Finance Committee on May 17th, 2007

[Some hon. members]

Oh, oh!

[Robert Thibault, Liberal, West Nova, NS]

Madam Fraser, thanks once again for bringing clarification to the committee.

If I understand your notes properly, you're suggesting that what you raised as a concern wasn't a broad interest deductibility, as was announced in the budget, but the abuses engendered by the use of low-tax havens for tax evasion, rather than international trade advantage.

[Sheila Fraser]

Essentially, yes. What we are saying is that in order to protect the tax base, government, Finance, and the Canada Revenue Agency have to be aware of the schemes that are being put in place and where abuse can occur. They need to track this quite rigorously, and the review in 1997 was very good because it went through a lot of that.

It's probably time to update all of that to see what legislative measures are required in order to address those issues.

[Robert Thibault, Liberal, West Nova, NS]

In your 2002 review, I believe you made some recommendations. In 2007, you say you're satisfied with the progress of CRA. When you refer to the progress, I presume you're talking about the policing side of the international activities rather than regulatory change?

[Sheila Fraser]

Absolutely, because CRA is largely responsible for the compliance activities. We also noted that they were doing better risk assessments and had better auditing procedures in place. There is still a large issue with the expertise they have in some of their offices.

[Robert Thibault, Liberal, West Nova, NS]

When they came for estimates at committee some time ago, they pointed out that problem. I guess the international tax experts are a very valuable commodity. As soon as CRA trains them, they can earn a better income somewhere else. So it continues to be a problem.

We talk a lot about the Bahamas, because it seems to be the hot spot right now. But for international competitiveness, a lot of Canadian capital flows through the Bahamas as a conduit for investments in other markets. That becomes a competitive issue and can have some positive aspects. Our companies have to grow.

So we have to be careful, even when we talk about double-dipping or towering, that we take care of the abuses but don't eliminate the competitive advantage that our Canadian corporations...because they have to compete against other people using the same vehicles.

But you raise another element that has been suggested by a few people at this committee, which is a clear abuse and poses a risk to our competitive ability and our economy generally, and that is debt dumping in Canada. Do you have an estimate of how much this is happening? Have you gone that far in your analysis?

[Sheila Fraser]

No. We had some information, but it would be quite dated at this point. I think if there were a study to be done, one would expect that they would do the analysis and have an estimate of what is the current situation, without question.

[Robert Thibault, Liberal, West Nova, NS]

When the minister retracted from the whole interest deductibility issue and brought it down to the microcosm of double-dipping or double deductibility, he didn't talk about the debt dumping aspect of it. I'm pleased that he put together a panel of experts, although it hasn't been fleshed out yet, who will hear about a reasonable and responsible way to deal with these things. Would it be your recommendation, if you had the opportunity to make it, that the question of debt dumping be part of that review?

[Sheila Fraser]

I would expect that review to look at the various threats to the tax base in Canada and the various mechanisms that could be used, broadly. I would expect debt dumping to come up as one of those issues. So, yes, my expectation is that it would be studied. It was an issue when it was last looked at, and nothing would indicate that it has changed since, so we expect it to be there still.

[Robert Thibault, Liberal, West Nova, NS]

On the question of the expertise at CRA to deal with international finance and shelters, I would presume that every industrialized country is having the same problem that we are in that respect. How are the best practices of other countries dealing with this lack of expertise in those areas?

[Sheila Fraser]

We didn't look too broadly at other countries, but we did look within CRA itself. The greatest problem it's facing is within the greater Toronto area, which is not surprising, given the competition for this kind of expertise, but that is where you obviously would have the most complex files. In other offices, they do have the expertise. It's not that CRA Canada-wide does not have the expertise.

We recognize that they do have a great difficulty competing in the Toronto market. What we have sort of suggested to them is that they need to take advantage of the expertise they have in other offices, use people in those offices who have long experience to deal with the more complex files, and reorganize themselves differently. They sort of said it was an interesting approach, but I'm not sure they are in total agreement with us on that. But I think it's a reality that they will have difficulty getting that expertise in the greater Toronto area.

[Robert Thibault, Liberal, West Nova, NS]

Thank you.

[The Chair, Conservative, Brian Pallister]

Further to Mr. Thibault's question, the image I'm getting is that the larger the potential tax liability, naturally the greater the motivation to hire the expertise necessary to develop avoidance strategies. We're not discussing whether they're illegitimate or legitimate, simply the fact that they are available to those who have the resources to put into providing them.

What I have in my mind is an image of Revenue Canada with a bunch of checkers players trying to fight against a bunch of chess players at the corporate level. No matter how you train those checkers players, what I'm concerned about is that once they become great chess players, they'll be hired by corporate Canada to be chess players for them. Is that a legitimate concern?

