Ottawa promises crackdown on loopholes that let big banks avoid billions in taxes

TheStar.com – News/Canada – The federal budget on Tuesday announced a series of measures to combat tax evasion and avoidance techniques revealed in the Star’s Panama Papers and Paradise Papers investigations.
Feb. 28, 2018.   By

The federal government has singled out Canadian banks for gaming the tax system to artificially reduce their tax bills.

In the budget released Tuesday, Ottawa announced it will tighten tax rules “meant to prevent a small group of taxpayers, typically Canadian banks and other financial institutions, from gaining a tax advantage.”

The measure was one of a slew of reforms to prevent tax evasion and avoidance that Ottawa estimates will bring in almost $1 billion per year.

An investigation published by the Star and Corporate Knights magazine in December crunched six years of corporate financial data to show that Canada’s Big Five banks avoided an average of $3.8 billion in tax every year.

Despite being the most profitable companies in the country, Canadian banks pay 1/3 the tax rate of other large corporations. They also pay a lower rate of tax than big banks in any other G7 country.

While publicly available information wasn’t specific enough for a forensic auditor to determine exactly how the Big Five — BMO, RBC, TD, CIBC and Scotiabank — avoided billions in tax, the banks all use offshore subsidiaries based in tax havens to lower their tax bills.

The 2018 federal budget specifically targets “the use of sophisticated financial instruments and structured share repurchase transactions,” used by banks and other financial institutions to create “artificial losses.”

“The Government is committed to closing tax loopholes that benefit small groups of taxpayers at the expense of those Canadians who pay their fair share of taxes,” states the budget document made public this week.

The Canadian Bankers Association, on behalf of the Big Five banks, said without more detail on specific legislative measures, it’s difficult to know how the reforms will affect banks.

“Banks in Canada have always paid their full share of taxes and will continue to work closely with Finance to ensure continued compliance in this area,” wrote CBA spokesperson Aaron Boles in a statement.

The crackdown on banks was just one of a half dozen measures in the budget that address tax avoidance and tax evasion issues brought to public attention by the Star and CBC/Radio-Canada’s reporting on the Panama Papers and the Paradise Papers over the last two years.

The measures introduced in the budget include:

Preventing banks from creating “artificial losses.” The budget proposes strengthening existing anti-avoidance rules to prevent banks and financial institutions from using share repurchase transactions with subsidiaries to create losses on paper in order to gain a “tax advantage.”

Enhancing tax reporting requirements for trust funds, such as the two secret $60 million Cayman Islands trusts that the Star reported last November were used by former Senator Leo Kolber, his son Jonathan, and Liberal Party chief fundraiser Stephen Bronfman and his father Charles for over 20 years.

Domestic and offshore trusts with Canadian connections will have to report “the identity of all trustees, beneficiaries and settlors” annually starting in 2021, according to a supplementary information document provided by the Ministry of Finance. Trusts will also have to report the identity of anyone who can “exert control” over a trustee.

If a trust knowingly fails to file a tax return, a penalty of 5 per cent of the value of the trust’s assets would apply — a fine that could run into the millions for certain large trust funds.

Strengthening rules for limited partnerships (LPs), a type of business structure the Star exposed in January 2017. The Canada Papers investigation showed how LPs are prone to abuse by foreigners who wish to “snow wash” their money through Canada.

New rules will “prevent taxpayers from obtaining unintended tax advantages through the use of complex partnership structures,” the budget states.

Cracking down on tax-free corporate distributions to foreigners, a method used to play Canada’s tax rules off those in other countries to evade paying taxes in either place. In the Canada Papers series, the Star detailed how a Quebec numbered company used this techniqueto hide at least $3.1 million (U.S.) from three South American governments.

New measures will “prevent unintended, tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts,” the budget states.

Increasing ownership transparency for numbered companies and shell corporations, which have been permitted to carry out large transactions without disclosing their owners. The Star has reported extensively on how transparency would allow tax authorities and law enforcement to determine the real people behind paper businesses that launder money and evade tax.

The budget commits the government to amending the Canada Business Corporations Act “to strengthen the availability of beneficial ownership information.”

The budget also clarified Ottawa’s plan to clamp down on investment income through private corporations. This reform, first revealed by the Star last July, sparked a fierce backlash among small business owners. New details specify that the changes would only target “wealthy corporate owners (who) can gain significant tax advantages by holding corporate income inside their corporation for personal savings purposes.”

The new rules would cap the amount of investment income that is taxed at the small business rate at $50,000 per year. Higher taxes would only affect 50,000 small corporations, 90 per cent of which are owned by the richest 1 per cent of people in Canada.

“Tax evasion and tax avoidance has a serious financial cost for the Government and all taxpayers. By cracking down on tax evasion, particularly abroad, our Government can ensure that it has the money needed to deliver programs that help the middle class and people working hard to join it,” the budget document states.

The fact that the budget includes an entire chapter of tax fairness “shows we’ve managed to make tax fairness a key political issue and they’re feeling pressure to make progress on this,” said Dennis Howlett, executive director of Canadians for Tax Fairness.

He applauded many of the reforms, including a commitment to crack down on banks and an increase to the enforcement budget at the Canada Revenue Agency. But Howlett also noted the lack of figures quantifying how much tax will be recouped.

“This is a big problem. The question is: How much of that problem is this going to fix?”

James Cohen, the director of policy at Transparency International Canada said he is encouraged by the crackdown on private trust funds.

“The government recognizes the problem that opaqueness around trusts creates,” Cohen said. “I’m encouraged by this first attempt to create transparency and accountability around the use of trusts, to make sure they’re used legally and to discourage their use for illegal ends.”

The budget did not break down expected tax revenue increases from each measure, but stated that increased compliance would result in an additional $354 million over five years. The private corporation reforms are expected to raise $925 million per year by 2022.

https://www.thestar.com/news/canada/2018/02/28/ottawa-promises-to-close-loopholes-that-let-big-banks-avoid-billions-in-taxes.html

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