End of business tax deduction to kill Sens? (Updated)

The McGuinty Liberals would like to work with Federal Government to stop businesses from deducting 50% of money spent on tickets and luxury suites for sporting events and other live performances.

To be clear, the province is not in a position to make the desired changes they are publicly pontificating, but they can write a letter.   On Wednesday Ontario’s finance minister Dwight Duncan read aloud from a letter he wrote to the federal finance minister, Jim Flaherty:

It is not clear that taxpayers should be subsidizing certain business expenses for income and sales tax purposes, such as private boxes and corporate seats at sporting events…

According to an Ottawa Business Journal article:

The letter called for a review with the Canada Revenue Agency to discuss eliminating the subsidy. The letter included other proposals to discuss such as “reducing opportunities for corporate tax avoidance” and adding enforcements against businesses that engage in “underground economy” activities.

 

HOW THE TAX EXEMPTION WORKS NOW

Before you get outraged one way or another it’s best to know what you’re talking about.

Presently the tax exception allows people and entities earning “business income” to deduct from said income half the amount spent on hockey tickets.  For those new to the payment of taxes, this does not mean businesses get half the price of tickets back… (see this article re tax credit vs tax deduction)

I say “entities” because it’s not just corporations that conduct business.  There are also partnerships, sole proprietorships, or those conducting business on their own (like consultants).

The difference in the type of entity earning the business income is important because it’s the key in determining what percentage of savings that entity will have on the tickets.

[Update: the following calculations have been updated to account for the fact that businesses, of course, are required to pay both Federal and Provincial tax.  Tip of the hat DLG (fellow member of the Bar) for the kick in the pants, as outlined in the comments section below]

While we can’t cover the implications for all corporations — it is important to acknowledge that, as pointed out by DLG in the comments section below:

The basic corporate income tax (CIT) rate for an Ontario corporation is actually 22%. You have to combine the 11% provincial rate with the 11% Federal rate. Both rates will fall this year to 10%.

Therefore, the combined Federal and Provincial tax rate on tickets for a Canadian Controlled Private Corporation based in Ontario, assuming both drop to 10% AND assuming the corporation has over $500,000 in revenue, would be 20%.

So, if a corporation spends $10,000 on tickets it will receive a tax deduction of $5,000.  This means the corporation would reduce its taxable income by $5,000.  Since corporate income tax is 20% that means the corporation saves about $1000, or 10% off the normal ticket price.

But if you run a business that isn’t a corporation (partnership, sole proprietorship, consultant etc.) then your business income is taxed at personal income rates … including 46.41% for income over $132,000.

So if you’re not a corporation, and are running a business, and you spend $10,000 on tickets then you can claim $5,000.  Based on non-corporate tax rates, assuming you make over $132,000 (2012 threshold), that would equate to a savings of $2,320.50 or about 23% (note that the savings are less when you’re deducting against income lower than $132,000).

I went out of the way to explain the above because there seemed to be a misconception out there among some fans that:

  • only corporations were affected;
  • we were only talking about a roughly 5% tax break for those affected; and
  • this wouldn’t affect the Senators much because a 5% difference in ticket prices shouldn’t make a big difference.

All told, the Ontario Liberals estimate that the current tax deductions they seek to eliminate cost the province approximately 15 million per year (a full two Wade Reddens!).

 

IMPACT ON THE SENATORS

Senators’ president Cyril Leeder came out swinging stating that the team will go under if the tax exception is removed:

We need that to survive […]

We cannot have another whack to our ability to operate here. You could take away incentives in bigger cities in sports and those teams would find a way to make it work, but the ones that are not in the major markets won’t survive. […]

If they made all tickets, suites non-deductible, we wouldn’t survive

Harold Bloom of Sports Business News weighs in via the Ottawa Business Journal and agrees with Leeder, saying that the Senators do need this tax break to continue in order to survive:

It just showed a real lack of understanding of how the sports industry works, and the importance of the sports industry in Ottawa.

[…]

In Ottawa, we’re already working at a competitive disadvantage because most of the population works in the government and most can’t buy tickets for a corporate purpose.

So Leeder, the president of the Senators and a completely unbiased observer, and Harold Bloom, a guy who writes about sports business news and is based out of Ottawa and also a completely unbiased observer, have determined that the Senators will fall if the tax exemption is removed.

The above Leeder quotes come from an Ottawa Citizen article by Lee Greenberg who also writes;

The tax deduction is an incredibly strong catalyst for Senators ticket sales.

All 120 leased luxury boxes at Scotiabank Place are occupied by corporations. Roughly 50 per cent of all season’s ticket holders use the deduction as well.

Unfortunately for Greenberg he just drove off the deep end drunk on Leeder juice.  Greenberg has no evidence to suggest that the tax deduction is an “incredibly strong” catalyst for those businesses to by tickets.  The fact that they use the deduction because it exists does not in any way prove the point that they would stop buying the tickets if the deduction was removed.

For example, if the price of beer remained the same but I no longer received the deposit back at the beer store my buying habits would not change one bit.  Why?  Because I don’t buy the beer to get the deposit back.  I buy the beer because it tastes good and I like to get drunk.

 

HOW IT’S PLAYING IN TORONTO

I think this CBC video paints a pretty good picture.  The media are spinning this as a full on victory for the little guy.  With the business tax break out of the game apparently all the big companies will cancel their tickets, then prices will lower, and then the little guy will be able to finally watch the Leafs live and in person fail to make the playoffs again, and again, and again, and… again…. and…….. again…………. and again…………….. AND AGAIN.

