Paradise Papers: Tackling creative compliance

By Justin Ling November 6, 20176 November 2017


It’s been more than a year since a consortium of news outlets worldwide released details on an international network of tax havens and shelters, some employed by the rich and powerful to avoid domestic taxes, known as the Panama Papers dump.

The leaks led to resignations in Iceland, Malta, Spain, and rocked governments the world over. Canada, however, was relatively spared.

But Trudeau’s inner circle was implicated in murky tax avoidance this week, after the Toronto Star and CBC/Radio-Canada published details from the Paradise Papers, more leaks from the world of tax shelters and aggressive tax avoidance.

What do the documents say? The Star reported Sunday that Stephen Bronfman and Leo Kolber, two prominent Liberal fundraisers and allies of the Trudeau family, held a Cayman Islands trust to hold revenue from the Bronfman family’s Israeli investments.

Athough this fund was holding investments made by Canadians, even receiving loans and funds from Canada, it was not subject to Canadian tax. Tax laws at the time, they believed, exempted their fund, as neither Bronfman nor Kolber were residing in Canada at the time.

The extensive investigation by the two outlets detail how money moving from the Cayman Islands to the Montreal’s fund manager to the two Liberal bagmen in Israel seemed designed to obfuscate where the fund was actually being managed.

What comes next? While many governments world-wide were forced to reckon with the difficulties of regulation of offshore funds after the Panama Papers, Canada appeared to be relatively well placed.

Both the previous Harper government and the current Trudeau administration aggressively funded investigations into tax shelters and aggressive tax avoidance, particularly after the Panama Papers. But these leaks hint at problems arising from the vagueness of the law. Tax experts who spoke to the Star and CBC said the nuances of how the trust was managed and whether it meets the letter of the law will be up for the Canada Revenue Agency to decide.

As the Star points out, previous Liberal governments had contemplated changes to clarify the law more than a decade ago, but abandoned those plans.

By the time new rules clarifying trust ownership finally became law in 2013, the leaks show that Bronfman and Kolber had already moved the funds to a new trust, which bore none of the linkages to Canada that their previous account had.

Geoffrey Loomer, a tax professor who spoke with the news outlets, called this “creative compliance.”

Trudeau expended some political capital to try and close loopholes for privately-held domestic corporations, but will almost undoubtedly face pressure now to expand that crusade to target offshore funds — especially since one of his principle fundraisers is now implicated.

Tackling “creative compliance” will likely be a priority.

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