The Conservative government, having just shut down one costly tax avoidance scheme, income trusts, now has another in its sights, offshore tax havens.
”There’s some significant tax avoidance there,” Finance Minister Jim Flaherty said, after revealing to the Commons finance committee that the government is reviewing the use of offshore tax havens to avoid paying tax.
Using offshore tax havens to avoid tax, just as corporations were using income trusts to do so, is not illegal but is costly to the government, he said.
Last year, Statistics Canada revealed Canadian direct investment in offshore financial centers, including ”tax havens,” had soared eight-fold since 1990 to $88 billion in 2003.
”Canadian enterprises invested substantial and growing amounts in countries known as ‘Offshore Financial Centers’, many of them in the Caribbean,” it said. ”These centers include countries that are often referred to as ‘tax havens’, as well as those which have important financial sectors, such as Switzerland, but also Ireland,” it said.
The largest increases went into Barbados, Bermuda, the Cayman Islands, the Bahamas and Ireland, the five countries being among the 11 nations with the most Canadian assets.
Auditor General Sheila Fraser has charged that multinational companies operating in Canada have avoided ”hundreds of millions” of dollars in taxes over the past decade through the use of tax havens, while one university study put the tax savings to Canadian banks alone at $10 billion over that period.
Flaherty later introduced a motion in the Commons to amend the Income Tax Act to prevent ”non-resident trusts and foreign investment entities” from using offshore tax havens to avoid tax.
”The motion will amend existing income tax rules to help ensure that income earned by Canadians through foreign jurisdictions, including tax havens, is subject to tax as if it had been earned in Canada,” he said in introducing the motion.
However, he said the amendments are separate from the overall review of income trust funds which is still underway.
The amendments mainly deal with the taxation of income earned through the use of non-resident trusts and foreign investment entities, the department said. They carry through on long-standing proposals that were first announced in the 1999 budget but whose implementation has been delayed by repeated proposals for changes.
Meanwhile, Flaherty continued to defend his decision to break an election promise not to tax income trusts, saying they were being used as a tax avoidance scheme by some corporations and that they threatened to push the government back into a deficit.
The loss in revenues resulting from the escalating number and size of corporations that were converting into trusts would have eventually pushed the federal government back into a deficit, he told the committee.
”The alternative would have been to impose a heavier tax burden on individual Canadians and their families and that’s not fair and we did not want to go there,” he told reporters later.
However, Liberal finance critic John McCallum argued that the government could have given investors a 10-year grace period before imposing the tax as the Americans did when they shut that tax loophole, rather than the four it did.
‘You would have the same long-run consequences but you would have very substantially reduced the meltdown which all sorts of Canadians who invested in good faith suffered,” McCallum said.
Flaherty responded that the Australians only gave investors a three-year grace period when it took such action, suggesting that is the model he followed.
Meanwhile, the Conservative government’s decision to tax income trusts faces a legal challenge from Democracy Watch. Duff Conacher head of the government accountability advocacy organization refused to reveal the grounds for the court challenge before today but it’s likely related to the breaking of a written commitment in the Conservatives election platform to not tax on trusts.
Source: Montreal Gazette
