Canada To Launch New Anti-Tax Haven Offensive

by Mike Godfrey, Tax-News.com, Washington

16 May 2007

Canadian Finance Minister Jim Flaherty has announced a new initiative to crack down on companies that he says are shifting the tax burden unfairly to small taxpayers by using offshore corporate structures to evade Canadian taxes.

Addressing the Toronto Board of Trade on Monday, Flaherty announced that: "When multinational corporations use this tax loophole, Canadian taxpayers are indirectly subsidizing their international operations. Our goal is to improve the fairness of our tax system and further reduce taxes for hard-working Canadians while preserving Canada’s overall tax advantage for our globally successful companies."

Specifically, the new rules are being designed to prevent multinational corporations from using tax havens and other tax avoidance structures to generate two expense deductions for only one investment, so-called 'double dipping.' To bed in the new rules, Flaherty said there would be a transition period to 2012, after the planned reductions to the federal statutory corporate tax rate are fully phased-in and the rate has been reduced to 18.5%.

The Finance Minister said that tax revenues generated through the Anti-Tax-Haven Initiative would be used to further reduce business taxes in Canada.

"The changes to the Income Tax Act required to give effect to the Anti-Tax-Haven Initiative will be complex and highly technical," continued Flaherty. "To ensure a comprehensive consideration of the factors involved and a smooth implementation, a Technical Roundtable of tax professionals, chaired by the Department of Finance, will be invited to work with government officials at a technical level to ensure that the proposal functions as intended. This Roundtable is a short-term project that will operate independently of the Expert Panel."

Flaherty also announced the creation of an advisory panel of experts in the near future to look for ways to further improve the fairness and competitiveness of Canada’s international tax system.

"We are providing corporate Canada with a transition period of almost five years to comply with these rules; we think this is fair and reasonable," he added. "Implementation will take place once our planned corporate tax reductions are fully implemented, allowing us to make our strong competitive economy even stronger."

The Conservative government has committed itself to cutting a number of taxes since taking office 15 months ago. These include cutting corporate tax to 18.5% by 2011 and eliminating the corporate surtax in 2008. Canada has also reached an agreement in principle on the Canada-US Tax Treaty that includes the elimination of withholding taxes on interest and the extension of treaty benefits to limited liability companies in Canada.

When fully implemented, the government claims its tax policies will move Canada from the third highest tax rate on new business investment in the G7 to the third lowest.

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