2019 paid less than the 15 per cent in federal tax in 2019, a surprising number that has the Liberal government rethinking how it taxes Canadas highest-income earners.

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Some high-income Canadians still pay relatively little in personal income tax (PIT) as a share of their income 28 per cent of filers with gross income above $400,000 pay an average federal PIT rate of 15 per cent or less, which is less than some middle class Canadians pay, reads the 2022 federal budget published Thursday.

In the document, Finance Canada reveals new data based on 2019 tax data that shows that nearly 18 per cent of Canadians who earned $400,000 in gross income that year or the 0.5 per cent paid less than 10 per cent (and sometimes even 0 per cent) in federal tax.

Another 10 per cent of wealthy Canadians paid up to 15 per cent, which is essentially the first income tax bracket for the federal government. The remaining 72 per cent of the countrys top 0.5 per cent earners in 2019 paid over 15 per cent in federal tax.

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There are still thousands of wealthy Canadians who pay little to no personal income tax each year. That is unfair, and the federal government is committed to changing it, reads the budget.

Though many within that 28 per cent paid less tax entirely legally, the government is concerned that many more have found ways to make far more deductions to their income than they should be able to.

These Canadians make significant use of deductions and tax credits, and typically find ways to have large amounts of their income taxed at lower rates, the budget reads.

But thats where Canadas little-known Alternative Minimum Tax (AMT) provision should kick in. The Royal Bank of Canada defines the AMT as an secondary means of calculating income tax that should prevent high income earners and trusts from paying little or no tax as a result of certain tax incentives, including claiming certain tax deductions and earning Canadian dividends and capital gains.

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But the federal government admits that the AMT, which hasnt been substantively updated since 1986, isnt working.

So now its looking for a new minimum tax regime which it wants to go further in ensuring that wealthy Canadians pay their fair share of tax.

The budget contains no details except to say that more is to come this fall, but tax experts say this is a very interesting move by the Liberals to address inequalities in the tax system.

Jamie Golombek, Managing Director, Tax and Estate Planning at CIBC, said he was very surprised to see that 28 per cent of wealthy Canadians paid so little in federal tax in 2019.

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That number seems crazy to me, Golombek said. We have an AMT, it affects very few people, literally, at the end of the day and its obviously not capturing enough people in their opinion.

This is very interesting, he added.

Greg Bell, a tax expert with KPMG, says Finance Canada should dive deeper into how so many wealthy Canadians managed to reduce their gross income so much on their tax filings.

The first question that comes to my mind is, if they have more than$ 400,000 of income, how are they getting their tax rates so low?, he said.

But a review of the AMT is only one of many tax measures in the latest federal budget meant to address what experts call loopholes that have allowed some corporations or wealthy individuals to pay less taxes than they should in the eyes of the government.

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The Liberals also promised to invest $1.2 billion over the next five years into the Canada Revenue Agencys fight against tax crime, focusing particularly on increasing audits of wealthy companies and individuals as well as countering foreigners use of Canada as a money laundering haven (also known as snow-washing).

For the most parts, experts agree that most of the measures amount to housekeeping, or simply patching known issues or grey zones in federal laws.

They have this laundry list of things that they dont like, and when (an issue) becomes serious enough, they go after it, Golombek said.

The most impactful change for government coffers announced in this budget is one that would ban private Canadian companies from using foreign corporations, such as shell companies based abroad or moving their headquarters to a tax haven despite still being fully Canadians owned and controlled, to avoid paying Canadas tax rates.

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The government estimates the proposal will rake in $4.2 billion over five years starting in 2022-23.

The budget also expects to recoup roughly $135 million per year going forward by closing the double-deduction loophole that allows companies to claim deductions on dividend-paying stocks that they both bet on and against.

Another $150 million per year is expected to return to government coffers by beefing up anti-avoidance rules to ensure that Canadians pay their fair share of taxes when they use a so-called interest coupon stripping arrangement.

Due to differences between Canadas various tax treaties, the interest received from Canadian residents is often subject to different tax rates depending on where the recipient resides. Interest coupon stripping arrangements exploit these differences and allow some to pay less in taxes, reads the budget.

Finally, the budget promises to review and strengthen federal rules aimed at preventing abusive tax avoidance transactions, though no further details are provided.

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Liberals to 'go further' targeting high-income earners with budget's new minimum income tax - National Post