CTO

Canadian parliamentarians are taking a crack at squeezing out more government revenue from tax havens, and we wish them all the luck and stamina.

Tucked away from the Conservative-to-Liberal floor-crossings and the nail-biting confidence-vote drama that have dominated this Parliament, MPs on the House of Commons finance committee were contemplating all the places where corporations put their profits.

What initially started as an Opposition “gotcha” strategy meant to tie Prime Minister Mark Carney to the tax practices of Brookfield Asset Management has turned into a fairly serious exercise to tackle one of the thorniest issues in fiscal policy.

Political soap opera this ain’t, but the implications are in the billions of dollars every single year — and Canada is missing out.

That’s anything but new, and Canada is far from alone. Tax avoidance and its more nefarious cousin, tax evasion, have bedevilled policymakers for time immemorial.

Over the years, Canada has thickened its tax code, added auditing resources and investigative powers to the Canada Revenue Agency and law enforcement, joined complex international agreements and is always adopting more advanced technology in the hopes of gaining the upper hand.

But companies and wealthy individuals often seem to be a step ahead, especially those that are well-resourced enough to navigate increasingly complex rules and murky financial transactions.

Taxing corporations and high net-worth families fairly is more important than ever. Canada needs the economic activity, governments need the tax revenue, and Canadians need to know that the tax system that they pay into — year in, year out — is equitable.

“There’s a constant balancing act between competitiveness — we want our businesses and our multinationals to succeed when they’re competing in foreign markets — and a desire to not facilitate inappropriate tax avoidance and erode the Canadian tax base,” Trevor McGowan, associate assistant deputy minister at the Department of Finance, told the committee.

Canada, like many other countries, is thirstier than ever for business investment, especially now that the global economy is in an uproar and the United States is no longer a dependable source of mutual benefit. And with trust in public institutions in a fragile state, the federal government can’t afford to be lenient.

Parliamentarians find it hard to determine the scope of the problem. CRA has measured the “tax gap” — the difference between what corporations should be paying and what they actually pay — in the past and says that in 2018 it amounted to between $1 billion and $3 billion a year, lower than previous years.

But CRA’s efforts focus on tax evasion (actually breaking the law) rather than tax avoidance, which is just playing footsie with the rules. And they admit up front that their estimate is uncertain.

Independent analysts who try anyway to measure the cost of tax avoidance come up with far higher numbers. Canadians for Tax Fairness figures Canada misses out on $15 billion a year because of tax haven abuse.

But as the prime minister himself said when he was faced with tough questions about Brookfield during the election campaign last spring, setting up corporate shop in a low-tax jurisdiction is legal and a legitimate business strategy.

Even trickier than counting up the missing tax revenue is figuring out what to do about it.

Canada has tax treaties and agreements with a growing number of key low-tax or no-tax jurisdictions — agreements backed up by domestic law that actually allows for Canadian firms to repatriate some types of income back to Canada without paying tax.

Officials believe their measures are chipping away successfully at the tax avoidance problem, delivering results.

Critics and parliamentarians of all stripes want more though — with good reason. But there are no magic solutions.

The approach of the past has often been to add more rules and complexities, but there’s a chance that amounts to a road map for dodgy activity. The same issues apply to multilateral agreements and tax treaties.

If the entities you’re trying to stymie specialize in hiding behind complexity, adding even more complexity may make things worse. Simpler rules, on the other hand, could help.

The other main approach is transparency. Europe and Australia are legislating public country-by-country reporting (PCBCR), which requires multinational corporations to make public key financial data in every country they operate.

Canada has some requirements along these lines but the information is not public.

The hope is that transparency will dampen tax avoidance.

“PCBCR really is sunlight as the best disinfectant. It would allow academics and researchers outside of the tax authorities to engage in the kind of research that we need to deal with this whack-a-mole problem,” D.T. Cochrane, senior economist at the Canadian Labour Congress, told the committee.

“There will always be incentive to create these schemes. We need more methods of confronting them.”

