Finance Committee on Dec. 13th, 2010

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Brison.

Ms. Ricard.

[Lyse Ricard]

There are not that many of these kinds of institutions in Canada. So when I say I'm afraid we cannot answer that question—

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

It wouldn't take long to follow those leads.

[Lyse Ricard]

Thank you for the suggestions.

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

I'm just trying to help.

Thanks.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Brison.

Mr. Menzies, you have five minutes.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

And thank you to our witnesses.

This is a very enlightening discussion for a lot of us. I think we've all heard about some of these issues that are going on, and we are all rather offended. The honest Canadians pay their taxes—not that anybody likes paying their taxes, but the honest Canadians do. I applaud your work in trying to follow those who don't.

Following up on some of these agreements, then, I believe it was in October that our Prime Minister signed an agreement with my friend, Madame Leuthard, in Switzerland. Is that the type of agreement the OECD is encouraging?

Mr. Ernewein, perhaps you could reflect on that one, if you would.

[Brian Ernewein]

The short answer is yes. We have a comprehensive double tax agreement, or tax treaty, with Switzerland already. But the terms of it in relation to exchange of information were not as comprehensive as we have sought in what I described earlier as this OECD standard.

The Swiss agreed, in a protocol to the treaty signed in October, to adopt the new OECD standard that covers all the ground. That is essentially on all fours with the tax information exchange agreements we're signing with other jurisdictions that don't include a comprehensive DTA, or double tax agreement.

[Ted Menzies, Conservative, Macleod, AB]

I guess if I can follow up on that, when I was at a meeting at the OECD, we spent one day in Berlin at the request of the finance minister. I think that was in 2009. Some countries--I believe three or four countries--were quite upset that they had been, and they used the term, “named and shamed” because they weren't living up to the OECD standards. We were actually expecting a very difficult meeting when in fact they basically came and said in front of all the other countries that they would be acceding to those standards. We haven't used the term “name and shame” here talking about these countries. Does it work, or was that one instance maybe?

[Brian Ernewein]

I think some of the countries felt it was a bit undiplomatic that others were pressing them to agree to things such as this on greater exchange of information. There were from time to time many assertions of each country's own sovereignty and objections to being pushed or pressured into making these changes.

Be that as it may, the result we were all seeking we thought was the right one. And yes, there were a number of countries that were hesitant to get there. As I said, I think the watershed was the G-20 of 2009, where in the midst of the financial crisis a number of countries were essentially saying “enough is enough” and demanding cooperation. And indeed, it was forthcoming.

I've also given the statistic about the number of tax information exchange agreements that have been signed since that time. We think we're on the side of right in this case, so while I don't want to roll out “the end justifies the means”, we think that what has happened is all for the good.

[Ted Menzies, Conservative, Macleod, AB]

You did say 14 of these TIEAs are under negotiation now. That still doesn't add up to a lot of countries, in my mind. I just wonder whether they are slow coming forward or whether that is all we need.

[Brian Ernewein]

Well, there are 25 TIEAs in total, 11 that have been signed and 14 more under negotiation. So that's the total. That, combined with our treaty network, which is fairly extensive, with 87 treaties and a couple more to be ratified, means that we have some 120, with 110 or 115 jurisdictions or countries covered. That represents a lot of the industrialized world.

It's certainly the case that our treaties and TIEAs do not cover every last country and jurisdiction, but through the OECD work the countries that were thought to merit the most attention have been identified, and those countries thought to merit the most attention have been pursued by us and other countries to get TIEAs in place.

[Ted Menzies, Conservative, Macleod, AB]

How do some of the small jurisdictions, which we don't ordinarily pay a lot of attention to, such as Guernsey, manage to attract money that skips out of this country?

[Brian Ernewein]

I think their proximity to the U.K. is important, and to Europe as well. Speaking personally, I've learned a little bit of geography as a result of this, and some of the smaller islands in the South Pacific are new to me, but it is true that you don't have to have a vast land mass to have sovereignty and to be able to offer certain regulatory or tax advantages. There are some small jurisdictions that have seen the advantage of doing that. It has raised concerns for us, so we're trying to find that balance.

[The Chair, Conservative, James Rajotte]

Well hear from Mr. Szabo again, please.

[Paul Szabo, Liberal, Mississauga South, ON]

It's often been said that if everybody paid their fair share, we would all pay less. I'm pretty sure that's true. Therefore, it's probably a priority for Canadians to see that we are being rigorous with all the tools that are available to us, domestically as well as internationally, and that the efforts we're making are in fact generating returns or a payback that is well in excess of what we put into it, because costing out a particular case usually indicates that there's an awful lot more ancillary or extended costs, like legal and so on.

