Finance Committee on May 8th, 2007

[Wayne Adams]

And most do, I would say.

[The Chair, Conservative, Brian Pallister]

Aren't you at all concerned that just as many won't when they come to understand what their friends in Corpco Canada can do to avoid paying their obligations? The percentage of revenue that's derived from corporations in this country has been decreasing relatively steadily over the last number of years. I would think that if governments don't address this issue in some form, the percentage of revenue that will be derived from individual taxpayers is going to continue to rise steadily as a consequence of the fact that big companies can take advantage of these types of things, and the little guy on the street can't.

What's going on in other jurisdictions? Are other jurisdictions just sitting back and saying that everybody else is doing it--this is an argument I've heard from some here--so we should do nothing about it, too?

First, what are other jurisdictions doing to limit the degree to which interest can be deducted and thereby reduce tax revenue on foreign investment? And second, what are they doing in terms of the repatriation aspects of this as to the tax-free repatriation of the money? Are other jurisdictions doing something in respect of these two issues?

[Brian McCauley]

I'll just make a brief comment, Mr. Chair, before turning it over to Wayne.

I think a number of the observations you made relate probably more to tax policy than to tax administration. That being said, in all fairness, the agency does take this issue very seriously. The government has made significant investments over time. It's certainly, as John said, one of our top four priorities that we focus on.

I would note that in the last Auditor General's report, which perhaps doesn't happen all that frequently, we really got good marks in terms of the efforts we were making within our responsibility as an administrator. So we are doing our best, but it is a difficult and, I would note too, long-term challenge.

It was interesting. We were looking at the issue of exchange of information agreements, and someone noted that the U.S. has 20 information exchange agreements, and we're still working on our first. We then pointed out to the individual that the United States started in 1983 and didn't sign the first agreements until, I think, the early 2000s, if I remember.

[The Chair, Conservative, Brian Pallister]

That's nice, and I appreciate the fact that the Auditor General commented on your favourable progress in policing the existing rules, but my question was about changing those rules. My question was about what other jurisdictions are doing about those specific issues we're talking about this morning: interest deductibility and repatriation. That's what I asked, and I'd like an answer to that question.

[Wayne Adams]

Chairman, again, I think it would be fair if Finance was given the opportunity to answer that question. We attend many of the same international venue meetings on what's referred to as harmful tax practices or sharing best practices and the like. Every country that has a reasonably high rate of taxation is struggling with these very issues. I don't know that it would be fair to say that we lag behind, or even that we are out front. I think it was thought, in 1988, when the general anti-avoidance rule was issued, that it might influence behaviour in a way, and I think it had that effect.

But I don't contest your observation on the relative rating of corporate tax revenue to individual tax revenue. I would defer to Finance to comment on whether they think there are mechanisms that can address that in a fair and predictable way.

[The Chair, Conservative, Brian Pallister]

Right.

We'll go to Mr. St-Cyr.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chair, for your intervention. Those five minutes seemed particularly long to me. I imagine that, in your great magnanimity, you are going to give me enough time to cover the three subjects that I would like to deal with today with the Agency.

I wanted to come back to what my colleague, Paul Crête, was talking about, namely regulation 5907, which allows the recovery of profits, more particularly from Barbados. Under the Tax Treaty between Canada and Barbados, a priori, tax should be paid when profits are recovered, but regulation 5907 overrides this regulation.

I would like you to explain to me quickly—because we do not have much time—what the mechanism is and how it makes the normal treaty inoperative.

[Wayne Adams]

Thank you.

The issue of regulation 5907 was raised last week. Brian asked me to look at it. Regulation 5907 is, I think, 36 pages long. It attempts to give some coherence to this deduction in respect of dividends that are received from foreign affiliates. That's very basic. There's a presumption that in Barbados there is a rate of tax. It is a low rate of tax, but it is a rate of tax nonetheless. As long as we have a treaty with that country and there is a rate of tax applicable to the earnings there, no matter how modest, it is within the scheme of the act to allow those profits to return to Canada without a second incidence of tax.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

According to the mechanism, when Canadian businesses complete their tax return and declare income earned abroad, for example, in Barbados, they also claim that, under regulation 5907, they have already paid tax on this income in Barbados. In so doing they ask to be exempted in Canada.

Is that right?

[Wayne Adams]

Yes, sir.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thus, when my colleague, Mr. Crête, asked you how much money that represented and you told us that you did not have the figures, that meant that, although you had not added up these figures, you had them in the tax returns for all the companies, and that all you need to do is to add them all up in order to provide them to the committee?

[Wayne Adams]

I don't know if there is a fair connection between those two terms. I thought there was a question of whether we could estimate the potential recovery of profits from those entities.

