Finance Committee on May 17th, 2007

[Scott Brison, Liberal, Kings—Hants, NS]

Yes.

When you analyze tax policy, for instance, and you look at issues like leakage, do you take into account tax base and impacts of decisions on the tax base or on macroeconomic...? In fact, you don't consider—

[Sheila Fraser]

No. I would just like to be precise. We do not do the analysis of tax policy.

We're simply looking at the Canada Revenue Agency and the Department of Finance in terms of what steps do they take to protect the tax base, how aware are they of the various mechanisms taxpayers may be using to avoid paying tax in Canada, and are they doing the necessary analysis and taking the necessary steps to protect the tax base? That is what we would like at.

So we would expect the government to be doing that kind of analysis.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Brison.

For greater clarification on one of Mr. Brison's questions, because we had a presentation from Revenue Canada here earlier.... I want to be sure that I understand. You mentioned that these are two different issues, yet my understanding from Revenue Canada is that they are intertwined. The double-dipping and the tax havens can be intertwined, because essentially you're shifting debt. You're borrowing money in high-tax jurisdictions and shifting it into low-tax jurisdictions.

For example, Canada Co. takes it and ships it to Barbados Co., Barbados Co. then lends the same cash out to another high-tax jurisdiction, the U.S., the U.K., or whatever. So isn't the tax haven functioning as a conduit for the double-dipping? Aren't the two things interrelated? When the minister speaks of the two, he is entirely right in assuming that they are not mutually exclusive, is he not?

[Sheila Fraser]

They can, of course, be interrelated. It's just that there are two mechanisms.

[The Chair, Conservative, Brian Pallister]

Actually, I'll bet there are more.

[Sheila Fraser]

I'm sure there probably are.

[The Chair, Conservative, Brian Pallister]

I'll bet there are many more. I'll bet there are more than we could even imagine.

[Sheila Fraser]

I'm sure there probably are.

[The Chair, Conservative, Brian Pallister]

We'll continue with Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

I also want to pick up on a point made by Mr. Brison. He was speaking about where the tax deductions might be claimed, indicating that these deductions might be claimed in Canada instead of in some other nation, which would reduce Canada's overall tax revenue.

But in fact one of the things we know from Advantage Canada is that Canada is moving toward the lowest corporate rate in the G-7. If that's the case, and corporations can only claim the tax deduction once from interest incurred on foreign debt, they're going to claim it in the highest tax jurisdiction so that they have the most savings from that interest. Isn't that inherently true?

[Sheila Fraser]

One would presume so, but it would be good to have an analysis of that.

[Dean Del Mastro, Conservative, Peterborough, ON]

Sure, but basic economics and finance would say that you're going to claim that deduction where it means the most money to you; you're not going to claim it in a lower-tax jurisdiction. That's basic finance.

I want to go back to something from 2002 that you said. You said:

... hundreds of millions of Canadian tax dollars have been lost to multinational firms because of weaknesses in federal law.

Foreign-based companies have taken advantage of loopholes in Canadian laws to cut millions of dollars from their tax bills here.... At the same time, many of those firms report their earnings in low-tax countries such as Barbados, and pay their taxes there.

Tax rules that reduce tax revenue mean either higher taxes for other taxpayers

—the average Canadian—

or reductions in public expenditures.

—meaning we can't afford to pay for as much of our social safety net.

Nobody wants to pay someone else's taxes. ... It's time to fix this.

This was in 2002. Well, here we are in 2007 and we're talking about entering into steps to eliminate double-dipping. It's time to move on this, wouldn't you agree?

[Sheila Fraser]

Yes, it's very much time to address this issue. There have been a number of bills introduced over the years, there have been a number proposals made, but there has never been final resolution to this question. We believe that the study that's been announced is good; hopefully, it will look at this broader question and bring forward the changes required to ensure that Canada's tax base is protected.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

[The Chair, Conservative, Brian Pallister]

I'm going to try to get several of my colleagues in with some brief questions. We'll try to have brief questions and then allow for a little bit longer answers, if we could.

Mr. McKay, you have three minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I could listen to this witness all day.

Thank you, Auditor General, for being here.

We all agree around this table, I assume, that this is a pretty complex area. I was rather interested in what you said to Mr. Brison, that you weren't aware of any study that had been done—that was, at least, made available to you when you were writing your reports. It seems to me you've done yeoman's service in producing that report, but in some respects what it does is look at one side of the equation, and what we need to see is the other side of the equation.

We had a witness here from the University of Toronto last week. He said there's a widely held view that the use of offshore financial centres is bad simply because of the tax advantages that come with their use. Then he went on to say that when these financial centres are used, in effect their use stimulates economic activity back in Canada—obviously in head office jobs but frequently in back office jobs.

Financial institutions here in Canada are a classic example, when they invest offshore but the head office work is done here and the back office work is frequently done here. That stimulates people who are technicians; it stimulates all kinds of clerical work, and things of that nature.

My question to you is, when you are preparing these reports, are you caveating your report, or are you familiar with, if you will, the macroeconomic picture of how these offshore financial centres actually stimulate economic activity in this country?

[Sheila Fraser]

We do not go into the kind of analysis of offshore that is being referred to. What we are really looking at is what the government does to protect the tax base when schemes or transactions are clearly designed only to avoid tax, when it is clear that there is no business reason.

We have the examples of the trusts, for example, where shares in a company are moved off to Barbados or another tax haven, are sold, and the gain is not taxed in Canada, and that is the sole purpose of doing that—those are the kinds of transactions we were focusing on here—or where multinational corporations are essentially dumping debt into Canada. We're recommending that the government really needs to understand what these transactions are, where the abuses can be occurring, and to take the measures to prevent them.

There obviously could be very legitimate reasons for people to do this, to stimulate business, but the studies aren't there. This is a question that's been around for a very long time—

[John McKay, Liberal, Scarborough—Guildwood, ON]

We agree that the studies aren't there on the economic activity stimulated. We don't know.

[The Chair, Conservative, Brian Pallister]

We agree that more money coming back into Canada because it's not taxed elsewhere is bound to be good for the Canadian economy too, but that's not the point.

Go ahead, Mr. Crête, for three minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

If I've understood you correctly, you say that not only should justice be done, but there should also be the appearance of justice and that, in this case, there is no appearance of justice.

I would like to get back to point 7. You state that the Canada Revenue Agency is not solely responsible for maintaining international tax compliance in Canada and that Tax Litigation Services at Justice Canada and Finance Canada also have obligations in this regard. You also say that all three organizations must work together if the tax base is to be protected.

You are saying this for a reason. Have you noticed that more effort should be made on this front? What type of action would you like to see?

[Sheila Fraser]

Lately, our work has been mainly focused on the Canada Revenue Agency, but the agency is only responsible for management activities and for ensuring that taxes are collected. Mostly, we want to emphasize that it is really up to the Department of Finance to ensure that the legislative framework is rigorous and that there is a follow-up to the studies. For instance, it would be incumbent on the Department of Finance to follow up on the Mintz report.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Would you say that the current inertia or lack of action is perhaps due to this lack of coordination?

[Sheila Fraser]

No, I would not say that. We do not really know why there has been so little follow-up over the years. It is a complex matter, for sure, but a comprehensive study to which there has been very little follow-up was in fact carried out.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

A few weeks ago, you published a study on the effectiveness of legal services.

[Sheila Fraser]

As a matter of act, we audited the Department of Justice and examined its operations.