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The ONW Salon:  Liberals and Offshore Tax Avoidance

Susanna Kelley (Moderator):  Justin Trudeau's fundraiser and former Liberal Prime Ministers Jean Chretien and Paul Martin are all linked to companies who are holding assets in offshore tax havens, according to the Paradise Papers leak.  What could the Liberal government be doing to crack down on tax avoidance? Richard Mahoney, Will Stewart and Tom Parkin debate.

 

Richard Mahoney:

Companies and well-to-do people have been able to take their money and invest and or hold it elsewhere for as long as we have had commerce. It's a complicated issue. Governments around the world, including Canada's, have signed tax treaties that allow for the free movement of capital around the globe.

In and of itself, that is not a bad thing. Problems arise when large corporate or wealthy personal interests use those "tax havens"—countries that have a lower tax burden than we do—to avoid paying tax they should by law pay.

The basic rule is that if that money is invested abroad, and directed abroad, there is no tax payable on it here. But if it is money that is invested or directed here and sent abroad merely to avoid tax, then Canadian authorities––the Canada Revenue Agency––can audit that and assess whether there should be further tax paid here.

In the Paradise Papers case this week, we saw a gigantic leak of data from a law firm that apparently specializes in this area of international tax. None of us are familiar with the details of those trusts or investments. The leaks themselves will cause the Canada Revenue Agency to review all of the cases now in the public domain to see if there is any tax that should be paid here.

That is the first thing the government can do to make sure no one is avoiding tax. The second thing is one the government could and should consider: are there any other measures that can be taken to ensure no one is avoiding tax that should be paid here? That would involve new legislation and likely, amendments to treaties.

But it's certainly worth considering seeing what more can be done. Canadians must have confidence in the fairness of our system. That is what motivated the Trudeau government to bring in a significant cut to middle income tax rates as one of its first acts in office. It was the motivation behind the massive Canada Child Benefit that has taken up to 300,000 Canadian children out of poverty. So if there is more that can be done on enforcement, then it should be done. And if changes to the law can make the system fairer and more just, then those should be considered too.

 

Tom Parkin:

In just two years, Trudeau’s rule has become one rolling ethics scandal—cash for access, billionaire island, French villas, ethical loopholes, now tax haven trust funds. Not since the start of the Mulroney government do I remember anything like this before. So jam-packed!

We haven’t even gotten over the scandal of multi-millionaire Treasurer Bill Morneau using an ethics loophole to maintain $20 million in shares of Morneau Shepell while proposing C-27. That bill would weaken Canadians’ pension security but increase demand for the services his company provides.

The current scandal features the Liberals’ billionaire “volunteer” chief fundraiser, Stephen Bronfman, who is alleged to have moved money through his company, Claridge, to a Cayman Island bank account and from there into a trust fund for the children of ex-Senator Leo Kolber.

But the real scandal isn’t Bronfman. It isn't about just one Canadian billionaire who doesn't pay his fair share of taxes. It is about just one Senator who helped shape laws to protect billionaires from paying their fair share.

The scandal is the rotten and rigged tax system created by Conservatives and Liberals alike that allow the ultra-rich to legally dodge taxes.

The scandal is that though Justin Trudeau has repeatedly said he would make the tax system fairer, when the issue of tax havens for billionaires arises, his talking point misdirects people. His response is that under the Liberals the Canadian Revenue Agency will crack down on tax evaders.

Let’s be absolutely clear: billionaires using tax havens to avoid paying Canadian taxes isn’t illegal. These people aren’t tax evaders. A CRA crackdown won’t turn up much. These billionaires are taking advantage of the rigged and rotten laws and tax treaties created by Liberals and Conservatives.

What needs to change are the laws and tax treaties. That's not the CRA's job, it's Justin Trudeau’s. He promised fair taxes. But judging by his talking point misdirecting people to the CRA, it appears Justin Trudeau is more interested in protecting billionaire tax haven accounts than keeping his promises.

 

Will Stewart:

Other than the drive-by smear of the Conservatives in a story about Liberal tax avoidance, I think Tom makes some great points, particularly around the different messages for small businesses versus Liberal friends.

You can always tell how damaging a series of events are to the Liberal party by the language that they use to defend the actions of their own. The latest allegations about offshore money has really hit home this week for the Liberals. We are now seeing that the Liberal party royalty of Trudeau, Martin, and Chrétien are all linked to holdings that have serious questions around them, and Richard is taking the approach of trying to convince readers here that there is nothing to see.

It seems Richard the lawyer showed up today, not Richard the Paul Martin partisan.

This is now a pattern of behavior for the Liberal elites that goes to the very core of who they are and what their approach to taxes is. Building on the foundation poured by the Minister of Finance being found to have broken Canada's ethics rules (contrary to Richard's assertion last week that no rules were broken), with a PM who has his own series of numbered companies, we now have significant assets placed offshore by senior partisans.

To be clear, it would seem on the face of it that there is nothing illegal about what they did, as pointed out correctly by my fellow panelists. But that is from the point of view of breaking the law. Of course as Tom and Richard both know, the court of public opinion is far more of an issue when we are speaking about politics. And in that court, the verdict is already cast.

This pattern of behavior is what the Liberal party needs to be concerned about from a strategy point of view. The transgressions of the partisans are only worsened by the insistence by the government that somehow small businesses are the ones who seek to avoid the taxes they rightfully owe to the government.

All we hear about, however, is yet more and more Liberals, many of whom have never worked for small business, being found to be the ones trying to hide income and avoid taxes. It is a classic case of do what I say, not what I do.

I would venture an assertion that a very small percentage of Canadians have numbered companies or offshore accounts, yet it seems that this is commonplace in the Liberal party. Optics are a significant challenge now for the once media savvy government.

