Rising investment sparks offshore tax debate in Canada
Friday May 13 2011 | 06:54 AM

Offshore financial centres continue to attract billions of dollars of Canadian cash despite the fact that overall investment overseas has been declining, creating debate as to whether Canada is losing out on revenue.

According to Statistics Canada, direct investment abroad dropped for a second year in 2010, falling by $4.5 billion to $616.7 billion, pulled down in part by a strong loonie.

However, investment in low-tax countries such as the Bahamas, Barbados and the Cayman Islands all continued to rise. So did the amount invested offshore by Canada's banks and financial institutions, which accounted for half of all investment abroad last year.

Canadian investment through offshore financial centres totals about $100 billion, or 20% of the total. However, the money rarely stays in the tax havens and is usually passed onto to operations elsewhere around the globe.

The company is then able to pay tax on these operations at low to zero rates -- 2.5% in Barbados, for example -- and repatriate the remainder to Canada.

Some say that means the government here is missing out on billions in potential revenue.

"I was really struck to the extent to which this trend seems to be increasing when we were assured it was less of a problem," said Toby Sanger, senior economist at the CUPE union. "This money is not going into investing in real activities and in growing the (Canadian) economy."

It's a hotly contested debate and one that was aired in a House of Commons committee probing tax evasion and offshore accounts as recently as March.

On the other side of the debate are those who say that offshore financial centres are an essential tool to help Canadian companies compete in global markets.

Walid Hejazi, a professor at the University of Toronto's Rotman School of Management who spoke at the committee hearing, warned against confusing tax evasion by using offshore accounts with tax minimization.

"When they are using them for tax minimization, it's completely legal," Hejazi said. "There is far more tax evasion within Canada than there is outside."

He estimated the amount saved in taxes through offshore centres is about $4 billion a year. That's way less than the $50 billion or so that is thought to be lost through evasion and under reported taxes at home.

While it's complex to estimate the exact size of the underground economy in Canada, most studies, including one by right-wing think-tank The Fraser Institute, calculate that it's probably about 15% of gross domestic product.

Hejazi said without the centres, Canadian companies would not be able to compete on a global stage.

"Every country in the OECD allows companies to use these centres," he said. "If it were so bad, why would they allow it?"

He argues that the competitive edge helps generate greater profits for the companies, which end up boosting revenues in Canada indirectly, through taxes of dividends paid to shareholders, for example.