Billions of dollars are moving out of Canada – nearly all tax free – with 92 tax treaties signed.
The seeds of Canadian corporations hiding billions of dollars in offshore tax havens were sewn more than 40 years ago, after the Canadian government pursued a series of tax treaties with tiny Caribbean and European nations.
The 92 tax treaties now signed with countries such as Barbados, Jamaica and Malta currently translate into billions of dollars moving out of Canada — nearly all tax free. This includes 22 tax information exchange agreements, where the sharing of tax information is intended to weed out evaders.
Consider this: From 1988 to 2001, Canadian direct investment in Barbados increased from $628 million to $23.3 billion, more than 3,600 per cent, according to Alain Deneault, a professor at the Université de Montréal.
In 2015, Canadian corporations held $79.9 billion in assets in Barbados, according to Statistics Canada. That makes Barbados the third most popular place for Canadian businesses to invest, directly behind the United States and the United Kingdom.
For the last several months, the Toronto Star has worked alongside the Canadian Broadcasting Corp., examining the Panama Papers, an unprecedented dump of 11.5 million documents that detail secret, off-shore accounts and deal-making among some of the world’s wealthiest people.
Those documents led the Star and the CBC to probe a deeper question: Why has the government of Canada sanctioned treaties and agreements between us and known tax haven nations, deals that have robbed the Canadian public purse of billions in tax revenue?
Canadian academics, auditors general and politicians have all warned some of these treaties have essentially done little else but give legal means for Canadian companies to move profits offshore to financially accommodating jurisdictions where they can pay lower corporate taxes.
“What became clear in the spring of 2013 was that the Canadian federal government’s policy is to fight tax fraud by legalizing it,” Deneault wrote in his book Canada: A New Tax Haven. Deneault spoke to the Star on Tuesday after he testified at Parliament Hill’s Standing Committee on Finance’s session on the Canada Revenue Agency’s efforts to combat tax avoidance and evasion.
Tax havens are jurisdictions, typically nations, where taxation rates are nearly zero and there is a high degree of bank and financial secrecy that is attractive to foreign clients.
At the urging of Canadian business interests that argued they could not be competitive without tax agreements, Canadian politicians and bureaucrats signed a dizzying array of tax treaties in the last several decades.
By 1987, Canada had signed more than 40 tax treaties with countries like Barbados, Jamaica and Malta, expanding to 92 by 2016.
“Establishing tax treaties was just something they did,” said John Crosbie, who was minister of finance from 1970 to 1980 and served in former prime minister Joe Clark’s short-lived Conservative government.
Corporate Tax Haven Barbados
Take the case of Barbados.
The Clark government signed a tax treaty with the Eastern Caribbean nation in 1980. There are about a quarter million people living in Barbados, where the main economic driver is tourism.
In 1980, what could have been Canada’s motives for establishing a tax treaty with Barbados?
The treaty Canada negotiated allowed for Canadian companies to set up subsidiaries in Barbados. Those companies were then funnelled international profits and taxed at the Barbadian rate. In some cases, tax rates were cut from 30 per cent in Canada to 2.5 per cent in Barbados.
The Star and the CBC contacted Leonard Farber, the former general director of the tax policy branch of the federal Department of Finance, to ask him why Canada pursued a deal with Barbados in the first place.
Farber, now a tax adviser at law firm Norton Rose Fulbright, said the benefit of a tax treaty between Canada and another country was to grant tax-exempt treatment for business income conducted in that country. When “income is repatriated to Canada,” it isn’t taxed again, he said.
“The rational behind that was to facilitate Canadian industry competitiveness in the world marketplace,” Farber said.
This was called a “double tax” avoidance treaty as a company is only charged taxes once. If a Canadian business is active in Barbados, it can pay the Barbadian rate, up to 2.5 per cent.
Farber rejects the suggestion that it is as if Canada effectively signed away a portion of its tax revenue purse. Canada has benefitted from Canadian corporations flourishing in other, indirect ways, he said.
“I think the international tax treaties Canada has negotiated over a significant period of time has facilitated that ability for Canadian companies to compete effectively in that marketplace with a clear understanding that … a lot of that after-tax income they earn from business activities in foreign jurisdictions were repatriated back to Canada to enable further expansion of operations that created more employment,” he said.
