Good morning ladies and gentlemen, committee members. My name is David Sohmer, and I practise tax law in Montreal. This morning, I will discuss a topic of national interest. Since I express myself better in English, I ask you to forgive the fact that I will speak only in that language during my presentation.
Sound tax policy should be based on facts, not on fantasy or fiction, and my presentation attempts to provide the committee with facts, from the perspective of a tax lawyer who has been involved with the voluntary disclosure program since its inception.
The following are some of the more important facts contained in my brief.
Firstly, there has been a dramatic shift in the demographics of Canadians who availed themselves of the voluntary disclosure program in the last five years, from baby boomers to the parents of baby boomers. In 2003-04, the main clients were 49-year-old males. Based on an analysis of 51 clients who have engaged me in the years 2009 and 2010, the average age is 72 and the median age is 75 years; 57% are male and 43% are female; and most of the females are widows who have inherited the accounts.
The increased number of disclosures has had little to do with CRA enforcement activities. The increase is almost exclusively due to events that by happenstance occurred in the same timeframe. The first was a change in registration requirements for investment dealers and advisers by the Canadian Securities Administrators. The change was effective as of September 28, 2009, and provided an exemption for foreign banks whose Canadian clients were restricted to those with net financial assets of more than $5 million.
UBS and Crédit Suisse, as well as other foreign banks, contacted their Canadian clients and requested written certification that the clients met the threshold, failing which they would no longer provide dealer and advisory services.
The second factor was the aging of the parents of baby boomers. They have accumulated substantial wealth, and the older they get, the greater their desire to put their affairs in order before they die.
The third was a highly publicized deferred prosecution by the American IRS of UBS.
The fourth was the highly publicized theft of data from LGT Treuhand, a Liechtenstein bank, and from HSBC. The data contained the names of Canadians who held accounts with the banks.
The next important fact is that the era of banking secrecy is not over. Article 26 of the OECD model tax treaty is the international standard and is reflected in the protocol to the Canada-Swiss tax treaty signed on October 22, 2010. Canada must provide the Swiss with the name of the taxpayer and the name of the bank. Fishing expeditions are expressly prohibited. Most golden agers have not deposited or withdrawn funds for over a decade, so Canada is unlikely to know their identity, and the risk of detection is minimal.
The next important fact is that the voluntary disclosure program is being undermined by CRA policy and by the refusal of Quebec to harmonize its program with that of the CRA.
The current CRA practice provides for a predictable set of acceptable outcomes, a critical aspect of a successful voluntary disclosure program. The CRA, however, does not preach what it practices. Its official policy gives voluntary disclosure officers substantial discretion in determining which years should be included in a disclosure. This raises consistency and predictability issues, which will deter taxpayers from disclosing.
The most serious threat to the program is the refusal of Quebec to harmonize its program with that of the CRA. The Ministry of Revenue of Quebec insists on taxing the balance that was in the account six years ago as income earned in that year. This has no legislative authority, and unlike the CRA policy, Quebec refuses to allow its decision to be attacked by administrative appeals or appeals to the courts, even where there is a lack of due process or where the decision is clearly wrong on its merits.
Pursuant to an agreement between the CRA and the MRQ, the CRA provides the MRQ with information relating to disclosures made to it, so a disclosure to the CRA is effectively a disclosure to the MRQ. Since there is little risk of detection, at least in the next five to ten years, it is expected that many Quebec residents whose children reside out of the province will not disclose. Their children will probably disclose to the CRA after they inherit the accounts. The “revenue rule” is a well-recognized rule that the authorities of one state will not assist in the recovery of taxes due to another state. It is clear that the United States will not assist in the recovery of Quebec tax, and it appears that other provinces will not do so either. It is also arguable that the U.S. will not assist in the recovery of federal tax when the liability of U.S. residents' children arises under Canadian law because of an inheritance.
It is estimated that Canadians have $100 billion in offshore accounts. The stars are aligned now as they have never been and as they may never be again. There is a window of opportunity for Canada and the provinces to have tens of billions of dollars repatriated and to realize a significant increase in short-term tax revenue.
The voluntary disclosure program does not encourage non-compliance. Golden agers have not transferred funds offshore for decades, and younger tax evaders are recidivists who do not evade in contemplation of disclosing.
The U.S. and the U.K. have recognized the merits of a pragmatic approach. The American settlement initiative has been described by my fellow witness Scott Michel, a recognized authority on the U.S. voluntary disclosure program, as ranking “in the upper tier of compliance successes ever implemented”.
For bureaucratic paranoia, Quebec-Ottawa friction, and electoral politics to impede a successful voluntary disclosure program is not in the national interest; nor is it in Quebec’s interest.
I'll be happy to answer questions from the committee.
Thank you.