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The secret world of corporate tax avoidance

The secret world of corporate tax avoidance

The secret world of corporate tax avoidance

Source: The Globe and Mail
Author: Allan Lanthier

Are large Canadian corporations bilking us out of billions of tax dollars every year, as commentators sometimes suggest? And if so, how do they get away with it? Two recent decisions of the Tax Court of Canada offer some answers, and a rare glimpse into the secretive world of corporate tax avoidance.

The first decision involves Bank of Montreal. In 2005, Harris Bank – BMO’s wholly owned U.S. subsidiary – required cash, and third parties were willing to lend the funds. You might have thought that Harris would simply borrow the cash from the third parties. You would have been wrong.

Instead, BMO established a complex finance vehicle referred to in tax circles as a “tower structure.” The structure typically involves three entities – a U.S. limited partnership, and a corporation in each of Nova Scotia and Delaware. The structure plays on different tax rules that exist in Canada versus the United States, with the result that interest expense on third-party debt is deducted twice – once in Canada and a second time in the United States. The entities have little substance and no employees. They exist on paper, on nameplates and in legal offices, solely to facilitate double-deductions for interest expense.

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