Finance Committee on May 17th, 2007

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

Thank you, Mr. Chairman.

Thank you, Madam Auditor General, for joining us.

In your 2002 report, you stated that the Canada Customs and Revenue Agency's data showed that Canadian corporations had received $1.5 billion in dividends from corporations located in Barbados.

Is your office in a position to give us an update on dividends received? Do you have an estimate?

[Sheila Fraser]

No. Unfortunately, we do not have an update, but the Canada Revenue Agency should be in a position to provide you with this information, because the agency has a data base on international transactions. This is the data base we use to obtain our figures.

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

When CRA officials came to testify before our committee, they told us that this figure was unavailable.

[Sheila Fraser]

If they need any help in finding this information, we could tell them where to look.

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

Very well.

That said, to get an idea of the numbers involved, can we assume that this amount would be fairly proportional to Canadian investments in Barbados and that the increase in the dividends returned to Canada would also be proportional to these investments?

[Sheila Fraser]

I would hesitate to draw that conclusion, but I think you can assume that if investments have increased, dividends have as well.

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

All right. From the beginning, this committee has been attempting to estimate the revenue shortfall for taxation authorities, based on the amount which would be collected if this type of loophole were closed.

Have you assessed the other possible adverse effects of tax evasion and the use of tax havens where tax rates are low? I'm thinking, for instance, of public trust in the system, of effectiveness, of long-term economic development.

[Sheila Fraser]

No. Our audit was mainly focused on the work and activities of the Canada Revenue Agency to protect the tax base.

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

So, that was your main concern. Do you have other concerns?

[Sheila Fraser]

Yes, in a way, but our audits and our work is always focused on procedures and policy implementation. Other issues like economic impacts, corporate expansion, etc. are political in nature rather than related to management systems.

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

Okay.

This committee has also discussed the concept of residency, because the corporations which use tax treaties to repatriate tax-free dividends must in fact be located in Barbados. That is stipulated in the regulations.

However, witnesses that have appeared before us, including a professor whose name I've forgotten, have told us that it is not always obvious that these corporations have offices in Barbados where the real decisions are being made.

First of all, did you look into this issue? Do you know whether the Canada Revenue Agency does this type of check when carrying out its audits, or does it simply rely on companies acting in good faith?

[Sheila Fraser]

We did not look into that specifically. But we did point out in our most recent audit that the Canada Revenue Agency had gone after 72 trusts which had managed to transfer approximately $600 million worth of capital gains.

So, we are expecting the agency to look into this type of issue, to see whether these corporations were legitimate businesses or not. I am certain that this type of issue is being addressed by the agency's auditor.

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

Earlier on, Mr. Crête referred to the relevance for Canada of looking into international tax issues. Do you think that we should include, as part of that study, the issue of residency and suggest clearer, and perhaps more restrictive definitions of the term?

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. St-Cyr.

We continue now with Mr. Wallace, for five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman, and thank you for being here.

On a bit of a note, I see that you were in my home riding of Burlington recently to give a speech. My wife was there, and I think she met you and was quite impressed. When an auditor comes to town and you can get people to buy tickets to come to a luncheon, it's an amazing thing.

[Voices]

Oh, oh!

[Mike Wallace, Conservative, Burlington, ON]

So congratulations.

I think you're doing the right thing by getting out to see Canadians and letting them know who you are and what you're about.

I have a couple of really basic questions—

[The Chair, Conservative, Brian Pallister]

Perhaps that says something about the social life in Burlington?

[Sheila Fraser]

If I could just add, I think there were a lot of accountants in the room.

[Mike Wallace, Conservative, Burlington, ON]

There may have been; my wife's not one of them.

I arrived here a little bit late, but in your statement today you talked about what you recommended to Finance Canada in your audit of 2002. My question is really about process. When you do an audit—and let's use this example of what's happening in this area—do you make operational recommendations? When you did this in 2002, did you have a sense of when that work should have been done?

It's great for you to produce all this documentation, and we look at it and so on, but what is your office's expectation with that information?

[Sheila Fraser]

In most cases, when we make recommendations, and certainly more recently, if the departments agree with the recommendations we make, and sometimes they don't, we would expect them to produce an action plan with clear timelines as to when they're going to address the issues.

We go back to do a follow-up audit, depending on the action plan and their commitment to taking action. We'll give a report on a follow-up, as we did this past February.

In questions like this, a good number of the issues we were raising here dealt with legislation. Obviously even the departments themselves can't always control.... That's why, when we did the follow-up on the international tax question in CRA, we indicated the agency had made good progress on many of the operational issues, but there were still some very large, complex issues that dealt with legislation over which the agency itself had very little control.

So we can simply note it, but obviously we can only recommend.

[Mike Wallace, Conservative, Burlington, ON]

Okay, but you recommend changes to address the issues. The way it's worded says you highlighted; you asked them to obtain the analyzed current information to reassess the impact. To me that doesn't...I'm not sure what you're saying. There may be an impact, you see an impact, and you need to do something. I'm not sure what that means.

[Sheila Fraser]

We are very reluctant to recommend legislation or legislative change ourselves. We are coming at this by saying the government needs to assess the situation. The last comprehensive study was done in 1997. Obviously, things could have changed since then. There was very little follow-up to that study, the Mintz report.

There needs to be a study, and the minister has indicated one will be happening, so we would expect out of that there would be recommendations for legislative change, if required.

[Mike Wallace, Conservative, Burlington, ON]

In the 1997 report, there were recommendations.

[Sheila Fraser]

In the Mintz report, yes.