Yesterday’s Globe and Mail:

The federal Finance Department is acknowl­edging it could reap a bonanza of additional tax revenue from a contro­versial budget move to scrap the deductibility of interest that companies incur to fund foreign operations.

I’m trying to under­stand the logic here but I can’t.

I know this is money leaving the country, but shouldn’t the law focus on foreign ownership of the overseas opera­tions at least, if that’s what this is about? After all, the money leaving has already been taxed anyway.

As well, this is incon­sistent with how interest is generally treated for tax — it’s deductible if used to earn income. It was simpler that way, and when simplicity and consis­tency intersect within tax law, that’s a good thing.

And this from the CBC’s budget coverage:

The government will crack down on corpo­ra­tions that use tax havens to avoid paying taxes by elimi­nating the deductibility of interest incurred to invest in business opera­tions abroad, improving infor­mation agree­ments with other countries and providing more resources to the Canada Revenue Agency to strengthen their audit and enforcement activities.

But I think the government could do more to stop this by focusing on the last two points: strength­ening infor­mation agree­ments with the countries deemed tax havens, and increasing audits where there is suspected abuse.

Otherwise I expect foreign investment by Canadian firms to decrease sharply. It’s never a good thing when tax influ­ences decisions, but this is going to hurt our global compet­i­tiveness too. It sucks when a few bad apples ruin it for everyone.

So it sounds like it’s similar to proposed legis­lation I blogged about a while ago in the US brought forward by a group which included Barack Obama.