Corporate Social Responsibility (CSR) is when a company regulates its actions and corporate decisions and is socially accountable to serve its society. In basic terms, CSR is an understanding of how a company can give back to society, and paying taxes is one of the ways a corporation could be socially responsible in an economic sense. A corporation’s income is taxable on federal and provincial/territorial levels. According to their worldwide income, corporations based in Canada are subject to Canadian corporate income taxes. If the corporation is non-resident in Canada, then income tax is derived from its capital gains and Canadian income.
Now typically, just like any individual, a corporation would want to avoid as much taxes as possible and owe as little as possible. Corporate tax avoidance is when a business legally maneuvers to minimize tax liability; so basically, it decreases a corporation’s tax burdens. This could be perceived as an illegal scheme or even mistaken for tax evasion, but it’s not; tax avoidance is legal.
What is tax avoidance?
Legal vs Illegal
Tax avoidance is when a company legally takes advantage of the tax system to minimize its tax liabilities. Examples of legal tactics to reduce tax could be establishing an offshore company in a jurisdiction known to be a tax haven such as the British Virgin Islands and the Cayman Islands. Tax evasion is when illegal schemes take place intending to escape tax liabilities. Examples of tax evasion could be dealing with cash without receipts or any record and hiding proceeds/assets in offshore accounts. Tax evasion ignores the Canadian tax laws and regulations, while tax avoidance minimizes tax liabilities through legal channels and strategies.
Exercising tax evasion schemes in Canada could potentially result in criminal prosecution, owing to monetary compensation and possibly up to five years of jail time. On the other hand, RRSP contribution is a form of tax avoidance and is highly encouraged by the Canadian Revenue Agency. Tax avoidance and tax evasion could be easily confused, but speaking with an accountant could save you not only the confusion but also a criminal record.
The Economic Impact
As long as a company is tax compliant and executes initiatives within a legal framework, that is considered tax avoidance, but does that eliminate all possible consequences? Sometimes being good could still land you in a tough place. In this case, the consequences are burdened on the economy in general. There is no doubt that tax evasion, which is natural or legal personally being non-compliant to tax rules and regulations, leads to severe economic loss, which impacts the Canadian society, but tax avoidance does result in a similar impact. Although tax avoidance’s negative impact is more minor in volume compared with tax evasion, tax avoidance could still hinder Canada’s growth. When a corporation legally avoids taxes, public revenue collection is reduced.
Although the intention is still to pay taxes and to remain legally compliant, the objective of tax avoidance is to escape financial regulations and disclosure. The economy is definitely impacted when a corporation’s taxes are avoided. The topic of corporate social responsibility comes into the subject when tax avoidance is discussed. A corporation’s social responsibility typically impacts its economy. A Canadian corporation benefits from the country’s security, infrastructure, and health benefits, hence avoiding tax avoidance would simply be fair and elementary to maintain these services and more. When a Canadian company is socially responsible from an economic approach, that company implements financial decisions and policies for society’s benefit and not just to gain profit.
The most crucial factor in being socially responsible is being as transparent as possible. When a corporation decides to commit to no tax avoidance, it’s perceived better by the society it serves. Therefore, corporate Social Responsibility and tax responsibility go hand in hand. Lack of corporate transparency around its taxation constitutes an increased risk on the enterprise.
Avoiding Taxes Legally is Not as Bad as its Impact
The idea and application of Corporate Social Responsibility are crucial and allow the enterprise to have a social impact and promote its business within the community. Tax evasion will implicate the business with both criminal prosecution and reputation hit, while tax avoidance will most probably just affect the company’s reputation. It’s always a good idea to be on the right side of the law, but that is not enough. Companies will benefit more when their community respects them and admires them for their work and influence. An enterprise could do everything by the book, give back to the community, and never have not one illegal stain on their resume. Still, once the people of that community know that a company is avoiding taxes, no matter if it’s done legally or not, it will be perceived differently. Remember, it takes years to build a reputation, but it takes a second to ruin it.
Consult a Financial Professional at ESS CPAs LLP in Burlington for More Information on Tax Avoidance Strategies
Our skilled accountants will advise on the benefits and risks of each tax avoidance strategy that could impact your business. If you are a small business owner or a self-employed individual and wish to learn more about maximizing tax benefits for your business, please contact the Chartered Professional Accountants at ESS CPAs LLP in Burlington at 905-517-2297 or by contacting us online.