Canada probing Barbados Offshore Investment tax losses

Largest Canadian Labour Union calls Barbados “Tax Haven” a “problem”

An article at the Toronto Sun news agency says that a Canadian House of Commons committee recently began probing offshore accounts and tax evasion. Some Canadians are concerned that Canada’s government is “missing out on billions in potential revenue” because of low tax countries. The article names Barbados, Bahamas and the Cayman Islands.

“I was really struck to the extent to which this trend seems to be increasing when we were assured it was less of a problem… This money is not going into investing in real activities and in growing the (Canadian) economy.”

…Toby Sanger, Canadian Union of Public Employees CUPE senior economist. CUPE has almost 600,000 members and is Canada’s largest workers’ union.

This is serious business for Barbados because our national economy and well being are highly dependent upon that offshore investment from Canada. Not only that, our tourism industry is also closely linked with the offshore banking and investment sector. Many Canadians and other tourists who head for Barbados in the winter are coming for their “annual shareholders meeting” that just happens to be scheduled every year in the middle of the coldest winter months.

And don’t kid yourself that it’s about all offshore jurisdictions: Barbados is a big big player in Canadians’ offshore tax strategies. I once heard it said that Barbados is the #1 Caribbean country for Canadian offshore banking and companies. I don’t know if that is still true, but Barbados is big enough that we are squarely in the sights of those who want to curtail the ability of Canadians to pay lower tax rates.

All Hands on Deck!

The Toronto Sun article seems to be a balanced piece that gives both sides of the Canadian debate. There is a side that says offshore banking and corporate centres like Barbados actually benefit the Canadian economy by allowing Canadian companies to be competitive in the world markets.

The danger for Barbados is that in bad times governments can get focused only upon revenues and lose sight of the big picture.

As we’ve seen occasionally in Barbados, governments can raise taxes too much and ‘kill the goose’. Some Canadians want their government to restrict access to offshore banking centres like Barbados, and don’t realize this would harm Canadian industry in the long run.

Let’s hope that our government acts decisively and swiftly to convince the Canadian Government, tax authorities and Canadians in general that both countries greatly benefit from our long standing relationship and the agreements that allow both Canada and Barbados to prosper in the world economy. We are both lesser without each other.

Further Reading

Please read the article at the Toronto Sun, but we’ll reprint it here because sometimes articles go missing in cyberspace and then we have nothing to support our fair commentary.

Rising investment sparks offshore tax debate

Rising investment sparks offshore tax debate

Offshore financial centres continue to attract billions of dollars of Canadian cash despite the fact that overall investment overseas has been declining, creating debate as to whether Canada is losing out on revenue.

According to Statistics Canada, direct investment abroad dropped for a second year in 2010, falling by $4.5 billion to $616.7 billion, pulled down in part by a strong loonie.

However, investment in low-tax countries such as the Bahamas, Barbados and the Cayman Islands all continued to rise. So did the amount invested offshore by Canada’s banks and financial institutions, which accounted for half of all investment abroad last year.

Canadian investment through offshore financial centres totals about $100 billion, or 20% of the total. However, the money rarely stays in the tax havens and is usually passed onto to operations elsewhere around the globe.

The company is then able to pay tax on these operations at low to zero rates — 2.5% in Barbados, for example — and repatriate the remainder to Canada.

Some say that means the government here is missing out on billions in potential revenue.

“I was really struck to the extent to which this trend seems to be increasing when we were assured it was less of a problem,” said Toby Sanger, senior economist at the CUPE union. “This money is not going into investing in real activities and in growing the (Canadian) economy.”

It’s a hotly contested debate and one that was aired in a House of Commons committee probing tax evasion and offshore accounts as recently as March.

On the other side of the debate are those who say that offshore financial centres are an essential tool to help Canadian companies compete in global markets.

Walid Hejazi, a professor at the University of Toronto’s Rotman School of Management who spoke at the committee hearing, warned against confusing tax evasion by using offshore accounts with tax minimization.

“When they are using them for tax minimization, it’s completely legal,” Hejazi said. “There is far more tax evasion within Canada than there is outside.”

He estimated the amount saved in taxes through offshore centres is about $4 billion a year. That’s way less than the $50 billion or so that is thought to be lost through evasion and under reported taxes at home.

While it’s complex to estimate the exact size of the underground economy in Canada, most studies, including one by right-wing think-tank The Fraser Institute, calculate that it’s probably about 15% of gross domestic product.

Hejazi said without the centres, Canadian companies would not be able to compete on a global stage.

