Rounding it up
The net corporate tax rate is just 15%, leading many to ask why such profitable corporations are not taxed like individuals, even though they enjoy “personhood.”
Corporate personhood is an old idea and has to do with ensuring the rights of a gathered group of investors (in this case, in a corporation) are protected.
Lower corporate tax rates help keep Canadians in jobs, support the real estate markets of many towns, and keep international business flowing.
Consumer advocates argue that corporations are not investing in employees but instead, are pocketing the profits for shareholders and executive salaries.
We generally think of people as our neighbours, friends, family, and that guy who always takes the bus at the same time as us on weekdays. Makes sense. Did you know, however, that Canadian law views the company that you work for as a person too? That’s right, ABC Corp. that makes widgets and wadgets is as much of a legal person as your Uncle Jim.
If that’s the case, they’re definitely paying the same taxes as you and your Uncle Jim, right? No sir, they are not. Companies in Canada, while enjoying personhood in a legal sense, do not have to ship the same amount of cash to the government as you or I. Seems kind of unfair, perhaps, but there is an argument to be made that a lower tax rate for corporations actually helps you as a Canadian citizen. Read on to understand a bit more about why this is the case.
How are corporations people anyway?
The development of Canadian corporation personhood actually began all the way back in 1897, when the House of Lords in a case called Salmon & Co. found that corporations are separate and distinct legal entities from their shareholders or even owners. Over the course of the last several decades, Canadian courts have continued to construct personhood around corporations. The idea behind this is that corporations are beholden to their shareholders. The shareholders, in turn, have the fiduciary responsibility to take action that promotes the success of the corporation. In this way, corporations can take “their own actions” and do things that are in their best interest and in the best interest of their investors.
In a way, you can see how this makes sense. Let’s say you’re investing in a company; you certainly want its leaders to act in such a way that makes the company as profitable as possible. This may not necessarily be in the best interest of the leaders of the company, but because the corporation can act on its own behalf (via others) it can be led to profit.
Just so you don’t think this is purely a Canadian invention, our neighbors to the South have dealt with corporate personhood for many centuries; it can even be traced back as far as when English monarchs awarded charters of incorporation to ventures like the East India Company. In recent years, corporate personhood has become a hot topic because of a court case called Citizens United. This case, along with much of the case law before it, found that corporations are people for the purposes of political donations as well.
So they pay their fair share, right?
Nope. Despite their personhood under the law, corporations do not pay anywhere near the tax rate that individuals do. The corporate tax rate in 2020 was just 15% and nine percent for small businesses. In 2015/16, Canadians paid $145 billion in income tax, while corporations paid $41 billion. The same study referenced above, completed by the Toronto Star, found that banks in Canada avoided more than $5.5 billion in taxes. In fact, Canada’s corporate tax rate has been cut over and over again over the last several decades. This came in response to a number of other countries lowering their corporate tax rates in an effort to lure business to their shores.
Individuals, on the other hand, paid, on average, between 15 and 35% in taxes in 2020. Keep in mind, this is an average, so some individuals ended up paying quite a bit more, while others paid less.
How do corporations do this?
First, and as we said above, it’s written into the law. The corporate net tax rate is about 15%; Corporations avoid taxes via a whole range of complicated loopholes and legal maneuvers. One of the more simple ways, however, is their ability to use offshore tax havens. Canadian law allows for a percentage of offshore profits to be exempt from taxes altogether. This construction makes it more profitable for companies to invest their dollars abroad as opposed to those that keep their money at home. This isn’t necessarily a trick by the companies, but instead a concerted effort by the Canadian government to keep companies competitive in an international marketplace.
Another common method companies avoid taxes is called transfer pricing. Many larger corporations have many subsidiaries and many of them exist in different countries with different tax rates. Transfer pricing involves selling goods to itself internally from a higher tax branch to a lower one. This lessens the tax payout in the higher tax country because the purchase is viewed as an expense. The Canada Revenue Agency takes a dim view of this strategy and investigates it, but it does still happen.
What value is there in having corporations pay lower rates?
In a country and world where so many are just scraping by, home prices are through the roof, and childcare is astoundingly expensive, one could argue that corporations should pay more instead of less. Bank CEOs made $75 million in salary and bonuses in 2020. When you consider that $75 million could build a new public transportation system or a series of new schools, it's tough to justify low rates for corporations. However, there are a few key reasons why it may be desirable to have corporate tax rates remain low.
Corporations offer Canadians jobs. The less they have to shell out in taxes, the more likely they are to reinvest in their company and hire more workers. Corporations can also afford to increase the pay of workers if their expenses for doing business are lower. Corporations also contribute to various social safety net programs, both on behalf of their employees and otherwise.
This doesn’t always end up being the case, though. Consumer advocates argue that the increase in profits often end up in the pockets of shareholders and executives, not workers.
Real Estate Taxes & Local Economy
Aside from the salaries corporations pay to employees, corporations make a large contribution to the cities and towns in which they do business or have their headquarters. Take your favourite local coffee chain for example; they not only pay the workers in both salary and benefits, but they also pay taxes on the property they own and make a positive impact on the economy around them.
Corporations will always prefer to do business in lower tax environments. This is why Ireland slashed its corporate tax rate in the nineties, which led to a wildly profitable economy that is often called the Celtic Tiger.Support for Small Business
Small businesses and their owners often live on a razor's edge between profitability and near collapse. This is because they’re profoundly affected by the economy: both by macroeconomics, like tariffs on raw goods brought into Canada, as well as by microeconomics, like a newer business coming to town that threatens existing ones. Corporate taxes make this existence far more difficult. This is also why the corporate small business tax rate in Canada is only about nine percent.
So, Is it good or bad?
There are a variety of reasons that corporations are viewed differently from individuals in terms of taxation. From real estate to jobs to the tangential benefits that low corporate taxes provide, there are a variety of arguments to be made that keeping corporate taxes low, as compared to the individual tax rate, is beneficial to Canadian companies and citizens alike. This is, however, an issue that is ripe for debate and an ever-present hot topic in Ottawa.
Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.