October 10, 2005

Proposed Amendment: Income Tax -- Note, CSL

Bumped up -- important to Canadians

Happy Thanksgiving! If time is at a premium, scroll down for the parts in blue.

This concerns tax havens and companies such as CSL, our PM and his government, along with business friends who operate globally, who, undoubtedly, will not be amused at this proposal -- a co-operative endeavour, it appears, between the Bloc Quebecois and the Conservatives.

CSL is now owned by Paul Martin's sons . . . Should we assume this will not affect the PM and that he will approve?

Private Members' Business: Amendment to Income Tax Act Regulations

Mr. Guy Côté (Portneuf—Jacques-Cartier, BQ) moved:

That, in the opinion of the House, the government should amend the Income Tax Act regulations so that they do not override certain provisions of the tax agreement between Canada and Barbados allowing Canadian businesses to use their subsidiary in Barbados to avoid paying taxes in Canada.

[. . . . ]

The purpose of this motion is to amend the income tax regulations so that they do not override certain provisions of the tax agreement between Canada and Barbados. These regulations currently allow Canadian businesses to repatriate income without paying taxes in Canada, which is a serious threat to our country's tax base. Moreover, this violates the spirit of these tax agreements, the purpose of which is to avoid double taxation. It so happens that in tax havens like Barbados, where the tax rate applied to foreign businesses is ridiculously low, not only do these businesses avoid double taxation, but they avoid taxation altogether.

As members of the House, we cannot turn a blind eye and ignore this reality when our constituents pay taxes and some businesses avoid doing so by using tax havens.

The necessity to look into this issue right now has to be put into perspective. Various measures taken by the current Prime Minister, especially when he was finance minister, are now allowing a number of businesses in the shipping industry, among others, not to pay their fair share, whereas the vast majority of taxpayers do pay their fair share of taxes.

The Office of the Auditor General has provided [. . . . ]

In 1993, when the Standing Committee on Public Accounts presented its 12th report to the House, it reiterated a number of the recommendations originally made by the Office of the Auditor General. The committee said, among other things, that:

—care must also be taken to keep the tax system fair and equitable, and that there is no reason, in our tax regime, why income earned in a tax haven should be given preferential treatment over income earned in Canada and subject to Canadian tax.

What happened in the 13 intervening years? The current Prime Minister has not simply been remiss in implementing the recommendations the Auditor General has repeatedly made to him over more than a decade, but we have seen carried out a long-planned measure to foster the use of Barbados as a tax haven.

Backtracking a bit, we have found a great example to illustrate what we mean: a shipping company by the name of CSL. In 1992, CSL created CSL International, which was at that time nothing but a shell company incorporated in Liberia and responsible on paper for all of CSL's international activities. CSL International is involved in very little actual shipping. It is a holding company that owns other companies, and it is those companies that are involved in shipping. It is important to make it clear that, at that time, it was possible to bring back to Canada, tax-free, the profits generated by a Liberian subsidiary of a Canadian company.

As I have said, in 1992 the Auditor General brought the problem of tax havens to public attention for the first time.

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What was the Finance Minister's reaction in 1994? To bring down his first budget and to state in it that he intended to put an end to the use of those havens. Such a noble intention.

However, the budget implementation bill and the regulations that came into effect in 1995 left one loophole available, and it is easy to guess where it was: Barbados.

That bill, in clause 5907 of section 11.2, renders inoperable the section of the tax convention which excluded “international business companies”, by setting out a series of criteria by which a company could be considered non-resident in Canada and thus not subject to taxation by Canada.

So that was in 1994, and the legislation was enacted in 1995. Just by pure chance, 1995 was the year CSL moved to Barbados. What an odd coincidence! The Auditor General's office did not let this go unnoticed. In 1996 he again sounded the alarm on tax havens, for a second time.

This is what he said:

[. . . . Much has been omitted here, for example what the Auditor General has said over the years, how Finance Minister and now Prime Minister Paul Martin responded, and much more.]

Background: Paul Martin's Influence on Tax Havens

Ms. Bev Oda (Durham, CPC): Madam Speaker, in the 1994 budget, the then minister of finance promised too crack down on tax havens. The implementation of the budget cracked down on Liberia as a tax haven but other tax havens, such as Barbados, still qualified due to a loophole in the Income Tax Act.

