Finance Committee on June 7th, 2016

[Dennis Howlett]

We, in some cases, found auditors who had recently retired, and so were freer to talk. We had auditors refer others to them. We also had the co-operation of PIPSC, the Professional Institute of the Public Service, which represents auditors in the CRA. Some of their members were informed that we were doing this study, and so some auditors came forward and contacted us to participate in the study.

We describe in our study the process of how that happened. We are not claiming this is a scientific poll. It tended to bring forward those who had concerns or issues, although there were a number who also were quite positive about what the CRA was doing. There are a range of views represented. That said, we're not claiming that it's necessarily a scientific study.

The reason we did the study is that I was getting calls, because I had been in the media. Various CRA auditors, and so on, were coming forward to me. I thought, okay, there's enough of this happening that we better take a look at it. That's why we had an independent journalist conduct the interviews for us. We didn't even know the names of all the people who were interviewed.

[John Nater, Conservative, Perth—Wellington, ON]

Okay, but I have a couple of points.

There was a degree of self-selection, then, in terms of the interview process.

[Dennis Howlett]

Yes.

[John Nater, Conservative, Perth—Wellington, ON]

Was there a peer review process of the findings?

[Dennis Howlett]

No, there was no peer review process. It's not an academic study. It was shared with government. The new minister has a copy of it. We did make these recommendations and the findings available to the government because we felt this warranted further investigation. We weren't claiming that this is the end of the story, but that there were sufficient issues of concern here that should be investigated further. That was our conclusion.

[John Nater, Conservative, Perth—Wellington, ON]

Okay. I'm from from academia. We were required to have non-medical research ethics approval before conducting a study with human subjects to do interviews. Am I right to assume there was no such approval for the subject leading into this?

[Dennis Howlett]

No, it's not an academic study.

[John Nater, Conservative, Perth—Wellington, ON]

That leads me to believe then that your allegation of political interference may be tough to substantiate, based on the fact that this was a study taken with a degree of self-selection, no outside ethics approval, and no peer review process. How are we to believe and substantiate these allegations when we don't have this framework in place that a normal academic study, for our academic colleagues here, would normally have to undertake when making such serious allegations? How are we supposed to take that seriously when some of these mechanisms aren't in place to clarify that?

[Dennis Howlett]

We were not reaching a conclusion about those issues. We were simply saying that there were sufficient cases brought forward to our attention that we felt they warranted further investigation. We have encouraged some of the CRA auditors to take their case to the Public Service Integrity Commissioner. We felt that was the best way forward.

It points to a problem here. First, many CRA staff were fearful of complaining to their superiors, were concerned about the atmosphere in the CRA; and second, our whistle-blower laws, while they've made a step forward with the Public Sector Integrity Commissioner, are still not adequate, in our view. That's why we're calling for a long overdue review of the Public Service Integrity Commissioner and that law. We think that law should be strengthened. There is not the same level of protection in the Canadian regime as in the United States, or New Zealand, or other countries. There are a lot of ways in which it could be improved. For some whistle-blowers who have blown the whistle on Canadian mining companies' practices in Africa, for example, there is no protection available for them. Very few come forward because they are threatened with being fired. They face reputational risk and not being able to find a job again, and that needs to be corrected.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Mr. Grewal, for five minutes.

[Raj Grewal, Liberal, Brampton East, ON]

At its core, this is about tax fairness, making sure that all Canadians, corporations included, pay their fair share, making sure that they don't cross the line between avoidance and evasion. As a former corporate lawyer, this was obviously an ongoing discussion. On any mergers and acquisition deal, you had to make sure that there was a tax plan in place. That was more tax avoidance than tax evasion.

My question is for Mr. Cockfield. It goes to the core of the issue that you have come out pretty aggressively against the CRA. I'm not going to disagree with you on the fact they don't do a good job in prosecuting Canadians who try to evade tax internationally. Specifically, in your experience, this wealth of experience that you have in international taxation, what jurisdiction gets it right? What country would you say that Canada or the CRA could model itself after?

[Prof. Arthur Cockfield]

That's a very good point.

I didn't say this, but it's a very tricky matter to go after these folks. Most countries do a lousy job. I sometimes say that the Americans get the tip of the iceberg, but at least they're getting the tip. The U.S. has a very aggressive reputation, with 500 international auditors and so on who travel around the world. So the Americans are often touted as one example. The Germans are another good example. Prior to the Panama leaks, I think they had 300 auditors breaking down doors and looking through tax records and so on. Then, finally, the Australian Taxation Office, the ATO, has a terrific reputation in having of innovative policies to address offshore tax cheats. We've adopted a similar risk assessment system in our country to that of the Australians.

Those are the three examples that I think we ought to take a careful look at.

