Tax avoidance: Canada-Barbados tax deal loopholes revealed
An exclusive CBC News hidden-camera investigation into the world of offshore banking found professionals in Canada and Barbados willing to help hide business profits in Barbados by exploiting loopholes in a long-standing tax saving arrangement between the two countries.
“My advice to [the Canada Revenue Agency] would be, every time you see a Barbados [company] in the structure, investigate it,” said an individual who used to run one of Canada’s largest offshore companies and also spent time in prison.
For decades, Canadian companies have flocked to Barbados with their cash in order to legally avoid paying Canadian taxes. If a Canadian company wants to expand its business outside of Canada, it can create a subsidiary in Barbados where it can park its international profits. This way, it legally doesn’t have to pay Canadian taxes on those profits.
More than 1,000 Canadian companies, including giants like Petro-Canada and Loblaws, have legitimate offices there. Canadian banks are on almost every corner to serve all the Canadian companies.
As part of the joint investigation with Enquête, the CBC’s French-language investigative program, CBC News hired a private investigator, who is also a restaurant and bar owner in Toronto, to see if he could create an offshore company in order to test the system and to see if his Canadian restaurant profits could be shifted to Barbados.
CBC policy for hidden-camera journalism
CBC's policy for hidden-camera journalism generally requires that we have credible information about wrongdoing before we film.
However when dealing with a secretive industry like this one, when the industry as a whole has come under critical scrutiny, the practice is to permit testing in this way, on a random basis.
That way, instead of being taxed at 30 per cent in Canada, he would pay the rate in Barbados — 2.5 percent.
“Unless CRA's got the money to come down and check us out, you'll get away with it. And that's the reality,” said the insider.
In order for that to be legal, his business must have legitimate international sales, which it doesn’t.
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The CBC’s undercover businessman met Allan Madan, an accountant in Mississauga, Ont., who offers tax tips online — including the top 20 ways to beat the taxman — and other international tax advice.
In a meeting recorded with hidden cameras, Madan suggested the businessman fly his chef to Barbados to invent recipes there.
“You'd have to have some physical presence on the ground, you know, because who's developing these recipes? Do you know what I mean? Is there a chef or does the chef fly down there and do the work there?”
He said the man would also need an offshore office, one that’s managed and controlled in Barbados by nominee directors.
These directors for hire often know little or nothing about the company.
“I'm not saying we're going to shift all the income, that may not be possible, but maybe, you know, 25 per cent of it,” Madan said.
“So you've done this before, like you've got experience doing this?” the businessman asked.
“Yeah, absolutely, so you don't have to worry,” Madan said.
Madan then referred CBC’s undercover businessman to Andrea Mullin Henry, a Canadian-born Barbadian who also runs a law practice called Crane Chambers in Barbados. The businessman travelled there to meet her.
Mullin Henry, who is still a member of the Ontario bar, also specializes in creating and managing offshore companies in order to protect “hard won assets.”
The undercover businessman told Mullin Henry about the plan to bring down a chef once a year and about possibly having access to a kitchen.
“Yeah, that would work,” Mullin Henry said. “The more that you can show is actually happening here, the safer you are if CRA comes to audit.”
Mullin Henry said the businessman would need the appearance of a presence in Barbados, including an office with a phone and workers.
“You just want to show that there is some type of activity going on there in Barbados. I think that would be a good compromise. You're bringing your corporate chef, they work with the local chef, and it doesn't have to be for that long period, and all of the manuals and the procedures are seen to come from the Barbados office, even if they're actually manufactured in Canada.”
‘Creating a façade’
After reviewing the hidden camera footage, the former Canadian offshore banker said, “We're going to have a pretense of developing your recipes down here. We're going to have the pretense of training your staff down here.… We're creating a facade. A bit of theatre for CRA to see that there's some action.”
Mullin Henry declined to be interviewed by CBC News, but Madan defended his advice.
“The work being done in an offshore jurisdiction must actually be done there. And that’s precisely what I indicated. That if there was any recipes developed, if there were chefs, if any testing was being done, that the work be physically done in Barbados,” he said.
“We were discussing high-level ideas and which we could possibly use in offshore structure to legitimately minimize income tax. Until a proper Barbados lawyer is brought in, like I mentioned, and until we put pen to paper, it’s difficult to provide a precise answer.”
In a followup letter to the CBC, Madan said his proposal was a “valid tax saving strategy proven in the court of law.”
But Laval University professor André Lareau, who teaches tax law, said to create a foreign entity “requires employees, requires producing something and a real business.”
Instead, what’s being created is “an illusion,” he said, an attempt to show the tax agency that a foreign business has been created.
Lareau said there’s nothing illegitimate about money in a tax haven, though you have to know what the source of that money is, and you have to declare the income from it.
But he said someone like Madan could be viewed as an accomplice to someone who’s not following the law.
‘Magic curtain’ approach
The undercover businessman also met with Canadian tax lawyer Jonathan Garbutt, who immediately shut down Madan’s ideas.
But instead, in a meeting recorded with hidden cameras, he proposed the businessman use his profits to buy an offshore life insurance policy, a structure he called the “magic curtain.”
“The magic curtain is something that exists in Canada that works, which is a life insurance policy,” Garbutt said.
The plan involved a series of transactions including a loan, bonds, offshore trust accounts and ultimately using business profits to buy an offshore life insurance policy, which isn’t taxed in Canada. And all of this would take place in Barbados.
The structure would ultimately allow the undercover businessman to avoid paying taxes on his Canadian restaurant profits.
In Canada there is nothing that makes a structure like this illegal, but there are provisions that allow the tax authorities to challenge a structure if they feel it violates the spirit of Canadian tax law.
Laval professor Lareau questioned whether this plan is really what the legislature intended when it created the law.
“I think that wouldn't pass the test of the spirit of the law,” he said.
Lareau said the Canada Revenue Agency could disallow the approach, but that the agency would have the burden of proving that it constituted an abusive arrangement.
“To me, it's clearly an abuse. But the agency would have to succeed in convincing a court that it's an abuse.”
In an interview with CBC, Garbutt said he had done nothing wrong.
“I love these structures because they’re front-door tax planning. You walk in through the front door and tell the CRA what they’re doing and they can pound sand if they try to go after us.”
In a meeting filmed with hidden cameras, Garbutt said his role as a tax lawyer is to be the “most devious underhanded son of a bitch in the room and that’s what you’re paying me for.”
He later backtracked a bit, saying that he regretted saying “underhanded,” but stressed that his job as a tax lawyer is to ensure his clients don’t pay one penny more than they are legally required to.
“Like I said, they invent better mousetraps, we invent better mice. That’s the nature of the game.”
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With files from Annie Burns-Pieper and Nicole Reinert