Canadian Prime Minister Mark Carney speaks at a press conference at the Port of Montreal in Montreal, Canada, on March 28.ANDREJ IVANOV/AFP/Getty Images
Allan Lanthier is a retired partner of an international accounting firm and has been an adviser to both the Department of Finance and the Canada Revenue Agency.
Liberal Leader Mark Carney is being dogged by questions regarding his time at Brookfield Asset Management, and the fact he co-chaired investment funds worth about $25-billion registered in Bermuda, a tax haven.
Mr. Carney says the tax strategy was designed to benefit Canadian pension plans and that there was no avoidance of tax. The former is true, but the latter is not. Booking profits in a tax haven is indeed tax avoidance.
While there are many corporations and partnerships in the Brookfield empire, let’s summarize how Canadian corporate tax rules work for the funds Mr. Carney co-chaired.
If a Canadian public company owns a subsidiary in Bermuda, there is no tax in Bermuda when business income is earned. Nor is there Canadian tax when the Canadian parent company receives dividends from its Bermuda subsidiary because of a controversial change introduced in 2007 by finance minister Jim Flaherty: Dividends received from tax-haven subsidiaries are exempt from Canadian tax provided the country in question has signed a tax information exchange agreement with Canada.
After the dividend payment from Bermuda to Canada, the Canadian parent company has cash available for the payment of dividends to public shareholders, with not a penny of tax having been paid.
If Canadian pension plans have invested in the public company and receive dividends from it, the dividend income is free from tax as well: registered pension plans are exempt from tax. Of course, payments to pensioners will eventually be taxed, but that may be 30 or 40 years down the road. Meanwhile, the Canadian government has bills to pay.
One of the main reasons we even have a corporate tax is to backstop the personal income tax, and extract about 25-per-cent corporate tax when income is earned, rather than waiting for many years when people receive the cash as pensions or otherwise. Tax havens eliminate this backstop.
Taxable investors hold shares of Canadian public companies as well. When individuals receive dividends from Canadian companies such as Brookfield, they are taxed at a preferential rate: They are entitled to a “dividend tax credit” that assumes the underlying earnings have been taxed at about 25 per cent. But Canadian tax rules do not require the tracking of actual corporate tax payments: Even with zero corporate tax, the individual still gets the full credit.
Mr. Carney’s explanation was interesting. When he bafflingly said there was no tax avoidance, he added that he understands “how the world works” and has the ability to put the necessary rules in place “to ensure that the appropriate taxes are paid here in Canada,” presumably meaning he would block tax loopholes if elected. But what Mr. Carney did not say is that new rules are already in place that counter a large part of corporate tax planning.
In 2021, following the lead of the Organisation for Economic Co-operation and Development, more than 130 countries agreed to adopt a 15-per-cent global corporate minimum tax for large multinational corporations.
While not all countries have enacted the tax – the United States being one important exception – Canada has. And effective this year, Bermuda has as well. Under a new tax law, Bermuda corporations that are part of large multinational groups now owe 15 per cent on their earnings.
Other low-tax countries such as Barbados, Ireland and Switzerland have also introduced the tax. While companies with mobile income such as Brookfield could always move their offshore operations to a tax-haven country that has not adopted the tax – the Cayman Islands, for example – it would be to no avail: Under the new rules, Brookfield Canada would owe the tax instead of the offshore subsidiary.
Tax avoidance is perfectly legal: Taxpayers have the right to arrange their affairs to pay the minimum amount of tax required by law, and Brookfield executives have a duty to their public shareholders to maximize after-tax earnings. That is what Mr. Carney should have said. In any event, while opportunities for tax planning still exist, the days of zero-taxed corporate income have come to a screeching halt.
