The options for going elsewhere might soon shrink.
At least 16 other countries have committed to creating similar public registries, according to Global Witness.
In Ottawa, Finance Minister Bill Morneau says the issue is on the radar.
“We’re absolutely in favour of knowing who is registering companies, what their goals are and what taxes they should be paying in our country and that they’re not in any way avoiding taxes somewhere else through their registry here,” he says.
But if swift action isn’t taken and the issue gets bogged down in federal-provincial jurisdictional squabbles, experts say Canada will only become more attractive to money launderers, tax evaders and corrupt foreigners.
“As jurisdictions start to clamp down on this kind of secrecy, obviously the corrupt will be looking for other places, other safe havens to put their money in,” says Rachel Owens, a researcher with Global Witness U.K. “If Canada doesn’t start to reform and bring in transparency of company ownership, then arguably Canada might become a safe haven for the corrupt as well.”
More than $1 trillion (U.S.) in “illicit” financial flows (including “tax evasion, crime, corruption and other illicit activity”) moved from the developing world to the developed world in 2013 alone, according to a study by Global Financial Integrity. That figure had been growing at an average rate of 6.5 per cent each year over the previous decade.
Dent says an influx of untaxed overseas wealth is already having a direct impact on Canadians by driving up the costs of real estate.
A recent study found it impossible to determine the identity of nearly half the owners of the most expensive Vancouver homes bought or sold over the last few years. Their names are hidden by numbered companies, private trusts, figurehead directors and impenetrable corporate structures, according to a study by Transparency International Canada.
“We don’t know the consequences of potential real-estate bubbles being created in our two largest markets in Canada — Vancouver and Toronto,” says Dent. “People wanting to buy a home in Canada . . . are being priced out of that market.”
Perhaps the most attractive lure is the Ontario limited partnership (LP). The unique tax structure is marketed globally by dozens of online firms promising quick and easy anonymity and shelter from taxation.
“This is a simple company with no obligation to submit a financial statement or pay taxes in Canada. Establishing a company takes 1 day,” reads the website of a U.K. tax avoidance specialist. “A Canadian limited partnership (LP) can be established by one person who will be the general partner, as well as the limited partner. If necessary, we can provide a nominee general partner or limited partner.”
Like other popular Canadian business structures such as limited liability partnerships (LLPs) in B.C. and companies in New Brunswick, Ontario LPs were never intended to be tax shelters for foreigners. They are being exploited by tax avoidance experts who scour the globe looking for tax loopholes. One reason LPs are so popular: they don’t require anyone behind the company to actually live in Canada.
As a “flow-through” structure, LPs don’t have to file any taxes with the CRA because their profits are passed directly on to the partners, who are supposed to pay tax. While this may be an efficient business structure, it also creates a corporate entity that isn’t required to declare its activities to the government. If its partners are foreigners, they don’t file taxes in Canada, and the LP’s cash flow is completely unknowable and untaxed.
“There’s a disconnect: you’re on Canadian soil, but you’ve got no scrutiny from the tax authorities. That’s potential fraud right there,” says Richard Leblanc, a corporate governance expert and professor at York and Harvard Universities.
“When you conduct business through an LP . . . you completely avoid the scrutiny of the tax authorities in Canada. That could be used as a vehicle, not only for tax avoidance, but for bribes,” he says.
“An individual, a resident of Canada or a corporation always attracts the scrutiny of Revenue Canada. Limited partnerships do not. So maybe the time (has come), the question can be asked, should they?”
“If Canada doesn’t start to reform and bring in transparency of company ownership, then arguably Canada might become a safe haven for the corrupt as well”
As of January 1, the U.S. Internal Revenue Service started requiring foreign-owned LLCs (a similar structure to LPs) to register their ownership and report transactions between the company and its owner.
“The U.S. has been attacking this . . . and yet Canada goes on so people are just obviously going to use Canada,” says Mark Morris, an independent tax consultant based in Zurich. “The only way this can be tackled is if Canada does something . . . Otherwise, it is facilitating global tax evasion,” he says.
As it stands now, Canadian corporate transparency is lacking. While they vary across the country, most corporate registries only list directors — not shareholders — and none list beneficial owners.
Closing these loopholes and improving public access to company information is more difficult here than in the U.K., in part because of Canada’s 10 separate provincial registries, said a spokesperson for Finance Minister Morneau.
“It’s far from straight forward, but it is important and top of mind,” wrote finance ministry staffer Dan Lauzon in an email.
Since taking office, the Liberal government has increased the CRA’s enforcement budget, committed Canada to international reporting standards designed by the OECD and raised the issue with the provinces, Lauzon wrote.
“Though there is no silver bullet or overnight fix, this is a government-wide effort, and we will continue to work with partners here at home and around the world to ensure fairness across the board,” he wrote.
In an interview, Morneau raised privacy concerns about the listing of corporate owners in a public registry.
That, says Dent, is a red herring.
“We’re asking (that) basic business card information be made public — names, addresses . . . I don’t think it impacts anyone’s concerns around privacy.”
In fact, the business community should welcome corporate transparency for their own interests.
“It’s in their own best interest to know exactly who they’re doing business with.”
The Association of Canadian Financial Officers signed an open letter to Morneau last December, calling for a public registry of beneficial owners of corporations and trusts.
British economic crime director Toon’s advice to Canada is clear: Make corporate ownership information open to all — not just police and tax authorities.
“There is a hugely valuable role that can be played by the media. The Panama Papers is an interesting example,” says Toon. “If there is an open access, it enables investigative journalism, it enables bodies such as Transparency International, such as Global Witness, to dig into area of concern they identify.”
“The more open the better, what do you have to lose?”