Under the guise of combating tax evasion, the federal government opened up dozens of tax loopholes that have allowed Canadian corporations to avoid paying tax on $55 billion in international profits over the last five years.

The money is funnelled into offshore tax havens and can be brought back to Canada tax free by multinationals based in Toronto, Vancouver and Calgary.

These offshore manoeuvres translate into billions of dollars in lost tax revenue for Canada, not because companies are cheating, but because they are encouraged to avoid taxes by government policies.

Since getting elected, the Liberal government has promised to fight tax evasion and tax avoidance, spending millions to reinforce the investigative branch of the Canada Revenue Service.

A joint investigation carried out by the Star and the CBC, however, shows that the previous Conservative government helped corporations avoid paying their fair share by turning a crackdown into a loophole, and the new government has done nothing to staunch the bleeding.

In 2010, Canada joined an initiative launched by the Organization of Economic Co-operation and Development to make tax havens more transparent and started signing Tax Information Exchange Agreements (TIEAs) with notorious tax havens like the Cayman Islands, Jersey, the Isle of Man and the British Virgin Islands.

At the same time, the tax code was altered to allow any Canadian multinational corporation doing business in a TIEA partner country to bring profits home tax free.

American multinationals have to pay tax when they repatriate international profits. But, in Canada, the TIEAs mean that profits can be declared in a tax haven, where there is little or no tax, and brought back without paying a penny more.

“TIEAs are a well-meaning but failed idea,” said Arthur Cockfield, a professor of tax law at Queen’s University who warned the government of the TIEAs potential for abuse.

“I don’t blame the companies. It’s kind of like a Christmas present sitting under the tree. What are you going to do, not open it?”

While Canada’s tax treaties have for decades encouraged businesses to work out of Barbados, where the tax rate is between 1 and 2.5 per cent, the TIEAs have opened up a new chapter of legal tax avoidance in zero-tax countries like Bermuda, the Bahamas and Panama.

Many of the leading corporations on the Toronto Stock Exchange now have a presence in tax havens and use Canada’s treaties to dramatically reduce their tax bill at home. One company, Gildan, reduced its taxes by more than 90 per cent in 2015 (see sidebar).

TIEAs have had a dramatic effect on offshore investment, and Canadian money stashed in tax havens is piling up rapidly. Canadian companies have increased their stockpiles of cash by more than 50 per cent in the Cayman Islands and the Bahamas since 2011, when their TIEAs came into force. They’ve doubled in Bermuda over the same time period, according to Statistics Canada data. In Panama, accumulated Canadian funds have increased by more than 600 per cent since its TIEA became law in 2013.

In the graph, you can see how Canadian money held in tax havens has shot up since the first TIEA came into force, more than doubling in the last five years to reach $108.2 billion in 2015.

Despite the tax-free privileges the TIEAs provide, the money isn’t coming back. Canada has sent more than 100 dollars to Panama for each dollar that has come here. The out/in ratio is more than 250:1 for the Bahamas and more than 500:1 for the British Virgin Islands.

When asked by the Star and CBC if TIEAs were undermining Canada’s efforts to crack down on tax avoidance, Finance Minister Bill Morneau said last week that all areas of tax policy were being reviewed “to make sure they generate tax fairness.”

“Companies should be paying their taxes in the jurisdiction in which they get their revenue and profits,” he said.

Even though Canada has now signed 23 TIEAs and has a further seven under negotiation, Morneau did not indicate that there were any plans to change course.

When they were first introduced, TIEAs had nothing to do with facilitating corporate cash flows to tax havens. They were supposed to be about catching tax cheats.

TIEAs were designed by the OECD to provide a way for authorities in one country to investigate international tax cheats and criminals by gaining access to secret banking information in tax havens. The OECD promoted the agreements by promising to remove any tax haven that signed 12 TIEAs from its global blacklist. The OECD went so far as to provide template treaties to sign.

