How Nova Scotia caters to tax-dodging offshore banks

NSBI subsidizes tax haven-based companies in exchange for few jobs: author

By Rachel Ward

Nova Scotia Business Inc. (NSBI) got quite the critique Friday by Université de Montreal professor Alain Deneault.

“It’s politically very surprising,” said Deneault. “It’s a concern to see that a Canadian province is so convenient (for) offshore entities that exist only to allow wealthy people and powerful corporations to circumvent the set of constraints society gives to itself to work properly.”

Deneault is about to publish a new book, “Canada, a New Tax Haven: how the country that shaped the Caribbean tax havens is becoming one itself.” NSBI funds, he argued in a presentation at Dalhousie University, subsidize offshore-based companies that avoid paying Canadian taxes.

NSBI, a “private sector-led business development agency,” uses provincial government money to encourage companies to expand or invest in the province. That’s done using payrolls rebates, research and development tax credits, as well as offering accounting support. For example, as the Halifax Examiner recently reported, NSBI invested $5.6 million in Unique Solutions, a now-troubled Nova Scotia company.

Several offshore banks, said Deneault, have taken NSBI money in exchange for a few jobs – yet haven’t returned the favour by paying taxes.

“It’s all only about allowing offshore firms to get access to the skills of the people of Nova Scotia without participating to the public effort to give to Nova Scotia public institutions that work,” said Deneault, “and it’s a concern to have that kind of system here.”

An investigation by the International Consortium of Investigative Journalists into leaked data from about 120,000 offshore entities shows individual people and companies use these banks to evade taxes, launder money, and commit other criminal activities.

The offshore banks operate in tax havens. The Canadian Revenue Agency describes a tax haven as a country with at least one of the following: “no tax, or very low rates of taxation, strict bank secrecy provisions, a lack of transparency in the operation of its tax system or lack of effective exchange of information with other countries.”

Using an offshore bank account isn’t in itself illegal. That money invested abroad, however, may earn income – and not paying taxes on that income upsets the CRA. However – totally legally – a company that functions in Canada can be based – technically – at a bank in Bermuda, for example, and not pay taxes otherwise due to Canada.

Those offshore-based companies then use nearby Nova Scotia, said Deneault, to house back office labour. This is called “nearshore.”

Deneault dedicates an entire chapter of his upcoming book to this: “Halifax: Bermuda’s Back Office, in which the Nova Scotia government helps offshore firms hire accountants.” NSBI, he said, took specific aim at attracting financial services and investment companies, for example, from Bermuda. Real estate is expensive in that Caribbean country, he said, driving up salaries and costs. In Nova Scotia, costs are lower and, he said, the provincial government, through NSBI, hands out money to companies to hire accountants.

“As it develops into a hedge-fund service location,” he writes, “Halifax is becoming a suburb of world finance where companies can use public money to bring low-level employees together in one location.”

In one example, a hedge fund from Bermuda, West End Capital Management, took advantage of a “highly educated provincial workforce,” writes Deneault. It collected more than half a million dollars in payroll rebates over three years, yet its employees were, in part, brought in from elsewhere in Canada and Bermuda. Deneault names seven other companies as examples of NSBI investment in tax haven-based companies.

“But however much companies may benefit from Nova Scotia public spending, they are released from any obligation to contribute to (the province),” he writes.

Canadians invested $684.5 billion in foreign countries in 2011, according to Statistics Canada. Of the top 10 countries of choice, half are widely recognized as popular tax havens: Bermuda, Luxembourg, Ireland, Cayman Islands and Barbados.

Those five make up almost a fifth of all Canadian foreign investment. Deneault said in his presentation these numbers may be underestimated, given the strictness of bank privacy rules. Canada also shares its seat at the World Bank with several of those countries.

Canada has a long history of helping to set up financial systems favourable to corporations looking to reduce their tax spending, said Deneault, including by signing treaties.

“It doesn’t happen often that the government will give the whole picture,” said Deneault. “They will just talk about job creation.”

In fact, he said, several tax haven-shopping corporations have been helped directly by former Canadian politicians and bank executives. The practice is echoed, he said, in how NSBI is set up as a board of people experienced in the private sector.

Stephen Lund, a former NSBI chief executive, once called Halifax “the next Dublin,” says Deneault in his book, noting, “Dublin, of course, being a notorious tax haven.”

Lund left NSBI in 2013 to head the Bermuda Business Development Corporation, reported the Bermuda Sun. The article notes Lund’s previous involvement with Butterfield Bank Services Ltd., which Deneault’s book says received NSBI subsidies. Lund now works as a vice-president for Irving Shipbuilding Inc.

Laurel Broten, about whom the Examiner has written, was recently appointed to the top NSBI job. She has worked for the Ontario government, but is most recently wrote a controversial proposal to do away with the province’s top income tax bracket, while cutting tax rebates for tampons and diapers.

People in Nova Scotia have “more imagination, more energy and more social consciousness” than government gives them credit for, said Deneault, and could create jobs without offshore-based companies.

“It’s something desperate to work that way,” he said, “and I don’t think that Canada – and that Nova Scotia – is at a point where we should behave like a Third World country: absolutely desperate for investment.”

Deneault’s book will be published in April. Canadians for Tax Fairness and the Canadian Centre for Policy Alternatives sponsored his talk with the sociology and social anthropology department at Dalhousie.