Finance Committee on Feb. 17th, 2011

[Arthur Cockfield]

No, I would disagree. I think the CRA is doing a good job. For last year, 2009, they have indicated that they have dealt with 3,000 disclosures. I don't think they've been lax. I think there may be some structural problems with the disclosure program itself. Sometimes taxpayers complain that there's a lack of certainty. They don't want to come forward because the rules aren't sufficiently certain for them to clear up their debt.

I think on one hand you're right that we need to worry about the reaction of other Canadian taxpayers, honest taxpayers, who might wonder why these tax cheats are being dealt with in a lenient fashion, but on the other side, I think the voluntary disclosure program should be looked at as a rehabilitation program. It's a way to encourage these dishonest taxpayers to become honest, to bring them into our program of paying taxes on an annual basis.

There's always going to be a problem with giving a break to tax cheats, but I suppose it's like having a bird in one hand versus two in the bush. We'd rather have some money.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Rosen, be very brief, please.

[Lawrence S. Rosen]

The other reason you don't get this compliance is that the original deed in the first place was probably criminal. So unless the tax people say they're not going to investigate what happened in the first place to get the cash that then went offshore....

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll go to Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

Once again, welcome to the witnesses.

I'm hearing over and over again that the original reason for people doing this tax evasion is typically criminal, or they're hiding money from a spouse because they're about to go into divorce. It's all bad from what I've heard. They were talking about needing to protect their interest to make them come forward. It goes against my philosophy, which is that you do the crime, you pay the time, so to speak. But at the same time, I appreciate your advice on this.

Monsieur Paillé was trying to get to the tax gap and the ability to determine how much is actually missing, how much is actually sitting in offshore accounts. And although it would be nice to know exactly how much is out there, that poses a significant challenge. I think Mr. Cockfield estimated that it's between $5 trillion and $38 trillion, which is really a big spread. It's a huge spread.

Can you just explain to me what the challenges are in actually getting to determine how much is being held in offshore accounts that is tax evasion?

[Arthur Cockfield]

I think the main challenge is the fact that all of these tax havens, at least to my knowledge, maintain bank secrecy laws. As a researcher, if I went to Switzerland, say, if I hopped on a plane and started to talk to either tax authorities or folks in banks, their answer would be, “If I reveal any information to you, I will go to jail. It's a criminal offence in my country to divulge personal financial information to any third parties.”

For that reason, we really have no idea how much is sitting in these tax havens around the world. Some studies have suggested that half is in one country, Switzerland. Sometimes in Canada we tend to focus on the Caribbean tax havens, but in fact they're relatively small players compared to some of the European havens.

Then, of course, Switzerland is a developed country with a very sophisticated financial sector. They did agree, for the first time in history, to share bank account information with U.S. authorities because of the UBS scandal. My understanding is that Canadian regulators also went and asked for information. They told us to go away. This was in part because the U.S. had conducted their Senate investigation that revealed this particular bank was sending people to the U.S. and they were pitching illegal tax evasion. Well, it turned out they had a Canada desk and they were doing the same thing here in Canada. Nevertheless, they refused to cooperate with us.

I should also highlight the fact that unlike Canadian banks, the Swiss government actually maintained, I believe, a 25% ownership in UBS at the time of all these scandals. So the government was a partner, in effect, with the banks. They subsequently divested their ownership interest in UBS. I'm not sure if they maintained interest in other banks. But because of the secret nature, because of these bank secrecy laws, nobody really has been able to estimate in any concrete fashion how much money is out there.

[Shelly Glover, Conservative, Saint Boniface, MB]

I'm really glad you brought up Switzerland, because there was an article on February 16 from the Associated Press that talks about the Swiss government wanting to relax its demands on foreign countries that are seeking help to look into tax evasion situations. In fact, the country is looking at easing the rules because they're afraid, and it says right in the article:

The country has gradually eased its banking secrecy rules in recent years to avoid being blacklisted as an “uncooperative tax haven”.

I encourage you to continue to push. It sounds like they are willing to share because they know we're all talking about it and we're all looking at them as a potential tax haven that is doing damage to our countries.

