Finance Committee on Feb. 17th, 2011

[Lawrence S. Rosen]

Let me make myself very unpopular. The situation I see from time to time is that governments want money to go to other countries, and they have causes and agendas and everything else. If you go so far as to cut off a government having a slush fund that most of us would agree should be spent, then you've gone too far, in my opinion.

Why do we pretend that the offshore is being used by everybody but various governments, various charitable organizations, and various philanthropists? It is being used for those purposes, and if it's a protection of democracy, I personally agree with it. There is a fine line in there, and trying to pretend that this is not happening in the world is just being extremely naive, in my opinion.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So that goes to your list of legitimate and illegitimate uses of offshore tax havens?

[Lawrence S. Rosen]

Yes.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

It includes support for democracy using special funds, among other examples. Is that what you're referring to?

[Lawrence S. Rosen]

That's unfortunately the way the world operates, and I don't know of another way of doing it. If I did, I would suggest it, but we can't pretend it doesn't exist.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So you're basically saying there's a limit to how far this tracking should go; otherwise we undercut legitimate purposes but illegitimate methods.

[Lawrence S. Rosen]

It's up to the parliamentarians to try to trace the funds that are coming out. How far they go is a personal and party choice.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

You made some strong comments in your opening remarks and also in your document here about the international financial reporting standards, the IFRS. You stated that it will open up many “previously-closed nasty schemes that are worse than tax evasion”.

Can you elaborate on that?

[Lawrence S. Rosen]

I don't see the point of us talking across Canada—and I'm not talking just federally—about protecting seniors. We had this report that just came out recently calling for more public education, and so on.

If we seriously want to protect pensions, and everybody agrees it's important, why don't we knuckle down and take the steps that are necessary to prevent these deregulations?

IFRS involves massive deregulations. It puts all the power in the hands of corporate management. I've tried to run courses for directors and so on with not much luck. The auditors are protected by a Supreme Court of Canada decision. There's nobody monitoring this IFRS and management control.

We are turning out lists for our clients saying, “Here's how the books can be cooked under IFRS where they couldn't be cooked before under Canadian GAAP.” I sent letters across Canada.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So you're saying that you're more concerned about pensioners and holders of investments and mutual funds and what have you, because the corporate managers will use this new-found freedom to swindle their shareholders, and that would be far worse than the tax havens we're talking about?

[Lawrence S. Rosen]

Yes, because the dollars are monstrous. I'm not guessing. We called Nortel years in advance. This was billions of dollars. It was the same thing for the business income trusts. You can go through a long list of situations that we've called as problems. I have given files to IMET and other people and said, look, these are ridiculous, they have to be investigated. The talent is not there, the money isn't there, and so on.

I see this as a growing problem. There's no sense telling people we're going to protect their pensions when we're doing essentially nothing to ensure the protection exists.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

The underground economy is also a problem. It's much smaller, I guess, according to the anecdotal evidence out there, but we don't even seem to have a good strategy to address the problems of the underground economy. Maybe it's a little simpler to deal with simply because it's a domestic thing, and we're not worried about all the creativity or the international intrigue.

What strategy are you aware of in terms of addressing the underground economy itself, and would it be reasonable for us to consider the principles underlying that strategy?

[Arthur Cockfield]

Boy, that's a tricky question. I think one thing that's helped in recent decades is the GST. One of the reasons a lot of tax scholars support VATs and GST and international consumption taxes is that they encourage compliance, because to get your rebate, you have to file your return with the government. So there is some empirical evidence that those have helped to reduce the amount of the underground economy. It's just very tough.

My understanding is that Canada's underground economy probably compares favourably with those elsewhere, certainly with those of countries outside of the OECD, for instance. We don't have a corrupt government here. Surveys indicate that we have high taxpayer morale, in part because most taxpayers trust the system. Most of us pay. Most of us trust. This is in part why this hearing is so important, because you're encouraging a greater trust within the system, and we don't want people to bail into the underground economy.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Rosen, do you have anything to add? You don't have to.

[Lawrence S. Rosen]

There are many relatively easy ways of doing this. You can just sit in a restaurant and observe the cash register and see how much cash actually gets into a pocket versus the cash register. There are dozens and dozens of these.

[Paul Szabo, Liberal, Mississauga South, ON]

It's under the counter.

[Lawrence S. Rosen]

They are used from time to time by CRA, to what extent I don't know. But the point is we aren't cracking down on a lot of this.

[Paul Szabo, Liberal, Mississauga South, ON]

It's nice to say we're good boy scouts, but relative to the size of the population, the numbers are not that much greater in terms of the percentage of the financial flows that are out there. I think this is a fallacy. I think we are as bad as any other jurisdiction because we have lawyers, accountants, and consultants--aggressive people--out there. They know ways. They'll all find ways. They'll get you. No matter what you do, they're always at least one step ahead of you.

The reality here is, do we need to start maybe a multifaceted approach? What is the accounting profession doing? What are its responsibilities? And the same goes for the lawyers and the tax professionals and the consultant groups. There are so many people involved. You can't do this as an individual and say, “I'm going to set up a tax haven.” There are other people involved. There has to be a ripple effect. You have to be able to find links.

I think it's naive to think they're untouchable. Privacy issues and respecting that privacy are a problem for us, but you need to start somewhere, and the ripple effect and the domino effect have to be there. I just don't see any enthusiasm for really dealing with the problem.

[Lawrence S. Rosen]

I agree with you 100%. There are many ways these things can be attacked. I often get into court and say, “Gee, this is a novel trick that was used. I wonder who advised them how to do this.” It certainly wasn't the client. So these things have to be pursued.

[Paul Szabo, Liberal, Mississauga South, ON]

You are a noted authority on forensic analysis and accounting, and actually a former professor of mine.

[Lawrence S. Rosen]

I'm now being accused of having produced a manual for the crooks.

[Paul Szabo, Liberal, Mississauga South, ON]

There you go.

And do you know what? The more people who know about it.... All of a sudden, people will try, but they will never have the finesse to be able to pull it off and they'll get caught.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Paul Szabo, Liberal, Mississauga South, ON]

Let's get back to generic approaches. What's the balance between deterrence and “I'd rather have you back in the system” or amnesty? It's the deterrence end. But where is the balance?