Tax avoidance has become an accepted part of doing business for corporations the world over. But it isn't just Google, Starbucks and Amazon working the system. Canadian corporations like Cameco and Gildan use complex, opaque practices to shift profits into low or no-tax jurisdictions. In what can only be described as short-term thinking, they prefer to reward a small group of shareholders rather than invest in the country that provides the stability, resources and workforce that makes their success possible in the first place.
So how do you stop Canadian multinational corporations like Cameco or Gildan from setting up subsidiaries in offshore tax havens so that they can avoid paying Canadian taxes? The short answer is that it is has been very difficult.
The Canada Revenue Agency (CRA) has no idea how much this profit shifting costs. And Minister Kerry-Lynne Findlay doesn't seem to be interested in finding out. But Canadian money in offshore tax havens hit at an all-time high of $185B in 2013. And when the CRA did decide to investigate the profit-shifting practices of Cameco, it discovered a scheme that used a Swiss office to avoid $185 million in Canadian taxes. That case is in Federal Tax Court.
Cameco is the tip of the iceberg.
Even though Canada has the lowest corporate tax rate in the G7, our top publicly traded companies use multiple tax avoidance tactics -- from transferring profits to offices in tax havens to paying CEOs and directors in stock options that are not subject to tax. Instead of understanding that taxes are an investment, they are described as onerous and punitive.
Rather than tackling this corporate spin, the government cuts services in the name of austerity.
Federal and provincial governments lose an estimated $7.8 billion in tax revenues each year because of tax havens. The scale of the problem gets larger while the federal government cuts back on health care, food safety, rail inspections, the CBC and more.
True fiscal stewardship would recognize that staunching the flow of money offshore is the better solution. Canadian taxpayers pay the price when the CRA doesn't follow the money.
Hopeful beginning: NDP bill
The 1,100-page mess that is Canada's Income Tax Act needs a lot of work. Even the all-party Parliamentary Finance Committee concluded that tackling tax havens was necessary. Two consecutive federal budget speeches addressed it as well. But so far, action has been underwhelming.
There are some hopeful beginnings. Earlier this year, NDP National Revenue critic Murray Rankin proposed new legislation that would make it easier for government and the courts to crack down on those who are playing the system.
Rankin's bill focuses on proving "economic substance." Corporations must be able to prove a transaction has economic purpose aside from reducing the amount of tax owed. Setting up a storefront office in Cayman Islands or Switzerland and then sending large invoices back to the Canadian head office charging "management" or "licensing fees" would no longer be acceptable. Make no mistake -- there are a lot of Bay Street lawyers getting very rich taking advantage of this existing black hole in Canada's Income Tax Act.
Rankin consulted on this legislation with internationally known tax expert Robert McMechan. The Ottawa-based McMechan is the author of a recent book, Economic Substance and Tax Avoidance. He points out that the U.S, Australia and the U.K. are among the countries that have drawn the line between legitimate tax minimization and unacceptable tax avoidance.
There's no doubt that for most of us tax law is the stuff of glazed eyes. But what's on the books can make or break a court case when the government goes after tax cheats. It is a multi-billion dollar problem for which the rest of us pay. Recognizing the role that these transactions play and making these changes is a good first step.
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