We have the ability to capture the amounts claimed under this deduction provision when the money is returned to Canada. You are not required to file a global tax return in Canada. If the entity in Barbados is a separate corporate entity filing in Barbados, then Canada simply asks for information related to some of the activities of that entity, or when profits are recovered.

And I don't know whether we'd have the capacity, on the deduction under section 113, to further say from what country it originated. So our systems may not be able to produce the information, but we could certainly undertake to—

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

When businesses recover their profits, they have to declare them. They must first declare them and then request the exemption. So you can at least obtain the total amount for which an exemption has been given?

[Brian McCauley]

We can check. The difficulty may be on the individual side, where sometimes certain fields aren't always necessarily keyed or captured. So it must be reported. But we can certainly undertake to verify what information we have and can make available.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

All right, thank you.

I would now like to pose a second question concerning the double-dipping structure that you presented to us. I would like to know whether I understand it properly.

Is there actually anything that would prevent triple-dipping or quadruple-dipping? Is there something that would prevent an American corporation from underwriting capital under another company’s name in a tax haven, and so on?

[Wayne Adams]

We have speculated that there may be a possibility. We don't have any companies for which we have been able to document where that behaviour has occurred. But it is possible that there could be more than two.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur.

Mr. Del Mastro, we continue with you now, for five minutes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

I thank the panel members for their contributions here today. They are certainly shedding some light on this issue.

In your notes, you spoke of a number of issues. Certainly tax fairness, I think, is the overriding objective of what we're trying to achieve. Certainly if you look at why we audit in the first place, it's to ensure that everyone who is a taxpayer in Canada can be reasonably certain that everyone, be they corporate or individual, is contributing their fair share of taxes. That's why we audit, because it is an honour system, as the chair pointed out. Ultimately we want to make sure everyone has confidence that nobody is skipping around the rules.

I was concerned about a couple of things. First of all, there are some pretty big numbers as to money that we've actually been able to pick up in additional taxes--$215 million in this recent quarter. We've also talked about how the Internet is making access to tax havens, or at least promotion of them, easier. We heard about some unsophisticated investors being taken advantage of and potentially losing capital because of the understanding that they can skip out on some taxes.

Are we just scratching the surface on this? What is your feeling on this? How big is this market? Do you have any scope or any idea of what we're really talking about?

[John Kowalski]

We do have some indications in terms of the scope. I might step back a little bit, though, in terms of the self-assessment system itself.

It certainly is a self-assessment system in Canada, although we do have a number of checks and balances in that self-assessment system to ensure that there is compliance. You mentioned audits. We have third party reporting. We have various verifications of income tax returns as a process. They go through automated validity checks and so forth. We do investigations. So there's a large number of different instruments that we bring to bear on compliance issues. We provide service. We do taxpayer alerts, so that people are aware of potential transactions that perhaps they might want to explore further before they get into them and so forth. We have a registration system for tax shelters. That's the example I was referring to earlier. Any tax shelter in Canada has to come in to the CRA and receive a number.

[Dean Del Mastro, Conservative, Peterborough, ON]

I'm sorry, John. He's going to cut me off at five minutes. Can you give me some idea as to how big you think this problem may be, how much tax avoidance is occurring?

[John Kowalski]

We can get the actual numbers in terms of the growth in the tax shelters. I simply wanted to indicate that over the years we have noticed a significant growth in the number of tax shelters that are being promoted and in the number of investors who are participating in the tax shelters. We recently had an alert on that and the numbers are out there on our Internet site.

But we can endeavour to provide those to the committee, with the chair's concurrence.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Would you agree that primarily the vast amount of money, the large sums of money that we're really trying to get a handle on, is predominantly large corporate money? We're not talking about corner stores; we're talking about large multinational corporations that are using their reach amongst multiple jurisdictions to avoid paying taxes through tax havens.

[John Kowalski]

I would say that approximately 40% of the additional tax assessed by the agency is related to large corporations.

[Dean Del Mastro, Conservative, Peterborough, ON]

Right. And if we go back to the point of the chair, if we changed some of the rules around interest deductibility, that number could be much higher, because they're not necessarily doing anything wrong if they're working within the current framework of taxation policy in Canada. In fact, they could very easily be going along with the rules that are in place. We may not like the rules. We may not feel that those rules are bringing in tax fairness, and I think that's what the finance minister has indicated when he's talking about cracking down on double-dipping. But that number could change substantially if we changed the rules.

Would you agree with that?

[John Kowalski]

I wouldn't be in a position to speculate on the revenue implications of a particular budgetary provision.