Tightening Up Canada's Tax Law

How do you stop Canadian multi-nationals like Cameco or Gildan from setting up subsidiaries in offshore tax havens so that they can avoid paying Canadian taxes? Short answer is that it is has been very difficult.

But this week, NDP National Revenue Critic Murray Rankin proposed new legislation that would make it easier for government and the courts to crack down on those who are playing the system. You can see his House of Commons speech here

Rankin’s bill focuses on proving “economic substance”. That means corporations must be able to prove that a transaction has economic purpose aside from reducing the amount of tax owed. Setting up a storefront office in Cayman Islands or Switzerland and then sending large invoices back to the Canadian head office charging “management” or “licensing fees” would come under greater scrutiny. This kind of profit shifting is a global problem made famous by Starbucks, Apple and Google. But make no mistake - there are a lot of Bay Street lawyers getting very rich taking advantage of the lack of clarification in Canada’s Income Tax Act.

Rankin consulted on this proposed legislation with internationally-known tax expert Robert McMechan. The Ottawa-based McMechan is the author of a recent book, Economic Substance and Tax Avoidance . “An absence of economic substance is now considered to be a prominent indicator of abusive tax avoidance in many jurisdictions,” says McMechan. “The line between legitimate tax minimization and unacceptable tax avoidance is drawn in many countries, including the U.S., Australia, New Zealand, South Africa and the U.K. Incorporating economic substance amendments that target unacceptable tax avoidance will assist the courts in denying tax benefits in cases where the benefits have been ‘manufactured’ by engaging in transactions without any real economic consequences.”

There’s no doubt that for most of us tax law is the stuff of glazed eyes. But what’s on the books can make or break a court case when the government goes after tax cheats. It is a multi-billion dollar problem for which the rest of us pay. Recognizing the role that these transactions play and making these changes is a good first step. We will keep you posted.