Finance Committee on Feb. 5th, 2013

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Mark Adler, Conservative, York Centre, ON]

In terms of increasing bank transparency globally, is it making your job any easier, or are you finding it more and more difficult, more complex?

[Brian Ernewein]

I will start, and then Mr. McAuley may have more to add.

I will just make the point that with the tax information exchange agreements and with the revisions to our tax treaties—to make sure that all countries with which we have a relationship, and we are hoping to get a relationship with every country and subnational jurisdiction where they have separate responsibility for taxation—we're trying to get the template in place that allows our colleagues at the Canada Revenue Agency to get the information they require.

So the framework is supposed to be in place, and as I mentioned earlier, there is actually a peer review process to try to make sure not only that we sign these agreements but that the other countries we sign them with have the legal capacity and have, frankly, the willingness to, on the ground, give effect to change of information.

A lot of these, particularly the tax information exchange agreements, have been signed, and in some cases ratified, only very recently—they've come into effect only in the last year or so—so I think Canada Revenue Agency's ability to use these and to make requests under these exchange of information agreements is very nascent. That's how things are positioned.

[The Chair, Conservative, James Rajotte]

Thank you.

Do you have just a very brief add-on to that, Mr. McAuley? We're over time.

That's it. Thank you.

Mr. Rankin, go ahead, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you Mr. Chairman.

I would like to thank the witnesses for their very thoughtful testimony this morning.

I have a question building on what my colleague, Mr. Caron, was mentioning with respect to the United Kingdom. Apparently the U.K., among other countries, has put a burden on tax advisors so that they can be prosecuted for advising, if it turns out in favour of tax evasion.

I would like to know your thoughts on that approach. Is there anything Canada should be doing or is doing specifically in that context?

[Brian Ernewein]

Let me talk specifically about what Canada is doing in that context. I've lost track of when it was done, but sometime in the last decade or 15 years, there were rules, so-called third-party penalties, introduced for tax advisors—civil penalties. There have been for many years possible criminal sanctions that could apply to those complicit with tax evasion, those who conspire to engage in tax evasion even on another's behalf. But there was a perceived gap, in that there was no ability to proceed civilly against tax advisors who would engage in what we'll call domestic tax avoidance.

More recently, actually in the 2010 budget, and, as I've said, as part of Bill C-48 currently before the House of Commons, we have an aggressive tax reporting regime. It essentially gives an early warning or notice to CRA of transactions that have an avoidance motive, which the taxpayer evidently believes works. Nonetheless, where there are certain hallmarks of a tax avoidance transaction, such as a contingency fee or the like, there's a reporting regime in place that requires the taxpayer or the tax advisor to formally advise CRA of the existence of the transaction, which thus allows CRA to step in. They can take a look at the transaction and challenge it early. Perhaps if they think there's a real concern for the fisc and that in some sense the transaction may work, they can let us at Finance know as well and we can take stock and decide whether a change should be required.

[Murray Rankin, NDP, Victoria, BC]

That would be in the context of criminal prosecutions, but there's no such ability now to go after people, for example, for civil penalties, for fines and the like, who are too aggressive in their tax advice?

[Brian Ernewein]

No, excuse me, it's the contrary. Both of these regimes are really in the civil context. The third-party penalty rule was, as I said, to fill a gap instead of having only the option to proceed criminally against the tax advisor. So it created the opportunity to actually proceed on a civil penalty basis for tax advisors engaging in, essentially, gross negligence, in transactions that amounted to gross negligence on behalf of the client.

The more recent aggressive tax reporting regime is about letting CRA know. I think almost by definition it's civil, because if there's no prospect of the transaction working, then it's not sensible for taxpayers to pursue it.

[Murray Rankin, NDP, Victoria, BC]

In the United States, Senator Levin and then Senator Obama brought in a bill called the Stop Tax Haven Abuse Act in 2011, and one of the things was to prohibit certain fee arrangements, the kinds of contingency fee arrangements that you've discussed. There's no such prohibition in Canada?

[Brian Ernewein]

This regime that is currently before Parliament has some elements of that. It also shares some features with some Quebec legislation that's in place, and it does look at these hallmarks...sorry, I'm drawing a blank in terms of the three hallmarks it has. But if you had two out of the three of those, that would represent an aggressive tax transaction, which requires reporting.

