The Paradise Papers: Why are offshore tax havens legal?

Last week, 13.4 million documents were leaked revealing yet again that corporations and the elite are holding their money in offshore tax havens. Over 3,000 Canadians were found to be associated with these ‘Paradise Papers,’ including former Prime Ministers Brian Mulroney, Paul Martin, and Jean Chretien, and top Liberal fundraiser Stephen Bronfman. However, this is not a scandal in which corporations and the elite are avoiding taxes illegally; rather, they are doing so legally.

The Canada Revenue Agency has yet to determine whether Canadian citizens identified in the Paradise Papers committed any illegal activity. In Canada, the use of tax havens is legal as long as funds are being managed offshore and Canadian contributions are taxed. But the covert and complex nature of such accounts facilitates controversial behaviour and raises challenges for investigation. For example, it remains unclear how Bronfman’s accounts are being managed, and whether management is controlled offshore or in Canada.

Ultimately, the question we should ask is not how, but why. Why is it legal to keep money in offshore accounts when it gives Canada’s top tier an unfair tax advantage and increases economic inequality? This question should especially be asked at a time when our Prime Minister is consistently promoting a middle-class agenda and making efforts to increase tax fairness by imposing controversial tax reforms for small businesses. Trudeau defends the reforms by arguing that they target wealthy Canadians who need to pay their fair share of taxes, while Minister of Finance Bill Morneau argues that “many of the richest Canadians are unfairly exploiting tax rules designed to help businesses thrive.”

If the Trudeau government wants wealthy Canadians to pay their fair share of taxes, they have missed the mark by not addressing the systemic issue of Canadian money held in offshore tax havens. For this neglect, Trudeau’s critics have called him a hypocrite. By the federal government’s own estimates, it loses about $8 billion dollars per year in tax revenue from citizens, not including corporations, using offshore accounts. If the government is losing out on so much tax revenue, and if Trudeau is so focused on tax fairness, why not reform the current system?

The first possibility is that Trudeau has friends and integral Liberal party members that use offshore accounts. For example, Bronfman and his godfather Leo Kolber, another instrumental Liberal Party fundraiser and close friend of Trudeau, have been found to have $60 million dollars in offshore tax havens.

The second possibility is that big firms have blocked any changes in legislation through lobbying. The Canadian government has been trying to pass legislation to tighten the rules on offshore tax havens since 1999. Many big tax accounting and law firms delayed the passage of this legislation; most notably the law firm Davies Ward, which represents Bronfam and Kolber, became an official lobbyist against this legislation in 2005. In 2007, when the Harper government finally passed this legislation in the House of Commons, Davies Ward and other firms managed to kill the bill by bringing it to the Liberal majority senate. By 2013, a revised bill was passed that did tighten the rules on Canadian contributions to offshore accounts. Firms, including Davies Ward, endorsed this bill, given that some of the farther-reaching aspects of the legislation had been removed.

The last possibility, which puts a little more faith in our democracy, is that legislation hasn’t been changed simply because it’s such a complex issue that is too large for Canada to attack on its own. Companies from all over the world use offshore tax havens. Making it illegal for Canadian companies to do so would put them at a distinct competitive disadvantage. It will be very challenging for Canada to independently change its laws; as long as offshore tax havens exist, companies will have incentives to use them to ensure competitiveness in the market. If we put our faith in the democratic system and choose to believe that offshore tax havens are still legal because of global market complexities, then Trudeau’s behaviour seems a little less hypocritical. Closing offshore tax evasion is a global issue—and can only be addressed with global cooperation.