This is, as one well fed Ottawa reporter would tell you, naive as all shit.

There are over 5.5 million people in GTA and the majority of the major businesses, corporations and firms have their head offices in Toronto.  Tax break or not Leafs tickets will be just as hot as ever and they’re certainly not going to magically start falling in price.

 

WHAT SHOULD YOU THINK?

This is a tough one.

Leeder, and those in Ottawa opposing the requested change, are mostly doing so not based on some defence of a business’ right to expense a good old night at the hockey game.  Rather they’re saying that the Sens will not be able to survive without the tax exemption.  Full stop, end argument.

By framing the debate that way Leeder has managed to get everyone into a debate about the Sens profit margins and how likely is it that businesses will cancel their tickets without the exemption and so on.  But hold up, we just got suckered into a weird sub-question.  Further, it’s a question that only those with access to all of the financial records of the Senators and the related companies could hope to answer.

We should not be starting tax policy debates by debating how one business will be affected by a change.  We should, in my opinion, be starting with an assessment of whether the foundation for the policy makes sense in the first place.

Personally, if I ignore my Sens allegiances, I cannot figure out how not to support the proposed change.  I simply cannot come around to the proposition that, after everything is taken into account, it is economically beneficial and necessary that we all support corporate executives’ nights out on the town with friends, family and clients.  If it is good for business then they can make it work without the 10% or 23% discounts.

As many have said, if all that’s keeping the Senators in Ottawa is a 10% discount for corporations and a 23% for other businesses then we’re probably screwed anyways.

And another way to look at it is that the government revenue generated by ending the exemption will largely come from Toronto … and that sounds good to me.

 

Join the conversation in the SensNation Fan Forums or in the comment section below.

7 comments
Da lil Guy
Da lil Guy

Should be noted that Ontario politicians may be playing with fire to some extent.   Someone is bound to point out that as long as you're getting rid of tax 'loopholes' for corporations, you might also consider getting rid of the extremely generous tax credits (note: not deductions) corporations currently enjoy for political contributions in this province.

SensNation
SensNation

Well put DLG... I was so focused on just the Ontario side!   So you'd agree that the combined tax rate on tickets for a Canadian Controlled Private Corporation based in Ontario, assuming both drop to 10% AND assuming the corporation has over $500,000 in revenue, would be 20%.   So then if that company spends $10,000 on tickets and deducts $5,000 then they're looking at a savings of $1,000 or 10% (versus the 5.75% figure above).   A Canadian Controlled Small Business would obviously save less, on account of their lower tax rate.  And following that same reasoning a non-Canadian Controlled Private Corp. woulds save more given their higher Federal rate?

Da lil Guy
Da lil Guy

 @SensNation I would agree.   Has to be said that the corporations who are most likely to buy a season suite are also the ones most likely to be inelligible for the small busness deduction - and the more you spend the more you can deduct.   Another potential benefit for a large corporation (speaking of ones that might have income higher than $100,000,000) is to try to offset corporate minimum tax. If you can reduce your net taxable income below that threshold you can avoid those taxes entirely. The corporate minimum tax is 2.7% (i.e. - $2.7 million and up) if your a corporation that floats around the $100,000,000 threshold it obviously behooves you to find ways to reduce your reported income to avoid that tax entirely.  

Da lil Guy
Da lil Guy

Also, the 11% Federal rate is only for Canadian Controlled Private Corporations claiming the small business deduction - for other corporations, the federal rate is 15%.

Da lil Guy
Da lil Guy

One thing to note, Owen -   The basic corporate income tax (CIT) rate for an Ontario corporation is actually 22%. You have to combine the 11% provincial rate with the 11% Federal rate. Both rates will fall this year to 10%.   The rate for a Canadian Controlled Small Business Corporation (as defined in the Income Tax Act) is lower because they get a 4.5% CIT rate on the first $500,000 of Active Business Income. That means a qualifying business with up to $500K of business income pays 15.5%, which will lower to 14.5% this year due to the Federal rate drop.  

SensNation
SensNation

Thanks. I agree with all your points. The "loophole" tagline is nonsensical hyperbole PR bullshit. As you point out, this is further supported by the fact the province can't do anything about it.   We can debate the merit of business deductions without calling them loopholes.   I hope the article was clear that I was a little ticked at people on both sides of the "debate" who didn't know what the shit they were talking about.

DefenseMinister
DefenseMinister

That's some well researched shit.  I agree with most of everything written but the only thing I'll say about the validity of the policy is that this tax break is not some obscure well-hidden loophole as the Ont Government is portraying it as.  It's a commonly used practice throughout North America and a proven method to provide incentives for corporations to spend money on local businesses.   The fact that a) this is not even a tax lever the province can control, it is a widespread Canadian tax code issue that the feds would have to look at and b) it is not part of some larger overall strategy for austerity purposes means that this whole proposal is not a whole lot more than an easy PR proposal for the Libs that will end up going nowhere because the federal Conservatives aren't interested in re-writing the corporate tax code at this time.   The province knows this and knows that this is an easy target given that it only really would hurt "rich, greedy pro sports franchises".  It's obviously no coincidence that this announcement came right after the Drummond report which gave them lots of suggestions for ways to address the crippling provincial debt (this btw, was not one of them).   Leeder would have been better off not even addressing this because it's almost assuredly not going anywhere.