Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
A recent Report from the U.K.-based Tax Justice Network (TJN) used a powerful analogy to summarize the impact of offshore tax havens on the global economy: “The equivalent of one nurse’s annual salary is lost to a tax haven every second.” Overall, the Report concludes that globally over $427 billion (USD) in tax is lost each year to offshore havens.
And while higher-income countries lose more money ($382 billion USD), the relative burden falls most heavily on lower-income countries, collectively losing the equivalent of 5.8 percent of their total tax revenue compared to only 2.5 percent for higher-income countries.
The 5 countries most responsible for the losses:
- British Territory Cayman at 16.5 percent of total global losses (about $70 billion USD)
- U.K. (10 percent or $42 billion USD)
- Netherlands (8.5 percent or $36 billion USD)
- Luxembourg (6.5 percent or $27 billion USD)
- U.S. (5.54 percent or $23 billion USD)
However, these numbers might change as more EU countries pass laws requiring disclosing the real beneficial owners of corporate entities held in overseas territories.
Regardless of how you parse the numbers, the current tax revenue loss through the use of tax havens remains a massive figure.
What This Means to Canada?
According to the TJN Report, Canada loses over $5.7USD billion (over $7.5 billion Canadian) in potential tax revenue annually, roughly equivalent to 1.2 percent of total tax revenue. About $4.3 billion (CDN) is lost through haven use by multinational corporations and $3.2 billion (CDN) by private individuals, with most of the money (67 percent) flowing outward to two countries: the U.S. and Netherlands. A 2019 study by the Parliamentary Budget Office (PBO) found that in 2016, over $990 billion (CDN) was held by Canadian corporations in offshore territories, including tax havens.
“Offshore tax dodging by wealthy Canadians and large corporations is robbing governments of many billions in foregone revenues that could be used to pay for critical programs through the COVID-19 crisis,” said Toby Sanger, director of Canadians for Tax Fairness. “This has not only robbed governments worldwide of hundreds of billions in revenues, but also led to much greater inequalities and corporate concentration, which hurts consumers, smaller businesses, and our economy. Canada and other countries can’t afford to allow these abuses anymore,” Sanger said.
Avoidance or Evasion?
To be clear: tax havens are not necessarily illegal, which creates some confusion between two terms that inevitably get tossed into these discussions; tax avoidance and tax evasion. As Jonathan Farrar, Associate Professor of Accounting at Wilfred Laurier University, explains: “The confusion results from those two terms, one is perfectly legitimate, and the other is not legitimate at all. And where it gets problematic with international taxes is that it’s hard to know where to draw the line.”
Technically, a tax haven (also referred to as tax shelter or offshore haven) tends to have a combination of lower tax rates and fewer regulations in income than Canada. In events reminiscent of the recent FinCEN controversy, leaks of the so-called Panama Papers (2016) and Paradise Papers (2017-2018) detailed how many of the world’s wealthiest companies and individuals (including several prominent Canadians) have mastered tax avoidance, most often through the legal pathways offered by tax havens and recognized by Canada Revenue Agency. About 670 Canadians were audited in the post-Panama years, while to date, about 30 have been marked for audits in the post-Paradise era, mostly multinational corporations.
That said, the CRA’s Offshore Tax Informant Program (OTIP) “allows for financial rewards to be made to individuals who provide information related to major international tax evasion and aggressive tax avoidance that leads to the collection of taxes owing.” Examples of the types of cases the Agency would mobilize to address include but is not limited to:
- Does not report all income from business or property and moves the unreported domestic income to foreign countries
- Creates and/or uses trusts or corporations in foreign countries to inappropriately reduce or avoid tax payable in Canada
- involved in aggressive tax avoidance or tax evasion scheme that involves offshore transactions.
The CRA criteria include assessing the information to ensure that it demonstrates that:
- the non-compliance is international
- the potential federal tax to be recovered is greater than $100,000.
If the information provided contributes to federal tax collection, CRA can award an informant between 5 and 15 percent of the tax collected related to international tax non-compliance.
The CRA website notes the two-fold benefits of this program: “By reporting on suspected international tax non-compliance, informants are not only benefiting from the possible rewards but contributing to the administration of a fair tax system where everyone pays their fair share.”
Again, it is essential to remember that using a tax haven or even mastering tax avoidance is not illegal but has to be managed carefully and in full compliance with CRA regulations and requirements.
I will share more on this issue as new information becomes available.