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Tax change could be damaging

Tony Best

Tax change could be damaging

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THE GLOBAL FINANCIAL DOWNTURN continues to take a toll on Ontario’s economy and what the Canadian province is planning to do about it in order to raise revenue could adversely affect Barbados.
Specifically, the Ontario provincial government in Toronto intends to go after Canadian corporations that use low-tax jurisdictions such as Barbados, Bermuda, The Bahamas, Cayman Islands and British Virgin Islands to reduce their tax burden.
Armed with a harmonized tax system, the Ontario Ministry of Finance is expected to work closely with the Canadian federal government to crack down on what are often called the loopholes in corporate tax-planning that allow large and medium-sized firms to avoid paying much of their provincial taxes.
The federal government in Ottawa already collects 75 per cent of Ontario’s taxes and Paul Hickey, a KPMG tax partner, says Ontario would have to work in concert with Ottawa in order to be successful in its drive against corporate tax planning.  
Any attack on tax planning that involves the use of offshore corporate entities would have a direct impact on Barbados, whose offshore financial sector is a major foreign exchange earner.
Barbados enjoys a favourable reputation as an offshore domicile for Canadians, so much so that Tim Kiladze, writing in the Toronto Globe And Mail, a major Canadian daily paper, singled out Barbados and the British Virgin Islands as major players in corporate efforts to save on their taxes.
Tax avoidance is legal in Canada and the United States and shouldn’t be confused with tax dodging, which breaks the law and can attract stiff fines and penalties for corporations and executives found guilty in court.
Tax experts like Hickey are quick to point out that Canada’s Income Tax Act allows corporations to employ tax-planning measures that divert revenue and profits away from Canada and its provinces.
Now, the provincial government is considering an anti-tax planning system for corporations that report an “effective tax rate” when declaring their quarterly profits.
“With the tax statute, it’s nowhere near black and white,” said Hickey.
The move to weaken corporate tax planning is being fuelled, in part, by the slow economic growth rate in Ontario in 2011, when expansion amounted to an anaemic 1.8 per cent instead of the three per cent the provincial Ministry of Finance had projected.
Interestingly, corporate profits surpassed the overall economic growth rate by a wide margin. Firms managed to report a 13.8 per cent increase in profits. At the height of the economic downturn in 2010, corporate profits in Ontario reached almost 20 per cent.
But the provincial government’s need for increased revenue isn’t the only development throwing the spotlight on offshore financial services in the Caribbean.
Royal Bank of Canada stands accused by the United States Commodity Futures Trading Commission of engaging in a massive “wash” trading scheme involving hundreds of millions of dollars.
Canada’s biggest bank, which has an extensive branch network in Barbados, Cayman Islands and the rest of the English-speaking Caribbean, allegedly carried out a scheme enabling the bank to claim large tax credits from Canada’s revenue agency.
According to court papers filed in a federal court in Manhattan, RBC allegedly created bogus trades for several years. The CFTC charged that the scheme was carried out through the bank’s offices in the Cayman Islands, Toronto, Luxembourg and London, and involved trading in commodity futures contracts.
In essence, the commission has accused the bank of using the scheme to fix commodity prices rather than allowing the futures market to set them.
The bank has vigorously denied the allegations and has vowed to fight them in court.
“The lawsuit is meritless and we will defend ourselves against such baseless allegations,” the bank said in a statement.