Finance Committee on March 10th, 2011

[The Vice-Chair, Liberal, Massimo Pacetti]

Good morning. I'd like to call this meeting to order.

Good morning everyone.

Thank you, everybody, for coming. We're here pursuant to Standing Order 108(2), a study of tax evasion and offshore bank accounts.

We have two sets of witnesses. We have Mr. Larin.

He holds the Canada Research Chair on Public Finance and Taxation at the University of Sherbrooke.

And from the Canadian Bankers Association, we have Ms. Fung and Mr. Hannah.

My understanding is you've been told you have not more than 10 minutes, so I'll allow you 10 minutes for opening remarks and then we'll have questions from members.

Mr. Larin will be speaking first.

Please proceed.

[Prof. Gilles Larin, Chairman, Research on Public Finance and Taxation, Professor, Université de Sherbrooke, As an Individual]

Good morning, my name is Gilles Larin, and I am a professor at the University of Sherbrooke and Research Chair on Public Finance and Taxation. That chair was created in 2003.

I will be making my presentation in French, because my paper was written in French. According to what Mr. Pagé told me, the English translation is available and you should have it now. Since I only have 10 minutes, I will try to be brief.

My comments this morning will deal mainly with what are known as TIEAs, or Tax Information Exchange Agreements. My argument is that where administration of the Income Tax Act is concerned, the details are as important as the principles. In English, you might say: the devil is in the details. That is why I am proposing to discuss the content of the agreements recently signed by the Government of Canada on tax information exchange. We have looked particularly closely at the agreement signed on October 23, 2010 by Canada and Switzerland; however, I also consider in my paper a variety of tax information exchange agreements signed recently by Canada.

My goal is to determine to what extent these agreements are consistent with the international standard, and which is the OECD standard, which I will explain in a few moments. The international standard is in keeping with similar documents signed by some of our trading partners. The overall objective is to determine the effectiveness of such agreements. At the end of my brief, I make six or seven recommendations to the committee that I would like you to pass on to the Department of Finance and CRA, because those two departments—and particularly the Finance Department—are responsible for negotiating tax treaties and protocols.

Why exchange tax information? Because this is a critical tool for creating fairness in the Canadian tax system. This is explained in an excerpt from an OECD document that I will not read now, but which can be found in the middle of page 1. It really isn't that complicated; it's the principle of free flowing information, because the taxes that are not paid by those who should be paying them will be paid by people who should not have to pay them.

What distinguishes a tax treaty from a tax information exchange agreement? To save time, I will designate them by the acronym, TIEAs.

A tax treaty is an agreement between two signatory countries on the shared right to collect taxes. One of the results is avoidance of double taxation—in other words, that the same income is not taxed twice by both countries that have signed a bilateral tax treaty. Tax treaties are based on one of two models: the OECD model which, in practice, governs relations between developed countries, or the United Nations model, which is different and governs relations between developed countries and emerging countries, or between emerging countries. I initially used the dating back to the 1950s expression “developing countries”, but it is no longer in fashion. Now we talk about emerging countries, so I will make that substitution.

An agreement is used to formalize arrangements for information exchange between two countries that have not signed a tax treaty. A TIEA is necessary when, because of the economic relationship between the two countries, the range of provisions found in a tax treaty is not advisable or appropriate, even though information exchange is desired.

Thus, TIEAs are used to formalize information exchange arrangements between developed countries or emerging countries, and tax haven countries. I will have some amusing comments to make a little later regarding TIEAs between tax haven countries.

[The Vice-Chair, Liberal, Massimo Pacetti]

I just want to let you know that you have already used almost six minutes.

[Prof. Gilles Larin]

All right, I am going to summarize. In any case, you have read the brief.

Our analysis dealt with key components that define the purpose of a TIEA—namely, the burden of proof, the types of taxes that can be subject to a request, the legal criteria that apply to a request, the required documentation, control of information and the obligation of states to cooperate.

Following a review of these conditions under the OECD standard, we compared our results with conditions laid out in the Canada-Switzerland Protocol.

It is important to mention that the documentation requirement in the Canada-Switzerland Protocol for an information exchange request is stricter than the OECD standard. Both the taxpayer and holder of the information must be identified, which is not often the case for other protocols, such as the one signed by the United States and Switzerland or the protocol between Germany and Switzerland.

However, there have been some minor changes recently which were published on the site of the Swiss Parliament, following pressure from the OECD Transparency Committee, which strongly recommended, along with the G-20, that the protocol as adopted on October 23, be made less stringent with respect to the conditions for obtaining information. That information is not provided in the paper I have presented. The Swiss document only appeared on the Internet on February 15, and our paper had already been completed by then. However, I can provide further information in that regard during the question period.

In other words, in my opinion, the Canada-Switzerland Protocol, as signed—it has been signed but not yet ratified—by the Government of Canada and Switzerland, is somewhat lacking. The best way to explain that might be with an image: compared to the U.S., Canada is a dwarf as far as its rights go, while the United States is a giant, given what it was able to negotiate with Switzerland and the coercive power it has secured over Swiss officials in the agreement they signed.