“Every country in the OECD allows companies to use these centres,” he said. “If it were so bad, why would they allow it?”

He argues that the competitive edge helps generate greater profits for the companies, which end up boosting revenues in Canada indirectly, through taxes of dividends paid to shareholders, for example.

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7 Comments

Filed under Barbados, Barbados Tourism, Canada, Economy, Offshore Investments

7 responses to “Canada probing Barbados Offshore Investment tax losses

  1. Harry

    It can’t continue forever. We are living off a rather weird loophole in one tax treaty. It is a form of indirect overseas aid that mostly benefits a few accountants in the Bishop Court Hill area.
    And I really fail to see how robbing their country of tax revenue is beneficial to the average law-abiding tax-paying Canadian.
    Time the Barbados “International Business” Community started getting creative – mutual funds, captive insurance, online poker, shipping registries, a film commission, international pensions and life assurance, trust funds, the space industry. All work well in other jurisdictions.

  2. Mr Coco

    Nothing to worry about… the Toronto Sun is a lunch bucket tabloid read by philistines and half wits.
    Too many big words in the article, also it didnt mention the UFC or maple leafs so nobody paid any attention.
    Our dirty little secret is still safe.

    Eugene Melnyk come on down!!!!

  3. watcher

    The current tax treaty was put into place by former Prime Minister Paul Martin in his last budget while he was Minister of Finanace. His family owns Canada Steam Ship Lines that now has its head office in Bridgetown. It allows world wide proifts other than those made in North America to be gathered into Barbados through a IBC and then dividended back to a Corporation back in Canada without further taxation. It has survived a number of Canadian Governments so it is ulikely that it is going to change. The tax rate paid on these IBC profits in Barbados is about 1.5% with a maximum of 2.5%. MAYBE THAT IS WHAT SHOULD CHANGE. Moving the tax collected in Barbados to say 5% would make little difference to the strategic planning of IBC’s but at the same time would offer Barbados a more equitable split of these monies.

    At various times there have been discussions about Barbados becoming a province of Canada. Loss of preferential tax arrangments would certainly have thrown a spoke into the wheel of those discussions and without the IBC’s the whole financial banking system in Barbados would require a massive change. RBC, Bank of Nova Scotia, and the CIBC (new name now) have a lot of influence. Nothing going to change for a long long long time.

  4. Mysified

    Many things mystify me about Canadians.
    2 things mystify me about Canadian IBCs.
    Maybe somebody can enlighten me.

    1. The WTO ruled that US Foreign Sales Corporations (FSCs – which I believe are similar entities to Canadian IBCs) were acting in contravention of world trade rules by effectively providing an illegal export subsidy (which is pretty obviously their sole purpose). The EU was awarded US4 billion in retaliatory sanctions, which in their wisdom they decided not to implement. Why does no-one challenge Canada over these IBCs?

    2. Didn’t Stephen Harper make a great play of how he was going to put a stop to all this in 2006. Why didn’t he follow through?

  5. what will they think of next
  6. watcher

    @mysified

    There are no Canadian IBC’s. They are Barbados IBC’s. Many other countries have IBC’s as well. There is nothing illegal about having an IBC in Barbados or anywhere else. What makes the Canadian situation unique is that the profits of a Barbados IBC (known as exempt surplus in Canadian Tax law) can be dividended to Canada without payment of income tax in the hands of the company that is receiving the dividend so long as certain conditions are met. One of them being that the company receiving the dividend can not be a company that has normal business income in Canada.
    There is lots of information on the web about this situation. As far as Stephen Harper changing this situation goes….very doubtful that this will happen. It was put into place by a former Prime Minster and the banking system in Barbados relies heavily on these transactions for foreign exchange earnings….and who are the b ank in Barbados…mostly Canadian.

  7. house in order

    There is much Canada can do for Barbados and Barbadians, all the way from further investment, assistance and training for underpaid policemen, modernized land and judicial registries, building of libraries etc.

    This cannot happen to any serious degree if Barbados refuses to adhere to international standards of acceptability, such as full ITAL including FOI, enforcement of human rights, an independent educated judiciary and audited statements for all government bodies delivered in a timely manner.

    The Canadian Banks with all their competent local employees need to be part of the political process to improve these minimum international standards for Barbados by supporting credible candidates for election from whatever party that is capable of making such reforms.

    The alternative is that the Canadian Banks continue to become enablers of addictive international grants with little or no accountability to assist Canadian taxpayers or Barbadians. In the meantime, billions of Canadian dollars annually disappear through tax leakage.

    If there is no desire to reform quickly and effectively, the tax treaty should be terminated.