Canada: Tax reform or tax collection?

Philip Maguire, CPA, CA, is a principal at Glenidan Consultancy Ltd. His practice focuses on internal controls over financial reporting for a number of publicly listed companies on the Toronto Stock Exchange.

THERE HAS been a lot of attention recently on tax reform. There are few issues that unite Canadians so much as when we complain about how much we pay in taxes.

While reform is important, unfortunately there is not much attention paid to tax enforcement or collection. How will reform help matters if we won’t pursue offenders? Why aren’t we applying the existing laws? Why aren’t Canadian politicians, tax experts and the public insisting that offenders are paying their fair share of taxes?  

There are many misconceptions about taxes. Let’s focus our attention on those who offend rather than those who comply. 

Some Uncomfortable Truths 

An uncomfortable truth is that the Income Tax Act (the Act), at over 3,700 pages, is designed to be confusing. Despite the odd public pronouncement denouncing the complexities of the Act there is little appetite for reform once you realize who benefits from the status quo. 

Rules are easy to break when there are so many exceptions. The biggest beneficiaries of today’s confusing Act are multinational corporations and wealthy individuals. Whenever wealthy individuals, from Mr. Bezos to Mr. Balsillie to Mr. Buffet, are challenged about their tax avoidance schemes they roll out the standard defence: “we are in compliance with all of the rules and regulations.” And many lawyers and accountants oppose simplification of the Act. What better way to increase billable hours? 

Another Myth 

Many pundits argue that lower tax rates encourage businesses to invest. This is debatable as there are many other factors to consider. However, we know that lower tax rates encourage multinational corporations and wealthy individuals to shift assets and income to lower tax jurisdictions, which is not the same as investing in these jurisdictions. Wealth has no loyalty, and limited ties, to its host country. 

Do lower tax rates help the economy? 

Let’s examine Ireland, which is often lauded by pundits who advocate for lower corporate tax rates in Canada. 

A few years ago Microsoft Corporation transferred its licensing rights to Microsoft Ireland. Microsoft Ireland in turn charged Microsoft Canada a royalty so that revenues were eliminated in Canada but recorded in Ireland. An Irish tax rate of 12.5% versus Canada’s tax rate of 26.1% is tax avoidance and does not encourage investment in Ireland or Canada. 

And you would think that the Irish State, in the example above, would be pleased with the extra tax revenue. Think again. In 2016 the European Commission (EC) pursued Apple Inc. for offshore profit shifting and tax avoidance. The EC announced in 2024 that Apple owed the Irish State 13 billion euro including penalties and interest. Not surprisingly Apple appealed the initial ruling of the EC.

What was surprising was that the Irish State rejected this significant tax windfall and joined forces with Apple against the EC. If Canada enacted lower corporate taxes would we too fall into the trap of appeasing a large employer such as Apple? 

More Avoidance

In 2008 the Internal Revenue Service in the US compared the Forbes 400 annual listing of wealthy individuals to amounts declared by these individuals when they died. Approximately half of the wealth of these individuals was declared, which suggests a significant shield on inheritance taxes. The type of tax that is easy to apply to the population, such as income tax and sales taxes, is not as easy to apply to wealthy people.   

Avoidance Closer to Home  

Canadians for Tax Fairness reported last year that Canada’s largest corporations and wealthiest families have transferred $682 Billion to tax havens. They note that 75% of companies listed on the S&P/TSX 60 have at least one subsidiary in a tax haven, including all of the big Canadian banks and insurance companies, Shopify and Cenovus. In 2024 these 60 companies avoided $7 Billion in taxes. 

Brookfield Asset Management (Brookfield) is one of the biggest offenders when it comes to tax avoidance. Brookfield has more subsidiaries in tax havens than any other company on the S&P/TSX60.

Canadians For Tax Fairness, in October 2022, concluded that Brookfield had the largest tax gap, of $6 billion, in Canada between 2017 and 2021. Most of Brookfield’s operating businesses are carried out in Bermuda. Brookfield’s effective tax rate has been below Canada’s statutory tax rate in nine of the last ten years and, in five of those years, below 13% (according to S&P Global Market Intelligence). Brookfield stated in a recent proxy circular: “Brookfield and our perpetual affiliates are in full compliance with all applicable tax laws …”.  

Why not align reform with collection? 

Wouldn’t effective tax collection ease the strain of federal and provincial budget deficits? Since wealth leaks to the lowest tax jurisdiction, the Group of Twenty (G20) established a Global Minimum Corporate Tax Rate. The goal of this effort is to overhaul the manner in which large multinational corporations are taxed and to align the taxation of the digital economy based on location of sales rather than headquarters. 

Tax reform is meaningless unless it is aligned with tax collection. Let’s hope that the moral obligation to pay our fair share of taxes spurs tax reform, and simplification of the Act, in a meaningful direction. 

Philip Maguire, CPA, CA, is a principal in Glenidan Consultancy Ltd. His practice focuses on internal controls over financial reporting for a number of publicly listed companies on the Toronto Stock Exchange. Philip teaches a number of CPD (continuing professional development) courses in Canada, England & Wales and Ireland.