During his budget presentation, Jim Flaherty said that, in support of tax fairness, he was going to close a number of tax ‘loopholes’, one of which was interest deductibility on money borrowed by corporations to finance foreign takeovers. He claimed that this cost all Canadian taxpayers as we (the great unwashed) had to fill the gap left by this rampant abuse of the Canadian tax system. Now, in response to predictable cries of outrage from Bay Street, he’s changed his tune, and although he refuses to call it what it is – a flip-flop – his ‘clarification’ leaves me more in the dark than ever.
The issue he is supposedly fighting is multi-national, Canadian-based companies that claim a tax exemption for interest expenses twice – once in Canada and a second time in a foreign country. Whereas his original proposal, at least according to some interpretations, would completely eliminate all such interest deductions, his clarification to the Toronto Board of Trade this week was that what he really meant is that he would disallow the second deduction only. In other words, companies could still deduct interest expenses for tax purposes, but only once. No more, in his words, double-dipping.
This may play well with the uninformed public, but at best it’s a smokescreen to hide his budget mistake, and here’s why.
Canada’s corporate tax rate is higher than much, if not all, of the western world, and certainly higher than that of any country that considers itself a tax haven. Companies will take the single deduction where they get the most benefit. And that is in – yup – Canada! So the impact on Canada’s tax base will be effectively unchanged as corporations will continue to deduct the interest expenses from their Canadian corporate taxes as that’s where they get the best financial benefit. The only difference is that they won’t be allowed to also deduct those expenses in any foreign country.
Even if Canada could control foreign tax laws and monitor corporate entities operating in foreign countries (which it can’t), the net result of Flaherty’s proposal would be to improve the tax base for the tax havens. Now Flaherty may consider himself and the Conservative Party the natural ruling party of Canada and now, apparently, the world, but I fail to see how making sure Bermuda collects taxes from Canadian companies helps us in any way, shape or form.
So as Jim Flaherty stumbles from one ill-advised financial disaster to another we have to ask ourselves: Does this Whitby lawyer have any idea what he’s doing?
UPDATE MAY 17, 2007
Sent my M.P. (Scott Reid) a request to confirm my understanding - clarify the clarification, if you will. I will post his response, if and when I get one. Don't hold your breath though; so far his response rate to my previous inquiries on other items of interest has been 0%. Ignoring the electorate seems to be the Conservative way!
UPDATE JUNE 17, 2007
Despite two follow-up emails, Scott Reid remains silent, thus confirming Conservative disdain for anyone who might question their infallability.