CRA targeting mining-sector tax havens

Tax evasion by Canadian companies using offshore havens promises to become election issue

“CRA is seeking to tax, within Canada, streaming income earned outside of Canada,” says Silver Wheaton CEO Randy Smallwood | Dominic Schaefer/BIV files

Canadian corporations that use tax havens like Switzerland and the Cayman Islands to reduce the taxes they pay at home have good reason to worry.

The Canada Revenue Agency (CRA) has been stepping up its scrutiny of Canadian companies with offshore subsidiaries, as evidenced earlier this month when it was announced that Vancouver streaming company Silver Wheaton (TSX:SLW) is facing a potential reassessment that could cost the company more than $600 million.

It’s an issue that the Canadians for Tax Fairness and the Liberal Party of Canada appear to be  hoping to make a federal election issue.

Tackling corporate tax evasion is one of the planks in the Liberal Party’s platform and has been raised in Parliament by Liberal national revenue critic Emmanuel Dubourg.

“It is unacceptable and unfair that CRA frightens and poorly serves honest Canadian taxpayers and it harasses charities for political reasons while leaving billions uncollected in tax havens,” Dubourg told Business in Vancouver by email.

Silver Wheaton is the second large Canadian mining-sector company in recent years to be placed in the CRA’s crosshairs.

Since 2008, Saskatchewan uranium miner Cameco Corp. (TSX:CCO) has been doing battle with CRA over $1.5 billion worth of taxes and penalties.

On July 6, Silver Wheaton announced it had received a proposal letter from CRA stating that, in the agency’s opinion, the company should have paid taxes on $715 million in income from the company’s subsidiaries in Barbados and the Cayman Islands between 2005 and 2010.

The company’s stock – already dragged down by low precious metals prices – dropped nearly 12% the next day.

Should the company have to pay taxes on that income, it could result in a $150 million tax bill plus $72 million in penalties. That’s just for the 2005-10 period.

BMO Capital Markets mining equity analyst Andrew Kaip estimates the company could also end up owing another $440 million for the 2011-15 period. BMO estimates the company’s valuation could take a $900 million hit as a result.

But, as Kaip points out, a proposal letter is not a reassessment.

“This is something that’s going to take a long time to unwind,” he said.

Even if Silver Wheaton has to shell out more than $600 million in taxes and penalties, the company is in a strong enough financial position to cope, Kaip said.

“From a financial perspective, they can deal with this. They have the money on their balance sheet. As an analyst, I am not concerned with this company’s ability to be able to deal with a negative ruling.”

In a press release, Silver Wheaton CEO Randy Smallwood said the company believes it is in full compliance with Canadian tax law.

“Generally, a company is taxable in Canada on its income earned in Canada, while non-Canadian income earned by foreign subsidiaries is not subject to Canadian income tax,” he said. “However, with this proposal, the CRA is seeking to tax, within Canada, streaming income earned outside of Canada by our foreign subsidiaries related to mines located outside of Canada.”

A significant amount of Silver Wheaton’s investments in streaming deals are outside of Canada in South America, Mexico and Europe. With its subsidiaries in Barbados and the Cayman Islands, it avoids the high taxes it would pay on income from those overseas investments.

As the company notes in its annual financial statements, a “significant” amount of the company’s profits come from its Barbados and Cayman Islands subsidiaries.

As for Cameco, a CRA reassessment that could cost the company $1.5 billion has been dangling over the uranium miner like the sword of Damocles since 2008. Its dispute with CRA heads to federal tax court this year.

Cameco has a subsidiary in Switzerland. The issue CRA has with that arrangement is that the company negotiated a long-term contract with that subsidiary to sell uranium at prices that are well below today’s market price. That reduces the taxable income it has to pay in Canada. Its subsidiary sells the uranium at the market price, but because Switzerland has such a low tax rate, the taxes Cameco pays there are much lower.

“This is a very common practice that multinationals do,” said Dennis Howlett, executive director of Canadians for Tax Fairness. “It’s called profit shifting.”

It may be good for large multinationals, but it can hurt small independent businesses, Howlett said. He cites online retailers such as Amazon as an example.

“Because they’re using tax havens so extensively, they hardly pay any taxes at all. They’re eliminating bookstores and clothing retailers, and all kinds of other small businesses are increasingly just unable to compete. One of the reasons is because these big multinationals are not paying anywhere near a similar level of taxes.”

Howlett said his organization estimates that $10 billion in potential taxes is not being collected annually, thanks to Canadian companies sheltering income in tax havens. His organization wants to see increased resources made available to CRA so it can step up its enforcement.