2002 December Report of the Auditor General of Canada

December 2002 Report—Chapter 11

Exhibit 11.4—Shifting debt into Canada

Examples of how the Canadian tax system financed a non-resident's foreign operations

In each of these examples, the Canadian company may never pay tax on the income earned from its offshore investments because of the current rules.

• A United States company loaned its Canadian subsidiary about $1 billion. The Canadian subsidiary then invested the funds in a foreign company. The interest that the Canadian company paid on the $1 billion loan reduced Canadian tax revenues because it is deducted from the Canadian company's Canadian income before taxes.
• Canadian company A, a subsidiary of a U.S. company, borrowed $300 million. This $300 million plus $100 million of cash it already had, were invested in $400 million of shares of Canadian company B. "B" then invested the $400 million in shares of a Bermuda company. The interest which "A" paid on its loan reduced Canadian tax revenues because it is deducted from its Canadian income before taxes. Furthermore, if the cash amount of $100 million had stayed in Canada, the interest income which "A" would have earned, would have been taxed in Canada.
• A foreign-owned Canadian company borrowed over $800 million to invest in a Barbados subsidiary. The related interest expense of $100 million reduced Canadian tax revenues because it is deducted from the Canadian company's Canadian income before taxes.

Source: Canada Customs and Revenue Agency