Thank you and good morning.
Canada has made a choice in its legislation. My comments will focus more on these legislative choices so that we can find solutions to solve the problems associated with tax havens.
In order to tax a Canadian company, the notion of residence must be taken into account. Residence must be initially established in order to levy taxes in Canada. A company located in Canada pays taxes on its global income. Of course, companies which have decided to lessen their tax burden have opted to put aside the notion of residence and go somewhere else. A foreign entity, in the form of a company, is then created in a tax haven such as Barbados, even though Barbados does not constitute a tax haven according to several economists, because tax rates are extremely low for IBCs, International Business Companies, and hover between 1% and 2.5%.
This is where the problem arises: under the current notion of residence as we know it, a company, even though established in Barbados, can be considered as residing in Canada if the control centre of that company is located in Canada. During a trip to Barbados in 2004, I quickly realized that for the sum of a few dollars, many professionals working in Barbados offer their services to incorporate a company. As such, one can easily find columns of professional plaques displayed in many of the law firms operating in Barbados. One simply needs to go to the Registrar's Office or to the Corporate Office to find a list of many companies that ultimately reside in Canada. A quick visit will reveal that there are many companies in Barbados, but that pay their dividends to Canadian residents.
Of course, Barbados has a tax agreement with Canada, as was mentioned earlier, and that even excludes IBCs. Yet, Canadian regulation, no. 5907(11.2)(c) specifically excludes entities created in Barbados, subjects them to Canadian tax and allows such entities to pay dividends to the Canadian parent company tax-free, something that is the exclusivity of companies that are subject to the agreement. However, the famous 5907(11.2)(c) regulation brings Barbados back into the fold, with regard to the pay out of tax-free dividends. This is an aberration.
Therefore, the first thing that must be done is to change the notion of corporate residence, doing somewhat what the Australians have done, a new notion of residence dealing specifically with directly or indirect shareholders with voting rights.
There is a second problem that also arises. When a company in Barbados pays dividends to the Canadian parent company, the dividends are not taxed. The Canadian company will then pay out the dividends to its shareholders, and perhaps individuals. The Canadian tax law includes the concept of integration which allows for a Canadian shareholder to receive a tax credit on dividends received, in order to compensate for the taxes paid by the company, thereby avoiding double taxation.
For example, suppose I were a shareholder of Bell Canada stocks or any other tax paying company. I receive my dividends, but I also receive a tax credit to compensate for tax paid by the company. This is an illustration of the concept of integration. Yet, if the dividend is received by a Canadian company that prior to this received funds from the Barbados subsidiary, no taxes are paid. Despite all this, a Canadian shareholder or individual is given a tax credit to compensate for a tax that was not even paid in the first place. Once again, this situation cannot tolerated.
Lastly, there is the notion of disclosure. We cannot control what we cannot see. In 2005, the United States introduced Circular 230, an obligation to disclose aggressive tax schemes.
I therefore include in these aggressive tax schemes the planning to integrate tax havens, and thus the requirement, in all tax planning, to inform tax authorities. England passed a similar measure in 2004 called the tax avoidance scheme.
Thank you.