How will Tories find spare cash? Close $1-billion in tax loopholes

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Jim Flaherty is closing down $1-billion worth of tax loopholes for corporations and investors in his 2011 restraint budget, an aggressive bid to claw back lost revenue even as Ottawa proceeds with hefty cuts to business taxes.

The measure echoes efforts taken in the United States as cash-hungry Washington combs through its tax code to seal off revenue leaks and mop up the red ink on their books.

The effort sends a carefully cultivated message to voters as the country prepares for a possible election: The Conservatives may be in favour of chopping levies for business but they will not tolerate efforts to dodge legitimate tax bills owed.

Michael Ignatieff's Liberals oppose $6-billion in corporate tax-cut commitments by Stephen Harper as an unfair sop to business in tough economic times and plan to campaign in favour of reversing them in a campaign that could begin this week.

Later Tuesday, the three federal opposition parties announced they will all vote against Mr. Flaherty's proposed budget, making it likely that a spring election will be called and that none of the budget's provisions will be enacted.

The Tories, who refuse to abandon the cuts, are trying to demonstrate through this year's budget that they are not letting corporations and investors off easily.

In effect, as the Finance Minister said in his Tuesday budget speech, tightening the tax code helps pay for broad-based relief such as the multibillion-dollar business rate cut the opposition Liberals are decrying as the wrong move during an era of deficits.

"We will keep taxes low, while taking action to close unfair tax loopholes that allow a few businesses and individuals to take advantage of Canadians who pay their fair share," Mr. Flaherty told the Commons.

The single biggest loophole being shuttered is one that allowed corporate partnerships to defer paying taxes until future years. It's one commonly used by oil and gas companies and is potentially lucrative in a period where business tax rates are declining.

Sewing this exception shut will reap Ottawa as much as $850-million annually in the years ahead, the budget document forecasts.

This effort will underwrite about 60 per cent of Ottawa's new spending over the next few years. The 2011 federal budget plans for $6.6-billion new measures over five years, while the loophole-closing exercise is projected to reap $4.1-billion over the same period.

The tax-avoidance curb also represents nearly a quarter of the cost-savings measures the Harper government is announcing to balance the budget - possibly one year ahead of earlier projections.

Don Drummond, an economic adviser to the Toronto Dominion Bank and an ex-Finance Canada official, said Ottawa has clearly pulled out all stops in the 2011 budget to rein in tax dodgers.

"There's an unusually concerted effort here," Mr. Drummond said.

He said normally Ottawa tightens tax loopholes on a case-by-case basis after being alerted to a particular avoidance scheme. This time, however, the federal government appears to have been ordered to scour the tax code for leaks.

"This is clearly starting from a different point. There clearly has been a directive: 'Look at the whole system; find some money you can save,'" Mr. Drummond said.

Pete DeVries, a former Finance Canada official, said it's been decades since Ottawa moved aggressively to curb tax avoidance. The former Mulroney government in the 1980s, under pressure to cut the deficit, also cracked down on such loopholes.