Canada Desperately Needs Real Tax Reform

The Minister of Finance is not setting a very shining example. He himself  has companies in countries considered to be the worst tax havens.  He has companies in Liberia, the Bahamas and Bermuda.  How can someone have any political will to reform the tax system, to review tax agreements between Canada and Bermuda or the Bahamas, when he himself  is involved in these countries, and benefits from the tax agreements between Canada and these tax havens.                                              

-Yvan Loubier M.P.(Saint-Hyacinthe Bagot, BQ)        

We have asked the Finance Minister for real tax reform. We did not ask for this on a partisan basis. Since 1996 in particular, we have even conducted studies and made serious proposals to the Finance Minister regarding an in-depth reform of personal and corporate taxes.

Our proposals were so devoid of partisan thinking that when we, in the Bloc Quebecois, tabled our analysis reports, the government was delighted and considered them as serious proposals for tax reform. Unfortunately,  the Minister of Finance has not undertaken any real tax reform.

Yet year after year, the Auditor General of Canada, Mr. Desautels—whom I congratulate on his excellent work over the past ten years—spoke of the need for a real tax reform. In his 1992, 1996 and 1998 reports, he mentioned the disastrous effects of certain federal tax  provisions  and  of the tax agreements between Canada and other countries throughout the world, the result of which could be to erode the federal tax base.

Current tax  provisions which are used to decrease tax revenues the federal government could collect should be eliminated.  If the Income Tax Act were properly enforced and if fiscal co-operation accords, or tax treaties, were signed only with counties whose tax rates are similar to Canada*s, our tax base could be protected.

This is very important. It is so important that, in his final report, Mr. Desautels said, and I quote: “One of  the  biggest  threats to the tax base lies in the international  activities  of Canadian taxpayers, particularly the use of tax havens. This is not unique to Canada; many nations are working individually and together to find solutions.  In report after report since 1992, the auditor general has spoken about the danger to the tax base of Canadian taxpayers* international activities, which are based on tax agreements signed with count- ries not considered to have a normal tax system.

They are seen as tax havens, countries whose rates of taxation are so minimal and their tax treatments so preferential compared to what we have here and in the United States.  These provisions, which are permitted under the tax agreements between Canada and these countries lead to a substantial amount of tax avoidance.  Because of investments made elsewhere throughout the world, in these tax havens, the federal government has been losing tax revenues at an alarming rate, particularly over the past ten years.

In 1999, the last year for which this kind of data is available, Canadian direct investments abroad, totaled $257 billion.

Nearly $28 billion of the $257 billion was invested in three countries considered as ideal tax havens, that is countries where the corporate tax rate, is 0% in some countries, and 2 to 3% in others. Three countries at the top of the list of ideal tax havens have received nearly $28 billion in Canadian investments abroad.

This means 10% or so of direct Canadian investments abroad have gone to three countries considered as tax havens, with tax rates that are ridiculously low or nonexistent. They are Barbados, the Bahamas and Bermuda.        Canadian investments in these three tax havens are larger than all the Canadian investments in the whole of Asia.  Barbados, in particular, accounts for $17 billion in direct investments, and these investments are larger than those made by Canadians in Japan, France and Mexico taken  together. Is it normal that a country like Barbados, with a very small population, can account for that much direct investment by Canadian taxpayers?

With regard to investments in tax havens, they have been growing considerably over the last ten years. There are 28,000 companies, subsidiaries of Canadian, British and other corporations operating in the Cayman Islands, the population of which, is only 30,000. Members will admit that there is something odd about the way the Cayman Islands attract businesses, in view of their   population. In the Turks and Caicos Islands, a British colony north of Haiti, there are 7,000 people living in the whole of the Turks  archipelago---not to he confused with the country of   Turkey–but there are  16,000   companies, Canadian for the most part.

