B.C. sets example to end offshore tax havens

Effective Sept. 11, the B.C. government ended its tax-haven status by terminating the tax advantages given to corporations and individuals under the International Business Activity Act. The “global businesses” that benefited from the IBAA included Canadian domestic and foreign banks, many securities dealers and at least one alleged money-launderer.

The benefit of the IBAA for B.C. citizens was never clear. The banks and securities dealers were refunded up to 100 per cent of B.C. corporate tax for doing business they would have done anyway. The CEO of Advantage B.C., which administers the IBAA, admitted the program wasn’t set up to create jobs.

Ottawa should follow B.C.’s example, and overhaul Canadian legislation that allows wealthy Canadians and Canadian corporations to benefit from using offshore tax havens. When Canadian companies and wealthy individuals were named in the Paradise Papers as holding investments in known tax havens, many protested that their financial arrangements are legal. They shouldn’t be.

Canada has a long history of negotiating tax treaties, but easy access to a tax haven for wealthy Canadians began in earnest when the Clark Conservative government passed the Barbados tax treaty in 1980. Offshore investing increased so dramatically that, in 1995, the Chretien Liberal government legislated to limit its tax benefits, although exempting Barbados, enabling Canada Steamship Lines, owned by then-Liberal finance minister Paul Martin, to benefit.

In 2011, the Harper Conservative government passed another amendment to limit the use of tax havens, but again exempted Barbados. Also in 2011, the government negotiated a tax treaty with the Cayman Islands, which taxes nothing on international income and investments.

Two auditors-general, Denis Desautels and Sheila Fraser, warned about the growing loss of tax income, but neither Conservative nor Liberal federal governments acted. A 2016 private-member’s bill to tax Canadian-owned Barbados corporations as Canadian residents failed for procedural reasons. The federal government should introduce similar legislation, but apply it to any tax haven.

Tax havens allow the wealthiest Canadians and large Canadian corporations to grow their investments tax-free. Ottawa must stop allowing Canadians to bring those funds back into Canada tax-free and allowing the funds to be tax effectively distributed as dividends. Canadians who earn and invest their money in Canada don’t get those benefits.

Properly taxing Canadian companies and individuals who invest offshore would provide billions of dollars for health, education and infrastructure. Those companies and individuals enjoy Canadian health care and other benefits. They shouldn’t be allowed to escape tax.

Just as B.C. citizens didn’t benefit from the IBAA, citizens of the Caribbean tax havens don’t benefit from living in a tax haven. The OECD confirms income inequality and poverty are growing in countries like Barbados and the Cayman Islands Canadian investment in tax havens increases Canadian income inequality, too. If the Canadian federal government cares about Canadian income inequality, it can change the rules.

Canada can maintain its existing 93 tax treaties to share financial information about residents who do business and keep accounts in two or more countries. However, there is no justification for allowing the wealthiest Canadians and companies to invest money free of tax and bring it home tax-free.

— Joan L. Rush is a former B.C. financial institutions regulator and retired lawyer.