Three Reasons banks Need To Bail-In In Canada – Tax Havens, The Bail-out of Canadian Banks, And Absurdly Low Corporate Tax Rates.

The following commentary originally appeared in the online publication  called Canada Uncut, and is being reposted here for our readers with the permission of Canada Uncut. You can visit that publication’s site at http://canadauncut.net/facts/the_banks.php

Studying Tax Shelters is difficult. The point of these shelters is secrecy. But Professor Leo-Paul Lauzon, of the University of Quebec’s School of Management, did his best. His study of tax avoidance by the five largest Canadian banks (RBC, TD, Bank of Nova Scotia, BMO, and CIBC) found that:

·    These five banks have a minimum of 89 official subsidiaries in tax havens – this suggests the existence of more that have gone undetected.1
·    The data from their financial statements reveals that they have cumulatively dodged at least $16 billion in federal taxes between 1993 and 2007.1 That’s $16 billion that could have paid for better healthcare, more environmental safeguards, education, help for seniors, badly needed infrastructure and social housing, a national day-care strategy, and countless other necessary programs and services.
·    Tax dodging by banks is on the rise. 41% of that $16 billion was lost in the last four years of the study (between 2004 and 2007).1 This corresponds to approximately 30% of the big five banks’ total tax obligation avoided.

In addition to avoiding their own corporate taxes, many of our banks abuse Canada’s tax system by helping wealthy Canadians shelter their income offshore. Hervé Falciani, an HSBC employee, recently blew the whistle on 80,000 secret accounts in Geneva. The CBC reports that 1,700 of those accounts are held by Canadians.2 HSBC are not alone in this practice. The Canada Revenue Agency alleges that investment advisers at RBC Dominion Securities Inc. helped clients set up accounts in Liechtenstein, many of which were used to evade Canadian taxation.3 Once again, this investigation was instigated by a company whistleblower. These practices rob Canada of the vital revenue required to keep our public services and infrastructure intact, and place an increasingly heavy burden on honest, hardworking Canadians who do pay their taxes.
The $75 billion dollar bailout

Harper refused to call it a bailout.4 He certainly couldn’t risk characterizing it as one identical to the US bailout of the banking industry (see the excellent film Inside Job for the full, fascinating story on that). According to the IMF, the cost of trying to stabilize the Canadian banking system was the third-highest amongst the G7, just behind the U.S. and the U.K.5 Whatever history decides to call it, it delivered more public money into the already dirty hands of the banking industry.

Here’s what happened: in 2008, the government took $75 billion worth of risky mortgage assets off the hands of the banks, and placed that risk in the hands of the taxpayers through the Canadian Mortgage and Housing Corporation.6 Harper justified this by explaining that they were only acquiring assets that the taxpayer was obligated to insure if debtors didn’t pay up.7 But taxpayers were only obligated to insure those assets because the government forced the taxpayer to insure them. This was done to make certain that banks wouldn’t decrease their lending as dramatically. But why are taxpayers the ones taking on these risks, making the only real sacrifices to improve the economy – in effect, being “stung” twice? The “bailout” helped create a 9.3% increase in Canadian household debt between June 2008 and June 2009.8

The amount of risk from which Canadians freed the banks is enormous. With the additional burden of mortgages insured by CMHC, by the end of 2010 the amount had reached $500 billion, up from $138 billion in 2007.9 That $500 billion is the debt least likely to be paid back. It was the problem of the banks that provided the loans, and they carry no risk. Now it’s Canada’s problem. It’s national debt if the mortgages don’t get paid back. What happens if too many debtors default, and the housing market and the financial system in Canada come crashing down? The disturbing answer can currently be seen as it plays out south of the border.

