Remember the income trust? This “flow-through” corporate structure gained popularity during the early 2000s because it allowed companies to pay little or no tax: profits were distributed to unitholders, who paid any taxes owing on an individual basis. After learning some of Canada’s largest public corporations planned to convert into trusts, in 2006 the federal government enacted so-called specified investment flow-through (SIFT) rules that annihilated this tax advantage. But Brookfield Asset Management found a way around the rules—even today it continues to lower its tax bill by fashioning a clever offshore substitute.
Brookfield manages an extensive portfolio of office buildings, malls, power plants, toll roads, railways and other commercial properties across 20 countries, worth about $175 billion. Yet it paid just $1.3 billion in cash taxes worldwide over the past decade, or 12.9% of its pre-tax income.
Brookfield’s offshore adventure began in 2007 when it spun off timberlands and electricity transmission assets into Brookfield Infrastructure Partners LP, based in Bermuda. The idea was to mimic a flow-through vehicle like a Canadian real estate investment trust. After that entity proved popular with investors, Brookfield spun off power generation assets into Brookfield Renewable Energy Partners LP, also in Bermuda. Last year, it formed Brookfield Property Partners LP to manage its commercial real estate portfolio. Internally, they’re known as “the LPs.”
Bermuda levies no taxes on corporate earnings, investment income, capital gains, or virtually anything else. The LPs are therefore extraordinarily tax efficient. Brookfield Infrastructure, for example, received net cash tax refunds totalling US$29 million during the past three fiscal years.
Brookfield must perform some unusual contortions to satisfy the taxman. For instance, it must ensure the LPs are managed and controlled from outside Canada. But still, its Bermuda office employs only a dozen people performing accounting functions. “What happens, in practical terms, is that the Bermuda-based entity hires Brookfield Asset Management as the general partner,” explains Andrew Willis, Brookfield’s senior vice-president of communications and media. “But the board meetings and the business of the LP is done in Bermuda.”
Brookfield itself is also highly tax efficient, thanks in part to a large arsenal of loss carry-forwards available to offset any taxes owing. These stem from the tax treatment of real estate assets. Under accounting rules, the rising value of its real estate must be reported as income; Willis says half of Brookfield’s reported income in 2012 came from such increases. However, usually the company pays no tax until it sells properties.