Canadian companies transferred more than $1.6-trillion in 2018 to low-tax countries known as offshore financial centres and conduits to these nations, according to a new report by the Parliamentary Budget Officer.
The in-depth analysis by Yves Giroux – a former senior official with the Canada Revenue Agency – calculates that if just 10 per cent of that amount was transferred to avoid taxes, that would mean Ottawa lost out on $25-billion in federal revenue. Billions more would have been lost in provincial corporate taxes.
Mr. Giroux said the 10-per-cent figure is largely a guess for illustrative purposes, and the actual percentage could be higher or lower.
“There is significantly more that CRA could be doing to look at international taxation, but it is a very complex issue,” he said in an interview.
The report is the PBO’s attempt to measure the so-called “tax gap,” which is the difference between the amount of tax that would have been collected if all individuals and companies paid the taxes they were supposed to, and the amount of tax revenue that is actually collected.
The Canada Revenue Agency has released its own series of reports on this topic, including one this week that said Canadian companies avoided paying up to $11.4-billion in taxes in 2014.
The CRA has previously reported that the combined tax gap for personal income tax and sales tax was up to $14.6-billion in 2014.
Since 2015, financial institutions in Canada have been required to inform CRA about all cross-border electronic fund transfers worth $10,000 or more. Working with Statistics Canada, the PBO analyzed these data to study Canada’s potential tax gap.
The data provide insight about the flow of money between Canada and suspected tax havens, while also providing broader insight about capital flowing in and out of Canada.
To focus in on jurisdictions where tax avoidance may be a factor, the PBO relied on a list created by researchers at the University of Amsterdam, which identifies and defines Offshore Financial Centres.
An OFC is described as a jurisdiction that provides financial services to non-resident companies on a scale that is out of proportion with the size of its economy. These include small, low-tax jurisdictions such as the Bahamas, Cayman Islands, Liechtenstein and Luxembourg, which the researchers call “sinks” where money disappears from the financial system. The researchers also name five countries as conduits through which disproportionate amounts of money flows to these sinks: the Netherlands, the United Kingdom, Switzerland, Singapore and Ireland.
The PBO report found $213.5-billion flowed from Canada to sink countries in 2018, while $1.4-trillion went to conduit countries, for a total of $1.6-trillion that year. The report said $1.4-trillion came into Canada from those countries.
According to the CRA transfer records, the United States was by far the top country in terms of capital exchanges with Canada in 2018. The records found $5.6-trillion left Canada for the U.S. in 2018, while $2.9-billion came from the U.S. to Canada, for a net loss to Canada of $2.7-trillion.
That coincided with a period when accountants were warning that federal tax policy – combined with new U.S. tax cuts – was encouraging high-income individuals to move funds out of Canada, but Mr. Giroux said the main factors behind those capital flows are not immediately clear.
NDP finance critic Peter Julian praised Mr. Giroux’s work Thursday as PBO officials appeared before the House of Commons finance committee.
“This is going to become a major issue, I believe, for the federal election campaign,” Mr. Julian said. “The reality is, there are astronomical sums that seem to be getting around our taxation system with no action by our federal government.”
Liberal MPs on the committee challenged Mr. Julian’s comments, pointing to the fact that the government has increased funding to boost the CRA’s auditing powers.