Finance Committee on May 8th, 2007

[Brian McCauley]

No, traditionally as an agency we don't give revenue estimates, particularly on items like that. That's the responsibility of the Department of Finance. The Auditor General is obviously comfortable with how she came up with that number, and maybe it would be a good idea to chat with her.

We don't disagree with the number, but we don't confirm it either. We're not in the job of making estimates in that manner.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you have an estimate of the tax avoidance that occurs under regulation 5907? Some companies must use this provision, and you must know how extensive it is and what the amounts are.

[Brian McCauley]

We know this is a problem and it worries us. But we do not calculate the figures like an objective or as an estimate.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So you do not deny the amount of $1.2 billion mentioned in 1990 by the Office of the Auditor General or the estimated annual increase of 18% by Statistics Canada. You do not deny that these figures may be realistic.

[Brian McCauley]

We would say neither yes or no. We accept them as being a reasonable effort on their part to come up with the calculation, just as Finance and a number of independent papers do. There are enough people making those estimates. We know it's an issue and we attack it from an administrative perspective, but we don't make a practice of trying to estimate, as John said, tax gaps or numbers like that. We don't challenge or disagree with what others are putting out.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

When the government does its budget estimates, it makes budget choices. It must be able to estimate that, if it got rid of the Tax Treaty between Canada and Barbados, it would recoup a certain number of billions of dollars. You do not have that estimate? Such figures have never been requested from the Department of Finance? You do not have an estimate of the amount of tax avoidance that stems from the application of the Tax Treaty between Canada and Barbados?

[Brian McCauley]

No, we typically do it the other way round. For example, we know roughly what the productivity of an audit effort is, or a particular application of a capacity from a tool or an instrument. We say to Finance, with this much effort we typically can generate these certain amounts, but we don't do it by country and we don't overfocus our efforts. That's largely because the challenge keeps evolving, and depending on our risk assessment and risk profiles, those resources will move.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Still I am a bit surprised. Who can tell what the impact is of regulation 5907? By taking advantage of this provision, people do not have to pay any taxes. In fact it was drafted so that any profits returning from abroad do not have to be taxed. Can you give us the amount?

[The Chair, Conservative, Brian Pallister]

Monsieur Crête, you're finished.

Go ahead, Mr. Wallace, for seven minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

I want to thank the officials for coming on relatively short notice. It sounds as though we made you work a little overtime yesterday. Now that it's tax season, you'd be working overtime anyway.

I have a couple of general questions.

Some of the earlier questioners have been focusing on the business side. In your presentation, you talk about personal tax avoidance through using tax havens, and companies and businesses using them. What's the balance? in your view, based on what you've been working on, is it mostly on the corporate side, or are there some opportunities that individuals have been taking advantage of?

[Fred O'Riordan]

There's more money at stake on the corporate tax side. More of our audit efforts are devoted to corporations than to individuals. I don't have an exact percentage split, but it's predominantly corporate tax.

That's not to say we don't devote a considerable amount of audit effort to the individual tax side as well. We focus on high-wealth individuals, in particular when there's an association with a haven country. We have been doing more on the personal income tax side in the last couple of years, partly because of the exchanges of best practices that we've had with other tax administrations.

I can mention, for example, the Australian tax office. They undertook a high-wealth-individual project several years ago that they briefed us on. We were quite taken with that and initiated what we call a related parties initiative that looks at high-wealth individuals and the entities they control, either directly or indirectly. This is a non-traditional audit approach; it's a merger of what we would normally do on the individual side and the corporate side. It means we have a network of associated entities and we have parallel audit work. It's actually a single audit divided into numerous audits on that basis.

We find we've had very good success with that project. In fact, we'll probably be converting it into a permanent program, based on the results of the pilots we've undertaken. We've done about 12 of these. They take a considerable investment of audit expertise, but there is a return on investment that makes it well worth continuing to do it.

[Mike Wallace, Conservative, Burlington, ON]

My second question basically relates to that.

We heard from Governor Dodge last week, and the opposition brought forward the issue in the budget that instigated this broader review, which I think is an appropriate way to go. I believe he indicated that this is not a new problem, that it's been around for a number of years, and it's really not that easy to solve, because there are people who are doing things fairly--let's say it that way--and others are taking advantage.

Would you like to comment on the difficulty of this file in terms of trying to close what some people call tax haven loopholes, and so on? I'd like a high-up overview of how difficult this is.

[John Kowalski]

Perhaps I could start, and other colleagues could join in.

I would certainly agree with the view that this has been a long-term challenge for a number of years and will likely continue to be a long-term challenge. By definition, the tax havens issue involves other countries around the world, and any sustainable action to address it involves the cooperation of other countries around the world. Working in multinational forums such as the OECD and other venues like that is always challenging in terms of the length of time it takes to work through these kinds of issues and to get agreements on different approaches, exchange of information provisions, and so on.

We would certainly agree that it is a challenging issue that does take a fair amount of sustained effort and commitment to address.

[Wayne Adams]

Thank you.

I appreciate your observation there. There are occasions when it is difficult to tell the difference between what is entirely contemplated by tax policy and what might be characterized as taking an unintended advantage.

