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Paradise Papers: Tax havens aren’t illegal, so what’s the problem?

WATCH ABOVE: ‘Paradise Papers’ reveals Liberal Party fundraiser’s alleged use of tax scheme

The Paradise Papers — a collection of more than 13-million files unveiled this weekend — helped shed light on the financial practices of some of the world’s wealthiest entities.

READ MORE: Leaked ‘Paradise Papers’ show alleged financial dealings of Canadian, U.S. politicians, Queen

The documents, leaked to the International Consortium of Journalists (ICIJ), showed that companies, politicians and even Queen Elizabeth take advantage of tax havens.

While this generated international headlines, tax havens aren’t necessarily illegal. But they are controversial.

Jonathan Farrar, an associate professor of accounting at Toronto’s Ryerson University, says the terms “tax avoidance” and “tax evasion” sometimes generate confusion.

“The confusion results from those two terms, one is perfectly legitimate, and the other is not legitimate at all. And where it gets problematic with international taxes is that it’s hard to know where to draw the line,” he said.

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Here’s a deeper look at what the Paradise Papers are, and what is (and isn’t) illegal.

What’s in the Paradise Papers?

The Paradise Papers are the world’s second-biggest data leak, second to a similar Panama Papers leak in 2016.

They detail how some of the world’s wealthiest companies (such as Nike, Apple and Facebook), and individuals (such as Bono and other Hollywood stars) avoid paying bulky taxes.

WATCH: White House officials named in Paradise Papers linked to Russian money

White House officials named in Paradise Papers linked to Russian money
White House officials named in Paradise Papers linked to Russian money

Among the Canadians whose names have been mentioned in connection with the Paradise Papers are Stephen Bronfman, a financier for one of Canada’s wealthiest families and chief fundraiser for Justin Trudeau, as well as former prime ministers Jean ChretienPaul Martin and Brian Mulroney.

The papers were mostly leaked from a prominent offshore law firm named Appleby, which was founded in Bermuda and does the majority of its work in North America.

READ MORE: CRA vows to crack down on offshore tax evasion by wealthy Canadians

How do tax havens work?

“A tax haven is a country that has lower tax rates than Canada,” Farrar explains, citing places like the Cayman Islands as an example.

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Tax havens, commonly referred to as tax shelters or offshore havens, also tend to have few regulations on income.

A legitimate — or legal — use of a tax haven could involve a Canadian setting up a trust for foreign assets in an offshore country.

“If a trust’s decisions are not made within Canada, income from the trust’s assets is not taxable in Canada,” Farrar says.

Tax havens are legal

While 3,000 Canadian names appeared in the latest leak, neither the Canada Revenue Agency or any court has determined they did anything wrong. That’s because, technically, tax havens are legal.

On its website, the ICIJ clarifies that those named in the leaks didn’t necessarily break the law.

WATCH: Panama Papers name of hundreds of Canadians

Panama Papers: Names of hundreds of Canadians released
Panama Papers: Names of hundreds of Canadians released

“There are legitimate uses for offshore companies and trusts,” it explains. “We do not intend to suggest or imply that any people, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly.”

But Canada Revenue Agency says it won’t hesitate to investigate new evidence of offshore tax evasion in the wake of a second massive leak of tax haven financial records.

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The agency said it has invested $1 billion to tackle the problem and currently has more than 990 audits and more than 42 criminal investigations underway related to offshore tax havens.

Tax evasion is illegal

“Tax evasion is something that is illegal,” Farrar said, explaining it usually involves someone hiding wealth from the government.

But he says Canada’s anti-avoidance rules are vague.

“It’s a very difficult thing to find and to define because the rules are not always crystal clear. If the rules were crystal clear it would be much easier to find if someone was engaging in tax evasion,” he said.

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The moral dilemma

If offshore tax havens are legal, then why are they being reported on this way? The ICIJ explains having an offshore account often leads to illegal activity.

“While having an offshore entity is often legal, the built-in secrecy attracts money launderers, drug traffickers, kleptocrats and others who want to operate in the shadows.”

READ MORE: Liberals offer no timeline on closing controversial stock-option tax loophole

It’s also about everyone paying their fair share of taxes — especially those who can afford to do so.

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“It generates some resentment from the majority of taxpayers who are middle class,” Farrar said. “They don’t have the means to afford high-priced lawyers or accountants to set up these offshore structures.”

“It can set up the perception that the wealthy elite have an unfair advantage.”

— With files from Global News, The Canadian Press

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