The Alberta government has put in place a team of auditors to combat certain tax planning strategies — the province is calling them “tax schemes” — that have diverted $200 million from provincial coffers over the past four years.

The recent move by Lyle Oberg, the province’s finance minister, follows an initiative announced in his budget speech this past April.

“We will allocate more resources to enforcing both the letter and spirit of our tax laws,” he said in the speech. “We want to protect law-abiding Albertans from tactics putting our overall low taxes at risk. Certain corporate tax-avoidance schemes pose such a risk.”

Oberg was referring to the so-called “Ontario shuffle” and the “Quebec truffle,” as well as two other tax planning schemes that he did not identify. The Ontario shuffle involves Alberta-based corporations making interest payments to related companies based in Ontario. The Alberta-based firms then reduce their taxable income as a result of interest expense. In some cases, the Ontario-based companies are not subject to taxes in their home jurisdiction, thereby avoiding provincial taxes completely, although they still pay federal taxes.

The Quebec truffle scheme, on the other hand, occurs when income earned by Alberta-based corporations is shifted to trusts based in Quebec, making them immune to Alberta taxes. Some tax rules make it possible for the income not to be taxable in the hands of Alberta-based beneficiaries, enabling the corporations to avoid all provincial but not federal taxes.

“We’ve strengthened our tax audit area,” says Jay O’Neill, communications director for Premier Ed Stelmach’s government. “We have a full complement of at least 10 staff now that will focus specifically on tax-avoidance schemes. They have the resources to do their jobs.

“Now is the time to do something about it, to protect Albertans from the tactics that are going on,” he adds. “Alberta has such low [personal and corporate] tax rates, we don’t want to put them at risk.”

CLOSING LOOPHOLES

Alberta became aware of these schemes through its contacts with governments in Ontario and Quebec and after both those provinces made tax changes to address the schemes. The Ontario government closed a loophole in its provincial corporate tax act that had facilitated the Ontario shuffle. Quebec also introduced retroactive tax legislation to close the planning opportunity that made the Quebec version possible.

“It just shows how the other jurisdictions are getting information and everybody is working together on this,” O’Neill adds. “You don’t know what’s going on until you find out.”

The Stelmach government has also introduced an amendment to Bill 36, the Alberta Corporate Tax Amendment Act, to enhance anti-avoidance provisions.

Many of the companies doing the “shuffle” and “truffle” — practices that date back to the mid-1990s and possibly earlier — are reportedly large oil and gas companies with significant financing needs.

Alberta’s spring budget outlined about $33 billion in spending for the current fiscal year, a 12% boost from the previous year. That increase had critics up in arms about the province’s ability to maintain such hikes in the future and its overdependence on oil and gas revenue.

“There is so much tax planning [going on], everybody wants to make sure taxpayers are paying their fair share,” says Sebastien Souligny, senior manager of private client services in Deloitte & Touche LLP’s Calgary office. He suggests the Alberta government is hiring the auditors to protect its tax base.

Alberta isn’t concerned about whether the forgone tax income is taxed in other provinces; and the province doesn’t appear to be taking any action regarding provincial “inbound” tax planning that adds to provincial revenue, Souligny adds: “The Alberta finance minister will probably leave that matter to other provinces as well as the federal government, given the various interprovincial income tax collection agreements signed with certain provinces.”

Alberta has established formal partnerships with Ontario, Quebec and the federal government to identify tax-avoidance schemes and will conduct audits alongside the three governments, with the hope of eliminating this kind of activity, O’Neill says.

“To be on top of it,” he says, “you really need to be focused and working with other jurisdictions.” IE