Corporate Canada pays low taxes but contributes in 'lots of other ways'

Corporate Canada is often derided for not paying its fair share in taxes, but one of its top advocates argues that the corporate income tax rate doesn't give a full picture of how Canadian businesses contribute.

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"Corporate Canada pays governments in lots of other ways. They pay different levels of governments, they pay property taxes and they pay a variety of fees and charges that in many cases actually exceeds what they pay in corporate income tax," said John Manley, head of the Canadian Council of Chief Executives, in a feature interview with Michael Enright on The Sunday Edition.

Canada's corporate tax rate has been repeatedly cut for more than a decade, and now sits at roughly 25 per cent when combined with provincial tax rates. Activists complain many of the country's largest firms don't pay anywhere near that rate.

The left-leaning advocacy group Canadians for Tax Fairness said they did an analysis of the top 60 companies listed on the Toronto Stock Exchange, and found only four companies paid the full corporate rate. More than half paid less than 10 per cent, and 13 firms paid less than five per cent.

PricewaterhouseCoopers did its own analysis — a survey of the Canadian Council of Chief Executives' roughly 150 members. It was voluntary and only 63 replied. But of those who did, the survey found their businesses paid a total of $19 billion in corporate taxes, plus another $5 billion in various other charges and fees to various levels of government.

"For that small a number of companies, that's about 17 per cent of total federal corporate income tax revenue, so it's a pretty big number," said Manley.

"When you look at the overall numbers ... the amount of corporate income tax coming in to government has, except for the recession years, remained pretty steady."

Trying not to discourage investment

In 2012, the share of federal revenues from corporate taxes was about 13 per cent, while the share from personal income taxes was 49 per cent.

Mr. Manley said striking the right balance is tricky, because relying on people for tax revenues is safer for governments than relying on corporations.

"That's a judgment that every jurisdiction has to make: What's the right level that doesn't discourage investment?" he said. "Investment is clearly more mobile than individuals are."

Corporate tax avoidance strategies have become more prevalent in Canada. In 2011, almost a quarter of Canadian investment abroad wasn't investment at all. Rather, it was money transferred out of Canada to tax havens.

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For example, in 2011, Canadian businesses invested $53.3 billion in Barbados, third only to the United States and the United Kingdom. By some estimates, the Canadian government is losing $80 billion a year in tax revenue due to this kind of profit-shifting.

"It's not right," Mr. Manley said. "But figuring out how to fix it without unintended consequences requires really smart people, and the Organization for Economic Co-operation and Development has been working at this for a very long time."

Mr. Manley said the Canadian Council for Chief Executives supports the OECD's efforts, but until the Canadian tax code changes, businesses have every right to take advantage of what the code allows.

"There is no one in Canada who wouldn't avoid paying a tax if there is a legal way to do it," he said. "It doesn't mean it's wrong to minimize your tax. It just means that governments have to get rules in place and make sure everyone is playing by them."

The problem of 'transfer pricing'

Mr. Manley said he believes one of the government's priorities is investigating a corporate tax-avoidance strategy called transfer pricing. This is when a multinational company sells its goods or services to itself internally, between subsidiaries in different countries. It usually involves selling from a branch in a higher-tax country to a branch in a low- or no-tax country to lessen the company's tax payout.

"In my experience, it's one of the things the Canada Revenue Agency examines the most closely. And tax advisers generally tell companies that you have to be really careful about this, because you have to be able to justify what you charge. "

Mr. Manley said that tackling tax reform has always been a challenge for governments. He said when he was finance minister, business leaders would often complain about the corporate tax rate.

"One of the things I would say to them is, if you want really low taxes, try Nigeria. There's no security, there's no infrastructure, the telephone systems don't work, but the taxes are pretty low.

"There's an old saying: 'Don't tax you, don't tax me, tax the guy behind the tree.' Nobody likes to pay. Unfortunately, governments need the money."

Mr. Manley said he recognizes that corporate Canada may have a perception problem over paying its fair share of taxes, and the stakes are quite high.

He says that it shouldn't be perceived as a "general unfairness," because that could lead to "a breakdown in social cohesion."

"We've got a great country. None of us go around with bodyguards and people live pretty well together. But that reality can be fragile. We've seen it break down in other countries. So a sense that everyone is contributing is important to that."