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Deals Canada signed to catch tax cheats allow billions in taxes to escape

Agreements Canada has signed in recent years with offshore jurisdictions — ostensibly to enable a crackdown on tax evasion — have instead permitted tens of billions of dollars to flow into those locales, totally above board.

Billions in potential revenue lost as money flows to offshore havens, CBC/Toronto Star analysis finds

Under Liberal Finance Minister Bill Morneau, Canada continues to negotiate tax information exchange agreements with tax havens. The deals are pitched as enforcing financial transparency on the offshore world, but they've allowed billions of dollars to flow from Canada to tax havens in the last half decade. (Eduardo Lima/Canadian Press)

Montreal-based clothing maker Gildan earned $396 million in profit last year, but paid just over $6 million in cash taxes — a rate of about two per cent.

Drug maker Valeant, based in nearby Laval, Que., booked $1.1 billion in profit in 2014 but paid only $110 million in tax.

It seems like a fiscal fantasy for Canadians used to personal income tax rates of up to 54 per cent. But both companies, and dozens more, did it completely legally, thanks in part to offshore tax havens.

"Usage of tax havens have gone up significantly in the last five years," said Art Cockfield, a tax law expert and professor at Queen's University in Kingston, Ont.

Arthur Cockfield: 'There is no going back'

7 years ago
Duration 0:24
Arthur Cockfield: 'There is no going back'

The laws that allow it have only loosened. In the last half-decade, deals the federal government enacted with offshore jurisdictions, ostensibly to allow the Canada Revenue Agency to crack down on tax evasion, have instead permitted tens of billions of dollars to flow into those locales, totally above board.

A joint CBC/Toronto Star investigation, as part of ongoing coverage of the Panama Papers, examined those international tax agreements and treaties and found an explosion of companies taking advantage of the tax opportunities the deals provide.

Barbados treaty set the standard

In Gildan's case, much of the company's day-to-day operations — design, sales, manufacturing, customer service, marketing and distribution — are in Barbados, where it has around 200 employees out of a global workforce of 42,000.

Gildan Activewear has a subsidiary in Barbados that handles much of the company's day-to-day operations. Barbados also has a tax treaty with Canada that lets offshore profits be brought home tax-free. (Tatem Architects)

The Caribbean country has been a darling of corporate Canada because it has had a tax treaty with Ottawa since 1980. The pact allows Canadian companies with subsidiaries in Barbados — there are more than 1,000 with offices there, including titans like Petro-Canada and Loblaws — to bring their offshore profits back home subject only to the low Barbadian income tax rate of between one and 2.5 per cent.

Valeant has also used a Barbados subsidiary to cut its tax bill. When it merged with Canadian pharmaceutical firm Biovail in 2010, Valeant CEO Mike Pearson pledged, "We'll figure out exactly how to take most advantage of this tax structure."

Even better than Barbados

But serene, sun-kissed Barbados is being supplanted by other palm-fringed tropical paradises where the tax rates are even lower.

Since 2009, Canada has signed 23 tax information exchange agreements, or TIEAs, with tax havens from Aruba to Turks and Caicos.

Originally designed by the Organization for Economic Co-operation and Development to help make offshore havens more transparent, TIEAs are pacts that see those countries commit to handing over secret banking and other financial details to Canada as it tries to ferret out tax cheats.

Except Canada added a special twist: The then-Conservative government amended the tax rules to make every country Canada has a TIEA with into a new Barbados, giving companies the right to set up business there, earn profits that face little to no corporate tax, and then bring that money back tax-free.

"The tax havens were thrilled," Cockfield said, attributing the changes — which weren't part of the original intent — to successful corporate lobbying.

Since Canada started activating its TIEAs in 2011, huge sums of money — $55 billion — have legally flowed into those very tax havens, figures from Statistics Canada show.

Since Canada put in force a new series of accords with tax havens in 2011, billions of dollars have shifted from here to those countries. This graph shows total amounts parked in those tax havens, by year. (CBC)

The amount of Canadian money in zero-tax Bermuda has more than doubled since then, while about $20 billion has left Canada for the Cayman Islands. Those two countries together now have more Canadian investment than in Mexico, Brazil, China and Australia combined. Canada's big banks partake, too, and have branches everywhere from Anguilla to St. Lucia.   

But while the flip side was supposed to be an end to the offshore secrecy that supports tax evasion, independent tax experts consulted by CBC News and the Star believe there is little evidence Canada is actually getting any useful data on hidden accounts and transactions via the TIEAs it has signed.

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That's because the Canada Revenue Agency needs so much information on potential tax evasion just to lodge a request — information like taxpayer names and bank branches and account numbers, that is  kept secret in the tax haven in the first place, said David Kerzner, a tax lawyer who wrote his PhD on TIEAs and recently published a book about them.

"When Canada was telling Canadians … that TIEAs fight tax evasion, there's really only a kernel of truth in that and that's mostly incorrect."

Kerzner added that often, tax havens don't even keep the kinds of records the CRA would need to pursue an audit.

CRA won't say if TIEAs have worked

The new Liberal government has pledged to inject $444 million into the CRA over five years to fight tax evasion and aggressive tax avoidance, and has talked big about ensuring Canadians pay their "fair share" of taxes.

And yet the CRA would not say if it's ever requested or received information on any hidden wealth via a TIEA. In an email, it only made general reference to "expanding the flow of information" with more than 100 other countries.

Allison Christians, a professor of tax law at McGill University in Montreal, said Canada has made a choice: forgoing potentially billions in corporate tax revenues in hopes of finding money hidden by individuals. "We are giving up the corporate tax base in order to grab the high net worth individual who has access to bank secrecy and forms of investment that they can hide from the CRA," she said.

'The public can't judge'

Yet, Christians said, "We the public can't judge how well the system works. … When you spend money on TIEAs, does that reveal higher tax returns?"

Pressed last week in Toronto about why Canada is continuing to sign TIEAs when, instead of halting the flow of Canadian money offshore, they've hastened it, Finance Minister Bill Morneau did not directly answer. He said Canada is working with its allies on new ways to make sure corporations pay their tax "where they should be."

The OECD, which spawned and campaigned for a global system of TIEAs, insists the information-sharing agreements are working, but it acknowledges there is a massive uptick in Canadian money flowing into tax havens as a result.

Pascal Saint-Amans, director of the Paris-based organization's tax policy centre, said that problem — "the fact that companies locate their profit in zero-tax jurisdictions where they have no activity" — is "huge" and something "we are dealing with" in yet another round of international accords.

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    Zach Dubinsky

    Senior Writer, CBC Investigations Unit

    Zach Dubinsky is an investigative journalist. His reporting on offshore tax havens (including the Paradise Papers and Panama Papers), political corruption and organized crime has won multiple national and international awards. Phone: 416-205-7553. Twitter: @DubinskyZach Email