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Canada Has a Tax Haven Problem & Nothing Is Happening About It

The Takeaway: Canadian politicians have spent the past several decades arguing about whether to raise or lower tax rates, but the ultra-wealthy in Canada may not care if the top tax rates go up or down… they’re likely going to avoid paying much of them anyway.

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In recent years, the disturbing pattern of the wealthiest Canadians hiding wealth overseas has increased dramatically.

Through the use of tax havens, large Canadian businesses and wealthy individuals are able to avoid paying higher tax rates here in Canada.

  • Tax Havens: Foreign countries with much lower tax rates for foreign investors. For Canadians, countries like Barbados and the Cayman Islands are very popular.

A 2019 study by the Parliamentary Budget Office (PBO) found that in 2016 alone, $996 billion dollars was held by Canadian corporations in offshore destinations, including tax havens.

  • In the same report, the PBO found that Canada lost $25 billion in legal tax avoidance schemes.
  • Meanwhile, the CRA, which focuses on illegal activity, reported that illegal tax avoidance schemes had led to $26 billion in uncollected tax revenue.
  • Once funds are parked in a zone with low to non-existent tax rates, interest collected on that money is often tax-free and can be sent somewhere else.

That’s revenue that could be used to increase funding for healthcare, education, or any number of important social programs. Instead of being put to good use, that money simply sits in a bank account in the Bahamas.

One of the biggest problems: tax havens are not technically illegal.

  • Nothing in Canada’s tax law prevents someone from stashing their money on a Caribbean island to avoid Canadian taxes.

The Proof is on Paper

The government could take further action if it wanted to do so:

  • A number of leaks, such as the Panama Papers and the Paradise Papers, illustrate the scope of the issue quite clearly and identify which companies and individuals are responsible.
  • If they used this information, a quick amendment to the tax code would enable the Canadian Authorities to start collecting billions of dollars in new tax revenue.

Solving the problem is easy and many other countries are doing it. Both the UK and EU have begun to crack down on tax havens – specifically, tax havens operating within their own borders.

Political Prerogative

Lack of reform on Tax Havens might be explained by the unacceptable number of prominent politicians found abusing them.

  • Three former prime ministers, Liberal and Conservative alike: Paul Martin, Jean Chrétien, and Brian Mulroney were all named in the Paradise Papers.
    • Former PM and finance minister Paul Martin was revealed to be one of the largest clients of the offshore law firm at the centre of the Paradise Papers.
  • Justin Trudeau’s former “chief fundraiser” and “close advisor”, Stephen Bronfman and his company were linked to a $60 million offshore trust in the Cayman Islands.
  • The company Morneau-Shepell, founded by the father of Liberal Finance Minister Bill Morneau, who at one time ran the company, and who may still own shares has also been linked.
  • Liberal Foreign Minister Francois-Phillippe Champagne was recently found to be connected to an offshore entity registered in the Turks and Caicos Islands which had facilitated payments.

With powerful people so heavily tied to both the Liberal and Conservative parties, it seems unlikely that either will take action on tax havens in the near future. 

Tackling Tax Havens

In 2016, an anti-corruption summit was held in London, where dozens of countries agreed to work together to tackle tax havens.

  • Although Canada was in attendance, the country made very few commitments that would change current Canadian law to deal with the problem.
  • Part of the issue is that the summit primarily went after countries that served as tax havens, rather than wealthy countries that allowed their money to flow offshore.

Although the use of tax havens is not inherently illegal, there may be some illegal activities associated with it that Canada can use to help curb the practice.

  • In light of the Paradise Papers, the Canadian Revenue Agency launched a number of investigations and even laid criminal charges against companies named in the leak. However, in the three years since the release of the Paradise Papers, there has been nearly no action to deal with the problem.

According to Toby Sanger, the director of Canadians for Tax Fairness,

“Other countries have taken tax evaders to court and recovered billions from the Panama leaks, but despite some tough talk from this government, there hasn’t been a single conviction.

The Bottom Line: Promises but no progress.

Despite promises to deal with the problem, no progress has been made over the last several years. The problem of lost revenue due to tax havens seems even worse when we take into account the fact that under the Liberal COVID-19 relief plans, only companies convicted of tax evasion are ineligible for federal aid.

  • This means that many of the companies, which have been caught breaking the law, will still be given tax-payer funding to help them through the pandemic because the Government has not been able to get a single conviction

Despite the great social benefit Canada could reap from taxing money hidden offshore, especially during a time when the pandemic has hugely increased our spending, it seems unlikely that things are going to change.