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Canada targets offshore tax havens

Canadian Finance Minister Jim Flaherty set into legislative motion a process to tax offshore "tax havens." The minister introduced a motion in the House of Commons on 10 November 2006 to amend the Income Tax Act to prevent "non-resident trusts and foreign investment entities" from using them to avoid paying tax.

Flaherty said the use of offshore tax havens while not illegal was costing the government considerable amounts of revenue. Last year, Statistics Canada reported that Canadian direct investment in such shelters has risen eight times since 1990 to $88 billion in 2003, with much of the money being invested in the Caribbean. The largest increases went into Barbados, Bermuda, the Cayman Islands, the Bahamas and Ireland, the five countries being among the 11 nations with the most Canadian assets.

Federal Auditor General Sheila Fraser reported that multinational firms operating in Canada have avoided "hundreds of millions" of dollars in taxes over the past decade through the use of tax havens.

Flaherty said: ''The motion will amend existing income tax rules to help ensure that income earned by Canadians through foreign jurisdictions, including tax havens, is subject to tax as if it had been earned in Canada,'' he said in introducing the motion.

The proposed amendments deal primarily with the taxation of income earned through the use of non-resident trusts and foreign investment entities, the department said. They carry through on long-standing proposals that were first announced in the 1999 budget but whose implementation has been delayed by repeated proposals for changes.

The proposed amendments are separate from the overall review of income trust funds, which is still underway. Flaherty defended his decision to break an election promise not to tax income trusts, saying some corporations were using them as a tax avoidance scheme and that they threatened to push the government back into a deficit.

Under the plan, a 'Distribution Tax' will be applied to distributions from publicly traded income trusts and limited partnerships. This will be partially offset by a 0.5% reduction in the general corporate income tax rate as of 1 January 2011. The changes also increase the Age Credit Amount by C$1,000 from C$4,066 to C$5,066 effective 1 January 2006 in a bid to benefit low and middle-income seniors.

For income trusts that begin trading after 31 October, these measures will apply beginning with their 2007 taxation year. For existing income trusts and limited partnerships the government is proposing a four-year transition period. They will not be subject to the new measures until their 2011 taxation year.

The loss in revenues resulting from the escalating number and size of corporations that were converting into trusts would have eventually pushed the federal government back into a deficit, Flaherty told the committee. There had been some C$70 billion (US$61.83 billion) worth of income trust announcements so far this year, which was "not right and not fair" said Flaherty. "It is the responsibility of the Government of Canada to set our nation’s tax policy, not corporate tax planners."

The government's proposal faces a legal challenge from lobby group Democracy Watch, which is likely to be based on the breaking of a written commitment in the Conservative's election manifesto not to tax on trusts.

Flaherty has said, however, that the government will proceed with its attempt to cut capital gains tax after postponing the measure for further consultation earlier in the year. He argued that it would help to free up "trapped" capital and encourage more investment throughout the economy.

The Conservatives initially proposed to abolish capital gains tax on all profits that were reinvested within six months. The change was opposed because of the potential cost in terms of foregone tax revenues and the proposal was postponed in March after Flaherty conceded that the government would find it "challenging" to push it through in the short term.

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