It’s time for Canada’s big tax crackdown to include CPP

‘‘ Every dollar in foreign taxes we pay comes at the expense of the returns we generate. MICHEL LEDUC CPPIB PUBLIC AFFAIRS

When it comes to performance, Canada’s national pension fund rightfully boasts impressive results. Over the past decade, the Canada Pension Plan Investment Board (CPPIB) achieved an annual rate of return of 10 per cent on our CPP fund, one of the highest rates among global pension funds.

But those stellar results rely in part on a questionable practice: tax avoidance.

CPPIB manages assets worth $570 billion, of which only a small part (about 14 per cent) is invested domestically. On its Canadian investments, it is exempt by law from paying taxes. But on its international investments, where taxes are due, CPPIB works very hard to minimize tax payments.

CPPIB is so adept at using legal strategies to minimize taxes that over the past year (fiscal 2023), its total tax bill was a mere $186 million on gross income of $15.6 billion — an effective tax rate of just 1.2 per cent.

To help achieve this, CPPIB has established a vast network of at least 30 subsidiaries in the Cayman Islands, the tax haven capital of the world.

For DT Cochrane, an economist with Canadians for Tax Fairness, an Ottawa based non-profit group, the use of offshore tax havens is deeply worrisome. “My instinct is that when you start to see these complex ownership structures, it’s just an immediate red flag,” he tells me.

Ironically, this is all done while Canada’s finance minister — who heads up the legal owner of CPPIB — says the government is serious about cracking down on loopholes that allow tax avoidance.

Brigitte Alepin, professor of taxation at Université du Québec en Outaouais, and one of the most influential tax experts in the world, acknowledges the big gap between CPPIB’s use of tax havens and the official stance of the Canadian government.

“The Canadian government supports the global tax reform, of which one of its objectives is to impose limits on the use of tax havens by companies. How can we explain and demand from Canadians and Canadian businesses to respect the global tax reform if CPP seems to be using tax havens without any limit?” she wrote in an email.

But when asked about the conflict, Chrystia Freeland’s press secretary referred all questions to CPPIB. “The CPP is guided by an independent board of directors and operates at arm’s length from the federal government,” she said. “As such they are best placed to provide further comment.”

When contacted by the Star, Michel Leduc, CPPIB’s global head of public affairs and communications, said the CPPIB maintains there is nothing wrong with using legal means to minimize the taxes paid on international investments. “We are unapologetic about our prudent tax planning,” he wrote in an email.

Leduc said CPPIB operates with the goal of helping “our hard-working contributors and beneficiaries achieve lifetime financial security,” and added that “very few national retirement funds are solvent over the long haul.”

But what about the ethics of using offshore tax havens and other strategies to reduce taxes to the point where they are much lower than those paid by most Canadian citizens and companies?

Leduc argues that the CPPIB is competing for deals “against trillion-dollar behemoths” (other large sovereign wealth and pension funds) and needs to use every tool at its disposal.

“Every dollar in foreign taxes we pay comes at the expense of the returns we generate for our 21 million contributors and beneficiaries. The notion of us voluntarily keeping one hand tied behind our back is a non-starter and we have full confidence Canadians support us in this effort,” he adds.

I have three comments on that. First, CPPIB is arguably one of the more aggressive wealth funds when it comes to tax avoidance. Just because its international tax planning is legal doesn’t mean it’s ethical.

Quebec’s pension plan, the Caisse de dépôt et placement du Québec, which is similar in size (it manages $402 billion in assets), has no subsidiaries in tax havens at all, and other Canadian pension funds, such as PSP Investments and the Ontario Teachers’ Pension Plan, use tax havens on a smaller scale.

Second, Canada is one of the richest countries in the world. At least some of the foreign tax CPPIB avoids paying would have gone to much poorer countries such as India and Brazil, where it has massive investments.

Lastly, how can CPPIB have “full confidence (that) Canadians support” its tax avoidance practices? After all, they are well-hidden, never shared with contributors and beneficiaries, and are rarely (if ever) publicly discussed.

CPPIB claims that it is a highly transparent organization. Its website reads: “we believe transparency is the foundation of trust with our stakeholders.” But it discloses none of its complex financial structure to its 21 million contributors and beneficiaries on its financial reports.

In my opinion, while CPPIB’s genuine commitment to fulfilling its mandate “to create value for workers over the long run” is appreciated, its obsession with achieving ever-higher returns has caused it to lose its ethical compass.

High returns are important, but at what cost? There is always a tradeoff, and CPPIB’s returns don’t necessarily have to be as high as they are. According to the most recent Actuarial Report on the Canada Pension Plan, if CPPIB’s average annual rate of return for the next 75 years was 5.75 per cent — much lower than the 10 per cent it has made over the past decade — it would still be well funded until the end of the century.

As things stand now, there is considerable inconsistency, even hypocrisy, between Canada’s official call to crack down on loopholes that allow tax avoidance and the way its national pension fund operates.

Freeland should not hide behind the argument that CPPIB operates at an arm’s length from the government. She needs to send a clear message that CPPIB should pay its fair share of taxes — just as you and I and most Canadian corporations are expected to do.