There is something odd about the way these countries attract billions of dollars in Canadian investments. The federal government*s inaction on this issue has been condemned not only by the Bloc Quebecois, but also by the OECD, the Organization for Economic Co-operation and Development, which published a report a few months ago. This report says that OECD countries that have relations with countries that are considered as  the worst  tax havens, are the worst contributors to tax evasion.  The money  does not go into federal coffers, but rather  into  investments  made  by  the  wealthiest Canadian taxpayers, in these countries. The OECD is asking its members—Canada is a prominent member—to cancel tax conventions they might have with tax haven countries. Far from abolishing them, Canada is promoting these countries that are considered as tax havens and promoting Canadian investment there.

To make a long story short, a tax convention is an agreement between Canada and another country to avoid double taxation of the profits of branches of Canadian corporations abroad; in other words, to avoid the   profits being taxed in the country where the branch is located, and taxed again by federal tax authorities when they are brought home.  A corporation cannot be taxed in the United States on the profits its branch generates there, and taxed again when these profits are brought back in Canada. Since tax levels in Canada, in the United States and in most OECD countries are more or less the same, we can justify the existence of and need for tax conventions. When it comes to countries that are considered tax havens, with tax levels of 0% on corporate income—in the Bahamas—or 2.5%—in  Bermuda, we have to ask why Canada should sign tax conventions with them, especially since the  OECD  has  just  condemned  this  practice.     It does not make any sense to sign tax treaties with countries where the tax levels are so totally different from ours that they are considered tax havens.

We must bear in mind that what is invested in these countries is not taxed in Canada and that Canadian taxpayers must therefore make up for this loss in tax revenues.  It is not because we now have a budget surplus that we should let go of some of our tax revenues by signing tax treaties with countries identified as tax havens, and let go of hundreds of millions, if not billions of dollars, in current and future taxes on investments.

We have nothing against wealth or against the wealthy, but there is a limit  to  being the laughing stock of the world, when our taxpayers have to  compensate for the inaction of the Minister of Finance in the area of tax reform. 

Since the release of its recent report, the OECD is going after governments that are unfairly attracting investments and are hurting most member states of the OECD with their tax provisions, which are much  too lax.  Furthermore it is rather strange  that we still have a tax convention with the Bahamas, for example, while the OECD Financial Action Task Force on Money Laundering, or FATF, in a report tabled on June 22, 2000, points the finger at countries that are not co-operating in the fight against money laundering. Among these are two countries with which Canada has tax conventions and where Canadian investments are astronomical, not to say unbelievable.

The OECD has just released a report that points the finger at 35 countries meeting the criteria of tax haven. The finger points as well at counties which do not co-operate in the area of money laundering. Yet Canada continues with our tax conventions with these countries.

Not only do we retain the tax conventions, but we encourage Canadian investors to use these  tax havens to swell Canadians savings. The Canadian government is encouraging this tax evasion. On July 16, 1999, for example, the Canadian Departments of Foreign Affairs and International Trade published their calendar of special events for 1999-00 in CanadExport, the departments* major trade publication. Included was the title of a conference, a seminar given by the Departments of Foreign Affairs and International Trade, “Demystifying Tax Havens.” The federal departments and the Government of Canada promote tax evasion, promote the outflow of capital to tax havens. These are the topics covered, in broad terms, in this seminar organized by the federal government. They discussed the origin or tax havens, their use as a financial strategy---imagine that. They encourage the use of tax havens to avoid federal tax. Great morality, this federal government.

They also discussed the criteria for selecting a good tax haven. Not only was the use of tax havens being promoted, but they also said “Listen, the best one is probably the Bahamas. There is no corporate tax. You can do whatever you want. There are no labour laws and no environmental laws to speak of. Use the best tax haven”, This is the message that was conveyed. The fourth theme of the conference—and  this  is shameful—was, “Tax havens and Canada*s  tax laws and how to get the most out of your tax havens.”  Unbelievable. A seminar organized by the federal Department of Foreign Affairs and International Trade teaches investors how to save as much federal taxes as possible.  They are told to take their money abroad, to the best rated tax havens, while the taxpayers who are here and who cannot afford to pay for financial planners and to invest in tax havens continue to pay, continue to be choked by the tax system in spite of the tax reductions recently announced by the government. These reductions are totally inadequate, given the margin available to the government to lower taxes The middle income taxpayers, middle income families, are the ones paying, not millionaires.

