Business
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By Allan Lanthier
If elected, Conservative Leader Pierre Poilievre has promised to attack wealthy corporations that are dodging taxes. He says he will “close all the loopholes that allow companies to stash their money away in tax havens,” and create a “name and shame publication to expose all the wealthy multinational corporations that are dodging taxes.”
But is corporate tax avoidance really a significant problem? Or is it more of a tempest in a teapot? Before answering those questions, let’s look at the difference between tax avoidance and tax evasion.
Taxpayers — both people and corporations — have the right to reduce their taxes to the minimum required by law. This is called tax avoidance, and can be as simple as contributing to an RRSP. After all, people can save for retirement without an RRSP: the only reason for using one is to minimize taxes. Is this abusive? Of course not: Parliament established the RRSP rules precisely to encourage people to save for retirement in a tax-effective way.
Tax evasion is different, and involves criminal activity in which people or corporations intentionally declare less taxes than they legally owe, often by hiding revenue or deducting fictitious expenses.
Of course, corporate tax avoidance is more complex than simply contributing to an RRSP. Our federal-provincial corporate tax rate is about 26.5 per cent, yet many large corporations with international operations pay substantially less than that — about 15 per cent on average based on some estimates. Why is that?
First, like almost all countries, Canada does not tax business income earned by foreign subsidiary companies, and the tax rate in the foreign country may be lower than Canada’s. More importantly however, multinational corporations often transfer earnings from higher-taxed to lower-taxed countries using interest or royalty payments. Why do Canadian rules allow this — why doesn’t Canada tax interest or royalty income earned in low-taxed countries at 26.5 per cent, the Canadian rate?
This is an old chestnut. In 1992, the Auditor General severely criticized the Canadian tax rules applicable to international income. In its response, Finance Canada defended the rules with some vigour, pointing out that foreign tax minimization does not cost a penny of Canadian tax — it reduces foreign tax, preserves the international competitiveness of Canadian multinationals and reflects parliamentary intent.
I agree with Finance Canada. In addition, about 140 countries have now agreed to adopt a 15 per cent global corporate minimum tax brokered by the OECD. While not all 140 countries have enacted the tax, Canada has, as have many low-tax countries such as Barbados, Bermuda, Ireland and Switzerland. And so, in the example above, the low-taxed subsidiary company earning interest or royalty income must now pay 15 per cent tax on its earnings.