We have the opportunity to consult on the committee that administers the general anti-avoidance rule. We have lawyers from the Department of Justice, policy experts from the Department of Finance, and our audit and legislation people within Revenue.

For example, one of the issues we struggle with is the Univar court case, to which I referred. I read the decision a couple of times, and I didn't even get a sense from the tax court judge that he saw any of the mischief that we saw. It was a very traditional, classic double-dip structure. Sometimes we have to be careful and continuously do a validity check on ourselves so that we're focused on the right cases to pursue. We sense we are, but occasionally the observations of the court help us to refocus. It is difficult.

I think we're aware of investment that's intended to take advantage of incentives. Hopefully we can focus on those that aren't, and address them.

[Mike Wallace, Conservative, Burlington, ON]

If you discover an inadvertent avoidance—let me call it that—within a corporate structure, do you take them to court or give them an opportunity to pay it back? What's the process if you discover this kind of inconsistency?

[Wayne Adams]

If we're satisfied that we're correct and convincing in our arguments, it's entirely possible that the company will agree that their strategy was aggressive, and they're a company with a philosophy that's a bit risk-aggressive. It's very expensive to litigate cases, for both sides.

Some will be satisfied if John and Fred's area has convincing arguments to support the assessment. Some may file a notice of objection and still deal with Revenue officials and the appeals process. At that point in time, they might be satisfied with the outcome. Very few go off to court. It's quite surprising how few cases go off to court.

[The Chair, Conservative, Brian Pallister]

We'll continue now with Madam Wasylycia-Leis, for seven minutes.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

Thanks to our witnesses today.

The genesis of the motion that the committee has before it came out of concerns about the budget provision around the elimination of interest deductibility, in terms of investment in foreign corporations.

From the minister's statement yesterday and media reports, it appears that in fact this whole issue is being addressed by the government. Do you have any sense of when that change will come and specifically what it may deal with?

[Brian McCauley]

That's a very good question, and it allows us to maybe make a point, which I think John mentioned in the beginning. As the Revenue Agency, we are extremely careful that we do not comment on tax policy or legislative changes. There's always a very clean dividing line between the responsibilities of the Department of Finance and their officials to speak to tax policy and legislative questions.

For us to begin to do so can certainly cloud the messages that the government or the Minister of Finance wants to send, and can have some adverse effects in the markets or with business decisions. We respect our role as an administrator and keep our comments to the administration side.

In fairness, I would note, madam, that we obviously work closely with Finance. The Department of Finance is always well aware of our concerns and our views as administrators—as is the minister, I'm sure—and they take those into consideration before they make any decisions on changes or the timing of changes.

But no, we're not privy to the degree to which Minister Flaherty may or may not be adjusting, or the timing around that. They'll call us when the time is right, and at that point we'll have a chat with them.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

In terms of the measure as introduced in the budget, were you consulted with respect to the ability to enforce that particular provision—given the fact that the concern was raised by Mr. Dodge and others—about the difficulty of separating out those who use this as a tax haven versus those who are legitimately expanding and investing?

Did you comment on the difficulties of enforcing this particular budgetary provision?

[Brian McCauley]

We had an opportunity to signal to Finance that if they asked us to administer this particular change, we certainly could do so.

I would ask maybe John or Wayne to comment.

I don't think it makes anything any more or less difficult for us at the end of the day. As we've described, it is a very complex and highly technical area, but it's one where we certainly signal that if the Minister of Finance and the government wanted us to administer this particular provision, we would be happy to do so.

I don't know, Wayne or John, that we've identified anything beyond that in terms of administration. We, much like you, are waiting for further clarity as to the intent.

Did you have an observation, Wayne, that you wanted to share with the committee?

[Wayne Adams]

A couple of questioners have commented on the abolition or elimination of interest expense. It's my understanding in reading that provision that the Finance measure is simply saying that the deduction is deferred until taxable profits are recovered from these entities in foreign countries. I don't believe it would be fair to characterize it as abolition. It is available, and that is how the minister would sense that he could continue to stimulate the investment he intends to stimulate. It's a deduction that would be available to companies, but only once they're recovering taxable profits.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

There are those who believe that in fact the government made the right decision all along, and that there is considerable revenue to be gained from this measure that could then help deal with the growing gap between the overburden upon individual taxpayers for government revenue rather than on corporate interests. We've seen that gap grow considerably.

Could you comment on the amount of revenue we would be saving by staying on course versus what would happen if the minister makes an adjustment to this policy as you've suggested, by putting on hold the deductibility?

[John Kowalski]

Perhaps, as noted earlier, that would be a good question for the Department of Finance from a tax policy perspective rather than to us in our role as tax administrators. In terms of the kinds of consultations we get into, we certainly get asked for our advice on the administrative feasibility of a particular provision or the related cost of a particular provision, or perhaps the administrative burden it might or might not engender for individuals or corporations, and so on. That's normally the kind of feedback we provide. But from the perspective of tax policy and the implications from a tax policy perspective, it's clearly the domain of the Department of Finance.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

On the issue of tax havens, we've had evidence in the past that companies are being investigated for using offshore countries for tax haven purposes, as the court case involving Merck Frosst shows. In the past, officials have said they can't comment on the specifics of a case. Can you tell us how many companies are being investigated besides Merck Frosst for evasion of taxes by using tax havens?