Millionaires and billionaires use the federal government’s services to send money abroad without having to pay any taxes to the federal government. The result is that we---the majority of low and middle income taxpayers—continue to pay taxes and to be choked by the tax system. This is unbelievable.

It is not just the OECD report that provides a picture of the 35 countries considered to be tax havens. There is also a report from the task force on money laundering, which says that Bermuda and the Bahamas are among the countries that do not co-operate in the fight against money laundering. Those two countries are considered by Canadians as tax havens par excellence. Not only do they choose them themselves, but the federal Department of Foreign Affairs and International Trade tells them how to use them. One day we will  have to wake up. The members will have to wake up, put on the brakes and say, “That this is enongh.”

The tax system has to he changed, We have to make sure that there will be no tax treaties with countries considered as tax havens.  

I once read a statement made by David Dodge, the former Deputy Minister of Finance and now Governor of the Bank of Canada, saying, “We have to maintain our tax treaties with the underdeveloped countries because they help to create jobs and wealth in those countries.” Fat chance! They have nothing to do with job creation or economic growth. The only thing that tax treaties with those tax havens do is give millionaires and billionaires a chance to get even richer. Those who already have money, manage to escape taxation here and to make even more money because they pay very little, if anything, in income tax in the host country. That makes absolutely no sense.  There is a fundamental  problem with regard to our tax system and tax treaties that needs to be dealt with.   

When we know that it is not only the opposition  parties that are calling for a thorough reform of our tax system and a review of our tax treaties, but also the OECD, it means that the whole industrialized  world unanimously agrees that we need to review our tax practices. I am amazed that this has not been done earlier, because all the evidence is there. Since 1993, use of these tax havens has climbed sharply. But the example has to come from the top down and, in this regard, the Minister of Finance is not setting a very shining example. He himself has companies in countries considered to be the worst tax havens. He has companies in Liberia, the Bahamas and Bermuda. How can someone have any political will to reform the tax system, to review tax agreements between Canada and Bermuda or the Bahamas, for instance, when he himself is involved in these countries, and benefits from the tax agreements between Canada and these tax havens? This is directly related to what the Minister of Finance is.  He is a shipowner, he owns companies, he has 13 subsidiaries in other countries considered to be tax havens and identified as such in an OECD report. He is taking advantage of this tax avoidance, How could he be expected to be interested in reviewing all this?

He cannot review it, because he is both judge and judged. That is why, given what we know, we should be asking questions. The need for true tax reform is urgent.

First , we should review all tax conventions Canada has signed in recent years, and more particularly conventions with countries which are on the OECD list and are considered the worst tax havens.

Second, talking about the preservation of the tax base, the auditor general has made it crystal clear. He said, “One of the biggest threats to the tax base lies in the international activities of Canadian taxpayers, particularly the use of tax havens.” The situation is critical.  We have a problem if we do not act immediately to review and, if need be, cancel tax conventions with countries which make tax avoidance easier, something rich Canadian taxpayers take full advantage of, and with countries which do not co-operate adequately in the fight against money laundering, we are at fault.

Third, if the finance minister feels he is both judge and party to the case, because of his companies and subsidiaries located in countries considered to be the worst as far as tax havens and tax avoidance go, he should step aside and let somebody else do what has to be done.

It is however, doubtful that the Minister of Finance will start a movement to reform tax conventions and taxes, which could enable us to ensure that the most serious threats to the tax base, as criticized in 1992, 1996, 1998 and again  in the auditor generals recent report, are countered. Until they are, I do not think this objective will  be met. I challenge the government  to truly reform taxation.

We must realize that, every time a billionaire invests money in the Bahamas with the help of the federal government and of the Department of Foreign Affairs and International Trade, that tax money is no longer in the federal treasury. The Minister of Finance then gets new money from the poor, from the unemployed, from students who have a hard time making ends meet and from the sick. Is it not indecent to maintain the status quo because the Minister of Finance is both judge and jury here?  #

Material  excerpted  from a speech from Hansard Number 025, Friday, March 2, 2001, House of Commons Debates.