Canada’s biggest corporations are making record high profits and paying income tax at record low rates. This potent combination deprived the public of more than $30 billion in tax revenue in 2021.  The foregone revenue could have reduced the 2021 federal and provincial deficit by 20%.  Unfortunately, a lack of corporate financial transparency makes it difficult to identify how corporations were able to avoid so much tax. The government needs to explain how corporations are able to avoid such large amounts of tax and take action to reduce the corporate “tax gap”.
The “tax gap” is the difference between how much a taxpayer actually pays in tax, and how much they would pay at the statutory tax rate—the rate stipulated in the tax code. The corporate tax gap grows if corporate profits increase or if the effective tax rate—how much income tax companies actually pay as a share of profits—falls.
- The 2021 effective tax rate for 123 of Canada’s biggest corporations fell to 15% from an average of 19% for 2017 to 2019. At the same time, the pre-tax profits of these companies skyrocketed by 60%.
- The combined federal and provincial statutory tax rate on corporate profits has been around 26.5% since 2012.  The difference in 2021 between the statutory rate and the effective rate is the largest since the 2008/9 Global Financial Crisis.
- Lower tax rates, applied to record profits, more than doubled the 2021 tax gap for these 123 corporations to $30 billion from an average of $13.5 billion in 2017 to 2019.
- Relative to GDP, the corporate tax gap jumped to 1.2% from an average of 0.6% from 2017 to 2019.
Corporate tax avoidance is not a new problem. Rather, the enormous increase in the corporate tax gap for 2021 suggests that a persistent problem may be growing worse.
Corporate tax avoidance has significant consequences for government finances and the Canadian economy. It also undermines people’s confidence in our tax system. Above all else, Canadians expect the tax system to be fair. Whether corporations are using questionable tax planning to avoid taxes or simply taking advantage of lucrative loopholes offered by governments, we deserve to know why the corporate tax gap reached such enormous proportions in 2021.
The tax gap in 2021 was $30 billion. The tax gap in the three years before the pandemic was $13.5 billion. In other words, the 2021 tax gap was more than twice as large.
The enormous increase in the tax gap for 2021 is the product of much higher corporate profits and a lower effective tax rate. Corporate profits increased by 60% over the three years before the pandemic. This was partially due to higher revenues, which increased by 17%, but largely due to higher profit margins, which rose from an average of 12.8% to 17.4%. At the same time, the effective tax rate dropped from an average of 19% to 15.3%.
In other words, although corporate operating costs increased in 2021, those costs were more than passed along to buyers. Canadian corporations were not just responding to inflation. They were helping to drive inflation. And by pushing down their tax rates, the corporations were able to keep more of those inflated profits. The affordability crisis of Canadians and record corporate profits are two sides of the same coin. A windfall profits tax should be considered as a way to address both.
The Largest Tax Gaps
The largest tax gap for 2017 to 2021 belonged to Brookfield Asset Management. Close behind was the oil and gas company Canadian Natural Resources. However, large tax gaps are not limited to just one or two industries. Figure 3 shows the 20 biggest total tax gaps over the last five years. It includes companies from a range of industries. Four of the Big 5 Banks are there (RBC had the 26th largest tax gap). In addition to Canadian Natural Resources, Imperial Oil and Barrick Gold represent extractive companies. Canada’s pipeline giants, Enbridge and TC Energy, are third and sixth, respectively. While Bell was the only telecom to make the Top 20, Rogers is 29th and Telus is 31st.