BUSINESS WATCH

Turning Canada into a world shipping power

A small tax change could send an important signal that Canada really is interested in joining the 21st century

Peter C. Newman October 29 1990
BUSINESS WATCH

Turning Canada into a world shipping power

A small tax change could send an important signal that Canada really is interested in joining the 21st century

Peter C. Newman October 29 1990

Turning Canada into a world shipping power

BUSINESS WATCH

A small tax change could send an important signal that Canada really is interested in joining the 21st century

PETER C. NEWMAN

With Canada’s economy in a free fall and no signs of remission, the creation of new jobs will become Ottawa’s fiercest dilemma. Throwing money at the problem won’t work anymore; there’s no more money left to throw.

That means coming up with imaginative national policies which will make us more competitive internationally, while at the same time creating domestic employment. One idea that has bubbled up would achieve precisely that, though not on a grand scale. Last week, a delegation of Vancouver business types journeyed to Ottawa and briefed Mulroney cabinet ministers on the advantages of establishing what they call International Shipping Corporations. Such corporations would allow shipowners to operate their fleets out of Canada without paying tax on their profits from international operations. The format could be applied to all Canadian harbors and would tap a rare window of opportunity in world commerce. They estimate that in Vancouver alone, an International Shipping Corporation (ISC) would create 1,600 new jobs in the next three years, as well as an extra $1 billion in regional cash flows, and $180 million in purchases of local goods and services. By then, a fleet of 200 ships could be owned, managed or controlled out of Canada’s Pacific coast, compared with less than a dozen now. If the scheme is accepted, similar benefits could flow to such tidewater ports as Halifax, Saint John, N.B., Quebec City, Montreal and St. John’s, Nfld.

The B.C. group, operating under the umbrella of an advisory council called Asia Pacific Initiative and led by business executive Graham Clarke, claims to have already won endorsement from nine federal cabinet ministers. The stumbling block to date has been Finance Minister Michael Wilson.

Wilson’s view is critical because no ISC can be established without an amendment to the Income Tax Act that would allow resident ISCs tax exemptions for profits earned from international shipping operations. And such an amend-

ment must be enacted in time for next spring’s budget. The reason for the rush is that the world’s shipping executives are now eagerly seeking new locations for their operational headquarters, and further delays would leave Canada out of the running. Many European, particularly Scandinavian, shipping owners are among those having trouble maintaining current arrangements because of restrictions on operating foreign-flag vessels from their national locations. But the big potential attraction is Hong Kong.

The rush is on by the British colony’s shipowners to find new operating headquarters before China’s 1997 takeover. They control 1,099 ships, mostly bulk carriers, operated under 31 different registries, and Michael Fairlie, director of the Hong Kong Shipowners Association, has already gone on record favoring Vancouver as the preferred relocation for the majority of his members—if the tax laws are changed. At the moment, Singapore is their preference; to attract the trade, the city-state has reduced corporate taxes on shipping companies to 10 per cent from 33 per cent.

Global shipping is the most international of businesses—uninhibited, volatile and homeless. Shipowners register their vessels, recruit

their crews, report their incomes, buy their supplies and fuel their tanks where they can get the best deals. Historically, the locale of a ship’s registration was also its country of ownership—where it was also manned and managed. But that was before the cost differences grew outrageous. (The annual price of crewing a 60,000-ton bulk carrier in 1987, the last year for which figures are available, was $1.8 million with a Canadian crew, as opposed to $704,000 with a crew of South Koreans.)

There are no national limits to the shipowners’ quest for economy. One example is a vessel that used to carry B.C. coal to Japanese steel mills. It was built in South Korea, financed by an American bank on the Asian dollar market, registered in Liberia, nominally owned by a Panamanian corporation, but legally owned by the secret holders of its bearer shares and insured through a London underwriter. It had been chartered without cargo to a Bermuda company and managed by a Hong Kong firm which was staffed by executives from India. The ship itself was crewed by British officers and Filipino seamen.

Less than five dozen ships still fly the Canadian flag—and most of those service the east coast in what is really a domestic trade. Owners of our largest fleets—Paul Martin Jr.’s Canada Steamship Lines and MacMillan Bloedel’s Canadian Transport Co., both of Vancouver—are actively investigating foreign locations. They can no longer afford to stay in Canada.

Putting ISCs in place would require a budgetary measure that exempts shipowners from having to pay taxes on their offshore operations. At the moment, as long as a shipping company’s “mind and management” remains on Canadian territory, it is taxable on its entire international operation. Canada would hardly lose any tax revenue by granting the exemption because current revenues from shipping companies are close to zero, and the fears of creating a tax haven are unfounded because the actual operating companies will be here, and not just dummy paper corporations.

“Although this proposal could be viewed as a tax exemption,” says Clarke, “strictly speaking it’s the exclusion of value added offshore from income tax calculations. This doesn’t amount to preferential treatment, because it already applies to the majority of Canadian companies doing business abroad. Neither is it a tax incentive, but rather a change in definition of what actually constitutes Canadian income for tax purposes. And what we’re proposing doesn’t include tax breaks for any individuals. International shipowners, their families and shareholders, as well as their employees, would pay tax on their earnings just like any other Canadian. The only income that would, not be taxed is what flows in from international shipping, most of which would be reinvested as operating or capital costs into the vessels anyway.”

Even if approved, this imaginative initiative will make little difference to our sagging economic fortunes. But at least it would send an important signal to the world that Canada really is interested in joining the 21st century.