Lax federal and provincial regulatory frameworks have made Canada a destination of choice among international tax defectors. This increase in tax non-compliance is inhibiting economic growth and increasing the tax burden of the middle class and low-income segments of society.
On March 21st, Transparency International Canada published a report which put forward some staggering findings: Since 2008, corporate entities have purchased $28.4 billion in houses across the Greater Toronto Area; And of these purchases, $9.4 billion were made through cash payments. By and of itself, the movement of large sums of money across the real estate industry isn’t problematic. But what is particularly concerning is that many of the companies funneling these funds were used in conjunction with trusts and nominees to hide the identities of beneficial owners – people who profited from ownership without being on record. Thus, the report’s staggering discovery is the sheer number of people who aren’t paying their fair share of taxes. Which means a higher tax burden for you, and slower economic growth for the country.
For some, the fact that tax avoidance goes largely unchecked in Canada may come as a genuine surprise. After all, Canada is known for its rule of law, regulatory efficiency, and stable economy. Moreover, just last year Canada ranked ninth out of 180 countries classified by the 2018 Corruption Perceptions Index.
With that being said, Canada’s status as an emerging tax haven shouldn’t be so astonishing. In 2005, Toronto lawyer Simon Rosenfel was charged for using attorney-client privilege to launder money for international clients. In 2009, the RCMP estimated that roughly $15 billion was being laundered through Canada by companies with unclear ownership. In 2016, reports surfaced that incomeless students were buying million-dollar homes in Vancouver on behalf of anonymous foreign owners. That same year, the Panama Papers implicated more than 100 Canadians in tax evasion and revealed a trend among foreign firms to establish shell companies in Canada.
The rise of snow washing – the exploitation of Canada’s reputation to divert tax scrutiny – and the ascendance of Canada as a de facto tax haven are a direct result of the country’s opaque regulations for the ownership of public companies and trusts. People are able to take advantage of these laws because Canadian corporate registries do not require a verification of identity. Most do not require information on shareholders, and in many cases, owners are allowed to list figurehead directors in their stead. Additionally, trusts in Canada do not need to keep a record of their business activities or disclose when they are operating in the interests of others. And what’s more, in many cases limited partnerships do not have to pay taxes in Canada if their owners do not live in the country, or if the money is said to have been taxed in its country of origin.
Tax noncompliance is a very real issue because the individuals that actively avoid taxation ultimately eschew their obligations to contribute to social and economic development. By narrowing the tax base, tax non-compliance results in unfulfilled tax obligations – which don’t pay themselves. Oftentimes the middle and low-income segments of society are forced to take up this tax burden by funding incentives for the private sector and paying higher taxes. But it’s more than just an issue of the haves against the have nots. This shifted tax burden can result in an overburdening of tax payers, which in turn can lead to the flight of labour and capital into the shadow economy. And activity in the shadow economy – a realm you may know as the black market – detracts from legitimate capital formation, ultimately curbing the growth of Canada’s Gross Domestic Product and inhibiting further growth of the national economy.
So. Tax noncompliance. It’s happening in your good, post-national, multicultural suburb. It’s happening all over the country. The system is broken. But we already knew that. What we need are effective solutions to address flaws in the regulatory policy surrounding disclosure and beneficial ownership. We need to demand that our governments and tax authorities put in place more rigorous ownership review processes and remove the red tape in inter-jurisdictional financial crimes investigations. Furthermore, we need to insist that they establish a central database for the ownership of companies and trusts in Canada, reform our corporate registry legislation, and be more aggressive in charging perpetrators of financial crimes. Most importantly, we need to call on unscrupulous shell companies, trusts, and nominees to make good on the call-to-action of iconic film character Jerry Maguire: “Show [us] the money!”