C-298 makes a small change to the Income Tax Act that should close a loophole involving companies using tax havens to avoid paying taxes.
As usual with tax legislation this one seems a little tricky to me, so if I make any mistakes here feel free to let me know!
C-298’s change to the Income Tax Act makes it so an avoidance transaction that results, directly or indirectly, in a tax benefit worth more than the actual or anticipated benefit of the transaction itself is considered a misuse of any of the other relevant tax laws.
So first up an “avoidance transaction” is a transaction taken for the sole purpose of avoiding paying taxes. In the example given by Daniel Blaikie when he introduced this Bill, that would be opening a shell company in a tax haven. The entire point of paying for the shell company is to not pay taxes.
Now the point where C-298 decides that it’s definitely tax avoidance is when the actual financial benefit of opening a company in the tax haven is less than the tax benefit you would receive for having it. So the entire point of opening a shell company in a tax haven is that our current tax laws prevent you from being double taxed – you pay the taxes at the rate in the haven and not here. The problem of course is that tax havens have extremely low tax rates, so no taxes end up being paid. Not having to pay taxes in Canada would be the tax benefit you receive.
So if opening the shell company doesn’t result in more financial gain than what you save by not paying taxes in Canada, it’s considered tax avoidance. If the shell company generates more income than the taxes you’d be expected to pay in Canada, then you’re fine!