Tax Code Fiscalamity

activities in Canada, and wants to give back to the community. A local university has been urging him to contribute $500,000 to help fund a study on economic mobility. While Michael believes that this is a great initiative, $500,000 is a lot of money. But the university says it has a plan: It involves something called “flowthrough shares.”

Canadian resource companies incur substantial amounts of exploration and development expenses — expenses that some companies are not able to deduct because of insufficient income. If an individual invests in to a third party arranged by the promoter. Michael receives both a deduction for the resource expenses, and a credit for the charitable donation, reducing the after-tax cost of his donation to about 10 cents on the dollar. This means that the donation of $500,000 only costs Michael $50,000, while other Canadian taxpayers — you and I — pick up the rest of the tab. And here is the baffling part. The tax authorities have issued a number of rulings blessing this scheme.

The third example is PubCo, a Canadian public company with extensive international of corporate documents. Using a number of techniques — including finance and royalty charges — most of the foreign operating profits are diverted from the high-taxed subsidiaries to HavenCo.

HavenCo pays no tax on its income and, under Canadian rules, there is also no Canadian tax, either when HavenCo earns the income or when PubCo receives dividends from HavenCo. And PubCo’s shareholders (investors like Emma) even receive a 27-per-cent credit when PubCo pays dividends to them. The Department of Finance is on to this, right? Er, not so much.

Canada is participating in the OECD plan to address global tax avoidance by multinational corporations — the base erosion and profit shifting (BEPS) initiative. BEPS has 15 action plans, one of which includes measures to limit the use of conduit companies in tax-haven jurisdictions. The OECD beganitsworkin2013,and its action plan was released in final form and endorsed by G20 leaders two years later. But it is now 2018, and Canada has still taken no action to limit the use of tax havens.

In short, Canada’s tax code is a fiscalamity, and in need of major repair. The last comprehensive review of our tax system was carried out in the 1960s, and layer upon layer of ad hoc changes have been added since that time. It is time for the government to appoint a panel of non-partisan experts to complete a thorough review, and recommend changes aimed at competitiveness and attracting business investment.