Harper’s government also created the Extraordinary Financing Framework, which established a commitment of $200 billion to lend to the banks. Billions were borrowed to establish this fund, which will charge taxpayers with the interest carrying-costs – all so that banks can lend the money back to the consumer, to make more money.9

Bruce Campbell of the Canadian Center for Policy Alternatives, writing about the $75 billion dollar bail-out and the $200 billion fund, had this to say:
“These measures are considered “non-budgetary” or “off book.” They do not show up as expenditures, which increase the federal deficit and debt. Rather, they appear on the books of CMHC and the Bank of Canada. But they have increased the government’s borrowing from 13.6 billion in 2007-08 to $89.5 billion in 2008-09, or double the fiscal deficit now projected for 2009. (Note the government has arbitrarily chosen to expense $8 billion of the auto restructuring package – normally an off-book expense – as a one-time loss provision.)” [emphasis added]5
Meanwhile, compensation for bank CEOs has risen dramatically. It was recently reported that the Bank of Montreal’s CEO pay has increased by 28% (to $9.5 million annually), and CIBC’s Chief Executive received a pay raise of 50% (to $9.34 million).10 11 These astronomical salaries are ridiculously disproportionate to the contributions these individuals make to society. Under the current system, Canada enables these corporations to provide such ridiculous rates of compensation.
Corporate Tax Rates

Canada’s corporate tax rate has dropped dramatically in the last half-century – from over 40% throughout the 1960s, to 28% in 2004. It currently stands at 16.5%, and will drop down to 15% in 2012.12 That’s one of the lowest rates in the developed world. The argument is that a low corporate tax rate benefits Canada, because it attracts business, and creates jobs. But it also means that Canadian job-creators sell out to foreign investment, and that good jobs that currently exist are replaced with less stable, lower-paying jobs. Many economists argue convincingly that these low rates hurt the Canadian economy overall. They do little to improve the unemployment rate, and they direct the most benefit to already wealthy corporations.13

Canada – with its rich natural resources, and ability to produce energy – is very unlikely to become impoverished as a result of failure to attract foreign investment. If investors do actually leave because of an increase in the corporate tax rate, Canadian companies will step up to benefit from those resources, and create jobs in the process. Whatever the case, banks in particular benefit from these criminally low rates. Considering their elaborate network of offshore tax shelters, on top of the recent government bailouts, it’s easy to argue that – like many wealthy individuals and corporations – our banks aren’t contributing their fair share.

Corporate culture has accepted and embraced greed as best practice, and few multinationals demonstrate any real commitment to giving back to the communities that support them, locally or globally. As one writer pointed out, we have gone from companies that apologize when they have to lay off workers to corporations that brag publically that their layoffs have improved their bottom line. There are plenty of corporations (and individuals) that need to “bail in” to society, and politicians who need to do more to change Canada’s economic policies. But banks are a worthy target for public outrage, for reasons that have already been made clear. As the campaign to address policies that push the country and the world further wealth inequality kicks off, efforts to expose and correct the blatant mistreatment of our money at the hands of these “banksters” should be the first order of business.

1.    Leo-Paul Lauzon. Canadian banks and tax avoidance in tax havens: 16 billion in evaded taxes University of Quebec at Montreal 2008.
2.    Joseph Loiero. Offshore bank account probe nets Canadians CBC News September 30, 2010.
3.    Canada Revenue probe focuses on some RBC DS clients CBC News December 14, 2009
4.    $25B credit backstop for banks ‘not a bailout’: Harper CBC News October 10, 2008.
5.    Bruce Campbell. The Global Economic Crisis and its Canadian Dimension July 1, 2009.
6.    Michael Chossudovsky. Canada’s 75 Billion Dollar Bank Bailout Centre for Research on Globalization January 25, 2009.
7.    $25B credit backstop for banks ‘not a bailout’: Harper CBC News October 10, 2008.
8.    Murray Dobbin. Canada’s Sub-prime Mortgage Time Bomb Canadian Centre for Policy Alternatives
9.    Murray Dobbin. The Canadian ‘good banks’ myth Rabble.ca May 24, 2010.
10.    Bank of Montreal CEO pay jumps 28 pct to C$9.5 mln Reuters February 28, 2011.
11.    Grant Robertson CIBC’s McCaughey gets 50% pay raise The Globe and Mail March 17, 2011.
12.    Why inflate deficit with corporate tax cuts? Edmonton Journal March 17, 2011.
13.    Armine Yalnizyan. Five Reasons to say no to more corporate tax cuts Globe and Mail Blog January 28, 2011