A Canadian business lawyer and politician has called Barbados his country’s “favourite tax haven” and he wants the Justin Trudeau administration to initiate changes in the interest of “equity, neutrality and simplicity”.
Nicholas dePencier Wright, the principal legal counsel at Toronto, Ontario law firm Wright Business Law, has authored a new proposal called Canada Barbados Tax Treaty: Controversy & Proposed Reform.
He is insisting that “the tax exemption for Canadian international business income using offshore tax havens must start to be phased out”.
“To align the taxation of corporations with the principles of the Canadian tax system including equity, neutrality and simplicity, we must phase in a rate of taxation on exempt surplus dividends that would otherwise go untaxed,” he recommended.
Wright said such should be done “until either the feared loss to the Canadian economy is demonstrably greater than increased tax revenues or until the exemption is eliminated and the international income of all Canadian corporations is taxed equally whether or not an offshore jurisdiction has been used”.
He stated that the Canada-Barbados Tax Treaty, related Canada Income Tax Act provisions and regulations were “developed in conjunction with foreign legislation to create a Canadian tax exemption on corporate dividends of Canadian foreign affiliates”.
This “has resulted in a significant loss to the Canadian tax base as the Auditor General has twice warned against”.
“The personal business interests of influential politicians appear to have resulted in tax policy inconsistent with fundamental principles of Canadian taxation and a failure to address this problem as it has continued to grow,” he asserted.
“The Ministry of Finance’s assertion that the existing regime reflects the intention of Parliament and its unsubstantiated assertion that an increase in the applicable Canadian tax rate from zero per cent will result in widespread divestiture and insolvency is not supported.”
Wright said in 2015 an estimated CAN$80 billion of Canadian foreign direct investment was made in Barbados, “primarily to take advantage of the Barbados international business company tax rate, which is as low as 0.25 per cent for some amounts”.
He added that “in an increasingly globalised world, the use of tax havens to avoid tax liability is having a significant impact on government revenues”.
The lawyer appeared to be peeved that “despite this fact, Canada has chosen to enter into tax treaties with low tax countries and maintain policies that facilitates Canadian tax exemption for international corporate profits”.
“The result of the interplay between the Canada-Barbados Tax Treaty, the Barbados International Business Companies Act and [foreign accrual property income] rules under the [Canada Income Tax Act] and [Canada Income Tax Act] Regulations is that if a Canadian resident corporation sets up a Barbados IBC and the IBC makes CAN$100 in active income, the affiliate pays 2.5 per cent or CAN$2.50 in Barbados tax and the remaining CAN$97.50 can be transferred to the Canadian parent company as a dividend completely free of Canadian tax,” he said.
“This is significant and in effect exempts the international operations of many large Canadian corporations from Canadian tax.”
Wright said “it is inequitable to exempt the international income of mostly large Canadian corporations that are able to benefit from complex offshore structures because it gives an unjustified preference over smaller businesses operating internationally that cannot afford the professional fees”.
It also “provides an unjustified preference to international income over domestic income and because it unfairly reduces corporate income that must then be made up with taxes from other sources”, he added.
“It is not neutral because it has resulted in Canadian corporations setting up structures and staff in a foreign jurisdiction that they would not otherwise operate from. It is not simple because it has resulted in an exceedingly complex set of [foreign accrual property income] rules that are difficult and costly to understand, comply with and administer,” he said. (SC)