In any event, Mr. Cockfield, you did an interview, and the Toronto Sun wrote about the interview and you're quoted as saying that:

...wealthy Canadians evading the taxman here by burying undisclosed assets and income in offshore accounts should be “quaking in their boots,”....

What did you mean by that?

[Arthur Cockfield]

I think that was in reference to the WikiLeaks potential disclosure. There's another possible scandal that hasn't really hit yet. A Swiss bank clerk has given information he stole from a Swiss bank, I think a Cayman bank, to WikiLeaks.

I may have said “quaking in their boots” to the reporter, but the truth of the matter is that there have been greater disclosures of these secret accounts, and if I was a dishonest taxpayer who had used one of the banks this fellow had been working at, I probably would be quaking in my boots.

As I think I also noted in that article, the problem with the WikiLeaks disclosure is that it would also disclose potentially honest taxpayer activity. Canadians with global business operations use bank accounts in Switzerland and elsewhere for completely honest purposes. They have full disclosure to the CRA. In contrast to other scandals such as the one where the Germans gave us the information from a Liechtenstein bank, this is going to show up on the web. It hasn't occurred yet. It will probably get some folks quaking in their boots, but it will also reveal honest taxpayers, which could pose a security risk for them and create privacy problems.

[Shelly Glover, Conservative, Saint Boniface, MB]

I think they may actually take advantage of the voluntary disclosure program. Since 2005, the number of people who have come forward under the voluntary disclosure program has doubled. I firmly believe that the more the media report our getting access to the information, the more people will be encouraged to use our program so that they can try to get out of this without being charged, not that they don't deserve to be charged.

Go ahead, Mr. Rosen.

[Lawrence S. Rosen]

When you try to trace these accounts, how many people are going to actually do something in Canada that's iffy and then have the account in their personal name? When we trace these, they're in joint ventures, they're in lawyers' trust accounts, they're in corporations. They're multi-layered; they're in all sorts of other trust arrangements. So the tracing sounds easy, but it's extremely complex, especially when you have them moving from territory to territory.

[Shelly Glover, Conservative, Saint Boniface, MB]

You said you use specialists. Which ones do you use? You said that in the beginning of your—

[The Chair, Conservative, James Rajotte]

That's the last question.

[Lawrence S. Rosen]

They are not in Canada. They're for the most part American and English. When they get to a certain point and say they need money to bribe somebody, we say goodbye.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Thank you, gentlemen.

I find myself in agreement with Ms. Glover. We don't always agree, but....

Mr. Cockfield, when you talk about a voluntary compliance program...my understanding is that CRA has a voluntary compliance program for Canadians here who may not have filed a tax report four or five years ago, for instance, and nine times out of ten they just pay the interest, unless you have somebody represent you.

I guess there are two questions, and this kind of goes to both of you, I think.

It seems to me that folks who are actually bringing their money back, who are actually voluntarily complying...it must be because they want to actually repatriate the money they've actually put over there, because otherwise, if you want to leave it over there, what do you care? If you're bringing it back, you're bringing it back for a reason. Maybe it's an inheritance issue. You might be elderly. Maybe it's going to a family. Maybe you're trying to move it into a different business that might be legitimate. So we're allowing that to happen as a voluntary compliance piece and we're saying to them that it's okay to bring it back: we want you to bring it back; you can cut a deal with us and we'll reduce the penalties outstanding for you—never mind the moral piece about how we're actually rewarding you for doing something that was illegal.

It seems to me in the criminal justice system it's the only time we actually reward folks for doing something illegal in the first place. If I break into a Mac's Milk store and nobody catches me but one day I say I did it, the authorities don't say to me, well, let's cut a deal because you voluntarily told us that you've broken into the Mac's Milk store when you were 14. It doesn't work that way.

The other side is--Mr. Rosen, I will let Mr. Cockfield start, and then if you could help me with this....

Maybe I heard it wrong, but it seems to me that you are suggesting that this money being voluntarily repatriated—and looking, through advisors or whomever, for some sort of a deal, if you will, that's less punitive than what's established at the moment—seems to have started out as perhaps even illegal in some cases. I think you actually said it's now the majority of cases.