So at a very high level there is a parallel there.

[Murray Rankin, NDP, Victoria, BC]

I understand Project Jade was the ability of the CRA to go after those who came out of the Liechtenstein tax evasion situation in 2008. Apparently, 106 Canadians were involved. It was expected that millions of dollars in back taxes and penalties would result. Could you update us on what happened with respect to that?

[The Chair, Conservative, James Rajotte]

You have one minute.

[Terrance McAuley]

That project is virtually complete now. You're correct in identifying the 106 names on that list. We have gone through the list and we have conducted 47 audits and identified $22.4 million in outstanding tax from a base of approximately $100 million in raw assets. From that, we are now in the process...we have finished collecting approximately $8 million of that. With respect to the balance, roughly $14 million is currently before the courts. So we have basically finished that project.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Rankin.

Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you all for appearing before us today.

Mr. Ernewein, I will talk along the same vein as Mr. Rankin, because I'm a little uncomfortable about that. I'm hearing from you that the government's approach is to clarify the rules rather than to prosecute. As a businessman I know there are times when we're advised on certain issues, and those sometimes are challenged, and then we could go back.... Isn't that a much better direct route to go, to clarify the rules so that we don't run into those situations whereby somebody may be accused of evading taxes when they really thought they were complying with the law?

[Brian Ernewein]

I think there's a conflation of evasion and avoidance in the discussion we've been having. With respect to avoidance, yes, absolutely. The clearer the rules can be to tell people where they can go and where they're going too far, I think that's all to the greater good. In relation to evasion, it's about ignoring the rules. In that context, it's not the situation you describe.

So putting evasion to one side again and going back to avoidance, these are rules where the third-party penalties are where people are really pushing the envelope in terms of purporting to be having an avoidance transaction, but one that would not be upheld in terms of current law. It's not evasion because they're telling you, but they're taking a position that seems almost beyond the pale. To the extent that you can narrow the range of situations that arise, that's better, yes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. McAuley, I want to close the loop. Mr. Jean brought up the energy and the direction of the government to give you the tools to go after those who are evading taxes. First of all, the result is that you've been successful in prosecuting and probably finding them, but what really is intriguing is the fact that it's created a culture—and I want you to verify this because this is what I'm hearing—that encourages people to do the right thing. Now the government has the tools to go after them, and chances are they're going to get caught.

Am I right? Did I interpret that correctly?

[Terrance McAuley]

We're certainly hopeful that we're on the right track, and I believe we are on the right track. When you look at the exchange agreements and the treaties that are in place, when you look at the new reporting requirements that Mr. Ernewein has talked about and our capacity to use tools to get information domestically and internationally from taxpayers, it's becoming much more difficult to put that information aside. Information is the real challenge in international tax planning. The more we have that gives us that access, the better.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We've talked about tax evasion, but I need a bit of information on the transfer. The United Kingdom has carried out a similar parliamentary study, and an issue that's caused concern is transfer pricing. Can you talk a little about transfer pricing? How big an issue is that? Is that a new, looming problem that we have in the tax world, or is it something that we've got a good handle on?

[Terrance McAuley]

In a very basic sense, transfer pricing is a very important part of the work that all tax administrations have to do, because the economy is becoming global and taxpayers are working internationally all the time. As a result of that, when you have organizations and structures where an organization is either entering into a sales transaction or a transaction with one of its related companies offshore, what you find is that there are times when the companies are trying to take advantage of certain sales that should take place at fair market value that are being either undervalued or overvalued for a tax advantage.

So it's becoming, and is, a big issue. For example, at the OECD right now, Working Party No. 6 has an entire area devoted to transfer pricing to set out guidelines on an international level to make sure that all countries are working toward a solution for transfer pricing.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Just very quickly, can you narrow that down to specific corporations? Is it in the extraction industry, is it in the manufacturing industry, or is it pretty much broad-based?

[Terrance McAuley]

It's across the board. It's large corporations, it's multinationals, it's small corporations. Any time there is a transaction across the border involving a related second party, it's possible now.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

M. Côté, s'il vous plaît.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

Mr. Cormier, you stated in your presentation that Canada's annual tax losses were estimated at $81 billion.

We are talking about tax losses in terms of collected taxes and not transferred taxable amounts, right?