Capital Flight

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FDI-FDO Gap Widens

I updated my Canadian Household Debt Chart that has GDP, Net Trade and the FDI In and Out data plotted as well.

The 2015 Federal Direct Investment data just came out and the gap between investment capital flowing into Canada and out has widened dramatically such that for every $1 of investment coming into Canada, $1.31 is leaving for jurisdictions that provide greater tax incentives, better yields or cheaper labour.

Canadians for Tax Fairness crunched the numbers and found that Canadian corporations invested almost $40 billion last year in the top 10 tax haven destinations for Canadian capital — taking investment totals since 1990 to $270.2 billion.

Barbados has been the top destination, attracting $79.9 billion in total while seeing its numbers climb 14 per cent in 2015.

Four other countries in Canada's top 10 — Cayman Islands, Bermuda, Switzerland and Hong Kong — all saw year-over-year increases of at least 34 per cent last year.

"The money doesn't just stay there, it goes on to somewhere else," Dennis Howlett, the CEO of the Tax Fairness advocacy group, said in an interview.

"But (corporations) route it through tax havens usually because there are tax advantages for doing so. The returns on the investments get booked in the tax havens so then companies don't have to report it as profits in Canada."

The direct foreign investment figures released Tuesday don't include the billions of dollars that individual Canadians appear to have socked away offshore.

The parliamentary budget office is currently in a battle with the Liberal government over access to tax information that would help it measure the "tax gap" — the amount of revenue lost to Ottawa through a variety of tax dodges, including offshore accounts.

The long-standing issue has been thrust into the international limelight again by the release of the Panama Papers, more than 11 million leaked documents that detail offshore accounts in the Central American country — including, reportedly, hundreds held by Canadians.

Direct foreign investment routed through tax havens "may not be illegal tax evasion but it is most definitely related to tax avoidance, or minimizing taxes paid here in Canada," said Howlett.

"So it does translate to much lower revenues for both federal and provincial governments."

Canadians for Tax Fairness would like to see corporate tax rules tightened up, including requiring that any offshore subsidiaries be more than shell companies by proving they have staff and capital investments such as plants and equipment.

Canada should also follow the lead of some other countries and cap how much corporations can pay in interest to subsidiaries. Corporations with high capital needs frequently borrow from their own subsidiaries at above market rates in order to shift profits offshore, said Howlett.

Since 2000, the federal corporate tax rate in Canada has been cut from 28 per cent to the current rate of 15 per cent.

In 2015-16, corporate income taxes were budgeted at $38.8 billion — or 20 per cent of total federal tax revenues — according to the most recent federal budget. In 2000-01, corporate taxes brought in $28.2 billion, or 24.5 per cent of total federal tax revenues.

CBC News via The Canadian Press, April 27, 2016