Finance Committee on June 7th, 2016

[Prof. Arthur Cockfield]

Tax law is interesting in how one is supposed to interpret it. All of this goes back to an old English case called Duke of Westminster, where the House of Lords told us that we could govern our affairs as we saw fit to avoid taxes as long as we complied with the letter of the law. This created a lot of problems in Canadian jurisprudence over the next hundred years. Professor Lareau mentioned that we tried to change things in the late 1980s by introducing a general anti-avoidance rule, a GAAR, that said not just that letter of the law matters, but also the spirit, that you can't abuse the Income Tax Act. So it is tricky, but having said that, within the Income Tax Act there are a host of different penalties for advisors who engage in reckless, negligent, or willfully blind behaviour. As I mentioned at the outset, one way to attack the problem is to pursue those penalties against the advisors.

We've heard that the CPAs are regulated. Of course, lawyers in this crowd would know that we're also a self-regulatory body. I published a book on legal ethics that annotates all the dozens of cases every year where the Law Society of Upper Canada sanctions lawyers. So sanctions are there as well.

However, the more obvious are in the Income Tax Act. As Professor Lareau also mentioned, there are whoppers. You can go after the advisors, like the Department of Justice did with the KPMG tax shelters of a decade ago and fined them $450 million. That was a much larger scale tax shelter called BLIPS—bond linked issue premium structure—and related structures, so it was a very different thing. But we do see that's possible to discourage reckless behaviour.

I'm not, of course, commenting on the KPMG case.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Mr. Chamberlain, you mentioned tax products in the U.S. having to be vetted and registered. Does that also come with somewhat of an audit and access to, in that case, the IRS in the sense that it's one thing to vet and register, but someone also has to regulate and audit, and the fact that whatever has been registered is actually what is being offered and not just some version of it, which I assume would provide some access? In this case, if it were the CRA auditing that, was there legislation to ensure in random audits that what was being offered was actually the item that was vetted?

[Scott Chamberlain]

I don't know the precise answer to your question. I can undertake to look into it. In fact, it was difficult to research where that regulatory obligation came from, because I just recently discovered it. All I can do is refer you to a document that was provided, or that will be provided electronically, which is the “U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals”. This was a 2003 report from the Senate committee in the United States.

If it's all right, I can read you a short passage, which is somewhat telling of this problem, or I can direct you to it. I'll actually just draw your attention to page 13, which details both that requirement and the reality that large accounting firms chose not to register, knowing that was a breach of the law, and did so in a calculated way. Evidence given to the Senate of the United States was that they calculated the profits and the tax that would be saved versus the lack of enforcement for this registration. It's much like the Ford Pinto was a calculation, and it cost us less to fix the Pinto than to pay off the people who were going to be killed. It's not exactly the same, but it is a cold calculation that was done.

What I would say further to your first question regarding the self-regulated professions is that I spent eight to ten hours looking through all the reported cases since 1987. They're online. That's almost 30 years of cases. I looked through the unlawful conduct provisions, and I looked through the reputation of the profession. There wasn't one case about tax evasion internationally. There were fraud cases that were domestic. There was not one case about that.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Chamberlain. We're well over time.

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I'll start with Ms. Thomas.

First of all, this whole area of taxes is something that is complicated. I always like to look at things the way I think the majority of my constituents would look at them. Really, the only issue is that they want to ensure that they don't pay more taxes than they're required to pay, come tax time. Is there a difference between tax avoidance and tax evasion?

[Joy Thomas]

Yes, there is a difference. Tax evasion, we all know, is unlawful and unethical, and it's very harmful to our economy. Tax “avoidance” is effectively a term used to define tax planning. As Canadian taxpayers, we all have the right to organize our tax affairs in such a manner as to pay the least amount of tax that we are legally obligated to pay through law. That is the fundamental difference.

I think where it gets confusing, though, is in the area of aggressive tax avoidance. Already, others here have mentioned that aggressive tax avoidance is really where you get into not planning your tax affairs in the spirit and the intent of the legislation of the tax policy.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Just plain tax avoidance is not illegal, as was mentioned by the questioner a few minutes ago. The statement by the member across the way was clear that tax avoidance was illegal. Is that...?

