Ontario’s decision to hold corporate taxes steady until its books are balanced isn’t the only big tax item in its new budget. The province has also signalled that it is ready to tackle corporate tax avoidance.
This avoidance is manifested in two forms. First, by diverting revenue and income outside of Canada, to places such as the British Virgin Islands or Barbados. Second, by carrying tax losses from other provinces into Ontario, to reduce the overall tax burden.
You would assume that the provinces would have already tried to crack down on such moves, but it takes a lot of effort, and more importantly, a lot of money. Plus, now that Ontario has a harmonized tax system and the Federal government collects 75 per cent of the province’s taxes, Ontario will need to work in concert with Ottawa, said KPMG tax partner Paul Hickey.
At the moment, Quebec has the stiffest regime to fight aggressive tax planning -- which is the euphemism that corporations use to make it seem like what they’re doing isn’t exactly avoiding taxes. They simply say they have a ‘tax plan.’ In Quebec, corporations who are diverting too much money outside the province face harsh penalties.
But to be clear, many corporations use ‘tax planning,’ and the act itself isn’t illegal. In fact, companies can be completely in line with the Income Tax Act, but are still able to avoid certain taxes. That’s why you’ll see corporations record an ‘effective tax rate’ when the report their quarterly profits.
“With the tax statute, it’s nowhere near black and white,” Mr. Hickey said.