Finally, you can have a look at the material that appears in Appendix A. It's fairly dense, but it lists the countries with which Canada currently has a tax treaty, and on the left the decade and year they came into effect are indicated. As you will see, most of them go back a long way and need to be reviewed.

On the right, in the second line, you have a summary of agreements and TIEAs. There is a whole series of TIEAs mentioned. At the bottom of the page, 15 or so are listed that have been signed in the 2010 decade. Of those countries with which Canada signed an agreement in 2010, none is a tax haven, of course: Anguilla, the Bahamas, Bermuda, Dominica, the Cayman Islands, and so on. I hope you understood that was a joke.

I will move directly to the recommendations that flow from our analysis. They are on page 7 of the brief.

We would like to see a regular review mechanism to examine the effectiveness of the information exchange provisions in the various protocols, as well as the many, hastily signed TIEAs that the government wants Parliament to ratify.

Among the TIEAs that appear in the appendix, only one is currently in force. It's the first one on the list. It's the agreement with the Netherlands and the Netherland Antilles, or at least what remains of them since they were broken up.

Are you stopping me here, Mr. Chairman? That's fine.

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Larin, we have your recommendations. Members will be asking questions. Is that all right? Thank you.

[Prof. Gilles Larin]

Would you like me to stop there?

[The Vice-Chair, Liberal, Massimo Pacetti]

Yes, please. Thank you.

From the Canadian Bankers Association, Ms. Fung, you will be giving the presentation? Okay. Go ahead for 10 minutes.

[Nancy Fung, Vice-President, Banking Operations, Canadian Bankers Association]

Good afternoon.

My name is Nancy Fung, and I am the vice-president of banking operations with the Canadian Bankers Association. I am accompanied today by my colleague, Darren Hannah, director of banking operations. We would like to thank the chair and the committee for the opportunity to be here today.

The Canadian Bankers Association works on behalf of 51 domestic chartered banks, foreign bank subsidiaries, and branches of foreign banks operating in Canada. Despite the turbulent economic environment of the last few years, Canada's banks have remained strong and continue to contribute substantially to the economic health of this country. Banks employ more than 260,000 Canadians, and full-time bank employment has increased 27% in the last 10 years.

The banking industry's contribution to Canada's GDP continues to grow, from 2.9% of GDP in 2004 to 3.8% in 2009, which is equal to $55 billion. Between 2004 and 2008, Statistics Canada data show that banks and other deposit-taking and investment companies paid $36 billion in corporate income taxes, representing 14% of all corporate income taxes paid in Canada in those years. In 2009, the six largest banks alone paid $7.5 billion in taxes to all levels of government in Canada.

Banks pay all taxes due on their business income in Canada and in other countries where they do business. Like many other Canadian businesses, banks are growing their business operations both in Canada and in other countries. By competing globally and earning foreign income, they generate economic benefits in Canada, such as more highly skilled, high-paying head office jobs and higher profits from which dividends are paid to Canadian shareholders.

All Canadians benefit from the success of Canada's banks. Most Canadians are shareholders in Canada's banks through the Canada and Quebec Pension Plans, their employer pension plans, RRSPs, mutual funds, and direct investments. In 2009, banks returned more than $11 billion in profits as dividends to their shareholders, who include the more than 17 million Canadians who own bank stocks through their membership in the CPP. Bank stocks are a key component of equity investments held by most private and public pension plans and mutual funds.

We are pleased that the House finance committee has taken the opportunity to review the important topic of tax evasion. And I want to be abundantly clear about this topic on both fronts.

First, Canadian banks do not promote tax evasion by their clients in Canada or in any other country. In fact, banks have policies and procedures in place to ensure the products and services they offer are not used for the purpose of evading taxes. Banks fully comply with the letter and the spirit of all laws, regulations, and reporting requirements designed to detect and prevent tax evasion.

Second, just as Canadian banks do not promote tax evasion among their clients, Canadian banks themselves do not evade taxes. They firmly adhere to the laws in Canada and in other jurisdictions where they carry on business, including laws that are designed to deter illegal activities such as tax evasion.

Banks are subject to regular oversight by Canadian tax authorities and the banks' prudential regulator, OSFI. Their corporate governance structure includes management and board committees, which oversee risk management, including compliance with tax legislation. I can assure you that banks take these two responsibilities very seriously. Tax evasion is bad business, and reputable financial institutions want no part of it.

I would like to take a few minutes to comment on measures that have been taken to prevent tax evasion.

The OECD has taken a leading role in developing international standards to enhance tax transparency. In 2000, the OECD established the Global Forum on Transparency and Exchange of Information for Tax Purposes. The objective of the global forum is to ensure that all jurisdictions fully implement the international standards on transparency and exchange of information.

