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Why are some Canadian companies paying almost no tax?

The government has been creating tax loopholes for business while clamping down on regular taxpayers

How much income tax do you pay? Forty per cent? More? Lately the government has become obsessed with making everyone pay their fair share. It set up a snitch line for tax cheats just last month, with Revenue Minister Kerry-Lynne Findlay announcing she would “aggressively” pursue those who aren’t paying every penny they owe. No more offshore tax shelters in the Cayman Islands or stuffing numbered Swiss bank accounts full of cash: the age of tax leniency is over.

That is, if you’re a person. If you’re a corporation, it’s a different story. Because quietly, while the government has been clamping down on regular taxpayers, it’s been busy creating new tax loopholes for business. The result? According to an exclusive Canadian Business investigation, some Canadian corporations are now paying virtually no taxes at all.

It’s hard to believe, but you can see the numbers for yourself in our special report, which is broken up by company in the navigation menu above. We independently scoured the financial statements of select large corporations in Canada to come up with a shortlist of 15 companies that are using legal strategies to achieve unbelievably low tax rates. For instance, we found that Canadian Pacific Railway paid an average effective cash tax rate of just 1.8% over the past decade. Manitoba Telecom paid 4.1%. Gildan Activewear paid 5.5%. And First Capital Realty has gone for years without paying any cash taxes at all.

These companies are using several different strategies to lower their taxes, but the government just keeps adding to their arsenal. A new policy that just came into effect in 2009 allows Canada to sign tax information exchange agreements with countries such as Bermuda, the Cayman Islands and the Isle of Man. It was intended to allow authorities to ferret out scofflaws hiding their money in offshore accounts. Instead, it ended up allowing companies to set up subsidiaries in these jurisdictions and bring their profits home tax-free.

Companies that do so are not breaking the law. The problem is that only certain types of businesses can take advantage of these agreements, which results in a corporate tax system that is neither transparent nor fair. Corporations like Gildan Activewear, which was able to structure itself so that its worldwide sales are managed out of an office in Barbados, are able to reduce tax rates to single digits, while those who continue to manage sales out of Canada have to pay millions more. By implementing this policy, the government is literally providing a strong cash incentive for companies to move operations out of the country.

This is not part of a larger government strategy to help Canadian businesses compete in a global marketplace. It’s the result of sloppy policy and backroom negotiations. It in no way helps to promote business as a whole, and only exists because most regular Canadian taxpayers are not aware that it’s going on.

When the Guardian newspaper in Britain revealed that Starbucks had paid just £8.6 million in taxes on £3 billion in U.K. sales since 1998, there was a public outcry, and a committee of MPs released a report accusing the coffee chain of an “immoral” use of royalties, secretive jurisdictions and Byzantine company structures to avoid paying taxes on British profits. It will be interesting to see how Canadians react when they discover that not only are some Canadian corporations paying tax rates that are almost as low—their own government is helping to make it all happen.