Economic Inefficiency And Tax Shelter Finance
When a large number of firms are not able to use the tax preferences as fast as legally allowed, pressures arise to create innovative after-tax financing (tax shelter) instruments. The purpose of these financing instruments is to transfer the tax losses of the corporation to investors who are willing to buy these losses to offset their taxable income. In the case of unused tax credits, they are purchased to offset their tax liabilities directly. These instruments provide the income tax system with a measure of indirect refundability of tax losses. Two more popular types of after-tax financing instruments in Canada are limited partnerships and flow-through. The objective of this paper is to evaluate how efficient these financial instruments are in providing such enterprises with tax loss refundability.
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