In order to further entice tax havens to enter into these agreements, Canada announced a tax loophole in the 2007 budget that would encourage Canadian investment in TIEA partner countries by allowing the tax-free repatriation of profits. But because corporate profits are either hardly taxed or not taxed at all in tax havens, Ottawa created a way for corporations to avoid paying virtually any tax at all on their foreign income.

“Canada’s decision to enter into TIEAs, when it was about getting information, is an improvement over not getting information,” said Allison Christians, a professor of tax law at McGill University. “On the other hand, when the decision was made to use those TIEAs as a platform to extend (corporate tax subsidies) then the TIEA takes on a different function.”

The TIEAs’ dual purpose of tax enforcement and business promotion has made for an uncomfortable trade-off.

“We are torn in two directions: We really want jobs and growth in Canada and we also really want a fair tax system, and we’re not really sure what fair looks like,” said Christians.

“The idea that Canadian firms would go outside Canada and make more money there and not pay tax, the immediate reaction to that is: ‘that seems unfair.’ But if you say to a person: ‘Yes, but you’re a pension holder and your pension holds stock in that company and that company doesn’t pay as much tax now. That means more money in your pocket when you retire.’ Then it’s not so clear.

“It’s hard for taxpayers to accept that.”

So how did a global crackdown on tax haven secrecy get turned into a tax break for Canadian corporations?

“The corporate lobby is alive and well,” said Cockfield, the Queen’s tax professor who had a front-row seat on the process when he was hired by the finance ministry to write a report on the proposed changes. “Why did (the government) do it? They were persuaded by industry that it was necessary to be globally competitive.”

The problem, Cockfield says, is that despite the billions that turn on these tax issues, they so rarely attract public attention.

“When the government proposes to do something (to crack down on tax havens), guess who they hear from? Corporate Canada, and they scream bloody murder . . . and the public is largely unconcerned, mainly because it’s so boring and complex.”

As the head of tax policy at the OECD, Pascal Saint-Amans is the global figurehead for the international movement to crack down on tax havens. He doesn’t think Canada is out of step with the rest of the world, and predicts that the explosion of tax haven use by multinationals will end when new global tax rules are established.

“The fact that companies locate their profit in zero-tax jurisdictions where they have no activity is a huge problem, which we are dealing with,” he said in an interview. “I am confident that many schemes will be closed down by these measures.”

But Cockfield isn’t so confident that global corporations taking advantage of tax havens now will willingly pay more tax down the road.

“This is a war of attrition between the multinationals in Canada and taxpayers. It’s a death battle where these tax savings are so huge to the corporations,” he said.

Even as they have had the effect of siphoning billions out of Canadian tax coffers, it’s not clear that TIEAs are effective in their primary purpose of revealing financial wrongdoing in tax havens.

“I have no way to know if that’s a successful program,” said Christians. “The rumours, the discussion in circles when you talk to tax experts is: very little — virtually no — information flows back to Canada from the TIEA system.”

The language of the agreements leaves lots of wiggle room for either partner to avoid having to turn over anything.

“This agreement does not create an obligation for the parties to obtain or provide ownership information . . . unless such information can be obtained without giving rise to disproportionate difficulties,” states the TIEA signed with the British Virgin Islands in 2013.

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The CRA would not confirm whether Canada has ever successfully used a TIEA to get any information on possible tax evasion, nor whether it has ever resulted in any criminal convictions or allowed the government to recoup any tax dollars.

“The integrity of Canada’s tax system increasingly depends on co-operation with other tax authorities, so the CRA protects all information related to exchanges of information and treats it as confidential,” wrote CRA spokesperson David Walters in an email.

Tax lawyer David Kerzner, who has written a book criticizing TIEAs, says the fundamental failure of the agreements is that tax haven governments don’t keep the financial documents sought by Canadian authorities.

“Ninety per cent of tax havens in the world lack these critical records,” he said. “It’s too easy to take advantage of this system.

“(These) solutions are flawed and no one’s standing up and saying the TIEAs didn’t work.”

Kerzner recommends Canada revamp the treaties to offer tax havens incentives to collect more complete records, including a possible cut of any recovered money.

