Hello. Thank you kindly for inviting me.
As you said, I am an Associate Professor in the Law Faculty of Université Laval, a tactful title for a retired professor who still makes a contribution to the university community.
I am not an expert on the application of the Proceeds of Crime and Terrorist Financing Act. I specialize in taxation only, so my comments today will be limited to taxation in international transactions. I do not claim to have the solutions, but I would still like to put forward some hypotheses that may or may not be borne out.
Laurent Laplante, a journalist and essayist who I greatly admired, told me about twenty years ago that we cannot control what we cannot see. That is true for the criminal activities we are discussing today. Applying that statement to taxation, we can see that crime draws its strength from secrecy. When essential information that is needed to understand a commercial transaction remains secret and is not disclosed to the authorities—who nonetheless should have access to it in order to do the necessary audits and calculations—that means that our detection tools are inadequate.
In short, these weaknesses of our tax system that I have identified—some fiscal, others more commercial—can be exploited by tax evaders. I will explain them in greater detail later on or in answering your questions.
First, our tax legislation is very attractive, especially to international players, as it provides a screen and camouflages illegal transactions through the exempt surplus. I will talk about this later on.
Second, the fines for tax evaders, tax criminals, are too lenient. Most of these people do of course have advisors, guides, who are experts in taxation and who do not act alone. Recently, a businessman in Quebec City told me that he had been approached several times by accounting firms to carry out large international transactions, using tax havens in particular. He was also told several times that it was risky, but that it should work. He turned down those offers.
There is a third element, something that could be discussed. I am referring to bearer shares, which are used in tax evasion and are often denounced. Unfortunately, the Canadian Bar Association made an exception to this rule and did not speak out against them. Stating that this would interfere with tax planning, it argued for the status quo.
The voluntary disclosures program is the fourth element. In spite of the most recent changes to the program, it needs to be completely reviewed and to a large extent scrapped. The United States has in fact just announced that it is scrapping its offshore voluntary disclosure program; the program will be eliminated in a few months.
The Jordan decision is the fifth element, and it is increasingly being raised in taxation matters. In a very recent decision regarding tax evasion of $31 million related to contraband tobacco, a Quebec Court judge dismissed the charges on February 26, 2018, in accordance with the Jordan decision.
The sixth element pertains to changes that should be made to paragraph 55(3)b) of the Proceeds of Crime and Terrorist Financing Act, in order to expand the powers of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to require it to disclose information to the Canada Revenue Agency. Paragraph 55(3)b) is poorly written, in both English and French, but I would say the French version is even worse.
Another element that I will discuss very briefly is the ability of foreign companies to pay tax-free dividends to Canadian parent companies through the exempt surplus.
My explanation is as follows: there is nothing stopping a foreign company that is located in a tax haven, where there are few controls, and that is affiliated with a Canadian company from smuggling firearms or selling illicit drugs and recording those revenues under the company's exempt surplus, since there are no controls in the foreign country. As a result, in many cases no one is the wiser when those amounts are repatriated as dividends payable to the Canadian parent company, because form T1134 requires very little information from the dividend recipient.
As a colleague from the Canada Revenue Agency told me recently, it is obviously worse when the parent company is not subject to an audit. It is smooth sailing because the Canadian parent company deposits the amount it receives in its bank account and not in a non-resident entity. The resident entity may deposit amounts from abroad. That is a major problem. As someone noted, a new generation of tax evaders could take advantage of this situation.
Why then should we not require the foreign entity that pays dividends to a Canadian parent company to obtain certification from an expert in the field to certify that the revenues earned are indeed from legitimate operations? And at the same time, of course, impose prison terms for experts who sign off on something that constitutes fraud?
Canada has concluded 23 information sharing agreements and more than 90 tax conventions, in some cases with countries that merrily engage in fraud.
On March 26, just two days ago, an article by Jeremy Cape was published in the Tax Notes International.
He is a tax and public policy partner with Squire Patton Boggs in London.
Mr. Cape said the following about Nigeria:
If I were a Nigerian living in Nigeria, I'm not sure I'd be wholly compliant with my tax affairs. In fact, there's a good chance I'd be a tax evader.
There is in fact a lot of tax fraud in Nigeria, and Canada has a tax convention with that country.
There are other aspects as well. I could mention Panama, with which Canada concluded an information sharing agreement. Article 6 of that agreement should include a foreign control mechanism to allow us to investigate what is happening abroad, but it does not. There is an article 6 in 22 other information sharing agreements, allowing Canada to investigate what is happening in those countries, but there is no such article 6 in the agreement with Panama.
As recently as yesterday, the Canada Revenue Agency told me not to worry about it, since Canada has signed the Convention on Mutual Administrative Assistance in Tax Matters. Article 9 of that convention does in fact provide that countries may conduct investigations in other countries, but Panama has set aside article 9. Since it does not subscribe to that article of the convention, Panama could refuse to let foreign countries conduct investigations within its borders.