Finance Committee on May 8th, 2007

[Dean Del Mastro, Conservative, Peterborough, ON]

But having said that, we've already established the double-dipping, the chart you've provided us, which, if we're looking at the example of a $200 million loan.... Now, I've got good credit, but I don't think anybody is about to give me that much. It would be a significant corporation that would borrow $200 million. We've established that in this example there's nothing wrong with what they've done here. They can deduct the interest twice. So if we were to change that rule, it doesn't take a lot of deductive reasoning to determine that we're going to bring in an awful lot more money.

[The Chair, Conservative, Brian Pallister]

We'll have to leave that as a point and move to Mr. Pacetti now, for five minutes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Perhaps this is the point that Mr. Del Mastro was getting to, and I think a few others, but we're sort of getting away from what we're trying to do here. We're trying to find ways in which we can help your job to increase collections and, hopefully, have Canadian taxpayers, whether they're in Canada or not, pay their fair share. I think we're having a bit of a problem between tax avoidance and tax evasion, and where some of these transactions cross a thin line and we're not sure if they are tax avoidance or tax evasion. But everybody seems to be talking about tax avoidance like it is tax evasion and vice versa. So we're asking for your help.

From what I've heard today, I haven't heard anything that we can put into a report or say this is what we should be doing to help Revenue Canada. We've had Revenue Canada, CRA, come before the committee numerous times in the last couple of months. We did the five-year review, and we had CRA come before the committee when we looked at money laundering and anti-terrorism, and there were some additional items or tools that I wanted to provide to give Revenue Canada the ability to look at certain transactions, but there doesn't seem to be a willingness.

Can somebody help me out here? What can we do? I understand that you have laws you have to abide by--rules, regulations--but with all the capacity and all the resources that you have, you're only able to win 50% of your court cases. I understand the complexity, but I don't think that's acceptable. And who knows how many others there are that you didn't decide to pursue because you didn't think you had a chance of winning?

So who is winning on this side? Is it the guy doing the avoiding, or the girl doing the avoiding or the evading, or is it us? Are we handicapping you guys? Can we help you, so that Canadians, whether they live in Canada or not, are paying their fair share? That's the question.

[Wayne Adams]

Thank you very much. I appreciate that.

I would like to ensure that you're not left with the impression that our success rate is 50% right across. In regular appeals--we were just speaking with the Tax Executives Institute yesterday--I think we are only unsuccessful in about 15% of our cases that are heard before the courts.

Avoidance cases have always been—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I just want to interrupt you. You should talk about the good work that you do, because the perception out there is because we don't sensationalize all the collections that you do make afterwards or things that go, because of the privacy laws.... I know there's a lot of good work being done. The perception out there is that people don't pay their fair share. It's good to have statistics like that.

We want to make your jobs a little bit easier.

[Wayne Adams]

For the category of cases referred to as avoidance cases, I think any country would envy the success rate that we have. These are very difficult cases, even ensuring that we have the interpretation of the law right, collecting the documents. The one thing that I think needs to be reinforced about taxation, unlike any other category of the law, is that smart people can have 180-degree different positions, and it's very difficult to tell for certain who's incorrect.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand that. But let's take the case, because we have limited time, of collecting documents. What is the problem with collecting documents? If that is a problem, can we help you somehow? What is the problem with collecting documents?

[Brian McCauley]

It's certainly something we can go back and look at in terms of whether or not there are any administrative suggestions or ideas that we could perhaps provide to the committee. But as was pointed out by an earlier member, the most significant measures would be either policy or legislative measures, which, of course, Finance will speak to.

Certainly one of the things we've always put a focus on is information and business intelligence. We have been focusing on that, and there have been some moves both to invest in that area and to put a greater emphasis, as was mentioned in the last budget, on exchange of information agreements with tax havens and others. We think that's going to be very helpful.

As for additional investment, at the end of the day, having additional moneys, the money that is proposed in the budget, will certainly help us do our jobs.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

What is the additional money going to be used for? From my experience, all that happens is that CRA just asks for more information, and all you're doing is creating more work and more paperwork, and not much is coming out of there.

So if somebody is going to put a tax shelter together, all that Revenue Canada is asking for is for more forms to be filed and more information, but there don't seem to be tax shelters closing down--or if you want to call them the loopholes. You just said it yourself; they seem to be increasing. All that happens is that the people putting these tax shelters together are hiring additional resources—

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Pacetti.

We're going to move on to Mr. Dykstra now.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Chair.

I just have a couple of things, maybe to follow up a little bit, in a more general sense, on what Mr. Pacetti is asking about.

Approximately how many tax haven cases does the CRA prosecute on an annual basis? That obviously would lead to the reasons why you requested and received more funding to be able to prosecute and research.

