Personal income tax revenue shot up by nearly $10-billion last year according to a federal government report that attributes the gain to a strengthening economy and the ripple effect of tax changes aimed at raising more money from high-income earners.
Finance Canada will release its annual financial report on Friday, which will provide the final statistics for the fiscal year that ended on March 31.
It will show that personal income tax revenue increased by $9.9-billion, or 6.9 per cent, in 2017-18, according to a federal official, who provided The Globe and Mail with a section of the report but was not authorized to comment publicly.
The report will state that this increase in revenue is due to “economic growth and the unwinding of the impact of tax planning" that saw high-income individuals declare income in the 2015 tax year rather than 2016 in order to avoid the new top tax rate of 33 per cent on income above $200,000. The department says that tax planning led to a short-term drop in tax revenue from high-income earners in 2016, and the figures suggest there was a rebound in 2017.
The Globe did not receive a copy of the full report, which will include other information such as the final deficit figure for 2017-18.
During the 2015 federal election, the Liberal Party campaigned on a pledge to run short-term deficits and return to balance before the next election, which is scheduled for October, 2019. However the government’s most recent budget said deficits will continue beyond that date and no timeline has been announced for when the books will be balanced.
The Finance Canada data provide the most up-to-date information as to how several significant tax changes may be affecting federal government revenue.
The Liberals also campaigned on a central pledge of raising taxes on the top 1 per cent of incomes in order to pay for a tax break for middle-income earners.
Those tax-bracket changes took effect on Jan. 1, 2016. In 2017, Finance Minister Bill Morneau announced a series of widely criticized changes to small business tax rules that are primarily aimed at high-income earners.
One of those changes included new restrictions on the splitting of business income with family members through dividends. Those measures took effect on Jan. 1, 2018.
Another change affecting high-income earners will kick in on Jan. 1, 2019. That change will phase out access to the small-business tax rate – which is lower than the corporate tax rate – for businesses that earn more than $50,000 in passive investment income in a year.
Accountant Kim Moody, a vocal critic of Mr. Morneau’s small business tax changes, said he suspects that after making adjustments for the 2016 tax rate changes, small business owners with high incomes have been making further tax planning moves in response to the new changes that affect them.
Mr. Moody said the new tax on split income might have encouraged some families to declare more income in 2017 to prepare for the new rules. He also questioned whether some of the new revenue could be the result of high-income earners leaving the country, which triggers a form of exit tax. Mr. Moody said he has a “significant” number of clients who have left Canada because of the higher taxes on high-income earners.
“The devil will be in the details,” Mr. Moody said. “I’m guessing that whatever is trumpeted by the government on this topic will not be as straightforward as they make it.”
Mr. Moody also noted that the figures only cover the first three months of 2018. He predicted that there will be continuing uncertainty over the impact of small business changes as the Canada Revenue Agency responds to how businesses filed their 2017 taxes.
The Liberal Party’s 2015 platform promised that a new tax bracket on income of more than $200,000 would offset a middle-income tax break perfectly, with the tax hike raising about $3-billion a year and the tax cut lowering federal revenues by about the same amount.
However weeks after forming government, Mr. Morneau and the Finance Department provided new estimates showing the two measures would come at a small net loss for the government.
In August, The Globe reported that CRA records showed that high-income earners actually paid $4.6-billion less in federal taxes in 2016, the first tax year under the new tax brackets imposed by the Liberals.
Mr. Morneau’s office told The Globe at the time that the 2016 figures were likely a one-time event influenced by the fact that high-income earners opted to declare some income in late 2015 rather than 2016 to avoid the new higher tax rate on income of more than $200,000.
The CRA figures are for the 2016 calendar year, whereas the new Finance Canada numbers cover the fiscal year that ended on March 31. The CRA figures are more detailed than the Finance Canada figures.