One Comment About Taxation – “Money For Nothing and Your Grant’s Tax-Free”

 

Let’s pretend that you see a newspaper ad for government grants.  The federal government of Canada is offering people $30,000 if you simply agree to be a nice person.  You make the application and voila! You’re approved!  The $30,000 appears electronically in your bank account. Is that amount taxable?  More than likely it is under existing laws provided for under Canada’s Income Tax Act.  So, if your marginal personal tax rate is, say, 35%, you’ll end up with $19,500 after-tax.  Still not a bad deal for simply being a nice person.

But what if Ottawa granted you a special exemption from the applicable provisions of the Income Tax Act to remove taxation on the $30,000?  Alternatively, they could give you $46,500 and tax it back at the same normal 35% marginal personal rate to ensure you receive $30,000.

Either way, the government is giving you $30,000 of “free” money and giving you special tax treatment.

If you think the above is a fairy tale in fantasyland, it is instead reality for politically-connected corporations.  The above story is almost bang on what happened with subsidies given to Volkswagen and Stellantis to build manufacturing plants to produce electric vehicle batteries.

Here’s the fairy tale-to-policy-reality story.  Last summer and fall, the federal government announced subsidies to VW and Stellantis to the tune of over $30 billion.  Quietly, however, the government had negotiated with VW and Stellantis to make such subsidies free from corporate tax by changing Canada’s existing laws to make that happen.  And earlier this month, that is exactly what happened.  Yes, to get to that same result they could have simply grossed up the subsidies to the amount that would net VW and Stellantis after-tax the same roughly $30 billion but that’s not what happened here.

Normally, such a change in tax law would need Parliamentary approval by bringing a bill to the House to be debated and ratified by Members of Parliament.  But this particular change was able to be done quietly without a new bill brought to Parliament due to a quirk in how certain specific amounts / issues can get implemented under the Act.  Of course, this type of process in changing the tax law is less visible (and quicker) than a bill appearing before Parliament that can at least be debated.

So, if we assume that the federal corporate tax rate is 15% and the Ontario (the home of the new plants) rate is 11.5% for a combined rate of 26.5%, then that means the governments have foregone almost $8 billion in tax revenue (assuming Ontario follows suit which it may not).  Ah, but it gets even more interesting.  You see, in the 2021 federal budget, the government of Canada announced that “green manufacturing” companies’ profits would be subject to only half the normal federal corporate tax rates.  The provinces did not follow the federal lead of this proposal.

When the ½ tax rate was announced in 2021 for such taxpayers, I was part of small group of tax practitioners that opposed such a move.  But, of course, such opposition fell on deaf ears since good politics is always more powerful than sound policy.

Given the half federal tax rate bonanza, VW and Stellantis (assuming the subsidy amounts would be subject to those lower rates) would have paid significantly less than $8 billion in tax on the $30B in subsidies. But now the federal government has gone one step further and made the $30 billion of subsidies completely tax-free.  The Parliamentary Budget Officer estimated that the foregone tax revenue to be $5.8 billion using the half federal tax rate and applicable provincial rates.

So why would the government of Canada offer to make these subsidies tax-free?  Well, apparently the government was concerned about the subsidy / tax credit competition from the U.S. Without making the subsidies tax neutral apparently would make such subsidies less attractive compared to the U.S.  Let’s just say I’m not buying this shallow logic and reasoning.

The simple mathematics provided above don’t tell the whole story.  To calculate the actual cost of the subsidy grants is complex but the Parliamentary Budget Officer has done a good job of providing estimates. As mentioned above, the PBO estimates the foregone tax revenue to be $5.8 billion but the overall cost of the subsidy handouts (including another $7 billion subsidy provided to another company – “Northvolt”) to be approximately $44 billion!

