Finance Committee on Feb. 17th, 2011

[Arthur Cockfield]

To my knowledge, there have been no criminal convictions for international tax evasion in Canada, at least within the last decade. This is to be contrasted with the Americans, where there hasn't been a whole bunch, but there have been select cases. They've highlighted them; they've publicized them. The U.S. Senate put all the names in the report. And that does act as an effective deterrent.

When you talk to crown attorneys in Canada or to people who work for the justice department and consider these potential prosecutions, they say they don't bring them forward. It's so difficult to get a conviction. It's this mens rea element. You have to prove beyond a reasonable doubt that the taxpayer had a guilty mind. They were not trying to avoid taxes in an aggressive fashion in the grey area of tax law, but they're actually trying to cheat the government out of taxes.

It would be a good idea for our crowns to identify a special case where it's quite obvious the person is engaged in tax evasion. They have evidence of this guilty mind and make an example out of that person. That, combined with a temporary amnesty, would be a nice combination.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Rosen, I think you had a note you were writing down.

[Lawrence S. Rosen]

No. I essentially agree with what he was saying.

[The Chair, Conservative, James Rajotte]

Thank you.

[A voice]

Pick up milk on the way home.

[Lawrence S. Rosen]

No. It's to clue in the members right across Canada that they have to do something about IFRS.

[The Chair, Conservative, James Rajotte]

Thank you.

We go to Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

Certainly it's been a fascinating conversation. We've headed down a very different track today.

I need to make a couple of comments first. I know Mr. Rosen lives in that dark world of fraud, but 95% of our taxpayers are honest and upfront. So in spite of--

[Lawrence S. Rosen]

You say 95%. Can you prove that?

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

The other thing that I actually found fascinating is this. Mr. Allen is talking about there being victims of white-collar crime. We heard about how people laugh at our system and our consequences. Yesterday we had a vote where, thankfully for the Bloc, we actually had some support for what we're doing and where we're going, in terms of repercussions for white-collar crime. I certainly hope some of the opposition have been listening to this; there are victims and we need to have consequences and repercussions. That's a really important take-away from this particular conversation.

I will head toward a question. Most of our focus has been on low-hanging fruit. And we've heard from previous witnesses that a number of things have come together. We're now in a position to actually go after that low-hanging fruit in a much more aggressive way. The structure is getting into place, so we'll be tackling that low-hanging fruit.

Mr. Rosen, I really appreciate your comments around upstream and how we really need to also be looking at the source.

Was I hearing that there are lawyers all over this country helping people set up systems to help them evade taxes? Is that what I heard?

[Lawrence S. Rosen]

You can go to certain lawyers who will be very helpful, yes. Is the word out on the street what lawyer to go to? To some degree. It's not something I have completely sampled. It's not just the lawyers; it's the accountants as well.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

What do you think we need to do about that piece?

[Lawrence S. Rosen]

I've hammered two or three times at this: self-regulating organizations. This has not worked in Canada for years. We keep clinging to it. The evidence is overwhelming for self-serving.... As long as the discipline is occurring within the accounting organizations or within the mutual fund organizations, you can see the results of those. They're published. The fines are abysmal, and that type of thing. We have to lift out of that and have oversight groups.

The oversight groups that exist in Canada now were put together by the self-regulating organizations. I've said many times to them, “I'm not that stupid. I know why you picked A, B, and C for the oversight committee.” So in that particular sense, although philosophically people don't like the idea of more government, more government is needed in certain cases, especially in the securities area and especially.... IFRS had no business getting into this country. And the only reason it did is because everybody sat silent and said “Let the self-regulating organization do what it wants.” It's completely absurd. I don't know what else to say about it.

So the government has to step in, in certain cases. I'm not saying build a huge empire, but at least, if we're living next door to the U.S., let's have some reregulation instead of deregulation.

[Arthur Cockfield]

Could I respond to that as well?

A brief defence of IFRS. I used to be a securities lawyer in Toronto, and my understanding is the main rationale is to enhance efficiency within the capital market. So when I would prepare a prospectus or an offering memorandum as a securities lawyer, it would comply with Canadian GAP—I was also trained as an accountant—but then I would create a separate document, or we'd hire counsel in New York to create a separate document, to comply with U.S. GAP. The theory is that if we all play by the same rules, this will make it easier for Canadians to invest in the U.S. But that—

[Lawrence S. Rosen]

That's a complete misconception.

[The Chair, Conservative, James Rajotte]

Order.

