2002 December Report of the Auditor General of Canada

Exhibit 11.4—Shifting debt into Canada

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