A balancing act indeed.

Three young women from the Vancouver area have just won a contest that would make government officials’ heads explode if they got wind of it.

Kiranjot Kaur Nahal, Khadija Rana and Jasleen Kaur Johal-Takhar responded to a call for ideas on how to pay for public transit improvements in Metro Vancouver, and they went out on a limb: they proposed a tax hike.

Just a little one, though: between 0.5 and 1 per cent added to the provincial sales tax for people in Vancouver.

Generally, bureaucrats scorn that kind of move. In the world of public finance, government revenues all flow into the same pot, and setting up artificial constructs to carve out amounts for special purposes is very inefficient indeed.

Administrators are not the only ones who look askance at the idea of bespoke taxes.

Many of the people the team tells about their pitch dismiss it out of hand, says Johal-Takhar. In fact, the trio itself had the same reaction to concept when they first started considering it as a way to ensure stable funding for transit.

“The three of us were apprehensive,” she said. “Sales tax has a negative reputation. We had a knee-jerk reaction.”

But being masters students at The University of British Columbia ’s School of Public Policy and Global Affairs, they put their research skills to work, looked harder and soon grew to embrace the idea — and eventually win $1,000.

The proposal works on many levels. It spreads the funding burden around. It provides a steady funding stream to a public good that will enable Vancouver’s world of work run more smoothly. It’s fairly simple to administer because it’s attached to an existing system.

And most importantly, the team hopes, it serves as a reminder to taxpayers exactly why they’re paying a small tax and what they get in return, turning their skepticism into support.

“There’s a tangible outcome to their taxes,” Johal-Takhar says.

And that’s the link we in Canada so often forget as we are repeatedly swept up in the political race to cut taxes indiscriminately as if they were a blight on society. The team struck at a disconnect in the public’s discourse on fiscal policy.

In the last federal election campaign, for example, the Conservatives promised an income-tax cut and then the Liberals quickly moved into that space too, hoping to neutralize the Conservative promise. The Liberal measure is expected to drain $27-billion from federal coffers.

And then came the elimination of the digital services tax, the cancellation of the consumer-facing carbon tax, and then, by the time we got to the Nov. 4 budget, the cancellation of luxury sales tax on yachts and fancy cars.

But the budget conversation was all about billions in new spending, investment and cuts — not tax revenue, where it should come from or who should pay. We seem to have forgotten that such revenue finances social supports, health care, infrastructure, training, defence, security and so many other programs that foster a stellar quality of life and a ripe investment climate in Canada.

Our tax conversation is dominated by calls to cut, and the debate is only around how much.

With such a lopsided discourse, it’s no wonder most taxpayers say they feel overtaxed. Polling done a year ago for the Canada Revenue Agency showed that just seven per cent of respondents felt they paid too little.

Back to the contest in Metro Vancouver.

To convince the judges of the contest run by advocacy group Movement that their idea was solid, the team knew it had to demonstrate that the public could actually be persuaded. Dogging them was a failed plebiscite 10 years ago to have the Vancouver region approve a 0.5 per cent increase to sales tax to fund infrastructure.

But similar votes in the U.S. asking citizens to weigh in directly on whether to increase taxes for public transit have proven largely successful, the team showed, pointing to Ohio and Arizona.

Indeed, the American Public Transportation Association shows that in the November 2024 election, 51 out of 61 proposals for public transit measures passed, leading to voter approval for $25 billion (U.S.) in transit improvements.

For sure, there are all sorts of reasons why American voters should not be compared to Canadians right now. And the advocates at Movement, while they plan to run with a version of the contest-winning tax idea, won’t go as far as pushing for a referendum on it.

The region has already indicated that it wants a new revenue tool for transit by 2027, says the advocacy group’s executive director, Denis Agar. For him, and for Johal-Takhar’s team, it’s not a question of “whether” but “how,” and they believe the best answer is a small increase to sales tax.

For the rest of us, their willingness to shout publicly about the direct links between taxation and services is a victory unto itself.