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Why Are We Letting Tax Cheats Rob Canada?

This latest scandal claims there are 450 Canadians who may be hiding money offshore. The only solution is to impose sanctions and travel restrictions on dirty money havens and to pursue, as ruthlessly as the IRS does, deposits belonging to corrupt dictators, drug cartels or tax deadbeats.

My first job in Canada was to create one or two corporations every day for the country's richest individual and industrialist, E. P. Taylor. This was because my boss, Taylor's tax lawyer, divided Taylor's huge income into thousands of new corporations to pay a tiny small business income tax.

Taylor, who treated taxes like a nasty rash, created the world's first exclusive gated tax haven, Lyford Cay in the Bahamas in 1959. Residents included author Arthur Hailey, Sean Connery, Henry Ford II, Aga Khan IV, Prince Rainier, Stavros Niarchos and Sir John Templeton, to name a few.

Another tax dodge pioneer was K.C. Irving of New Brunswick who in 1972 moved to tax-free Bermuda and placed ownership of his empire into a series of Bermudian trusts that have never paid taxes to Canada.

Clearly, Taylor and Irving were ahead of their time, but their "business" model has been copied by an offshore industry of banks, lawyers, accountants and shadowy characters that span the globe. And with Tax Spring, as the rest of us pay to politicians an inordinately high portion of our incomes, evidence has come to light that the extent of tax avoidance has become bigger than the U.S. economy itself.

The leak of two million emails and other documents, mainly from the offshore haven of the British Virgin Islands (BVI) and Singapore, show the booming offshore trade. A former chief economist at McKinsey estimated the wealthy have stashed as much as US$32-trillion in secrecy havens, beyond the reach of courts, spouses, business partners, shareholders, regulators, tax collectors and police.

The International Center for Investigative Journalists in Washington, D.C. obtained the documents and published a list of rich and famous leaders and oligarchs. Claims are 450 Canadians are identified but the only one named at this point is Tony Merchant, husband of Liberal Senator Pana Merchant from Regina.

It's important to distinguish between tax avoidance, which is legal, and tax evasion, which is not. But tax-court filings, obtained by CBC News, show that on Merchant's income tax return for 1999, after he put $1.7-million into the offshore trust, he didn't tick off the box declaring ownership of more than $100,000 in "foreign property."

Relying on an honour system as Canada does is naïve and negligent. Rules should change and tighten.This should have been a political issue but has never been.

So the result is that most of New Brunswick is still owned by a series of tax-free Bermuda Trusts on behalf of the Irving family. It's why former Prime Minister Paul Martin's ship empire was based in Barbados, beyond taxation in Canada, and only a few of us dared to raise a fuss. Bronfman billions were allowed by the government to go to the U.S. tax free and tax loopholes have remained which allow millions to leave daily, with minimal taxation, as long as their Canadian owners "live" offshore for more than half the year.

Clearly, the Canada Revenue Agency has been underfunded and is to tax collection what the Blue Jays or Maple Leafs are to sports success. I've written about this for years, but in "Canada: sucker nation for tax cheats" in 2010 I pointed out that the CRA was defanged completely, doing nothing to obtain information from a whistleblower about tax cheats in Liechtenstein, contrary to actions taken by the Germans, Americans, Australians or others.

The whistleblower sold his info to tax collectors, but in 2008, in question and answer period in the House of Commons, Canada's government said it didn't pay for such information. But the other countries had already imposed jail sentences and huge fines.

In 2009, Canadian Senator Percy Downe found out, under Ottawa's Access to Information Act, that there was about $10-million in Liechtenstein bank accounts related to 106 Canadian citizens. "The CRA anticipates that it will reassess approximately $17-million in taxes, interest and penalties."

The Senator sent another request and in October 2010 discovered: Only 26 cases involving 68 individuals had been completed, including 20 residents of Canada who came forward under the Voluntary Disclosure Program; $5.2-million was assessed in back taxes and penalties; an undisclosed amount was unpaid due to appeals and that no one had been charged with tax evasion.

"Other countries lay tax fraud charges against individuals for having undeclared bank accounts in tax havens, but not Canada," he wrote to me.

This latest scandal claims there are 450 Canadians, along with oligarchs, thugs or corrupt dictators and monarchs, who may be hiding money offshore. Let's see what the CRA is empowered to do with this information. (At least the Tories in last month's federal budget promised to pay tipsters 15% if more than $100,000 is recovered and to keep track of offshore transfers involving $12,000 or more. But this may take years.)

Such reforms must be expedited and tax laws changed. The Organization for Economic Co-operation and Development has crusaded against offshore havens for years and the G-7 and G20 have issued countless manifestos against the practice without success. The only solution is to impose sanctions and travel restrictions on dirty money havens and to pursue, as ruthlessly as the IRS does, deposits belonging to corrupt dictators, drug cartels or tax deadbeats.

The banking crackdown in Cyprus closed a dirty money haven inside the EU, but the biggest culprit in the world is Britain with its channel islands, former island colonies and the city of London's industry of tax and banking experts that hide money anywhere for anyone. (In fact, Prime Minister David Cameron's father made the family fortune by setting up such offshore tax havens for wealthy people.)

Frankly, Canadians and others should adopt American tax laws where citizens are taxable irrespective of their residency. That's how Washington stopped its crooks and gangsters from setting up shop in the Bahamas decades ago and how it catches most of them now.

Meanwhile, Canada lets its richest go offshore; allows the economy of a province to be owned by Bermudian trusts; allows the family of a former prime minister to make a tax-free fortune offshore and then leaves the rest of us to pay the tab every Tax Spring.

This piece originally appeared in the Financial Post.

5. Bermuda - $13.2 billion

Top Offshore Tax Havens For Canadians

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