The core product of the global forum is a standard for tax information exchange that provides for information exchange on request, including bank and fiduciary information. Put simply, what that means is that any information exchange agreement meeting the global forum standard includes a provision that empowers each government that is party to an agreement to ask another government to obtain and provide information about specific taxpayers, including banking information, if it has reason to believe the taxpayer is evading tax.

This approach to combatting tax evasion is working.

The work of the global forum has accelerated since the G-20 placed emphasis on tax information exchange as the key component to addressing tax evasion. The OECD indicated recently that since 2009, more progress towards full and effective exchange of information has been made than in the past decade. Between April 2009 and February 2011, the number of countries identified as not having implemented the standard shrunk from 44 to 9. Equally important is that all nine of these countries have committed to implementing the standard.

Canada has taken the leading role in this initiative. Canada has built on its already substantial network of tax treaties by concluding tax information exchange agreements with 14 jurisdictions, including several low-tax jurisdictions such as the Cayman Islands, Bermuda, and the Bahamas, and it's negotiating agreements with 11 others. In all cases, the agreements provide for the mutual exchange of tax information that is possessed by or accessible to the taxation authorities of either jurisdiction, in order to better administer and enforce taxation laws and to prevent international fiscal evasion.

In short, the Canadian government has made it a priority to ensure that it has the ability to investigate instances where tax evasion may be taking place. We encourage the government to pursue more such agreements. The government has also taken action domestically to better utilize the tools that are already available to help identify and take action on transactions that may be linked to tax evasion. In the 2010 federal budget, the government made tax evasion a predicate offence under the Criminal Code. If financial institutions suspect a transaction relates to laundering money received as a result of tax evasion, it must report those suspicions to FINTRAC. Again, we support this measure.

Although Canada already has a strong and robust system for dealing with tax evasion, certainly it can always be made better. For example, there may be ways to build on Canada's extensive network of information exchange agreements with other countries by expanding the network to include more jurisdictions. Alternatively, the government could consider incorporating the automated information non-resident reporting features that exist in the Canada-U.S. tax treaty into tax treaties and information exchange agreements with other countries. The committee may wish to explore these and other options as you weigh the evidence you have received and make your recommendations.

Thank you for your attention. We would be pleased to answer any questions members of the committee may have.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Ms. Fung.

We'll go directly to the members. The first round will be seven minutes, including questions and answers. If you would keep your answers brief, I think some of the members may appreciate it.

Mr. Szabo, vous avez sept minutes, s'il vous plaît.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you.

I think both of you are interested in promoting tax information exchange agreements. Are you aware of any success stories or performance measures with regard to TIEAs that currently are in place?

The question is for both of you. Each of you can have a little say. Go ahead.

[Prof. Gilles Larin]

I'm not aware of any.

[Darren Hannah, Director, Banking Operations, Canadian Bankers Association]

No, I'm not aware of the metrics the government uses to track success in these. We're certainly happy that they're going forward with it, but I don't know exactly how they go about assessing how successful it has been.

[Paul Szabo, Liberal, Mississauga South, ON]

That seems to be a problem then. If you don't know whether something works, and you know what the magnitude is, and you have no measures of success and no deliverables, to say let's have more of them seems to be a black hole.

[Prof. Gilles Larin]

May I intervene?

If I look at the protocol that was signed by Canada with Switzerland--and as I was saying earlier, the devil being in the details, I have the administrative requirements that Switzerland insists upon before answering questions from Canada Revenue Agency. This is fresh off the press from the Swiss authorities.

It says that Canada, for instance, would have to identify the taxpayer. This identification can be established not only on the basis of a name and address of the taxpayer who is being checked up on but also—and this is the important word, “exceptionally”—on an exceptional basis, on the basis of a bank account number. This was something that Mr. Owens....

[Paul Szabo, Liberal, Mississauga South, ON]

Let's just check on whether the Canadian Bankers Association has any comments.

[Darren Hannah]

From our point of view, information exchange really is the key thing. It's what was identified by the G-20. It's what was identified by the OECD. It's the approach that everyone is taking to try to deal with the issue.

Can it be enhanced upon--

[Paul Szabo, Liberal, Mississauga South, ON]

Just on that, are you aware of why the G-20 decided that was the key thing?

[Darren Hannah]

I believe--I believe--it is because information is what's necessary in order to try to--

[Paul Szabo, Liberal, Mississauga South, ON]

It's intuitive.

[Darren Hannah]

It's intuitive.

[Paul Szabo, Liberal, Mississauga South, ON]

But there's no evidence.

[Prof. Gilles Larin]

I can offer some suggestions.

[Paul Szabo, Liberal, Mississauga South, ON]

I'm sure.

[Voices]

Oh, oh!

[Paul Szabo, Liberal, Mississauga South, ON]

My time is running out.

Ms. Fung, your last statement was about the “automated information non-resident reporting features” that exist in the Canada-U.S. tax treaty, and that we may want to consider exploring it.

Are you aware of any features of our relationship with the United States, or other agreements, that permit that but that may not be existent in other countries, and in fact would not facilitate such an automated exchange?