Finance Committee on May 8th, 2007

[John Kowalski]

As pointed out, we couldn't discuss the affairs of any particular company or corporation. In terms of the action we take, it might be more accurate to refer to it as an audit than as an investigation. In the Canada Revenue Agency, when we use the term “investigation” it normally means a criminal investigation—and charter rights come into play—and that we're planning to make a recommendation to the Department of Justice to prosecute somebody in court. That is our use of the term “investigation”.

Audits are ongoing. At any point in time, there are hundreds of audits in play. I recall one number, if I remember correctly, in response to a question that I think was from a member of the committee. There were 305 audits going on at a particular point—I think at the end of November 2006—that involved international transactions of one type or another. These were not necessarily using tax havens but were international transactions of one type or another. That at least provides an indication of the level of effort.

[The Chair, Conservative, Brian Pallister]

Thank you.

Now we'll go to Mr. McCallum, five minutes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

This discussion is bringing back happy memories of opening centres of expertise in...what month in 2005?

[Brian McCauley]

The fall, I guess.

[John McCallum, Liberal, Markham—Unionville, ON]

The purpose was to intensify our efforts to go after aggressive tax planning. Now, as I recall, before opening those centres of expertise we were still pursuing these matters, but these centres allowed us to do it with greater resources and more effectively, isn't that right? Basically, CRA had been going after this kind of behaviour for many years, it's fair to say, but the centres of expertise allowed us to do it more expeditiously.

I remember visiting one of these places, having quite a long conversation with the people working there, and being very impressed with their commitment and knowledge. But I also remember that they were quite frustrated by certain court decisions that seemed to stymie their efforts to deal with these abusive double-dip structures and other things of that nature.

Have those efforts encountered further blockages by the courts--I haven't followed this as much since I left--or are there pending decisions that haven't yet been made?

[Brian McCauley]

Maybe Wayne can answer that.

I can offer one short update to the member. One provision in the current budget is to provide an additional $20 million on an annual basis to reinvest in and to reinvigorate the centres of expertise. That certainly is a capacity boost that we're very much looking forward to.

[John McCallum, Liberal, Markham—Unionville, ON]

That's good.

[Wayne Adams]

On the question of court decisions, any time we're unsuccessful we're disappointed throughout the whole organization.

The Supreme Court ruled on two cases in 2005. On Canada Trustco we were unsuccessful, and on a case involving individuals we were successful. Since then, on avoidance cases, I think there have been 12, and we're at about six-six.

It's still a learning process. I wouldn't fault the courts with this. These are very complex transactions, and a lot of them are very specific to their cases. I don't envy their job of trying to work through it. But we're batting about .500.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay, well, would you agree that when we established those centres of expertise, that was a significant increase in the intensity with which we went after these arrangements?

[Brian McCauley]

Yes. I think $30 million a year, if I remember correctly, was the capacity added.

[John McCallum, Liberal, Markham—Unionville, ON]

And how much was in the previous budget, did you say?

[Fred O'Riordan]

The previous budget was the $30 million that Brian mentioned. The 2005 budget was $30 million, with additional money, $50 million, in the 2007 budget, of which about $20 million is allocated to these sorts of exercises. It's not toe-tagged to centres of expertise per se, but rather the nature of the non-compliance problem we have.

[John McCallum, Liberal, Markham—Unionville, ON]

So about $30 million committed under the Liberals and an additional $20 under the Conservatives; is that what you're saying?

[Fred O'Riordan]

Well, I think what I said was 2005 and 2007 budgets, but....

[Voices]

Oh, oh!

[John McCallum, Liberal, Markham—Unionville, ON]

I guess the point I'm making is that both governments, by your testimony, decided to invest resources to go after these abusive behaviours in tax havens and in other ways to really try to deal with these in a serious manner.

[Fred O'Riordan]

Absolutely.

Just to expand a little bit on the centres, we have 11 of them across the country. They really supplement the traditional methods that we'd been using to investigate these types of non-compliance. They're doing a mixture of doing research on a project basis and initiating audits. Obviously we can't devote all of the $30 million to that area, but a significant portion of the money went to the centres of expertise.

