Thank you, Mr. Chairman and members of the committee. I'm honoured to have been invited to appear today to assist in your study of tax evasion and the use of tax havens. I have been a tax lawyer in Toronto for over 25 years. Our clients are primarily private companies, entrepreneurs, owner-managed businesses, professionals, and high net worth families and individuals.
Our law firm provides only three legal services. We provide tax and estate planning, tax dispute resolution and litigation, and defence of criminal tax evasion and other financial or regulatory offences. Tax evasion is very different from legitimate tax avoidance or minimization. Tax evasion, at its core, is fraud. The evader’s intention is to deceive the crown by failing to report income or by claiming false expenses in order to minimize income. The law requires the crown to prove beyond a reasonable doubt that taxes were owed and that the accused both knew that taxes were owed and deliberately avoided their payment. The most serious cases of tax evasion, usually involving amounts of taxes evaded of greater than $250,000, are prosecuted either by indictment under the Income Tax Act or as fraud under the Criminal Code. The Criminal Code offence of fraud is frequently the preferred criminal charge for major, complex tax prosecutions. My paper details some of the reasons why the crown may prefer to proceed under the Criminal Code rather than under the Income Tax Act. Generally speaking, it's a little bit easier to prove fraud than it is to prove tax evasion.
The investigation and enforcement of tax evasion, because it is a crime, engages the accused’s charter rights, for example, those under section 7 of the charter, as well as the right against self-incrimination, freedom from unreasonable search and seizure, the right to legal counsel, and the right to be presumed innocent.
The committee has previously heard that, unlike tax evasion, tax avoidance is not a crime. That is a true statement. The Canada Revenue Agency takes a broad view that tax avoidance "involves minimizing tax by contravening the object and spirit of the law but not the letter of the law." I have to say I disagree with that statement. First, there is no “object and spirit” test in Canadian tax legislation. Second, the CRA may have made it sound as if tax avoidance is one shade of grey below tax evasion. That's not true. The gap between avoidance and evasion is wider than the Rideau Canal. Although the CRA and the Department of Finance dislike it, tax avoidance, even aggressive tax avoidance, is legal. It does not involve hiding assets, claiming false expenses or refunds, or the use of sham documents or entities. In fact, in my experience, all transactions involving a tax-minimization or -avoidance strategy are properly reported on financial statements and tax returns to the respective tax authorities.
I bring these differences between avoidance and evasion to your attention because it’s not enough to understand the legal distinction between the two concepts. It’s important to understand the CRA's powers and the limits of those powers, depending on whether it's engaged in finding avoidance transactions or in investigating tax evasion. A taxpayer is required to comply with an audit, with respect to avoidance, whereas the taxpayer has the right to silence under the charter with respect to tax evasion.
Now let's talk for a minute about tax havens and offshore accounts. The committee has heard various estimates of the amount being held by Canadian individual and corporate taxpayers in offshore accounts. If those numbers are to be believed, it's in the billions of dollars. No one seems to know how much of those billions is made up of potentially legitimate investments, but be that as it may, let's assume it's a large number. It's a given that tax evasion must be investigated and prosecuted. However, the government cannot manage what it cannot measure, and you cannot measure the total amount of proceeds from tax evasion, because it is, by definition, being deliberately hidden by the tax evader. However, the government should be able to measure the CRA's efforts and results in capturing tax evaders.
To that end, I did a very unscientific survey by searching the term “tax evasion” in the Canadian Legal Information Institute case law database. The search obtained 670 results, representing all of the Canadian court cases from 1900 that mention the phrase “tax evasion”. I narrowed the search to include the word “offshore” and obtained only 21 results. That strikes me as a very low number. I then went to the CRA website, because it routinely posts press releases of tax evasion convictions. There were 24 in the last three months, but none of them involved unreported income offshore.
Let me look at some of the recommendations. One of the recommendations is that the committee or the Auditor General has to annually measure the CRA’s progress in catching tax evaders.
If there are no offshore tax evasion cases, then either Canadians are much more law-abiding than we thought and the hidden billions offshore are a fiction, or, my theory, our tax evasion laws are not being vigorously investigated or enforced enough. Without investigations or prosecutions there can be no convictions, and as a consequence no deterrence.
To that end, I would ask the committee to perhaps look at something similar to the U.S. FATCA rule. That has its criticisms, because it is essentially the extraterritorial application of U.S. law. However, if you can't get information government to government, you can do what the U.S. did—namely, try to get information directly from financial institutions.
I also considered whether the CRA could institute and encourage a whistle-blower program similar to that of the IRS, which pays awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest, or other amounts from a non-compliant taxpayer. The award can be between 15% to 30% of the amount collected.
For the sake of time, I'd be happy to take questions or comments.
Thank you.