Finance Committee on Feb. 8th, 2011

[Scott Bartos]

As I had mentioned earlier, HSBC Private Bank Suisse is a separate legal entity that is governed by Swiss laws. They are unable to share any information with HSBC Bank Canada, so I am not aware of the contents of the list, what names are on that list, or whether people have evaded taxes. I just do not have that information.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll go to Mrs. McLeod, please, for five minutes.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I think I want to follow up on the point Madam Hughes was travelling down. I'll direct the first comments to Mr. Bartos.

Certainly I think all of us recognize that Canadians do business throughout the world and have many reasons for perhaps wanting to have accounts in other countries. I'll use a personal example. My husband someday wants to perhaps be in the sun of the United States in the winter, and thought that having a U.S. account would be very helpful. I actually participated in that process as he set up that account. It was very interesting, because we sat in an environment in British Columbia and set up both a Canadian account and an American account, which I guess are separate entities. But it really felt very much part of the same thing we were doing as we set up these two accounts. Certainly we intend, of course, to be very up front in terms of what we do and how we do it.

It's a prime opportunity for an education for any client who is sitting in that room on understanding the tax implications or for having some handouts. And there is no focus on that area right now in terms of your focus with clients as they go through this process. Could you talk about that?

Then I'd ask you, Mr. Michel and Mr. Sohmer, if you think that would have any benefit or value if that happened as part of the process.

[Scott Bartos]

Mr. Chairman, I haven't walked through the actual account-opening process for some time now. My understanding is that, no, there is not a specific focus on bringing to the attention of somebody hoping to open up an account that the person needs to comply with the law, whether it be tax compliance or any other law. It's not currently something we draw to the customer's attention.

To the question of whether that might help ensure tax compliance by taxpayers, it may very well. I think we work in a system in which most taxpayers already know that it is their obligation to declare taxes and pay taxes. So another reminder may or may not be beneficial.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Again, how that applies in foreign environments might not be general knowledge to everyone.

Mr. Michel and Mr. Sohmer, do you have any thoughts on that particular area?

[Scott D. Michel]

The primary reporting requirement in the United States is both on the tax return and on a separate form called an FBAR, a Foreign Bank Account Report. It's a special treasury department form. Until three or four years ago, very few people knew that this form existed. It had been on the books since the 1970s. There were penalties in place for not filing it, but nobody knew about it. Most accountants didn't even know about it so that they could advise their clients.

I think anything that educates the tax-paying public on what their obligations are, in terms of reporting, can only be a good thing. The question, to me, would be how that requirement can be imposed on a foreign bank, because that's where the compliance failure occurs.

A U.S. bank can tell U.S. clients, for example, that they have to pay taxes on their interest and dividends, and they have to pay taxes on their capital gains. The U.S. bank will give the client a 1099 every year, a form that says that this is how much money you have to put on your tax return. That's reported independently to the IRS. A bank in Panama or Switzerland or Hong Kong is not going to automatically, I think, say that they need to notify Americans who come in that they need to report this account on their tax returns.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I'd like to get Mr. Sohmer's comments, but in this particular example, it was sort of a one-stop that allowed us into a couple of countries in terms of banking. I don't know what the paperwork was after we left, but it was generated in British Columbia, Canada.

Mr. Sohmer, could you comment?

[David Sohmer]

Generally, there is no problem between Canada and the U.S. It's virtually an automatic exchange of information between the two. The problem is with other countries. The automatic exchange of information was suggested by the OECD in G-20, and turned down by the G-20.

There's another treaty, called the Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters, with respect to collection, which Canada has signed but not yet ratified. Canada has to operate in the international context. The United States has the power to do it unilaterally. Canada can only act effectively internationally.

[The Chair, Conservative, James Rajotte]

Thank you, Mrs. McLeod.

Mr. Rota, please, for five minutes.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you to all our witnesses. I don't normally sit on this committee; I'm filling in, and it has been very interesting.