[Raj Grewal, Liberal, Brampton East, ON]

In your experience, are those tax agencies better funded than the CRA? The CRA went through a lot of cuts. Now our government has made a pledge to invest resources in it. When the CRA was before our committee, they said that's going to do a very good job. I can't remember the number, but for every dollar invested in addressing the issue, x percent is given back, and it's usually higher than $1.50 or $2.

In your experience, are the German officials and the U.S. officials better funded? Do they have more resources than Canada has for the CRA?

[Prof. Arthur Cockfield]

I'm not aware of any concrete information.

My sense is that the Americans traditionally were much more funded, and then again, they have this vast army of the DEA, ICE, Customs, the FBI, and so on that assist with tracking down tax cheats and international money launderers. But the Americans have just slashed their budget and have fired a whole bunch of international auditors for political reasons in the last couple of years, and so there's a lot of discussion. That's highly problematic.

I think the Germans, too, have devoted more resources to the problem. As I mentioned at the outset, it is a welcome change to see these additional resources to help the CRA. I think that will help a lot.

[Raj Grewal, Liberal, Brampton East, ON]

In my constituency, I usually get the small-business owner or the single parent who comes into our office and is being audited by the CRA. The CRA is sending them letters and giving them phone calls. They're reading the news—they're well informed—and they're very upset, to say the least, at the fact that wealthy Canadians are getting away without paying their fair share. The CRA is overly aggressive, in my humble opinion, on the average Canadian who is just trying to put food on the table and clothes on their kids' backs.

Mr. Howlett, you made a pretty substantial comment that there's political interference in the CRA. I would actually say, from what I heard today, that it happens more often than not at the CRA. Specifically, you mentioned that political interference has led to cases being dropped or not prosecuted. Then, when other honourable members of the committee here asked you to substantiate that claim, in my humble opinion, sir, and with no disrespect, your comments back did not lead one to believe that one could make that claim. You say that political interference is happening at the CRA but that you cannot prove it. You can't point to one factual element to say that, or to one auditor or somebody in the CRA who could give you a concrete example.

I worked on Bay Street. Rumour mills swirl like anything. I mean, in Ottawa, we're probably even worse for it in the bubble.

I take your claim very seriously. I think my constituents and all Canadians across the board would take something like political interference in their tax agency extremely seriously. So I urge you, if there is concrete information there, to please come forward with it to the committee to ensure that we do our job as elected officials to correct that problem, because I think it's a very serious allegation you just made.

[The Chair, Liberal, Wayne Easter]

Mr. Howlett, we'll ask you to keep the answer fairly tight. We're running out of time.

[Dennis Howlett]

We have given more details to the minister's staff, and it's not just political interference that is the issue here. We have ended up with a tax system that treats ordinary taxpayers in one way and rich taxpayers in another. We end up with a completely unfair system in which some people can afford tax planning assistance and expensive tax lawyers and accountants, and others can't, and one in which the CRA has been going after the low-hanging fruit, throwing the book at people who in some cases had simply made a mistake, and systematically going after most of the major tax evaders—and I'll use the word “evaders”—by letting them do voluntary disclosures with no penalties, and, in some cases, not even with any interest.

That ends up as an unfair system, and there are serious problems at the Canada Revenue Agency. This new government has begun to address some of the problems, but I would suggest there are still other problems that you need to get to the bottom of. We would be happy to co-operate, assist, and help the government to do so. There is a serious problem here that needs fixing.

[The Chair, Liberal, Wayne Easter]

We'll have to cut you there. Mr. Howlett—

[Dennis Howlett]

Our report really puts the emphasis on fixing it, and not just on the problems.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Howlett.

Mr. Caron, we'll hold you to three minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Monsieur Lareau and Mr. Cockfield, I'll ask my question in English this time.

There is such a thing as privilege between attorney and client. There is such a thing as privilege between a doctor and a patient. There is such a thing as privilege between, say, a member of the clergy and the faithful.

Is there such a thing as privilege between a tax accountant or tax lawyer and a client? Regardless of the answer, should there be?

[Prof. André Lareau]

The Income Tax Act covers privilege between client and lawyers and notaries. Accountants are not covered here in the Income Tax Act.

The Supreme Court last week rendered a judgment regarding notaries with respect to their accounting files, accounting documents, des cas comptables, and the Supreme Court said that even though the Income Tax Act says they are not privileged, they are indeed privileged.

The Income Tax Act is unconstitutional in that respect, so they are privileged with respect to notaries and lawyers, but not with respect to the accountants in the Income Tax Act. I'm not talking about the accountants with respect to their profession. I'm talking about the Income Tax Act.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Mr. Cockfield.

[Prof. Arthur Cockfield]

The only thing I would add is that it gets even more complicated when you have a firm like KPMG with an affiliate law firm. Generally speaking, accountants don't enjoy this privilege, but often their opinions and their plans are attached to what lawyers say, and then things get highly problematic, because privilege does cover the lawyers, so our lawyers' opinions shielding the work by accountants are an issue.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Madam Thomas.