Having put it that way, we're really talking about the underground economy and the fact that it's been estimated to be in the tens of billions of dollars, which should be of concern and of interest to us. So the question is, I think for Finance, whether or not we have had a serious discussion in Finance about our strategy for addressing the underground economy. When was the last time we looked at it, did a paper, engaged Canadians, and found out just how far Canadians are prepared to go--while protecting personal privacy, and so on--to ensure that we find as many people as possible who are not paying their fair share?

[Brian Ernewein]

That's a fair question, and it's certainly the case that we do want to be attentive to the system we've got in place to essentially help CRA in its ability to enforce Canada's laws.

First and foremost, I'd say Canada has a self-assessment system. For the most part, honest Canadians declare their income and pay their taxes. For those who don't, writing more rules doesn't necessarily help in terms of tax evasion. If you write another law saying you really, really owe the tax, that doesn't necessarily advance matters. For the group who seek to evade tax, it's necessary to put in other rules that come about it in a different way, or give Revenue more information that allows them to try to identify these taxpayers.

Now in the context of international tax, which I think is the focus of today's discussion, I identified a few different things in my opening remarks. We have had foreign reporting rules for a number of years. They aren't rules requiring a declaration of income; they require a declaration of the existence of foreign assets, as another way of trying to get at this thing.

We've had rules for some time that deal with the taxation of investments in so-called foreign investment entities—

[Paul Szabo, Liberal, Mississauga South, ON]

Okay. My time is running out and I have two other quick questions.

The first one has to do with...we've got international trade agreements with about 90 different countries. Why don't we make it a precondition of a trade deal to also enter into an information sharing agreement on taxation? Isn't that a good partner to have?

[Brian Ernewein]

Perhaps. I don't have a ready answer for that. I will make the observation that I think there's probably a lot of overlap in the criteria we'd apply, in terms of having both lots of economic interaction, diplomatic relations as a threshold question, and the like.

[Paul Szabo, Liberal, Mississauga South, ON]

It's a thought. If they're a good trading partner and it's a partnership worth having, then we should be working together in our best interest.

Finally, let me deal with all of these Internet businesses that send millions and millions of messages into Canada to everybody, saying your TD account has a problem, it's been shut down, contact us immediately to fix it. It's got the logo on it. And it's the same with Scotia, with RBC, with every one of our national banks.

These are all outside the reach of Canadian law, but there's no question in my mind that they are defrauding a lot of Canadians. That's just as bad as the tax evasion and illegal avoidance.

How does that work into your consideration of international dealings when many of these countries, like an India, a China, etc., are hotbeds for these massive telephone and Internet banks that are bombarding Canadians with attempts to defraud?

[The Chair, Conservative, James Rajotte]

A brief response, please.

[Brian Ernewein]

A brief response is that I certainly appreciate the concern.

I don't think there's a direct linkage between that and the exchange of tax information. Indeed we're pretty concerned about tax information being provided to other countries for the sake of making assessments of tax in that other country, and vice versa, so its use for other purposes would be something that would have to be given due deliberation.

[The Chair, Conservative, James Rajotte]

Thank you.

Ms. Block, please.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

And thank you to our witnesses for being with us today.

Ms. Ricard, in your opening statement, you stated:

The key to the CRA's domestic and international strategy to prevent aggressive tax planning and tax evasion, in addition to active enforcement, is to make it easy for taxpayers to comply with their tax obligations, while ensuring that the consequences of avoiding or evading tax are serious.

You also stated, “We expect taxpayers to operate in good faith”, and that if they enter into financial transactions for the express purpose of avoiding or evading taxes you take action. In another statement you talked about the difference between tax avoidance and tax evasion, and that tax avoidance is about contravening “the object and spirit of Canada's tax laws”. I'm assuming “evasion” would be that you actually contravene the letter of the law.

Once it has been determined that the letter of the law has been contravened and an investigation needs to take place, what triggers that? Then I want to ask some questions about tax evasion convictions.

[Richard Montroy]

Earlier today we did talk about this and I attempted to sort of explain the difference between what I'll call the civil side versus the criminal side.

It's basically a burden of proof. When we raise tax assessments based on tax avoidance, it's simply a question of preponderance of evidence, whereas when we go the criminal route, tax evasion, it's beyond a reasonable doubt.

It's essentially the level of documentation and proof we need to have, in consultation with our colleagues in Justice, to prosecute a case of tax evasion.