*The headline has been changed to clarify that the $1.6 billion the federal government lost out on occurred in 2015 and 2016, not in the 2015-16 fiscal year.

The Liberal government’s decision to hike taxes on Canada’s highest earners for 2016 gave them time to shelter incomes at a lower rate in 2015, resulting in $1.6 billion in lost potential revenue, according to a new report from the Parliamentary Budget Officer (PBO).

In 2015, the new Trudeau government announced the creation of another income bracket for earnings exceeding $200,000 with a tax rate of 33 per cent.

But because the new tax rate was announced before the end of the 2015 tax year, many wealthy individuals had time to shift income forward in order to take advantage of the existing lower tax rate.

That “forestalling” — bringing forward revenues ahead of a tax increase — resulted in the federal government receiving $5.6 billion from the higher income group in 2015, according to the fiscal watchdog.

In 2016, revenues from the new rate applying to Canada’s top one per cent totalled $3 billion.

However, the PBO concluded that because of that window to shift income forward, $4 billion worth of potential revenue was not received in 2016, a situation the fiscal watchdog describes as an “unwinding.”

The difference from the forestalling and unwinding effects totals $1.6 billion, money that could have been collected had the changes not been announced before the end of the 2015 tax year. The PBO arrived at the numbers by comparing the impact to a counterfactual scenario where none of the changes had occurred.

“This type of pattern suggests that individuals in the high-income group responded to the announced tax rate increase by shifting some income forward to reduce their taxable income in future years,” reads the PBO report.

As the C.D. Howe Institute notes, forestalling is mostly used by ratepayers for “discretionary income,” mostly stock dividends, and a similar phenomenon took place in the U.K. in 2010, when the top tax rate was increased from 40 to 50 percent.

The Liberal government had also cut the income tax rate in the second income bracket from 22 per cent to 20.5 per cent. That “middle class” bracket includes incomes between $45,282 and $90,563.

The PBO found that the tax cut reduced revenues worth $3 billion in 2016, which was offset by $800 million due to an increase in taxable workers.

In the 2015 federal election, the Liberal Party promised a middle-class tax cut that would be paid for by a new income bracket on Canada’s top earner. According to its platform, the middle income tax cut would cost almost $2.9 billion in 2016-17 compared to the hike on top earners, which would rake in $3.4 billion that year.

According to the Globe and Mail, Finance Canada released revised forecasts in late 2015 that said the tax hike would not pay for the tax cut. The department estimated the tax cut would cost $3.4 billion in its first full fiscal year while the tax hike would only raise $2 billion.

Toby Sanger, executive director of Canadians For Tax Fairness, said for the wealthiest Canadians, forestalling some their income is one of many tools they can employ in avoiding paying more taxes.

“Higher income people do have those opportunities partly because most of their income isn’t in employment income,” he said.

Sanger said while he doesn’t believe the window for income shifting was intentional policy, it does highlight a need to close tax loopholes available for the rich, whether it’s done year to year or through other people.

According to preliminary figures provided to iPolitics by Finance Minister Bill Morneau’s press secretary, Pierre Olivier-Herbert, Canadians with incomes in the top bracket paid $36.7 billion in federal income taxes in 2017, the first year without any forestalling and unwinding effects.

The figure is close to the $36 billion top bracket earners paid in 2015, which saw a revenue windfall due to forestalling, if the $200,000 threshold had existed then. In 2016, the figure dipped to $31.4 billion.

Olivier-Herbert said the 2017 figures provide a better picture of what revenues from the top earners would look like in a more consistent form. He noted the figures had been previously provided to Parliamentarians.

The numbers also suggest Canadians with income in the top bracket paid 25.1 per cent of overall personal income taxes in 2017, up from 24.2 per cent in 2014 before the tax changes.

The PBO also said its analysis is consistent with other studies done on the responsiveness of individuals to changes in their marginal tax rate.