Top 1% took 13.3% of income, Canadian study shows

A new study that takes into account income earned through Canadas private corporations finds the one per cent are doing even better than expected.

According to the tax study Piercing the Veil, the top 13 per cent of after-tax income in Canada goes to the top one per cent of income earners, with an additional $100,000 added to their income each year through private corporations they control.

And the ultra-rich the top 0.01 per cent earned $2.7 million to $3.5 million each through such corporations, money that would not ordinarily be measured when Canadian researchers look at income inequality.

• Wealthiest 1% earn 10 times more than average Canadian
• Rich got 14.6% richer in 2013

Studies based on income tax figures alone point to the top one per cent earning 10 per cent of Canadian after-tax income, but the authors of Piercing the Veil say it is considerably higher 13 per cent and has grown rapidly in the past five years.

The paper, by Michael Wolfson of the University of Ottawa, and professors Mike Veall of McMaster University in Hamilton and Neil Brooks of York University in Toronto, points to the role of tax planning in lowering tax bills for the wealthy.

They conclude income inequality is higher than conventionally measured.

While only five per cent of Canadians that fall in the bottom half of income distribution hold any stake in such corporations, they are heavily used by those in the top one per cent, with at least 65 per cent holding shares.

While most estimates of economic inequality in Canada are based on statistics from income tax filings, Piercing the Veil draws on a new anonymous linkage of Canadian-controlled private corporation (CCPC) income tax returns with a sample of their owners individual income tax returns.

Wolfson, a formerassistant chief statistician at Statistics Canada, spent part of his career inside the finance department, where he became aware of some of the complexities of Canada's tax law.

"The question is are the benefits that are being provided through the tax system really doing what they are supposed to do," he said in an interview with CBC's The Lang & O'Leary Exchange.

He said he believes that if the top earners are able to elude tax through tax avoidance, it will discourage the vast middle-class from paying taxes as well, as happens in Greece.

Most of Canadian private corporations are legitimate businesses, he said, but there appears to be little research into how wealthy people use them to funnel income into lower-tax vehicles.

"It requires more study.How much of it is legitimate and how much of it is tax avoidance?" Wolfson said.

The authors quote French economist Thomas Piketty, who has called for greater transparency in tax accounting so everyone can see where the money goes.

• Thomas Piketty and the economics of inequality

Piketty, who has become a prominent voice in the current debate about income equality, has urged reform of the tax systems to allow more wealth to flow to middle and low-income people.

High-income people who use a Canadian-controlled private corporation have several opportunities to save on their tax bill. These include:

• Paying tax at the corporate tax rate, which is usually lower than their personal tax rate.
• Deferring income to a later year by taking it as a dividend.
• Income-splitting by passing income to a spouse or adult child through the corporation.
• Taking advantage of corporate tax credits and small business credits.

Some people own as many as four such companies, which creates a complex tax structure that can reduce personal income.

Though figures from 2009 and 2010 showed income for the top earners plunged during the recession, it has recovered and is approaching 2007 levels of 14 per cent of all after-tax income.

We know inequality has been going up over the past few decades. The data that we developed shows that since the great recession, if we look only at the individual income tax data it looks like their income is rather flat, but if you include these private corporations, its been going up," Wolfson said.