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April 27, 2014

Canadians paying for taxes corporations are avoiding

Scott Stockdale

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While multinational corporations set up subsidiaries in tax havens such as Ireland, Switzerland and the Cayman Islands and devise ways to transfer profits there from Canada, ordinary Canadian taxpayers have to pay more to make up for taxes corporations are avoiding, according to Dennis Howlett, executive director of Canadians for Tax Fairness. Moreover, there are no laws to prevent this.

In an interview this week on the CBC radio programThe Sunday Edition, Mr. Howlett told host Michael Enright that 26 of the most profitable and powerful fortune 500 companies paid zero dollars in federal tax from 2008 to 2012 and, the lawyers and accountants who figured out how to do it (legally) are all likely getting hefty bonuses

“Corporate tax avoidance has become an essential part of doing business for multinational corporations the world over. They shift all or most of their profits to low or no tax jurisdictions.” While avoiding taxes in tax havens around the world, corporations doing business in Canada have also benefited from a considerable reduction in Canadian corporate tax rates under the Harper government. Mr. Howlett said the combined federal and provincial corporate tax rate is about 25 per cent, “so the revenue loss for the tax cuts that the federal Conservatives brought in amounts to about 1.8 per cent overall of the total tax collected.”

Although Canada has the second lowest tax rate in the G7 – even lower than the United States - Mr. Howlett said very few Canadian companies pay the 25 per cent.

“Recent data we got shows that of the top 60 companies listed on the TSX, 13 of those companies paid less than five per cent taxes; and this was calculated over a five year average from 2007 to 2011, based on Bloomberg sources. More than half paid less than 10 per cent and only four out of the 60 paid 25 per cent or more because they're all doing it (using tax havens).”

Multinational corporations in particular are in a position to set up subsidiaries in tax havens and shift a lot of their intellectual property. Mr. Howlett said they do financing; they set up loans from their subsidiaries; they come up with all kinds of ways to transfer profits out of Canada and accumulate them where there are very little taxes paid. And this is very unfair for medium and smaller sized businesses - that are not multinationals – which can't do that.

“Now a quarter of all Canadian direct foreign investment going abroad is going to tax haven countries. That's about 170 billion dollars,” Mr. Howlett said.

Canada Revenue Agency is currently in protracted court battle with Canadian uranium giant Cameco - which estimates it could have to pay up to $850 million in unpaid taxes if it loses the case.

“We think it's going to be over $1 billion once Canada Revenue finishes going through all the years; they haven't finished that process yet. All the profit was taken in Switzerland and very little profit would have remained in Canada; and they paid very little taxes here, even though all the uranium came out of mines in Saskatchewan.”

Tax havens also offer secrecy, which allows people to open up shell companies or trust companies where they don't have to identify who the ultimate beneficial owner is. Mr. Howlett said that way they can hide the fact that they have money sitting in an account and it's very hard for the Canada Revenue Agency to figure out who's got money hiding in Barbados or Cayman islands or wherever.

“Canadian corporations pay the applicable taxes in the Barbados - which is nothing - and then they can bring their money back to Canada.”

Canada’s low corporate tax rate, which the Conservative government established with no guarantee or requirement from corporations that they spend it on job creation or other benefits to the country,  is an additional concern for Canadians for Fair Taxes.

The theory behind corporate cuts was that they would stimulate investment and stimulate job creation, but the jobless recovery is a clear indication that hasn't happened. Instead, corporations are sitting on billions of dollars in cash. Mr. Howlett said this is because there's not a whole lot of consumer demand.

“One of the reasons for that is because wealth has become too concentrated in the hands of a few. Rich people don't actually spend that much; you can only own so many cars or houses. Ordinary Canadians are “maxed out” on their debts and they're not able to provide the kind of consumer demand needed to get the economy going again, so I would argue that a redistribution of income and fairer taxation is not only fair and just, but a critical step needed to get our economy going strongly again.”

It's getting to a point where some corporate leaders are saying reductions in corporate taxes - whether by tax avoidance or government policy - has gone too far, because this undermines the competitiveness of corporations, Mr. Howlett said.

 “If we don't have the revenue to invest in infrastructure or quality education, corporations can't operate in a competitive environment. Historically Canada's had one of the top education attainment rates in the world; that is now suffering. Other countries are surpassing us.”

But meanwhile, Canada has to compete to have multinational companies set up business here, because we need job creation. Allison Christians, a lecturer in the Faculty of Law at McGill University in Montreal, said Canada doesn't have a lot of multinationals, and we'd like to have more.

"How are you going to do that if you're taxing them out of step with everybody else?"

Mr. Howlett said we need a unitary taxation system where multinational corporations have to report their global profits, and the profits should be taxed where the economic activities occur and the value is created.

The real hope for substantive tax change, requires increased public awareness, Ms. Christians said. Until that happens there is little incentive for government officials to change course – after all, few if any of them will be out of work any time soon.

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