I’m guessing for the average Canadian, the above numbers are simply glossed over and dismissed quickly.  So, let’s try to put that in a bit of perspective.  I’m no costing expert but here’s some quick examples of what $44 billion can buy you today:

• 587 schools (assuming construction cost per school – $75 million)
• 22 hospitals (assuming construction cost per hospital – $2 billion)
• 11,000 kilometres of new two-lane road construction – or sufficient repairs of existing roads – (assuming construction costs of $4 million per kilometre)
• 88,000 modest single-family homes (assuming a construction cost of $500,000 per home)
• 1,467,000 average families of four (that’s about 5,900,000 people) having their grocery bills paid for an entire year (assuming an average annual grocery bill of $30,000 per family)

You see the point.  The money earned by Canadians and paid in taxes and are now forced to hand out and hand over on a tax-free basis to VW and Stellantis – is staggering.  The investment income alone – assuming a 5% rate of return on the funds – would be over $2 billion.  Again, enough to build another hospital.  Or another 27 schools.

The lack of transparency, the tax-free handouts and the dollar amount that Canadian taxpayers are on the hook for is shocking and staggering.

Canadians need to be better informed on how their tax dollars are being foolishly thrown away.  The lack of fiscal responsibility in how special-interest fairy tales do come true for select corporations.  Or re-wording the famous Dire Straits song slightly: “Money for nothing and your grants tax-free”.

Such subsidies / grants are at the expense of taxpayers and puts all of our financial futures at risk.

 

One Comment About Leadership – Leaders Grow Leaders and Plan For Succession

 

I’ve stated many times throughout my career when advising entrepreneurs – and most recently in some of the webinars that I have instructed on business / practice growth for new business owners – that I firmly believe that the day a business owner starts their business – or a leader takes over a leadership position – that they need to start planning for their succession.  Leaders owe it to themselves and to the people they lead to have such a succession plan in place and / or to be developing one.

Why?  Well, to state the obvious, a good and sustainable business should be able to grow beyond the voluntary or involuntary (such as an untimely death or disability) exit of the leader.

To build a succession plan early is not an easy exercise.  Most new entrepreneurs are more concerned about growing their business to stability and financial success.  Understandable.  But the building of a succession plan can be a very valuable exercise to provide insight in what exactly is being built, where the weaknesses and strengths are and what critical points of the business need to be replaced if the leader is gone.

One strategy to work on this is for the leaders to grow / mentor new leaders.  This involves intentional teaching by the senior leader and understanding the necessary growth areas of the new student.  In most cases, the leader won’t be an expert at all things leadership but such self-awareness of that simple fact can assist the leader in recommending courses or additional training.  My experience is that where organizations are purposely building other leaders, such organizations are much more adept at building good succession plans and building an overall better corporate culture.

Leaders, do you have a good succession plan in place?  Are you participating in developing new leaders for your organization?  If not, a good day to start doing this is today.

 

One Comment About Economics: Financial Literacy

 

One of my favorite podcasts is “Chatter That Matters” by the brilliant Tony Chapman.  I’ve been fortunate to get to know Tony over the years and learn a tremendous amount from him.  One of his latest short-style “snack-size” podcasts (5 mins) was about financial literacy and a lesson he learned recently while buying groceries at a grocery store.  The below is a description from the podcast episode of what he discusses:

In this episode, I share a story at the grocery store that led me to my insight – smartphones and technology are making us less financially literate. I have no empirical evidence, but many people are losing their ability to do even simple math.

With a math deficiency, how can someone make critical financial decisions? How can you decipher if that ‘too good to be true’ offer is a good deal or one that manifests into long-term pain? How can you be an informed voter and understand the implications of what is being promised.

The episode deals with a simple scenario of not being able to quickly do simple math.  I agree that is a concern.  One might counter by saying “well, I don’t need to know math, my smartphone can do it when I need it” but I think that is much too simplistic of a rebuttal. I agree with Tony that simple math is useful and needed to deal with many mundane but important life decisions and to assess such decisions.  Often such decisions need to be made instantly or quickly.

I have previously written about how I believe financial literacy education should be mandatory at the grade school level for all Canadian children in this newsletter. And not a cursory education of one or two courses in high school.  In my view, such education should be pervasive throughout grade school to assist our youth in making informed decisions throughout their adulthood including their voting choices.

A more informed and educated citizen makes a better citizen.

 

Bonus Comment – Quote From Jack Welch – Famous Ex-CEO of General Electric and Leadership Guru – About Growing Leaders

 

“My main job was developing talent. I was a gardener providing water and other nourishment to our top 750 people. Of course, I had to pull out some weeds, too.”

 

Yep, totally agree!  Leaders, are you intentionally developing talent?

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