[Arthur Cockfield]

That was the main theory by the people who put it all together, and we've heard there are some problems.

The government can do more. Last year, in the budget, they introduced enhanced reporting for those who market aggressive international tax, and I think that was an important step.

In the late 1990s, there were a variety of scandals. KPMG was subjected to a heavy fine because they would go to a multinational CFO, for instance, and say, “I can save you $500 million in taxes next year through my international tax shelter, or whatever I save you, I'll take 30%.” This led to a proliferation of these sorts of schemes, which are tax avoidance and not evasion. They're attempts to reduce global tax liability while complying with all rules.

Now we're forcing the marketers to disclose. I do think the accounting profession could be better regulated, but regulating lawyers is a different story. I'm a member of the Law Society of Upper Canada, and we don't like government interference. We don't want the government to tell us, for instance, to disclose confidential client information. But I think, certainly for the accountants, enhanced disclosure is required.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Allen, please.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

I'm always fascinated when lawyers say they don't want to actually disclose things they happen to know about. It might be legal, client privileges being the mask, but that's a debate for another day.

I'm interested, Mr. Cockfield, about this sense of harmonizing regulations with the U.S., if you will, to make it easier...as you talked about that one example. And I give credit to the government side, who trumpeted that our regulations in the banking sector saved us from what happened in the U.S. It seems to me, if we want to harmonize with the United States, from that perspective, maybe they should have gone the other way and harmonized with us.

Here's my point. We were selling—not us, personally, and not you either, Mr. Cockfield, but folks were selling a pig in a poke for the last three years. Whether they call it derivatives or asset-backed paper, you name it, it would be fascinating to know how much of that money actually found its way to offshore banks. I would suggest a fair amount.

If we lose the oversight ability, in the sense that we give it up to someone else whose history, quite frankly, albeit short.... I wasn't around in the thirties, so I'm not really sure what happened then—I can read about it--but I lived through the last 10 years and saw the devastation, not just to the U.S. market, U.S. consumers, and U.S. workers, but right across the world. We got off a little bit lighter than some other places. The one thing I see, not as an expert—I'm not an accountant, nor am I a tax lawyer—that was absolutely true about all those jurisdictions, including the U.K., and I grew up in Glasgow, Scotland, was that they went to deregulated or self-regulated markets where they said, “Trust us.”

My old granny used to say, if you've got 5¢—or in her case five pence—and you don't know the guy who's asking for the five pence, do you trust him or do you keep your own five pence in your pocket? So if we look at recent history, where folks who self-regulated almost wrecked the financial world—almost, they came within a hair's breadth—why should we trust them?

[Arthur Cockfield]

Those are all very legitimate points. There's the banking sector, and of course I think you're exactly right, we shouldn't replicate the American reforms. They got rid of the 1934 Glass-Steagall Act. That was the problem. They had a regulated sector, they deregulated it, and that led us into a lot of these problems.

But with respect to the accounting and tax evasion and disclosure of financial statements and so forth, the Americans have actually been aggressive here. Post-Enron and WorldCom, they introduced federal legislation called Sarbanes–Oxley, because of all the various scandals involving accountants and at times hidden revenues and so on. And then, in turn, we matched that legislation. Sometimes the nickname is SOX, for the U.S., and we call it Can SOX here. So we are regulating to a greater extent our accountants, following the U.S. initiatives.

In some circumstances we probably should follow them, but in others, I absolutely agree with you. With respect to the banking sector, we should not follow the U.S. reforms.

[Malcolm Allen, NDP, Welland, ON]

Dr. Rosen, do you have any comment?

[Lawrence S. Rosen]

The U.S. banking system is totally different. I took my graduate studies in the U.S. and had to do various reports on this. You can't compare a half dozen big banks in Canada to literally thousands and thousands of state-regulated banks in the U.S. Canada was easier to regulate.

Also, I'm on the same floor as OSFI, in Toronto, and I don't want to make my life in the elevator any worse, but—

[Voices]

Oh, oh!

[Lawrence S. Rosen]

—I'm standing on that.

Still, the general point that you're getting at is, for sure, how can we deregulate accounting when the rest of the world—most, unfortunately—is going in the other direction? I belong to all the big accounting associations, so I'm annoying all of them at the moment. They went with this international stuff and deregulation without understanding all the loopholes. They're beyond belief. Unattainable is the idea that you will have one system across the world. You can't even do it in three companies in Canada.

[The Chair, Conservative, James Rajotte]

You've got a very brief question, if you want it, but it has to be very brief.