Should fair-share taxation be focused offshore?

Canada might be able to recover more tax dollars by looking at what's fleeing the country

Should fair-share taxation be focused offshore?
The proposed changes on the taxation of private corporations, predicted to weigh heavily on small businesses, are aimed at making sure everyone pays their fair share. But as bombshell revelations from the Paradise Papers suggest, taxmen looking for loopholes in the country might be missing bigger revenue leaks from abroad.

Many have warned that the tax changes would push businesses out of the country, but Allan Lanthier, a retired partner of Ernst & Young, doesn’t see that escape happening.

“Canadian law includes an ‘exit tax,’” he said in a think piece on the Financial Post. “[A]ny individual or corporation that becomes a non-resident has a deemed fair market value disposition of most assets, and owes immediate Canadian tax on accrued gains.”

Instead of outright exits, Lanthier predicted that many taxpayers will resort to investing outside Canada — in foreign subsidiaries owned by their own private corporations. In adopting such a structure, such entities and individuals will not owe Canadian corporate tax on earned business income or dividends the corporation earns from its subsidiary. “The only Canadian tax will be personal tax when the CCPC [Canadian-controlled private corporation] pays dividends to its owner, perhaps many years in the future,” he said.

A CCPC that uses third-party financing for the new investment could also borrow the funds, he added, deducting interest expenses against its own business income. The borrowed cash could then be routed to the foreign subsidiary through a “double-dip” structure that would erode not just Canadian tax, but also foreign tax.

Passive investments could also be transferred to a foreign subsidiary, Lanthier added. Under the proposed rules, the combined personal-corporate tax on passive income would be around 73%; using a foreign subsidiary, according to him, would cut that down to as little as 54.5%, with less than 30% ending up as Canada’s share.

Finally, given the prospect of exorbitant Canadian tax rates and “a federal government that seems both anti-business and unpredictable,” Lanthier warned that the next generation of Canadian entrepreneurs and job creators might decide to go abroad.

“It is true that Canada is part of the OECD-G20 attempt to address tax avoidance by multinational corporations — the base erosion and profit shifting [BEPS] initiative,” he said. “However, there is no evidence that BEPS has made any dent in Canadian corporate tax avoidance.”

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