Morneau Should Set His Sights On The Real Corporate Tax Dodgers

Morneau should set his sights on the real corporate tax dodgers, by @TimPaziukAs someone who advocates for business owners in Canada, you may be surprised that I agree with some of what Finance Minister Bill Morneau and Prime Minister Justin Trudeau have been saying to whip up public support for their proposed tax changes. I agree that tax “loopholes” in place for corporations need to be closed and that we need to do more to catch corporate tax cheats. It is absolutely true that the current system and its framework costs our country dearly in lost tax revenue.

Where we differ, however, is in our perception of the source of this lost revenue and the policy changes that need to be made to address it.

Canada's Finance Minister Bill Morneau.

Before I offer my recommendations to help stop this scourge on our system, we need to define some terms. First, not all corporations are the same. There are Canadian-controlled private corporations (CCPCs) which are owned in large part by your family physician, the family who runs the convenience store, your friend who’s trying to open a restaurant and, yes, even the person who started doing well for themselves after a decade of flirting with bankruptcy to build their business.

By contrast, there are also publicly owned corporations. These are the ones that trade on stock exchanges that often embody the popular notion of “corporate greed.” The ones that corrupt our political system through campaign financing and fight regulatory measures meant to protect Canadian consumers, the environment and the economy.

To be clear, the tax changes as proposed by Mr. Morneau to limit opportunities for private corporations do not affect the large, publicly owned corporations. Not even a little bit.

By their estimate, the federal government aims to boost tax revenue by approximately $250 million by disallowing business owners the ability to income split with family members. More will be gained by taxing the retained earnings of CCPCs.

By contrast, it is estimated that Canadians have stashed over an estimated $261 billion in wealth in offshore tax havens — and this is the amount that the government knows of. That is billion with a “B.” Estimates vary, as it is difficult to know the exact figure given the secrecy laws in place in these tax haven countries. Whatever the actual number is, the government must surely be doing something to combat these corporate tax dodgers given their strident stance on tax “fairness.”

Enter Tax Information Exchange Agreements (TIEAs). These are agreements that have been reached between Canada and several tax haven countries to soften these countries’ secrecy laws enough to catch tax cheats. Did it work? Not exactly.

There are no clear figures as to the exact amount recovered by the CRA by use of these TIEAs. What is known, however, is the CRA and government officials are not exactly boasting about the amount recovered. What we also know is that TIEAs have exploded in popularity. Since the Conservative government first established a TIEA with the Netherlands Antilles in 2009, TIEAs have now been established with 22 different countries, with two others signed (but not yet in force) and six others currently under negotiation. If they are not helping us recover taxes, then why the explosion in popularity?

It could be that TIEAs allow foreign subsidiaries of Canadian companies to be taxed on income in the tax haven country, and are then allowed to send the profits back home to Canada tax-free. Not a bad deal, considering the corporate tax rate is far lower, or non-existent, in some of these jurisdictions.

Maybe [Morneau] is the type of person who likes to play shell games with the public.

Surely this is where the lost revenue should be recovered and is undoubtedly under severe scrutiny by our hawkish, whistle-blowing, corporate watchdog finance minister, right? Well as it turns out, Morneau-Shepell, Bill Morneau’s family business and publicly traded corporate giant human resources firm, set up a subsidiary in the Bahamas in 2014 while he was named a director. (Ed. note: Morneau has since announced that he had placed assets related to the firm in a blind trust and moved to sell shares in the company.) One can only assume that, at the very least, this was a happy accident. I am inclined to give Mr. Morneau credit and say it was not an accident and was a pretty good business decision, given the Bahamas’ zero-per-cent corporate tax rate and in-force TIEA with Canada.

To be fair, Mr. Morneau has done nothing illegal by possibly exploiting these agreements. Just playing the game, right? Maybe this is the type of business savvy individual we, in fact, need as finance minister. Alternatively, maybe this is the type of person who likes to play shell games with the public.

Maybe he and his wife Nancy, the vastly wealthy heiress to the McCain Foods empire, aren’t all that in touch with the tribulations of the average professional, farmer or small business owner. Maybe he is, in fact, the type to turn average, middle-class Canadians against one another while appearing as a Robin Hood to the very people being hurt by these agreements his company may exploit. Maybe the Canadian public will buy it. Maybe it will get his party re-elected.

However, maybe, just maybe, Canadians from coast to coast, regardless of political leaning, will not stand for this stupefying irony and brazen hypocrisy, and demand that the real corporate tax dodgers are made to pay the CRA piper.

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Author: Tim Paziuk