If that is true, we're now saying bring back the money that went offshore illegally—that was actually generated by illegal activity—and somehow we give someone a break for that. I hate to tell you, but I would have a tough time going back to workers at John Deere, whose plant disappeared, and saying to them that it's okay for folks to get that kind of deal when we couldn't save their jobs.

I wonder if both of you could talk about that issue. How do we make that salient with Canadians?

[Arthur Cockfield]

It is a very tricky balance. In terms of what the profile is of these Canadian taxpayers engaged in international tax evasion, I think you'd see a lot of different types. You'd see the contractor who doesn't have withholding obligations imposed on him and he makes a million dollars, discloses $500,000, and puts the other half offshore.

There may also be, I've speculated in the past, a kind of unique taxpayer to Canada and certain other countries with lots of immigrants. Let's say a hypothetical taxpayer moved to Canada from Hong Kong and had $100 million in savings in 1990. They come to Canada, knowing that once they're a Canadian resident they're taxed on their worldwide income. That total $100 million earned outside of Canada will then be subject to Canadian tax, so before they move here they put it into an account offshore. That's another person who didn't initially generate illegal moneys to be put offshore. Then you've got the drug traffickers, etc. There's also a concern that tax havens are being used to finance international terrorism. We've got FINTRAC and other measures to address that.

As a concluding comment, I think fear is the main motivation for entering into these voluntary disclosures—not trying to repatriate the money. They can probably get it back here in some fashion, through offshore credit cards or some other device. They're worried that they're going to be prosecuted criminally, and therefore they're entering into these disclosures. It's kind of like a plea bargain the crown enters into with counsel for the accused. I mean, some Canadians probably aren't happy that we engage in this plea bargaining process in our justice system to move people more efficiently through the system and for other objectives—to encourage rehabilitation, etc.

That's how I look at the voluntary disclosure program. It's not going to make a lot of Canadians happy to see that folks get a break; nevertheless, we want to bring them into our paying system, to rehabilitate them, and to get their tax revenues to pay for roads, schools, etc.

[Lawrence S. Rosen]

I sympathize with your point about the average person trying to save and hoping to keep their money and having a pension and so on. In fact, we wrote a book on this a few months ago.

I know a bunch of you probably don't agree with this, but I see the ugly side of it every week. The prosecutions do not occur. There are very, very few situations that actually end up in court, where there's a sentence and so on. If that side of Canada is not dealing at all with these various situations, then the CRA decides not to go after penalties and so on. What do you care, as somebody who has been working these types of activities? You don't.

The pressure isn't there right across Canada. We have had so many court situations, and I've seen these people laugh. The contempt for Canadian securities regulation is extremely high, and to pretend otherwise is not being realistic.

[The Chair, Conservative, James Rajotte]

You have time for a very brief question, Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you.

Following up on that, Mr. Rosen, the “white-collar crime”, as they call this moving of money, used to be called the victimless crime. I would suggest that my friends from Quebec, some of the victims who have lost their pensions and their livelihoods at the age of 75, are indeed victims.

[Lawrence S. Rosen]

I would agree a hundred percent with you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Brison, for a five-minute round.

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

Thank you very much for your insight today. It has been very instructive. It is one of the most productive witness sessions we've had on this topic.

Mr. Rosen, you've spoken of the inefficacy, if not of securities regulations, then of the capacity to prosecute successfully. Do you agree with many who say that the OSC is not as effective in concluding successful prosecutions as the SEC, as an example?

[Lawrence S. Rosen]

It's not just the OSC. I've testified in many other courts across Canada. I cannot honestly point out any of them that are strong in pursuing these.

We've had pathetic situations. Because of contacts with these particular law firms and so on, we have agreed to help on a case, and we find the securities commissions drop the case; they just do not put in the effort.

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

Is it a question of resources?

[Lawrence S. Rosen]

No, it is a multiple-level issue. It's a question of whether the Canadian public cares enough and the lawmakers see this as a priority. On the leadership—I've been on the prosecution side for the OSC, but it was some years ago—you need that courage to proceed.