Just from listening, one issue that has come up quite often—and I heard this from Mr. Michel—concerns providing a mechanism to allow people who have cheated to come back into the system. These are people who have left. We've lost this income; it's not coming back. It almost seems that we have a demographic both in the U.S. and in Canada whereby people are getting to a point where...well, the baby boomers aging. I guess that's where it is. And their parents are.... There seems to be a new-found conscience, I guess, or their scruples are coming back to haunt them. They almost want to come clean before they die, or they want to make sure that the next generation doesn't get caught into some kind a problem that they've caused for them.

Have any countries out there, or has anything that you know of, caused or put something forward that would allow them to maybe disclose...? I'm not going to say a tax holiday, or a penalty-free time, but has there been anything where we say, okay, for two years they can come forward, and their past indiscretions will be recognized, but they won't get the heavy stick right away that Ms. Glover was talking about? I mean, after that, if they still try to avoid that, they will get hit hard. There's no question. There has to be a penalty. But for a year, maybe two, maybe three...I don't know how long it would take.

Are there any examples out there where this has been implemented? And what were the results?

[Scott D. Michel]

In addition to the U.S. initiative in 2009, a lot of other countries have adopted amnesty or quasi-amnesty programs relating to foreign accounts. The U.K. has done so. Italy has done so. I believe France has done so.

Some of these programs have been wildly successful. I cannot recall the exact numbers in the Italian experience, but I remember being shocked at how large a pool of assets had been brought back into the system as a result of the Italian amnesty.

I think a lot of countries are looking at this. People are going about it in different ways, because people have different tax systems, but the notion of a settlement initiative for this program, for this type of problem, I would say, I think is a good idea.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

That sounds good, because that's exactly the answer I was looking for and was hoping for. It almost seems as if the penalty is important, but what we're really looking to do is to bring people back into the system.

You mentioned the amounts. Do you have any estimate of what it might be in the States or in Canada if something like that were put out there? And what would the cost be of putting something like that out there?

[Scott D. Michel]

I can speak to the United States, and Mr. Sohmer can speak to Canada.

The U.S. approach was to require a taxpayer to pay six years' worth of tax and interest and a surcharge penalty on the tax on the income earned in the foreign accounts, plus 20% of the highest balance in the accounts over the previous six years.

The demographics and the amounts varied. I would say that our clients who have been put into this program have paid anywhere from 30% to the high 40%s, or maybe even 50%, of their foreign account back to the IRS for global peace. I think it's one of the situations where if the penalty is set too high, people will balk. But it needs to be set high enough to recognize the fair point that most people do in fact pay their taxes, so people coming in must feel some pain for having done what they did.

[David Sohmer]

In terms of the amounts out there, I think I might be the source of the $100-billion figure that.... The IRS announced that there was $1.7 trillion of U.S. money offshore. I said Canada's got 10% of the U.S. population, which is $170 billion. We're about two-thirds, or a third, more conservative in our approach than the Americans. We don't steal as much--

[Voices]

Oh, oh!

[David Sohmer]

--so I brought it down to $100 billion, and I compared that against the yardstick of the $5.6 billion that apparently Canadians have with UBS, which made it sound reasonable.

So I figure there's $100 billion, and I would guess, based on my experience, that there is $20 billion or $30 billion that could be repatriated very, very quickly.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Rota.

Mr. Hiebert, please.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you.

Mr. Sohmer, in your opening remarks, you talked about the demographics and some information about your typical client. As you've looked at them, you mentioned that they had an average age of 72, with an average offshore account of $3.7 million, or a median account of $1.2 million. The difference between male and female was pretty much the same.

One thing you didn't mention in your opening remarks, which is in your document, is that 51% of them were immigrants.

It seems, based on that number alone, that I guess a lot of new Canadians, people who have come to this country, could have perhaps opened their offshore accounts prior to coming to Canada in an effort to protect their wealth, maybe coming from a country that didn't have the same kind of assurances that we have here in Canada.

Would that be an accurate statement?

