Finance Committee on Feb. 8th, 2011

[Shelly Glover, Conservative, Saint Boniface, MB]

But now you're saying that you do believe in aggressive enforcement, so I'm a little confused.

I thank Mr. Szabo for asking about deterrence, because essentially we believe that deterrence is an essential part of making sure that criminal behaviour, illegal behaviour, is addressed. So with the statement that you've made to begin with and the comments you're making now, it seems like you're not entirely on one side or the other. You're kind of sitting on the fence.

I'm going to provide you with some quotes from some things you've said in the past, and I want your new observations on those quotes, if you wouldn't mind.

In May 2008 you wrote an article in the International Tax Review entitled “Voluntary disclosure becomes a necessity”. In the article, you cited countries “making greater use of tax treaties and tax information exchange agreements, and engaging in more spontaneous disclosures of data from one taxing authority to another”.

Then you went on to write:

Exemplifying this trend, the US, Canada, the UK, Japan and Australia have established the Joint International Tax Shelter Information Centre (JITSIC), aimed at sharing information on tax shelters and on the professionals and financial institutions that plan and promote them.

Then again, you write:

Meanwhile, bank secrecy in tax haven jurisdictions is becoming an increasingly flimsy reed of protection. Even such formerly secret locales as Switzerland, the Isle of Man and the Jersey Isles are responding to properly-framed requests from other countries under applicable information exchange provisions, unimpeded by legal challenges from the businesses and individuals affected.

Mr. Michel, I want to ask you if you still hold this view that the ability of tax avoiders to hide money offshore is becoming more and more difficult due to steps taken by countries like Canada and its partners in the JITSIC.

[Scott D. Michel]

Absolutely. I disagree a bit with my colleague Mr. Sohmer. I do think that bank secrecy--at least for Americans--is becoming a thing of the past. In addition to these efforts by the joint task force, you now have a whistle-blower office in the Internal Revenue Service that encourages people--bankers--to come forward anonymously and provide data in exchange for a reward. So you have the international cooperation, you have whistle-blowers, and you have increasingly aggressive enforcement.

In the United States, a new piece of legislation called the Foreign Account Tax Compliance Act, or FATCA, as it's known, was just adopted. That, in my view, will eliminate bank secrecy for Americans around the world. So I think the trend--at least for American account holders--is that bank secrecy is waning, and that's why an effective voluntary disclosure policy is at least necessary to encourage people to come in and clean up their affairs.

[Shelly Glover, Conservative, Saint Boniface, MB]

I don't know if I agree with you, sir, and here's why. I have to side with Monsieur Paillé on this; when I hear that the interest of some of our banks is to prevent the theft of information that actually helps us, that this is their priority, that bothers me. That would say to me that bank secrecy is not going to change.

I'm open to hearing your expertise on it, and I'm going to take it into consideration; however, I have a real problem hearing all of the evidence today and trusting that this is, in fact, the track that we're on. I don't know if bank secrecy is something that is going to decrease.

Nevertheless, the CRA is a member of a number of international organizations and forums, and they work together to counter aggressive international tax planning. I just want to give you the names of some of these forums: the OECD working party on exchange of information and tax compliance; the Global Forum on Transparency and Exchange of Information for Tax Purposes; the Forum on Tax Administration; the Joint International Tax Shelter Information Centre, which we've already spoken about; and the Seven Country Working Group on Tax Havens. So the CRA is very much involved in the exchange of information and of course in the enforcement to ensure that we do target these tax havens. I believe that is a good step forward to ensuring that this is addressed. I believe some significant things have been done through the OECD, etc., to make sure that this is a priority.

I have to say, we had a witness just last week—I don't know if you saw any of the testimony--who claimed that in the last several years there's been remarkable progress here in Canada. I'd like your opinion on the progress that's been made in Canada. I know you're from the States, but surely you have some insight into the progress made here in Canada in the last five years. I'd like to hear from you on what you think are the significant actions that have been taken by Canada, the right steps in the right direction.

[Scott D. Michel]

I'm obviously not an expert on Canadian tax policy, but I can measure the impact of tax policy based on the somewhat anecdotal evidence of who calls us for legal advice and what problems they have. We have seen a significant uptick in the number of cross-border family issues, for example where one spouse would be a Canadian citizen and one would be an American citizen. There are tax compliance problems on both sides of the border. I think there is a much heightened sensitivity in the professional community in Canada and among the taxpaying public that the risk of getting caught from having not complied with the tax laws has increased.

[Shelly Glover, Conservative, Saint Boniface, MB]

What is it that happened that led to that sensitivity here in Canada?

[Scott D. Michel]

I think in Canada--I'm siding a little bit with Mr. Sohmer--there were enforcement developments. You had very public data theft that occurred; that was big news. I think there's been some publicity in Canada about the voluntary disclosure program itself.

Let me say that professionals like the two of us are to some extent gatekeepers. The clients come to see us and they want to know what's going to happen to them if they get caught and how they can come in and make things right.

