On a 2006 conference call, the chief financial officer of Manitoba Telecom Services was asked about the company’s income tax situation. “All things are usually possible in the tax world,” replied Wayne Demkey. Indeed, it’s even possible for MTS to pay no cash income taxes while raking in hundreds of millions in profit.
The low-profile telecom firm is an adept tax planner, and shows that esoteric financial structures aren’t always necessary for a company to ease its tax burden. MTS estimates it won’t pay any cash taxes until at least 2019, and has pushed back the date when it expects to start paying at least five times in the past decade.
When MTS was privatized by the Manitoba government in 1997, management created a “tax shield” using contributions to its pension plan, which are deductible, and the company did not have to pay income tax expense until 2001. A few years later, MTS purchased communications firm Allstream in a deal worth $1.7 billion. Aside from expanding MTS’s business, according to the 2004 annual report, the company “gained the benefit” of all Allstream’s tax loss carry-forwards, which are past losses that can be applied to reduce taxes owing.
Today, the company has a “tax asset” worth $300 million it can use against balances owing. The arrangement is clearly important for management and investors. In May 2013, when MTS announced the sale of Allstream (ultimately nixed by the federal government), it made sure to note that it will keep “all of the valuable tax assets” rather than turn them over to the acquirer.
MTS has another advantage, too: capital cost allowance (CCA), which arises from the depreciation of assets. MTS spent $2 billion since it acquired Allstream to upgrade its network and operations. Because communications equipment depreciates faster in value than, say, an office building, telecom firms can build up sizable CCA pools. MTS deferred claiming CCA until after the loss carry-forwards held by Allstream expired, a strategy that will “stretch out the duration of the tax shield,” Demkey said in 2010.
MTS has paid cash taxes only once since 2005—$1.2 million in 2010. In the past 10 years, the company paid 4.2% of its pre-tax income in cash taxes. Its situation is not unusual in the telecom world. BCE Inc. paid 4.5% of its pre-tax income in cash taxes over the same period, and cited loss carry-forwards, pension contributions, large capital expenditures and favourable CCA rates as factors.
As for MTS, the Canada Revenue Agency is auditing its returns between 2001 and 2008. MTS declined to comment on the audits, other than to say, “As a large Canadian corporation, all years are audited by CRA.” Past annual reports state the audits involve a review of Allstream’s loss carry-forwards.