At about the midpoint of the 2015 federal election campaign, in an interview with CBC’s Peter Mansbridge, Justin Trudeau hinted that his Liberals were prepared to cut the small-business tax rate if they won. But there was a catch. Trudeau also said “a large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes,” then added with considerable understatement: “So there’s a little tweaking to do around that.”
You could almost feel the shudder run through the nation’s tax-planning profession. A little tweaking. Uh-oh. Kim Moody, a chartered accountant at the firm Moodys Gartner in Calgary, and a former chair of the Canadian Tax Foundation, wondered where Trudeau was getting the idea that small firms are often tax-avoidance vehicles for the rich. He went browsing. “Google comes up with a paper by a guy named Wolfson that I’ve never heard of before,” Moody says.
That paper was Piercing the Veil: Private Corporations and the Income of the Affluent, which would be published the following year in the Canadian Tax Journal, but was already circulating in draft form and causing a stir among tax-policy wonks. Moody wasn’t impressed. From his practitioner’s point of view Piercing the Veil’s assumptions about how small-business owners arrange their tax affairs struck him as clumsy. But it contained new and potentially potent numbers.
It’s lead author, Michael Wolfson, a retired Statistics Canada data guru, now affiliated with the University of Ottawa, had achieved the formidable task of melding together the income tax returns of small businesses, those technically called Canadian-controlled private corporations (CCPCs), with the income tax returns of their owners, all without violating confidentiality rules.
Wolfson’s database laid bare the relationship between being well-off and owning a CCPC. Consider the top one percent, the focus of so much of the global debate about inequality over the past five years. In Canada, individuals making over $163,000 a year qualified in 2011 as a one-percenters, and Wolfson found that more than half of them were CCPC owners. Aim even higher, at the the top 0.01 per cent—the truly rich who earned $2.3-million or more—and 80 per cent were significant shareholders in a private company.