The OECD defines a tax haven as any jurisdiction that “has no or nominal taxation on financial or other service income and offers or is perceived to offer itself as a place where non-residents can escape tax in their country of residence”. That is from “Tax Havens”, the Library of Parliament, 2004, page 5.

Barbados is one of the 36 countries identified by the Organisation for Economic Co-operation and Development in 2000 as a tax haven. Canadian FDI to Barbados increased from $1.5 billion to $24.7 billion between 1990 and 2003, making Barbados the third largest recipient of Canadian FDI in 2003 after the United States and the United Kingdom. The value of Canadian direct investment in Barbados now surpasses Barbados' GDP by a factor of six.

According to a Library of Parliament briefing, “as a general rule, Canada negotiates tax treaties only with countries that have comparable taxation rates, structures and information disclosure requirements. There are, however, some exceptions to this rule. Canada has tax treaties with three of the 36 countries listed as tax havens by the OECD in a 2000 report on harmful tax practices. These three “tax haven” countries are Barbados, Cyprus and Malta”.

In Barbados the general corporate tax rate and the rules for information disclosure are comparable to those of Canada. Canadian foreign affiliates can, however, choose to incorporate themselves as Barbados international business companies and, instead, to pay tax rates of between 1% and 2.5%. In Canada the combined federal-provincial-territorial corporate tax rate is typically between 35% and 40%.

Note this:

There is a provision in the Canada-Barbados tax treaty that is supposed to prevent Canadian foreign affiliates from being able to take advantage of tax treaty protection and therefore from obtaining “exempt surplus” status, as the provision implies that any active income earned by a BIBC would be fully taxed when returned to Canada in the form of a dividend. However a provision in the Income Tax Act has served to override the preventative provision in the Canada-Barbados tax treaty. The Income Tax Act gives “exempt surplus” status to any company operating in any country with which Canada has a tax treaty regardless of the content of that tax treaty.

The Auditor General has estimated that the existence of tax havens, including but not limited to Barbados, has resulted in hundreds of millions of dollars in reduced Canadian tax revenues.

According to Statistics Canada, Canadian assets in OFCs, offshore financial centres, increased eightfold, from $11 billion to $88 billion between 1990 and 2003. These centres include countries that are often referred to as tax havens. OFCs accounted for more than one-fifth of all Canadian direct investment abroad in 2003, double the proportion of 13 years earlier.

The effect:

When companies transfer tax dollars out of Canada into tax havens, hardworking Canadian taxpayers are left to pay the difference.
When companies transfer tax dollars out of Canada into tax havens they are evading their social responsibility. Those tax dollars could be used for health care, education or the armed forces. Tax havens deprive the Canadian government of tax revenue that could be used to fund social programs, to pay down debt or to provide tax relief.

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One of the results of the government's uncompetitive corporate taxation levels is the desire of businesses to transfer tax dollars out of Canada into tax havens.

[. . . . ]

More important, the government should make Canada more attractive to business by implementing competitive corporate tax levels. It should focus on productivity and make Canada a more attractive place to invest.

Our party is looking forward to the study which will be commissioned by the finance committee during the second week of December. The Conservative Party of Canada feels that it is important to stress that investment is mobile and will continue to move. The problem is serious. Canada is now a net exporter of capital. Neither Canadians nor foreigners are investing in our country. Our party welcomes that Canadians are investing outside the country but we must [ask?] why they are not investing heavily in Canada.

Our party believes that overall tax reform with an emphasis on tax relief for large employers and reform of investment vehicles is necessary to ameliorate the situation in order that Canadians and other countries consider Canada as a good place to invest.

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Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Madam Speaker, I would like to use my ten minutes to try to give a clear explanation about the rules that govern the tax agreement between Canada and Barbados and our income tax regulations. How can these regulations, which are determined by cabinet, that is the governor in council, skew the rules contained in the tax agreement with Barbados?

As a general rule, all taxpayers who receive any income generated here or in a foreign country must pay taxes. However, there are exceptions. Tax agreements between Canada and certain countries provide that income that is taxed in a signatory country can be repatriated without being taxed again in Canada. That is the principle behind these tax agreements, and we support it.

