Canoe

Tuesday, May 22, 2001

Firms not paying fair share?

By DEAN BEEBY-- The Canadian Press

HALIFAX (CP) -- Federal analysts are questioning whether corporate Canada is paying its full share of taxes to Ottawa.

Two internal studies from the Canada Customs and Revenue Agency have uncovered large numbers of Canadian businesses that pay suspiciously low levels of federal tax -- or no tax at all.

Almost two-thirds of all businesses in Canada with annual revenues of less than $15 million paid not a dime of federal tax between 1995 and 1998, says one report. That works out to as many as 716,000 businesses in a given year.

Among giant corporations with annual revenues of more than $250 million, as many as 41 paid no federal tax in the same time period -- or about 6.5 per cent of all such corporations.

And among their subsidiary companies, up to 2,664 were tax-free -- about 40 per cent of all subsidiaries.

"There are many 'active' corporations paying little or no taxes," concludes the study from the agency's compliance programs branch.

"On-going analysis to learn the fiscal impact of this trend and to attempt to ascertain its cause will be beneficial."

The October 2000 document was one of two related reports obtained under the Access to Information Act.

The results echo a second internal study of federal taxes paid by Canada's financial institutions, dominated by the big banks, for the years 1996 to 1998.

Analysts found that in 1998, taxes paid to Ottawa by the financial sector dropped by an "astounding" $1.6 billion to $2 billion.

That's a decline of 44 per cent at a time when overall pre-tax profits fell by only seven per cent.

The amount of taxes paid by the same sector to all levels of government dropped $2.3 billion to $7 billion.

The December 2000 report -- marked "draft" -- is partly censored, including all of its recommendations.

It concludes that "the complexity of financial products, institutions and transactions provide(s) ample opportunity for aggressive tax planning."

Among the tax-planning examples cited are some of those used by Canada's big banks.

"Canadian bank spending on strategic initiatives both domestically and internationally sought tax efficiencies while moving capital into foreign jurisdictions in order to compete globally and to pursue the advantages of conducting business in jurisdictions with lower tax burdens."

The analysts noted in addition that "the banks also aggressively pursued acquisitions of financially distressed companies for their tax loss."

The authors recognize that the financial sector has seen major restructuring and amalgamation in recent years, which may have affected taxes payable. In addition, insurance companies saw profits cut in half in 1998 largely because of the January ice storm in central Canada.

Spokesmen for big business were quick to note that Canada's tax laws offer plenty of legitimate opportunities to reduce the amounts payable.

Research-and-development tax credits, as well as the ability to spread losses over several years, can help some corporations keep their tax bills low, said David Stewart-Patterson of the Business Council on National Issues.

In addition, the first study did not take into account profit levels -- a key factor in whether taxes are owed.

"Corporate taxes are based on profits -- not all companies are profitable," Stewart-Patterson said from Ottawa.

The report on financial institutions is incomplete, and does not cite reliable data, said Sharon Wilks of the Canadian Bankers Association.

"This is a draft report -- it's a work in progress," she said from Toronto.

Wilks noted that the big six banks paid $2.9 billion in federal taxes in 1999, at rates higher than for many other kinds of businesses. And she cited association statistics suggesting that taxes paid were roughly in step with profit levels in 1998.

A spokeswoman for Canada Customs and Revenue Agency, Collette Gentes-Hawn, said that Canada's largest corporations are audited by federal tax experts every year, and that there are many legitimate reasons for businesses to pay no federal taxes.

Owner-operated small businesses, which make up 95 per cent of all corporations in Canada, often pay out all of their earnings in salaries and bonuses, she said. The money is then taxed in the individual's hands, not the corporation's.

But the internal studies nevertheless are carried out to ensure nothing has been overlooked, Gentes-Hawn added.

"Is there something we have missed?" she said from Ottawa. "We should look further. It does not imply there is a problem. It does not imply there's not a problem."

-- Rachel Gibson (rgibson@hotmail.com), May 22, 2001