[David Sohmer]

I think it's important, and there are some very delicate aspects to it. There are people who came here to escape from dangers to their lives and regarded money in Switzerland as being a source of security in case they had to escape again. It was something that was almost hard-wired into their brains.

The other thing that's critically important about it is that the children of immigrants are more prone to move. They'll move to the United States. People from the United States don't move to Canada; people from Canada move to the United States and to other places. That deals in a very critical manner with our ability to enforce.

There are no international norms for collection of tax. The kids of immigrants who come to Canada will go to school in the United States. One of my kids was in Columbus. One of my kids was in Cleveland. They did come back. They were doctors, by the way, and they happened to like the Canadian system.

But the fact that the demographics include a large number of immigrants is very important, and a lot of it comes from the immigrant mentality that they might have to run again. It's something that does not resonate well with functionaries, but it happens to be a fact.

Where I think Scott and I live, we're in the trenches; we smell the burning flesh. We understand the family dynamics; we're dealing with the stories. These people say they don't know when they'll have to go; that's their security.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Right. So it's quite possible that if the law did not change in their favour, they might simply choose to move elsewhere and deal with this problem at a later date.

[David Sohmer]

Yes, and Canada has been party to that, because Canada has signed an international convention but has not yet ratified it with respect to international assistance in collection. It's a difficult issue.

There's a rule called the revenue rule that says one country won't allow its courts to be used to collect taxes from another country. Canada realized that in a very severe way when it chased after the American tobacco companies on a tobacco tax issue and lost before the U.S. Supreme Court.

It's not difficult for somebody from Montreal to move to Toronto, and Ontario will not collect Quebec taxes. The revenue rule is enshrined in the Quebec civil code.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So for the benefit of people who either might be listening—or, surprisingly, some might read the transcript—you said a typical client comes in, they're in their seventies, and they probably opened their accounts, according to your information, two decades earlier. What happens? They sit down in front of your desk and say, “Mr. Sohmer, here it is. I'm spilling the beans. What do I do?”

[David Sohmer]

I can tell you that if they were west of the Quebec border, or east of the Quebec border, given current CRA policy, I would tell them, without any compunction, “Send in your voluntary disclosure. Let's get this done quickly. The practice of the CRA now is perfectly compatible with a proper voluntary disclosure program.”

If they were in Quebec, I would explain the law to them. We have difficult ethical issues. Where somebody has already committed tax evasion, we're under no obligation to compel them, or encourage them, to confess. We cannot be complicit in future tax evasion, but we do have an ethical duty to explain the law.

So let's say they're in Quebec, and you tell them, “Quebec is going to virtually confiscate everything you have, because your portfolio has gone down in value. You have no recourse to the courts. You have kids in Toronto, and if you do nothing, there's little risk of detection. You make the decision.” It's a difficult.... It ends up being a charade. The ethics become difficult.

But to be perfectly honest, when you lay out the possibilities to them and say, “If you do nothing, nobody will catch you”...because the current protocol under the Canada-Swiss treaty does not allow Canada to obtain the information without having the name of the person and the name of the bank. They're not going to have the name of a 75-year-old using a walker who's just come into our office. So if you say to them, “When you die and your kids inherit, and your kids come clean with the CRA, and the CRA communicates the information to Quebec, Quebec will get its judgment but they can't enforce it in Toronto, so you'll save half the taxes”...and maybe they'll save even 90% of the taxes.

We can't encourage that, but I think we have an ethical duty to explain what the law is. It's something that I've discussed with Scott in terms of ethics. But if you explain the law....

I mean, one of my confreres, Dick Pound, before the Supreme Court in a case called Copthorne, happened to mention that if anybody has an IQ that's above room temperature, they know what to do--not in the context of tax evasion.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Hiebert.

We'll go to Mr. Szabo again, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Chairman, it's been an interesting discussion. The underground economy has a little bit of parallel to it, but it goes right across the income spectrum, so the approach to that really has to be a little bit more sensitive.

Now that we've had all this chat, can you, in your own opinion, just give me an idea of what the most significant condition is right now that would facilitate or promote tax evasion in offshore accounts?