Since then we have initiated additional research projects as well.

[John McCallum, Liberal, Markham—Unionville, ON]

I certainly remember pursuing these abuses with great enthusiasm and gusto.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. McCallum.

My concerns centre not so much on you going after the abuses, but that the current rules, by some definitions, may be interpreted as abusive in and of themselves. I'd like to address that issue.

The fact that money is shifted offshore doesn't concern me. The fact that it's shifted offshore to reduce Canada's tax obligation, or the obligation to Canada, does. The fact that it is then shifted to a jurisdiction where basically little or no tax obligation is incurred is a reality around the world. I know money will flow to those types of jurisdictions, so we shouldn't kid ourselves or buy the argument that what we're talking about in whole is going to reduce Canada's ability to expand its business efforts in the Barbados, which has a population of half of Ottawa. That's not why. Between 1990 and 2005, about a 4,000% increase in money going from Canada to Barbados occurred. It didn't go there so we could invest in Barbados, it went there so that these companies could pay little or no tax. That's why it went there.

My understanding from your presentation is that this money then can go from that jurisdiction to an affiliate company in another jurisdiction where they can also deduct interest expense for that money again. So Canadian-based corporations that have affiliate companies in the U.S. could actually reduce the tax obligation in Canada, move the money to a tax haven country or a low-tax jurisdiction, whatever semantics we like to use, and lend it again to a U.S. affiliate, where they would also be able to lower their tax obligation there. Is that correct?

[Wayne Adams]

In the worst scenario, yes, that's correct.

[The Chair, Conservative, Brian Pallister]

And that's not an abuse of the rules, those are the rules.

[Wayne Adams]

I don't know that it would be fair to say it's not an abuse. One of the opportunities with people who are aware of treaties, financial instruments, and all these other aspects is that they are able to create relationships and entities where you could use a term like “exploit” or “take advantage of”, but in isolation, each one of those transactions works within the law. It's only when you step back and look at it...and with the investment lately, we've had the capacity to look at a global investment scheme, whereas 20 years ago we'd have just been looking at the borrowing and the investment.

[The Chair, Conservative, Brian Pallister]

Suffice it to say that certainly in the last 10 years we've seen I don't know how many Auditors General reports on this issue saying it's a problem. I believe it has been a problem for 50 years, in some form. It's increasing exponentially, and I can't believe the relative calm with which it's met. With the degree to which the increase in offshore investment is occurring and we're apologizing for going after the subject, I find that kind of incredible.

Here we have an argument being made in this country that we shouldn't even talk about this issue because it will reduce Canada's competitiveness. You know, there are a lot of farmers, teachers, and auto workers in this country who don't have these types of mechanisms available to them. They could be a hell of a lot more competitive if they didn't have to pay their taxes either.

What concerns me about your presentation is this: what's missing from this chart is the repatriation issue, that not only is the situation as you've described it, and as I've repeated it, that you get to deduct and reduce tax initially and you can do it again in another jurisdiction, but you can cleanse it or launder it through a third jurisdiction—Bermuda, Cypress, or wherever—pretend that you paid tax on it when you didn't, and bring it back to Canada again tax-free.

Is that true?

[Wayne Adams]

If you repatriate profits from foreign affiliates by way of dividends, and if those dividends come out of what's referred to as exempt surplus, which is a concept that presumes taxation, then you're correct, it does return to Canada tax-free.

They don't even have to do that. They can just reinvest globally out of Barbados, if that's the country, to build more global wealth.

[The Chair, Conservative, Brian Pallister]

So CanCo pays little or no tax, dumps the money into Barbados, fools around with it and makes money on it, but pays 1% tax, and then is eligible to bring it back without paying tax on it. So you can understand the concern that a taxpayer who understands even the embryonic aspects of this would have about paying their taxes when they see somebody else not paying theirs.

Revenue Canada presides over a system based on volunteerism, essentially. Isn't that right? You have to have compliance based on people honourably filling out a form saying what they make. Isn't that the gist of our tax system?