In the end, Kerzner says, the government hasn’t ever been very concerned about tracking down and prosecuting those who evade taxes through tax havens — the real goal of the treaties has always been to lower taxes for Canadian corporations.

“TIEAs target individuals, not corporations,” he said. “But Canada used TIEAs to create business opportunities for Canadian businesses and that’s not their intention.”

Here are two Canadian companies that have legally reduced their taxes through offshore subsidiaries:

Gildan

The popular T-shirt and sports apparel manufacturer has declared more than $1.3 billion (U.S.) in income over the last five years but has paid only $37.9 million in tax, according to its corporate annual reports. That is the equivalent of a 2.8 per cent annual tax rate.

By its own reckoning, the company achieves this incredibly low tax rate almost entirely due to the “effect of different tax rates on earnings of foreign subsidiaries,” which reduced its tax bill by more than $384 million over that period.

Gildan operated out of Montreal for years, but in the late 1990s it came under intense pressure to cut costs in order to compete with cheap imports, said vice-president Peter Iliopoulos in an interview. The company moved its manufacturing to Honduras, where labour is cheaper, and its business headquarters to Barbados, where the corporate tax rate is 1.5 per cent.

“A company like Gildan that wanted to remain in the industry and maintain profitable margins — where it can drive its long-term growth strategy (was) essentially required to move their operations to countries where production costs were lower,” Iliopoulos said.

While Gildan maintains its corporate headquarters in Montreal, it says all day-to-day business decisions are made at its office in Bridgetown, Barbados, which employs 200 people out of a global workforce of 42,000.

“As part of that overall strategy for the company, we were looking at taking advantage of trade preference programs and trade agreements that were in place,” said Iliopoulos. “Canada has a long-standing income tax treaty with Barbados. . . The Canadian government has decided to have their foreign affiliate system function in order to provide Canadian multinationals with the best ability to compete on an international and global scale.”

It’s not clear that any of the tax Gildan does pay — $4.9 million last year — goes to Canada. The company wouldn’t provide a breakdown of where its tax is paid.

Valeant Pharmaceuticals

There was a moment last summer when Valeant briefly surpassed the Royal Bank of Canada to become Canada’s most valuable company, but then everything went wrong.

After allegations of fraud and price gouging, including jacking up the price of cheap drugs after acquiring their parent companies, Valeant is now under investigation in Canada and the United States and its stock price has plummeted by more than 90 per cent.

Valeant only became Canadian in 2010 after the New Jersey-based company performed a “reverse takeover” of the much smaller Quebec-based Biovail. This allowed the company to be technically based in Canada and take advantage of our tax treaties through an existing Biovail subsidiary in Barbados.

The company now lists more than 300 subsidiaries in its annual report, several of them in Canada’s TIEA partners like the Cayman Islands, British Virgin Islands and Bermuda. By holding patents and other intellectual property in these tax havens, Valeant can stockpile profits where there is little or no tax.

The company has only recorded a profit in one of the last five years, making it difficult to calculate taxes. In 2014, when Valeant declared more than $1 billion (U.S.) in earnings, it only paid $98.7 million in tax, for a tax rate of 9.4 per cent. Of the tax paid, Valeant states that only $600,000 went to Canada.

In its 2015 annual report, Valeant notes how important Canada’s relationships with tax havens are to its business model. Under important factors that could affect its bottom line, the company lists “our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries.”

The OECD’s proposed crackdown on these schemes to move money into tax havens “could have a significant unfavourable impact on our consolidated income tax rate,” the company states.

Company spokeswoman Meghan Gavigan said the company hasn’t moved any assets out of Canada to avoid paying tax here.

“Valeant’s assets outside of Canada were acquired through combinations with other global companies, not as a result of moving operations from Canada to other countries,” Gavigan wrote in an emailed statement.

Methodology: The Star and CBC used figures reported by companies in their annual reports to compare income before taxes with cash taxes paid. All companies are also required to report the difference between their statutory tax rate (theoretical tax rate on paper) and their effective taxes (what they actually pay), breaking down how they raised or lowered their taxes, including through offshore operations.