[Shelly Glover, Conservative, Saint Boniface, MB]

But they also want you to mitigate that so that they suffer the least penalty possible. So you do have an interest—

[Scott D. Michel]

Absolutely.

[Shelly Glover, Conservative, Saint Boniface, MB]

—in making sure that there's leniency, which I, as a police officer.... You know, we conflict a little bit on that.

Nevertheless, I just wanted to put that on the record. I know my time is up and I'll pass it on, but thank you for your interventions.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Ms. Hughes, please, for a seven-minute round.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

Thank you.

Mr. Michel, you've mentioned the UBS file. Could you please provide this committee with information concerning the stratagem put in place by UBS to help Americans move their money offshore?

[Scott D. Michel]

Yes. Based on the publicly available charging documents and stories that we've heard from our clients, what appears to have happened was this. American law changed in approximately 2000-01, and Americans who had accounts at UBS were approached--in Switzerland, by the way, in the Swiss private banking group--by bankers who essentially told them that the law has changed, and if they, in their accounts, would like to still own stocks in American companies, such to buy Microsoft or Apple, they could not do that individually in an undeclared account. But if they formed a corporation, say a Panama corporation or BVI corporation, or if they created a Liechtenstein foundation, known as a stiftung in some instances, and we made that entity the nominal owner of the assets, then they could purchase whatever assets they want.

So there was, at least as has been reported in the press, a concerted effort made by bankers from UBS to approach their American clients and help them structure their accounts in a way to maintain their undeclared status and give them maximum investment flexibility.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

There were comments made that young people are basically the repeat offenders. I'm wondering what techniques you would suggest be put in place to remedy this.

[Scott D. Michel]

That particular strategy, at least in the U.S., has been trumped by this Foreign Account Tax Compliance Act. And believe me, I'm not a proponent of this legislation. I think it's incredibly burdensome in many respects. But the U.S. Congress came up with a way that they hope will prevent Americans from being able to hide their accounts.

Basically, the legislation says that any bank anywhere in the world that wants to invest in the United States for any purpose on behalf of any client must enter into an agreement with the Internal Revenue Service. In effect, they must promise to disclose the names of all of their American account holders on an annual basis, and they must implement procedures to make sure that they are identifying all their American account holders.

That is one step. I think to some extent it's an excessive step, but that's a step that the U.S. Congress has decided to take.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

I have another question.

You said that we should absolutely try to process quickly and efficiently the cases of tax payers who voluntarily disclose tax evasion. I was wondering how much time this process could take and what you mean by “quick.”

[Scott D. Michel]

When a taxpayer comes to us to initiate a voluntary disclosure, it's important that we quickly gather their banking information so we know exactly how much previously unreported income they now need to report. And we need to identify them to the Internal Revenue Service as quickly as possible to lay down our marker that they want to come in and make a voluntary disclosure.

The system that ultimately developed in the U.S. special program, which provided an expedited way back into the system for these people, was quite effective. Basically, there was a pre-clearance process where we would provide the name of a client to the Internal Revenue Service. We would ask if a disclosure would be considered timely, and then they would check their files over a period of a week or two and get back to us and say, “Yes, it will be considered timely.”

That was essentially the protection that a client needed, to know that he wouldn't be prosecuted. Once they make a timely disclosure, the rest of the disclosure is simply ensuring that it is truthful and complete, and that they pay their liability.

As an immediate step, I would suggest you give people a risk-free path into the system.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

I also want to know whether, when people are investing, there is a statement provided to them that basically indicates their responsibility, as taxpayers, to disclose their investments. I wonder if anybody signs on the dotted line on that aspect. I ask that only because last week we also heard from CRA...and I'm just wondering, maybe there needs to be some changes in CRA such that the application for tax cannot move unless they absolutely tick “yes” or “no”. In today's technology, there is stuff that can be done on that.

[David Sohmer]

Canada has a form called a T1135, which requires disclosure of all foreign assets over $100,000.

[Scott D. Michel]

Banks are now providing clients with documents that instruct them on their reporting responsibilities. I had not seen this until the last year or two, but I have now seen American clients who receive forms from banks. These forms specifically direct them that they must report their foreign accounts. They must declare all of their income. They must file all their appropriate forms.

And the banks are saying that if they don't do that, they're not going to have them as a customer anymore.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

I'm wondering if HSBC has a comment on that.

[Scott Bartos]

In Canada, that is not something that we currently do.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

So you don't currently advise them that they have a responsibility to declare their investments? You don't have any documentation that they have to sign when they are investing or anything?

[Scott Bartos]

I'm trying to think back. I mean, we do have a number of terms and conditions that all customers sign when they open up an account, whether it be an investing account or a banking account. I cannot recollect, off the top of my head, whether or not we have a specific term that says, “It is your responsibility in order to pay your tax.”

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

Do I still have more time?

[The Chair, Conservative, James Rajotte]

You can ask a last question, just very briefly.