The latest massive leak of offshore financial documents, the so-called Paradise Papers, has put the spotlight on Canada.
It isn’t just that the papers reportedly turned up the names of prominent Canadians like former prime ministers Brian Mulroney, Paul Martin and Jean Chretien, as well as Stephen Bronfman, chief fundraiser for Justin Trudeau’s Liberal Party. The sheer number of Canadian accounts revealed in the investigation has turned heads.
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Canada was among “the biggest sources of business” for the offshore law firm that was the main source of the leaked documents, notes the International Consortium of Investigative Journalists, which shared the papers with Canadian media.
That’s despite a high-profile effort by the Canada Revenue Agency (CRA) to crack down on tax cheats, which has drawn fresh funding from the federal government in the 2017 budget.
The agency has recouped $25 billion in lost tax revenue in the past two years, with two-thirds of that coming from “audits of international, large business and aggressive tax planning activities,” CRA said in a statement responding to the release of the Paradise Papers.
But this and previous leaks have raised questions about two dozen tax information exchange agreements, or TIEAs, that Ottawa has been signing with well-known tax havens since 2009.
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The agreements allow the CRA to request information about Canadians who hold assets in those jurisdictions. But Canada also allows Canadian companies with subsidiaries in countries with which it has a TIEA to repatriate profits without incurring Canadian taxes, under certain conditions.
Avoiding double taxation is a mainstay of tax treaties. But while Canadian residents with personal income from countries where Canada has a tax treaty normally have to pay any positive difference between taxes they paid abroad and Canadian taxes owed, that rule generally doesn’t apply to repatriated corporate profits that satisfy the conditions outlined in the TIEAs, Lindsay Tedds, professor at the University of Victoria and an expert on Canadian taxation, told Global News via email.
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TIEAs were meant to make tax havens more transparent, but did they end up encouraging Canadian corporations to stash more money abroad?
The answer to that question varies depending on who you ask.
Toronto-based tax lawyer David Rotfleisch is “skeptical” that the agreements resulted in more money flowing into offshore accounts.
Well before Canada signed its first TIEA, it had a longstanding tax treaty with Barbados, also well-known for its extremely low tax rates.
The TIEAs “certainly” gave Canadian corporations “more tax planning opportunities,” or more options to minimize their tax burden, said Rotfleisch.
But while profits generated offshore are likely spread out over a greater number of foreign jurisdictions, there is little reason to believe the overall amount of funds has increased as a result of TIEAs, said Rotfleisch.
On the other hand, the TIEAs allow the CRA to unearth important information during international tax audits, said Rotfleisch.
While minimizing one’s tax burden using tax havens can be perfectly legal, the secrecy that typically surrounds offshore tax regimes makes it easy to use these jurisdictions to evade taxes in ways that are illegal or to hide illicitly obtained funds.
Better access to information enables the CRA to sniff out the illegal stuff, goes the argument for TIEAs.
Indeed, the CRA might use the TIEAs to pursue any leads that might have emerged from the Paradise Papers leak, according to Rotfleisch.
At Canadians for Tax Fairness, though, Dennis Howlett paints a very different picture of TIEAs.
The organization believes that Canada is losing between $10 billion and $15 billion a year in tax revenue due to tax havens. That estimate includes both tax avoidance, which is legal, and tax evasion, which is illegal.
And a whopping two-thirds of that money is likely tied to corporations, rather than individuals, said Howlett.
“TIEAs very much encourage offshore ‘investment’ because active investment can be returned to Canada via dividends almost tax free,” said Tedds.
While Canada has cracked down on the use of tax havens by wealthy Canadians, it has done little to prevent companies from avoiding taxes by shifting profits abroad, he added.
It was the Conservatives who started signing TIEAs and allowed Canadian businesses to set up shop in tax havens and repatriate profits, essentially, tax-free.
But Ottawa hasn’t done much to address the issue since, said Howlett.
Canada makes it easy to register shell companies and lags behind countries like France, Japan and the U.K. in curbing corporate use of tax havens.
And Canada isn’t getting much out of its TIEAs in terms of greater transparency, either, Howlett added.
The agreements don’t provide for automatic information exchanges, something the Organisation for Economic Co-operation and Development has been advocating.
In order to successfully request information from tax havens, Canada “has to have enough evidence as you’d need to get a search warrant,” said Howlett.
While it’s true that TIEAs might help the CRA pursue any tax cheats uncovered by the Paradise Papers, he added, “without those leads, they would have nothing to go on.”
And, Tedds pointed out, there is also the question of whether the Paradise Papers would have turned up so many Canadians if the preferential tax system did not exist.
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