Obviously, subsidiaries of Canadian companies that operate mainly in countries that have signed a tax agreement with Canada should not have to pay taxes again in this country when they have already paid taxes in the other country. We recognize that fact, especially when the tax agreement is with a country where income or profits are taxed at a rate that is comparable to what we have in Canada. We have no problem with that. We understand that and totally support the idea.

Herein lies the rub:

The rub lies in the fact that the former finance minister and current Prime Minister decided to get rid of the tax treaties signed with tax havens, in 1994, after the Auditor General and the Bloc Québécois blew the whistle on them. So he decided to clean house in 1994, with the exception of the tax treaty with Barbados. Not only did he keep this treaty with Barbados, but the former finance minister and current Prime Minister also had a company called CSL International, which is still owned by his family. It is a holding company that owns shipping lines operating in international waters and that had its head office in Liberia. By cutting its ties with tax havens, of which Liberia is one, the government forced CSL International to move its head office to Barbados in 1994. So, the terms of the tax treaty with Barbados remained unchanged, and CSL International moved to Barbados.

Two other amendments had to be made to the Income Tax Act. The former finance minister had tried to make an amendment in 1996, but an election was called immediately after and the bill died. This amendment was to consider the holding company as a company truly providing international shipping services, and no longer simply a holding company. By doing so, the former finance minister was building a golden cage so as to pay lower taxes from 1996 on, and to be subject to other provisions that were to come later. However, that bill was never adopted. In 1998, he re-introduced his bill, which he managed to get passed. We condemned it both times, naturally.

With time, we see that, in 1994, the first thing the former finance minister did was clean up the tax treaties in order to give the appearance of a government that cared about its tax base, after a number of years of whistleblowing.

On the other hand, he had the cabinet adopt, after he himself presented it as Minister of Finance, a section of the Income Tax regulations, namely 5907(11.2) c . And what is its purpose? A return to the tax convention signed with Barbados. And what does section 30 of that tax convention say? That there are two types of taxation in Barbados. There is the standard rate on corporate income— 40%—which is acceptable. But there are special provisions for foreign companies whose principal activities are not in Barbados, and who decide to establish a head office there. Such companies pay a tax of between 1% and 2.5%, as my colleague from Portneuf—Jacques-Cartier has suggested.

What is the intent of article 30 of the tax convention between Canada and Barbados? It states that, for subsidiaries of foreign companies subject to that low tax rate of between 1% and 2.5%, profits returning to the country of origin are not tax exempt.

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PM's Exception via Regulation

If they pay between 1% and 2.5% to Barbados, profits such as those of CSL International, when they come back to this country, are subject to federal and provincial tax. In the case of CSL, Quebec tax, since their head office is in Montreal.

In 1994, the Minister of Finance got this change via regulation. He announced that an exception would be made to section 5907(11.2) c of the taxation regulations.

This is an exception to article 30 of the Canada-Barbados tax convention, meaning that even if CSL's profits are taxed at 1% to 2.5% in Barbados, under the conditions set out in 1998 by another bill tabled by the Minister of Finance, when they come back here, they escape the provisions of article 30 of the convention. Thus, these profits are exempt from Canadian taxes.

That is the only exception and it was submitted by the then finance minister, who is now the Prime Minister. [. . . . ]

In 1994, tax treaties are tidied up with the exception of the one with Barbados. CSL International moves to Barbados. Tax regulations are passed that exempt CSL International from the provisions of the perfectly acceptable treaty between Barbados and Canada. An exception is made, even though CSL International is paying a maximum of 2.5% in tax. Despite the treaty with Barbados, when profits are repatriated here, CSL does not pay a penny in tax. That is the only exception that currently exists.

[. . . . ]

This morning, I likened Canada to a democratic public corporation whose shareholders are the citizens of Quebec and Canada. If one shareholder does something fishy, as the Prime Minister did when he was finance minister—and his family owned corporation continues to profit by it—this means that the other shareholders of the corporation have to live with poorer returns.

[. . . . ]



Mr. Pat Martin (Winnipeg Centre, NDP): If there has to be a tax treaty with Barbados, how the heck do we allow companies to get taxed earnings from Canada being taxed at 1% and 1.5% in that offshore tax haven. Let us call it what it is. It is a sleazy, tax cheating loophole designed by the Prime Minister's buddies on Bay Street for their self-interest. It is against the public interest of Canadians.
[. . . . ]

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