Kevin Milligan

Professor Kevin Milligan, UBC Vancouver School of Economics

Draft Comments to House of Commons Finance Committee

Delivered by Videoconference

April 14, 2016

Noon EDT / 9am PDT

Thank you for the invitation to comment on Bill C-2. I would like to make two brief points on the new 33% tax bracket and its impact on tax planning and avoidance.

First, I’d like to emphasize the importance of the federal-provincial angle. In a federation like Canada, it is more difficult to tax mobile economic factors at the provincial level. For example, if a province tries to tax high earners, some of that income may shift to other provinces through use of financial and accounting techniques—an example is the Alberta Family Trust into which a high-earner from another province can shift assets that are then taxed at Alberta’s lower rates.

On the other hand, at the federal level it is harder to avoid taxation because shifting income out of the country is harder than shifting between provinces within the country.

In research with Michael Smart from the University of Toronto, we found that high-income taxpayers are much less likely to shift their income in response to a federal tax change than they are to a provincial tax change. So, when looking at the revenue implications of a new high income tax bracket, the revenue expectations at the federal level should be higher than at the provincial level.

My second point is that enhanced administrative measures are critical to combat tax planning and avoidance. If the CRA makes it harder for individuals to engage in tax planning, the new 33% bracket is more likely to reach its revenue targets.

The government has already announced several measures that move in that direction, including a change in the recent budget in the definition of active vs. passive income for small-business corporations and also new enforcement programs to be introduced by the CRA.

But I believe there is still more to do.

• Reduce use of small business corporations as tax shelters: examine spousal dividends and the lifetime capital gains exemption, and consider an employee count or hours threshold, as Quebec has done.
• Re-open the case for the taxation of stock options.
• On the international front, organizations like the OECD pursue multilateral agreements to curb tax planning and tax avoidance at the corporate and individual level. Canada should be taking a leadership role in pushing these processes forward.

Canada deserves a tax system that is fair. I believe the steps taken over the past few months have been mostly in the right direction, but there remains work to be done.

Thank You.