[Brian McCauley]

I think you mean by “prosecute” that it's the number of files we're pursuing, and I think that would get back to the number John was using of some 305. One might say a case could be quite large and significant in terms of the level of effort represented by that one number.

[Fred O'Riordan]

Maybe I could add a little bit to that. I realize that time is of the essence, so I'll try to be very brief here in doing that.

When you say “prosecutions”, it masks something. Normally these don't reach the prosecution stage. A lot of the tools we're using that are directed at avoidance transactions involving havens are not things like double-dips.

[Rick Dykstra, Conservative, St. Catharines, ON]

Maybe I'll take the word “prosecute” out and insert the word “engage”.

[Fred O'Riordan]

Just audit, for example. We do transfer pricing audits with large corporations under section 247 of the act. You can look up transfer pricing, and basically what we're trying to say is that when there are related entities with cross-border transactions.... And they are occurring all the time. It's a globalized economy. Canada is not operating in isolation. Virtually all large corporations have some degree of foreign entity involvement, either as Canadian subsidiaries...or vice versa.

We look at all of the transactions of large corporations. We audit every large corporation in Canada, using transfer pricing legislation and other things. If we find that there are non-arm's-length transactions there, we will audit and assess. There's normally not a prosecution in those cases, rather there's an assessment and a payment. We'll use our system of tax treaties, first of all, to eliminate double tax that occurs as a result of that, and secondly, to the extent that we need information, we get that information through the exchange of information provisions in the treaties.

We've talked here this morning, or Brian has, about engaging in tax exchange information agreements with havens. By definition, those are areas with which we don't have treaties. But Canada has an extensive treaty network, 86 treaties globally, and we use them all the time to get information.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

That's very useful from an education perspective. I would assume that the reason you need more money, to get to the brunt of this, is that you've expanded it and you're doing more engaging, so to speak, in terms of making sure we do have companies that are obviously paying a fair share of their tax.

[Fred O'Riordan]

Most of the money does get to the field and is used for audit, for that type of engagement you referred to. That's exactly where most of that money ends up.

[Rick Dykstra, Conservative, St. Catharines, ON]

All right. I'll follow up as the chair usually does. That's why he's sitting there and I'm sitting here.

He asked a question that I was hoping to get at and maybe follow a little bit further in. It relates to the popularity of the Barbados as a result of the tax treaty, which I understand gives an exempt surplus status to Canadian foreign affiliates operating there.

Can you explain to me exactly what that means?

[Brian McCauley]

We will, but only if the member promises he's not going to actually try to use it.

[Wayne Adams]

There are an awful lot of expressions in tax that try to give some sense, maybe in two words, as you have with exempt surplus and other things, and to compress 36 pages of legislation down.

For exempt surplus, the model probably has a presumption that rates are reasonably equivalent. The model says that if Canada grants another country first right of taxation, then there won't be a second incidence of tax when that income comes back. You can debate whether that has merit from an academic perspective, but it's an approach countries take. They cede taxation to the other country, and if it's subject to tax, then they say the residual can come home without tax. There is an option of saying the residual can come home with tax, and we'll grant you foreign tax credit, but those are competing approaches from an academic perspective, and a collection of economists might tell you which way is better.

I'm sorry, I didn't mean to choke off your meter. The term “exempt surplus” is an expression that means a Canadian company can recover profits earned by its subsidiaries--referred to as affiliates--in foreign countries, bring them back, and not have a second incidence of tax until they pay it out to their shareholders. When they pay it out to their shareholders--to you and me, if we had shares--then there's an incidence of tax at that point in time.

It's fairly complicated. It's the field of economists.

[The Chair, Conservative, Brian Pallister]

Thanks, Mr. Adams. I don't think it would take a team of economists to tell us which would be better for the company, paying 1% in the Barbados or 35% here. I don't think so.

We'll continue with Mr. Thibault.

[Robert Thibault, Liberal, West Nova, NS]

Merci, monsieur le président.

You recovered $174 million two years ago, and that increased to $215 million last year, from aggressive international tax planning. Is that increase because of increased abuse levels, or is it because you're doing more policing?

[John Kowalski]

We believe it's related to a couple of things. One is certainly increased effort, because it followed the $30 million we received in the budget of 2005, and it followed the creation of the 11 centres of expertise.

What the centres of expertise do is leverage our entire audit effort across the country, because the knowledge and the intelligence that are accrued, and the risk factors that are identified, are then communicated right across the country, and that $215 million was for a six-month period of that year.

[Robert Thibault, Liberal, West Nova, NS]

Okay, so it's increased effort.

[John Kowalski]

Yes, definitely.