Finance Committee on May 8th, 2007

[Robert Thibault, Liberal, West Nova, NS]

Can you give me a rough 30-second profile of these people who are abusing internationally? Are they the large companies, are they the middle-income investors? Who are the people you've caught?

[John Kowalski]

I think the short answer would be both.

Certainly the dollar amounts and the complexity of the transactions and the complexity of the law are greatest with the larger corporations, and it's to them that we put a lot of our audit effort. The encroachment into the middle class of tax shelters and other abusive arrangements that can be sold over the Internet has certainly increased, and we've noticed that as well, but from a dollar perspective I would have to say it's more on the large corporation side.

[Robert Thibault, Liberal, West Nova, NS]

Now, in the international investment and tax deductibility field, we have companies in Canada that are producing in Canada, have manufacturing headquarters in Canada, that need raw material, like bauxite, for example, who could buy out the foreign company, make it a subsidiary for supply, or could open up a mining activity or something, create a company to do that in another country, borrow money in the domestic market or international, and that would be deductible, and that would be quite appropriate. That wouldn't be avoiding or tax sheltering. But it becomes questionable with the new proposition as per budget day. We don't know where the minister is now, but as per budget day, that might not be allowable.

Then you have companies that would be using offshore tax havens purely for purposes of hiding income, or avoiding taxes that would otherwise be taxable.

According to your analysis to give advice to the minister prior to making his decision, what is the current loss through those types of abusive practices, and what would be the foreseen loss from the hollowing out of our corporate community because of the proper investments that could be made, that would force them to have their headquarters moved offshore, to be able to compete with the international economic community?

[Brian McCauley]

We don't undertake that kind of economic or fiscal analysis. It would be Finance—

[Robert Thibault, Liberal, West Nova, NS]

But you would see it. You would be provided with that.

[Brian McCauley]

We only see it from the perspective, as John described it, of the files we encounter and the work we do, and we don't try to make estimates of what the global numbers are. But the Department of Finance obviously would.

[Robert Thibault, Liberal, West Nova, NS]

But this, it seems to me, is a huge change in Canada's economic policy and our competitive and productivity policy. I have a hard time imagining that the minister would make that type of announcement without having had a wide-ranging discussion within the government, both at Finance and at Revenue, as to what it means, what kind of efforts would be needed in the future, what are the expectations for additional revenue on one hand and losses of revenue on the other.

Are you telling me that the minister made that announcement without consultation and discussions within government departments in law?

[Brian McCauley]

No, I didn't say that. What I said much earlier on is that we have an ongoing relationship with Finance. We contribute data and information that they request of us, but Finance obviously goes to many other sources, departments, economists in the public and private sectors, and would take all of that into view before coming to a decision. But we don't have the economists and the fiscal analysis capacity.

[Robert Thibault, Liberal, West Nova, NS]

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Thibault.

The next questioner is Mr. Del Mastro, and we'll finish with Mr. Crête, so that we allow time for Madam Wasylycia-Leis' motion.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

I want to go back to where I was a couple of minutes ago.

The chair established that currently, the way policy works, there's nothing wrong with this double-dip structure; it's perfectly legitimate. Now, if we look at the current numbers, you said that about 40% of the money we're recovering from abuses of the tax system through tax havens is corporate. If we were to look at a way of cutting down on this double-dip structure--it may not be illegal, but inherently, if you look at it, is not ethical either--I don't think a lot of Canadians.... Certainly if I explained this to the people in my riding in Peterborough, they wouldn't like it very much if they understood that somebody could get a tax deduction for an expense that they're not really incurring.

[The Chair, Conservative, Brian Pallister]

I think we should make it clear, though, that we're talking about tax laws here and not ethics. The two things don't necessarily go hand in hand.

[Dean Del Mastro, Conservative, Peterborough, ON]

No, no, I'm only saying that ethically, corporately.... Okay, thank you, Mr. Chair, for the clarification.

But this could really change how things are functioning and really change that distribution of taxes being collected through these efforts and measures that you're taking right now in trying to curb the use of tax havens. Am I correct?

[Wayne Adams]

If I may, I would clarify one assumption you had during your opening remarks, and that is that there's a view that there's nothing wrong with this structure. We challenged this structure. We challenged the Canadian entity and were unsuccessful in a court case, but two other court cases, with slightly varied facts but very similar outcomes, still will be heard by the courts if we proceed.

So as far as the determination of whether this is or isn't appropriate is concerned, I wouldn't want to leave in the appellants' minds that we've now concluded there is nothing wrong with it. We still are litigating.

[Dean Del Mastro, Conservative, Peterborough, ON]

But the finance minister wants to make sure that if you go to court and prove this structure, you win every time. That's what we're trying to establish, that we don't think this is right. We think this is skirting around a Canadian tax obligation, and that under the principle of tax fairness—trying to make sure everyone pays their fair share of taxes, which will allow us to decrease the tax burden on everyone, individuals and corporations—if we make this change, you will win 100% of the time if you prove this structure. That would be a positive change.

[Wayne Adams]

We would appreciate any changes that guaranteed a 100% success rate.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

I have nothing further, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Del Mastro.

Mr. Crête.

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

Thank you, Mr. Chair.

Mr. Adams, earlier you gave an excellent description of how funds are transferred to Barbados and then how they are returned.

If regulation 5907 were abolished, would profits be taxed automatically on their return?

[Wayne Adams]

I'd have to undertake to reflect on whether an adjustment to regulation 5907 would achieve the outcome you've described. It's likely the case, but it's about 35 pages long. I don't know whether surgically they could fix it quite as you've described, but I'd certainly take it that this is a likely outcome.

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

I have another question.

In your document, it says that the Canada Revenue Agency is heading the seven-country working group on tax havens. You said in this connection:

[...] dealing with compliance challenges associated with the abusive use of tax havens.

We will be at the OECD next week. Is there a status information paper that you could give us? Does abusive use only affect illegal situations or does it include the massive use of a tax treaty that is not necessarily illegal, but that obviously constitutes a significant case of tax avoidance?

[Fred O'Riordan]

Thank you for the question.

As I understood it, the first part of the question was about the seven-country working group on tax havens, and then, distinct from that, about the OECD.

The seven-country working group on tax havens is distinct and separate from the OECD. The focus of the seven-country group is more on individuals, and high-wealth individuals, than on corporations. Canada provides secretariat services to the seven countries involved, and we have a number of projects under way that deal with bank—

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

In your text, you say that the CRA works with the OECD. In it we read: [...] including its seven-country tax haven working group [...].

[...] including its seven-country tax haven working group [...].

That gives the impression that this group belongs to the OECD. Is that not right?

[Fred O'Riordan]

I see that as well, and it is misleading. I'm sorry.

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

All right, but can you send us the information?

Thank you.