Nearly a trillion dollars moved from Canadian corporations to offshore destinations — including tax havens — through legal tax avoidance schemes in 2016, removing as much as $25 billion from domestic tax coffers, a new study by the Parliamentary Budget Office has found.

The findings follow a report Wednesday by the Canada Revenue Agency that detailed uncollected taxes of up to $26 billion each year.

The PBO analysis focuses on legal tax avoidance, while the CRA focused on illegal tax evasion. Together, the two studies suggest Canada could be missing out on as much as $51 billion in uncollected taxes annually.

That’s enough money to fund a universal pharmacare program and a universal child care program without raising taxes.

“Canadians are being robbed of investments to health care, child care, education and green infrastructure, all of which the government could afford if it were to get serious about cracking down on tax avoidance,” said Toby Sanger, executive director of Canadians for Tax Fairness.

“This is yet another report that indicates billions are being lost from tax coffers, and the federal government should be taking a stance and doing something about it.”

The Parliamentary Budget Office (PBO) tracked financial flows between Canada and tax havens such as the British Virgin Islands, the Cayman Islands and Bermuda, as well as no-tax or low-tax destinations such as the Netherlands, Ireland, Singapore and Switzerland in an effort to gauge the scope of legal tax avoidance practised by Canadian corporations.

The trillion dollars in Canadian investment into these offshore countries, “are disproportionately large,” the report says.

PBO general counsel Mark Mahabir said the amount of Canadian money flowing into tax havens and no-tax jurisdictions raises obvious questions about the purpose of those Canadian offshore investments.

“Is it to reduce taxable income in Canada? Or is it to help these jurisdictions economically? I think your readers can draw their own conclusions,” Mahabir said.

The PBO’s analysis focused on two key records: 2016 data from CRA’s T106 tax forms detailing transfers greater than $1 million from Canadian-based corporations to foreign affiliates; and 2018 electronic funds transfer data showing wealth movement into and out of Canada.

The PBO reviewed more than 15,000 corporations that filed T106 forms in 2016.

That year, nearly a trillion dollars — $996 billion — moved from Canadian corporations and their affiliates in offshore tax havens, a common technique used to inflate corporate expenses for the purposes of reducing Canadian taxable income, said Mahabir.

“It inflates their expenses for Canadian tax purposes so their Canadian taxable income is much lower — so they’re spending more money, reducing their taxable income in Canada,” he said.

The tax avoided for Canadian companies is estimated at $15 billion from T106 transfers, the report says.

The second measure analyzed by the PBO are electronic funds transfers (EFTs), which Canadian corporations have been required to report to the CRA since 2015 for transfers valued at $10,000 or more.

In 2018, $2.7 billion moved from Canada to offshore tax havens. Another $205 billion moved to offshore financial centres such as Singapore, Netherlands, Switzerland and Ireland on its way to destinations unknown, said Mahabir.

“Where the money goes after that, we don’t know,” he said. “A lot of these jurisdictions usually have zero taxes. If you want to park it in Switzerland, you could send interest income somewhere else.”

The estimated corporate tax avoidance from EFTs, according to the report, is $25 billion.

The PBO report zeroed in on a technique called “transfer pricing,” which allows multinational companies to reduce taxes by moving profits to tax havens.

“Some multinationals use transfer pricing as a legitimate tool to fairly price intracompany transactions, while others use it as a tool for aggressive tax planning by adjusting the price of goods and services traded within a corporate group,” the report states.

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Here’s a scenario: A Canadian corporation with a holding company or subsidiary in Switzerland would pay a fee to the Swiss company for use of its intellectual property. Those fees are deductible in Canada for Canadian tax purposes. The Swiss revenue from the intellectual property fees would be subject to a much lower tax rate — or not be taxed at all. The fees could then be distributed back to the Canadian parent company.

“This could all be legal. It’s just an abuse of the two tax regimes, in Switzerland and here, so that there’s less global tax paid by the Canadian company and its affiliates,” said Mahabir.

A third PBO calculation surveyed 3,200 multinational corporations to estimate how much business activity occurred in Canada and how much tax should be due. In 2015, that method found Canadian corporations reduced their taxable income by $4.2 billion. Applying a 15 per cent tax rate, that’s $600 million in lost tax.

The PBO cautions that “these calculations are of course hypothetical and cannot be verified.”

Generally, the PBO is pessimistic about the ability of Canada and other major economies to crack down on corporate tax avoidance.

“Tax avoidance by multinational corporations through transactions between affiliates that effectively transfer income and expenses are difficult to measure and prevent by one country alone,” it said. “These transactions also follow the letter of the law, which makes it difficult for tax administrations to prosecute the corporations that use such techniques.”

While the study notes that Canada joined an international effort to crack down on profit shifting in 2017, it said much more work needs to be done to stem the tide of untaxed profits flowing out of Canada.

“CRA efforts to increase audits ... could reduce the magnitude of aggressive tax planning. However, it may be time for a ‘fundamental rethink’ on international corporate taxation to ensure income is taxed where the economic activity is taking place,” the report states.

This call echoes one issued in March by Christine Lagarde, head of the International Monetary Fund. Lagarde warned that as more people become aware of how much money corporations make and how little tax they pay, their faith in the fundamental fairness of the tax system is eroded.

Shortly after, the IMF issued a study of ways corporate taxation could be reformed to make sure companies — especially the tech giants — pay more tax.

Sanger, from Canadians for Tax Fairness, said while the federal government talks tough about cracking down on tax cheats, it is a laggard on the international scene.

“The CRA has been taking some measures on the enforcement side, but there are still lots of loopholes that corporations take advantage of to avoid taxes. Yes, it’s legal, but that’s the problem,” he said.

“Ultimately, we need stronger measures to reform international corporate taxation. Other countries are doing it. We need to support them and bring in versions of our own.”