 

Richard Mahoney:

Tom is in full flight on this issue and I guess I don’t blame him. His party faces a difficult situation. They think they need to destroy the reputation of the Prime Minister in order to survive. So they invent scandals and use apocalyptic rhetoric. In a recent by-election in a traditionally nationalist Quebec riding that they would have to win to be relevant in that province, they got shellacked by Justin Trudeau in a seat the Liberals had not won since 1980.

So you can expect lots of rhetoric from Tom and the New Democrats over the next few years. We will see if that convinces Canadians they deserve to be elected.

There may be steps that can be taken to tighten the rules around offshore investments. But it is not as simple as Tom suggests. It means changes to laws and treaties. It’s not just Canada that's signed those treaties; most industrialized countries have signed them too. As I said above, existing law gives the Canada Revenue Agency lots of authority to audit, collect and prosecute any tax that should be paid here, no matter whose money it is. The Trudeau government has already spent a fair bit of money directed towards investigating these matters. More can probably be done, as I have said, and should be done. The confidence of Canadians depends upon it.

But don't be fooled by those who allege conspiracies for partisan gain. This is not a problem unique to Canada, as the Paradise Papers leak tells us. Only a globally coordinated attempt to investigate and audit, which the CRA is already doing, will get the job done.

 

Tom Parkin:

It is one of the nice but sad things that Richard got involved with the Liberals at a young age and apparently not knowing there is another party that actually more reflects his views. It is not too late—I can help you!

I believe there is indeed a storm brewing over this issue. And the Liberals are far out at sea with no port to pull into.

What’s becoming clear is there are three classes of Canadian taxpayers. There are the peons in the working and middle class who live off their income—T4 Nation—and pay their taxes in full and in advance. That’s by far the biggest class.

Next there are the Canadians who live off their wealth and get stock option income, dividends or capital gains. This includes people like Bill Morneau, who was earning $165,000 a month in dividends. Income from stock options, dividends and capital gains are taxed at a much lower rate than salary or wage income. So, those wealthy people who can arrange their affairs to get paid that way pay less tax than those in T4 Nation.

Then there’s a super elite who move their wealth to tax havens, invest it globally and pay almost no tax on their investment income. Due to tax treaties which recognize Barbados’ one percent corporate tax rate as the equivalent of ours, members of this super elite can bring back—“repatriate”—that investment income to Canada and use it to buy houses or other assets in Canada.

These people are so advantaged by Canada's tax laws it makes business sense for them to hire their own lobbyists to preserve their law and treaty status.

So billionaires living off wealth stashed in Barbados or the Cayman Islands can pay almost no tax on the dividends and capital gains that supports their lavish lifestyle—even as they live it right here in Canada.

Canada is not supposed to be a class society where the kings pay nothing, the lords pay a bit, and rest of us pay the full freight. Yet here we are.  It is both terrible and true.

And let’s be clear—the kings and lords will fight hard to stop this situation from being corrected.

Wednesday saw a report of a tax haven lobbyist saying tax havens "lubricate global commerce which helps poverty reduction." What kind of person makes up that sort of nonsense?

Tax fairness is a very tough fight. But if Canadians want one set of tax rules that apply to all equally, it is a fight we need to have.

 

Will Stewart:

I would like to unpack some of the reasons why this is an issue. Despite the insistence from Richard, it is not all about legal versus illegal. If it were, we would no longer hear the name Mike Duffy uttered at every instance possible by the Liberals and the NDP, as he was found not guilty on every single charge. But they still make hay of Senator Duffy's actions because they too know that the court of public opinion is a huge factor here.

Trudeau is looking for more and more tax revenue to support his spending. We can debate if that spending is good or bad, but the reality is that he promised small deficits for three years and then a balanced budget in the fourth.

Harper warned, pundits mocked, and the Liberal party defended its campaign promise. Not only did the Liberals fail miserably in adhering to their promise, but they have no plans to balance the budget. Trudeau needs more money despite his assertion that budgets balance themselves.

Rather than look at spending, the Liberals are only focused on revenue. And therein lies the problem. The higher taxes get, the more that the wealthy, and a good number of Liberal operatives it appears, move that money to avoid taxes by legal means.

And that is at the root of the issue here. While the Liberals focus on small businesses owned by families, farms and medical professionals to pay more money, the rich are avoiding taxes in record numbers.

And don't be fooled by their rhetoric of taxing the 1% more because they can afford it. Recent studies and media reports show that the low-income people that the Liberals profess to help are being hurt by Trudeau's tax changes.

A recent Fraser Institute study found that the bottom 20% of income earners in Canada are paying more federal tax now than they did under Harper, who, it should be added, had a balanced budget.

Look, I am a Conservative and it can rightfully be pointed out that my view is coloured by that, just like my fellow panelists and their stripes, but from a strategy point of view the Liberals had best pay attention to what is happening to their brand as the party of average people. Each time we hear more about the lifestyles of the Liberal rich and famous it eats into that brand. Not because of illegalities, but because of perception.

Voters seldom base their vote on one act, good or bad, or a party. Rather they base their votes on patterns of behavior. Regrettably for the Liberals, the recent pattern is going straight to their core value proposition as being on the side of the average Canadian.

 

Richard Mahoney is a lawyer with deep experience in politics and governance.  He is a former senior advisor to the Rt. Hon Paul Martin, a former Campaign Chair and President of the Ontario Liberal Party. Will Stewart is Managing Principal at Navigator, served as Chief of Staff to several Ontario Ministers and often appears as a national affairs commentator.  Tom Parkin is a veteran NDP strategist, columnist and a frequent commentator on national issues. 

 

 

Posted date : November 08, 2017
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