That is not how Deneault describes what happened. Instead, he says, Canadian companies used Barbados as a jumping off point to other tax havens.
“Basically, in the 1980s the interest in Barbados was to create a channel for Canadian corporations to get access to the offshore network on a legal basis. You create a subsidiary in Barbados. You send to that subsidiary some assets and from there on you may transfer the assets, once more, to another tax haven, to another subsidiary where Canada has no link,” Deneault said.
In the end, Canadian corporations skip out on paying their fair share of Canadian taxes.
For instance, Deneault said, if a Canadian corporation has a client in Spain, it can send an invoice from the Barbados subsidiary so the profit is registered in Barbados even though the work was done in Toronto or Montreal.
“Of course, these corporations benefit from public infrastructures. They use roads, they have access to water, to electricity. Their employees are trained by the state. They benefit from the social system but they don’t pay for it, they don’t pay their fair share and they know how to manage it so they don’t,” he said.
What Canadian companies have subsidiaries in Barbados? Statistics Canada could not provide the Star and the CBC with a list. Media relations officer Marie-Claude Deslandes first cited privacy reasons and then added that its business register group “don’t have any information on overseas operations, even those that operate from Canada.”
It is quite clear what needs to be done, Deneault said. “Canada needs to renegotiate the tax treaty with Barbados,” he said.
Not every bureaucrat or politician thought tax treaties signed with tax havens or financially accommodating nations was a good idea.
When Bob Rae was a New Democratic Party MP representing Broadview-Greenwood in December 1980, he stood up and opposed Canada signing a tax treaty with Barbados, during the third reading of Bill S2, which ratified the treaty and several others with Korea, Italy, Austria, Italy, Romania and Spain.
“Certainly, the trend was already beginning in the 1970s and the trend has accelerated and I think the problem now is it is seen by companies as a basic part of their corporate planning to create places were they can park money away from the Canadian tax man or the American tax collector, wherever they may be,” Rae said from his law office at Olthuis Kleer Townshend LLP, in downtown Toronto.
By 1992, Canadian government bureaucrats started to loudly complain about what they felt were unfair tax arrangements.
Denis Desautels, the former federal auditor general, released a report lambasting Ottawa for allowing massive tax deductions to occur because of the treaties and he wanted them fixed.
The AG’s concerns caused the House of Commons Standing Committee on Public Accounts to hold hearings and make recommendations to the finance ministry in 1993. But only slight legislative changes were made.
Paul Martin, owner of Canada Steamship Lines, became the Liberal finance minister in 1993. He was politically criticized by Progressive Conservative MP Joe Clark, at the time, for leaving Barbados out when he closed tax loopholes. (Martin eventually transferred his interest in CSL to his three sons when he ran for Liberal leader in 2003.)
In 1997, the finance ministry’s Technical Committee on Business Taxation discovered that foreign-owned multinationals were actually shifting debt into Canada and profits out.
The committee discovered a foreign affiliate of a foreign-owned Canadian corporation was used to move $500 million in capital gains from Canada to Barbados, tax-free.
In 2002, 10 years after Desautels’ report, former auditor general Sheila Fraser also criticized the government for inaction on this file.
While Fraser declined to speak to the Star and the CBC on the issue, on Dec. 3, 2002, in a news conference concerning the release of her report, she said:
“Tax rules that reduced tax revenues mean either higher taxes for other taxpayers or reductions in public expenditures and no one wants to pay someone else’s taxes.
“We first raised this issue a full decade ago and in 1997, the Minister of Finance’s Technical Committee on Business Taxation also sounded the alarm bell. It’s time to fix this,” she said.
By 2000, Canadian corporations received $1.5 billion of “virtually tax-free dividend income from their affiliates in Barbados, according to the 2002 auditor general’s report.
That is a jump from $400 million in 1990.
After a lifetime in politics and fighting against big corporate interests, Rae notes that the chickens have come home to roost. Canadian businesses have successfully diverted money offshore and the only one left to tax is the middle class.
“I think those of us who warned, 35 years ago, that one of the consequences of this would be, ‘those who have the most would end up paying the least and those with the least would end up paying the most’ — we’ve been proven right. ”