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Facing intense lobbying from resources companies and their tax advisers, Finance Minister Joe Oliver has perhaps bought into the argument that curbing treaty shopping would put a chill on foreign investment in places such as the Alberta oil sands, leaving Canada at a competitive disadvantage. (Chris Young/The Canadian Press)

Facing intense lobbying from resources companies and their tax advisers, Finance Minister Joe Oliver has perhaps bought into the argument that curbing treaty shopping would put a chill on foreign investment in places such as the Alberta oil sands, leaving Canada at a competitive disadvantage.

(Chris Young/The Canadian Press)

Corporations vs. Canada: The threat of treaty shopping Add to ...

With an eye to next year’s federal election, the Harper government has begun to sprinkle tax-relief treats across the country.

Small businesses got theirs last week with a break on employment insurance premiums.

Sometimes, however, what governments don’t do can be as telling as their actions.

The Finance Department has quietly shelved plans to crack down on so-called “treaty shopping” by multinationals. The surprise move suspends a long campaign by Ottawa to stop what it says is rampant “abuse” of international tax treaties by companies seeking to duck Canadian taxes.

Back in 2013, then-finance minister Jim Flaherty laid out the rationale for thwarting these aggressive tax-avoidance schemes, saying it means Ottawa can “keep taxes low for Canadian families – families who work hard, play by the rules and pay their taxes.”

Mr. Flaherty’s successor, Joe Oliver, sees things a bit differently. Facing intense lobbying from resources companies and their tax advisers, Mr. Oliver apparently bought the argument that curbing treaty shopping would put a chill on foreign investment in places such as the Alberta oil sands, leaving Canada at a competitive disadvantage.

The flip side is that not squeezing corporations means individual Canadians must bear a disproportionate share of the country’s tax load. Unlike companies, Mr. Flaherty’s hard-working Canadians can’t use complex offshore tax structures.

Treaty shopping is pretty seductive for companies. A foreign corporation from, say, the United States or France, can conveniently funnel income through a shell company in a lower-tax jurisdiction that has a tax treaty with Canada, such as Luxemburg or the Netherlands. The result can mean huge savings for the investor. Instead of paying Canadian withholding tax of 25 per cent on income generated here, a clever corporate shopper can whittle that down to as little as 5 per cent. On profits of tens or hundreds of millions of dollars a year, the savings to the investor – and the resulting losses to Canadian tax coffers – can be enormous.

In a prebudget submission to the House of Commons Finance committee, Deloitte & Touche LLP complained that Ottawa’s proposed crackdown was too sweeping and would scare off potential investors. Deloitte argued that investors from the United States and elsewhere demand higher returns than they would earn at home to come to Canada.

“To attract foreign capital, Canadian projects generally must support higher potential yields than comparative investments located in the home country of a capital source,” Deloitte tax policy leader Albert Baker said in the submission. “This is a particular issue for the energy and resource sector.”

The implication is that all other Canadian taxpayers – you and I – should subsidize the inflated profits of offshore oil sands investors.

The Finance Department did not explain why it’s not moving ahead to curb treaty shopping – a decision that comes after extensive consultation and policy groundwork. The department said only that it is awaiting “further work” by the Organization for Economic Co-operation and Development, which is leading a global effort to clamp down on various tax avoidance schemes used by multinationals. All the more curious, the OECD is set to announce this week that its member-countries, including Canada, have committed to eliminating treaty shopping.

While Canada stalls, other countries are moving ahead with various efforts to preserve their tax base and block multinationals from shifting profits offshore, including Britain and the United States. The United States, for example, has signalled that it may retroactively clamp down on so-called tax inversions. That’s the strategy of purchasing a company in a lower-tax jurisdiction, and then moving to the home country of the acquired business.

Businesses will always balk at paying taxes. Foreign investors, who are sinking billions of dollars into resource projects, want to get oil or minerals out as fast as possible, while maximizing profits.

But governments have a duty to ensure they’re charging a fair rent for resource extraction, so the entire country wins. Modern civilized economies can’t survive without an adequate tax base – to build roads, train workers, provide health care and maintain law and order. Tax evasion threatens that goal.

It’s a trade-off between what’s good for companies and what’s good for the the country.

Get the balance wrong and Canada risks becoming a big open-pit mine, surrounded by a hollowed-out shell of an economy.

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Follow on Twitter: @barriemckenna

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