[Sheila Fraser]

There is a concern, certainly, in certain markets. The greater Toronto area would be a concern. We noted in our report, to give you an example, that two of the greater Toronto area offices--and this is in 2006--indicated that more than 40% of their international tax auditors had less than two years of international tax audit experience. Now, they may have had more experience within CRA, but they are going up, as you say, against some of the largest corporations in the country that have very skilled people.

[The Chair, Conservative, Brian Pallister]

I don't like the odds, no.

[Sheila Fraser]

So they need to develop and use the experts, because they do have people with a lot of expertise in other offices.

[The Chair, Conservative, Brian Pallister]

Sure. Let's follow that up then.

When I raise this issue or get input from constituents—and perhaps some of my colleagues have this as well—I'm initially dismayed by the fact that certain Canadian companies are able to avoid their tax obligations legitimately. That depresses me. So when I speak to constituents, I must tell you I'm somewhat disappointed in their reaction. The most common reaction I get is, “Where do I get one of those?”, or “How can I do that?”, not “That's not fair”, or “That's not right”, or “My taxes are higher.”

So maybe we're not exploring the right approach here; maybe we're not even considering the right approach. Instead of chasing around trying to bang the gopher with the hammer, and it's disappearing as fast as we can bang it, maybe we need to make readily available to more Canadians, small and medium enterprises, individuals who work to pay their taxes, the same kinds of mechanisms and give them access on a more level basis to the same kind of expertise that major corporations have.

What do you think of that idea?

[Sheila Fraser]

Well, I see a couple of issues with that.

[The Chair, Conservative, Brian Pallister]

But why? These are legitimate rules. And you, in the past, have expressed concern about.... None of us has expressed concern about avoiding tax; that's an obligation every Canadian has, to avoid paying taxes, right? We have an obligation to avoid paying taxes that we should not be paying. If there's a lack of knowledge among Canadians of legitimate methods—which have been readily available to some for a long time—causing them to pay higher taxes than they should, I think we should all be concerned about that. That's what I'm asking.

[Sheila Fraser]

I agree with you that if people have, for example, a right to a deduction and are not claiming that deduction, that is not fairness in our system. They should have the ability to get the information to help them. I think the CRA, actually, has a lot of helplines. And people can go out and buy income tax packages for $10 or $20 or $30 today, which can actually be quite helpful with these things.

When we're getting into the larger, more complex issues of transferring assets offshore, it becomes very expensive to do that, so you have to have a certain wherewithal and a certain amount of assets to be able to do that.

[The Chair, Conservative, Brian Pallister]

Right, and I want to address that. It's a concern I have, and it's a concern I know Mr. Brison—who's here with us today—expressed in the context of the regulatory constraints faced by business, that regulations are disproportionately difficult for small business to comply with, but easier for large businesses, and he wanted to try to level the playing field. I know it's a concern that many of us who have dealt with the regulatory structures in this country have, and I see a parallel here.

So knowing that a number of small and medium businesses, and individuals, have tried to utilize these cooperative tax haven schemes being marketed, I was somewhat disheartened the other day when the Canada Revenue Agency came and testified they were working hard to shut those down and were addressing them as a real problem. But if that's a real problem for those small guys, and Canada Revenue Agency is focusing on addressing them, I think my concern is that they're doing that at the agency because they're checkers players and they are going after other checkers players when the chess player is escaping the attentiveness that needs to be focused on them.

Do you share a concern about the disproportionate obligation we're placing on small and medium enterprises versus large enterprises in the context of corporate taxation?

[Sheila Fraser]

I just have a couple of elements in response.

First, when we looked at the last audit in 2007, we found that the Canada Revenue Agency was doing a much better job in assessing the risks to the tax base, and we wouldn't expect that there would be a disproportionate amount of effort being placed on small businesses vis-à-vis large businesses, but that they should surely be doing it on the basis of risk.

The other element I would add is that we have to recall that small businesses do have a favourable tax rate—at least for a certain proportion of their income—versus large businesses.

[The Chair, Conservative, Brian Pallister]

But you would agree that there would be a bit of a concern, in terms of the revenue we need to deal with to support this country's social safety net and the various other mechanisms, if all Canadians were readily able to access the techniques we've heard about in this debate that large corporations are able to use?

[Sheila Fraser]

Well, the techniques being described are things that should not be used, and we're encouraging the Revenue Agency and the government to address them, so I think the committee should be hesitant to recommend that everybody start using these things.

[The Chair, Conservative, Brian Pallister]

Good. Well, that's interesting.

Thank you.

Mr. St-Cyr, you have five minutes.