Madam Speaker, in the 1994 budget, the then minister of finance promised too crack down on tax havens. The implementation of the budget cracked down on Liberia as a tax haven but other tax havens, such as Barbados, still qualified due to a loophole in the Income Tax Act.
The OECD defines a tax haven as any jurisdiction that “has no or nominal taxation on financial or other service income and offers or is perceived to offer itself as a place where non-residents can escape tax in their country of residence”. That is from “Tax Havens”, the Library of Parliament, 2004, page 5.
Barbados is one of the 36 countries identified by the Organisation for Economic Co-operation and Development in 2000 as a tax haven. Canadian FDI to Barbados increased from $1.5 billion to $24.7 billion between 1990 and 2003, making Barbados the third largest recipient of Canadian FDI in 2003 after the United States and the United Kingdom. The value of Canadian direct investment in Barbados now surpasses Barbados' GDP by a factor of six.
According to a Library of Parliament briefing, “as a general rule, Canada negotiates tax treaties only with countries that have comparable taxation rates, structures and information disclosure requirements. There are, however, some exceptions to this rule. Canada has tax treaties with three of the 36 countries listed as tax havens by the OECD in a 2000 report on harmful tax practices. These three “tax haven” countries are Barbados, Cyprus and Malta”.
In Barbados the general corporate tax rate and the rules for information disclosure are comparable to those of Canada. Canadian foreign affiliates can, however, choose to incorporate themselves as Barbados international business companies and, instead, to pay tax rates of between 1% and 2.5%. In Canada the combined federal-provincial-territorial corporate tax rate is typically between 35% and 40%.
There is a provision in the Canada-Barbados tax treaty that is supposed to prevent Canadian foreign affiliates from being able to take advantage of tax treaty protection and therefore from obtaining “exempt surplus” status, as the provision implies that any active income earned by a BIBC would be fully taxed when returned to Canada in the form of a dividend. However a provision in the Income Tax Act has served to override the preventative provision in the Canada-Barbados tax treaty. The Income Tax Act gives “exempt surplus” status to any company operating in any country with which Canada has a tax treaty regardless of the content of that tax treaty.
The Auditor General has estimated that the existence of tax havens, including but not limited to Barbados, has resulted in hundreds of millions of dollars in reduced Canadian tax revenues.
According to Statistics Canada, Canadian assets in OFCs, offshore financial centres, increased eightfold, from $11 billion to $88 billion between 1990 and 2003. These centres include countries that are often referred to as tax havens. OFCs accounted for more than one-fifth of all Canadian direct investment abroad in 2003, double the proportion of 13 years earlier.
When companies transfer tax dollars out of Canada into tax havens, hardworking Canadian taxpayers are left to pay the difference. When companies transfer tax dollars out of Canada into tax havens they are evading their social responsibility. Those tax dollars could be used for health care, education or the armed forces. Tax havens deprive the Canadian government of tax revenue that could be used to fund social programs, to pay down debt or to provide tax relief.
One of the results of the government's uncompetitive corporate taxation levels is the desire of businesses to transfer tax dollars out of Canada into tax havens. As a result, the government must use a two-pronged approach when addressing tax havens. It should make Canada more attractive to investment by instituting competitive corporate taxation levels and reinvesting in strategic areas such as skills development and post-secondary education or research.
Closing tax loopholes that allow Barbados to operate as a tax haven for Canadian companies should be part of an overall strategy to restrict the use of tax havens. Merely closing tax loopholes that allow the Barbados to operate as a tax haven without addressing other tax havens will cause many companies to shift their operations to those other tax havens. More important, the government should make Canada more attractive to business by implementing competitive corporate tax levels. It should focus on productivity and make Canada a more attractive place to invest.
Our party is looking forward to the study which will be commissioned by the finance committee during the second week of December. The Conservative Party of Canada feels that it is important to stress that investment is mobile and will continue to move. The problem is serious. Canada is now a net exporter of capital. Neither Canadians nor foreigners are investing in our country. Our party welcomes that Canadians are investing outside the country but we must why they are not investing heavily in Canada.
Our party believes that overall tax reform with an emphasis on tax relief for large employers and reform of investment vehicles is necessary to ameliorate the situation in order that Canadians and other countries consider Canada as a good place to invest.