[Joy Thomas]

Tax avoidance is a term used for tax planning, and it's not illegal.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Right, so part of this issue, as I read it and in the way my constituents look at it, is that they hear about things like tax avoidance and tax evasion and, frankly, it makes them angry. It makes them angry because there are a lot of terms just thrown around out there that are probably inappropriate. I heard one just a few minutes ago from Mr. Howlett, who said that there was “political interference” at the CRA.

Your answer to my colleague left a lot to be desired. I'm political. I'm elected. I'm considered to be a politician. Quite frankly, when you throw something out there by saying there's political interference, I think you owe it to the Canadian public to be more specific than how you answered in this hearing. I'm going to give you another opportunity to be more specific, because if you can't be, I would suggest that maybe you take back that comment about political interference at the CRA.

[Dennis Howlett]

As I said before, I deliberately made sure that I did not know the particulars of the cases that were mentioned by CRA auditors. I did not interview them myself. We hired a journalist to do the interviews and to keep the names of the CRA auditors from us, so I don't even know the particular CRA people who said this.

What I do know is that there was a pattern. There was more than one. There were a number of CRA auditors interviewed who had serious complaints and suspicions about political interference, and it is evidence sufficient to warrant further investigation. That is what is in the recommendations in the report, that the government should encourage CRA staff to take advantage of the Public Sector Integrity Commissioner's offices to try to get to the bottom of this issue.

I know it's a very serious matter, and that's why I think it needs to be brought to the government's attention, so that it can determine whether there is, in fact, something there or not. All I know is that there were enough cases that were brought forward to our attention that we felt something needed to be done about this. I have met with the minister's office to talk about this issue and have recommended that CRA staff be encouraged to come forward to the Public Sector Integrity Commissioner.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Mr. Cockfield, maybe I can conclude with this comment. We've had a couple of instances just here this morning where you have tax avoidance being deemed to be illegal. You have allegations of political interference that is very difficult to substantiate. If my numbers are correct, we have hundreds if not thousands of informants about illegal tax schemes, and yet the crown has not been successful in any of the cases, if I am correct. Is there a theme here that there's a lot that's thrown out in the way of allegations but very little that can be substantiated?

[Prof. Arthur Cockfield]

Yes, and to return quickly to your earlier comments, when I teach tax law I tell my students that, if they have an RRSP, they are engaged in tax avoidance—that is a registered retirement savings plan, like many of your constituents have, presumably. That is legal, but your constituents are right to be confused. I've been studying this my entire professional career and I'm still confused. At some point, the tax planning becomes so egregious, so aggressive that one needs to take steps to curtail it, to potentially punish or at least sanction the advisers as well as the taxpayers who take it up. It is confusing. It's not an easy area, and that's why the crown may be reluctant but, as I mentioned, it has to go after these bad apples for precedential value at a minimum. It has to go after them, prosecute them, and get successful convictions. That's something we have a terrible record at in our country.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Ouellette, the floor is yours.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Mr. Cockfield, I'd love to ask you just a few questions. You wrote this interesting article, “Big Data and Tax Haven Secrecy”, and there's a lot of information in it. I guess you had the opportunity of looking at the International Consortium of Investigative Journalists' Panama papers, the leaks, and trying to understand that in greater detail. You write that the ICIJ leaks provided evidence of capital flight from non- or quasi-democratic countries to wealthier democracies like the U.S. and other OECD nations. Apparently there is a small portion of elites in countries such as China who use tax haven intermediaries as conduits to invest their monies.

[Prof. Arthur Cockfield]

Sure. Thank you. It's a very boring academic article, but thank you for bringing attention to it.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I don't think it's boring at all.

[Prof. Arthur Cockfield]

There is an estimated $10 trillion to $35 trillion hidden offshore in tax havens. When we look at the empirical research by economists in this area, we see money moving all around the world. It typically comes from middle-income, developing countries that are quasi-democratic or ones with outright tyrants, and it ends up in places like Canada; frankly, in Vancouver condominiums. This has been well covered by the media and increasingly by the academic community. In a strange way, the point I make in the paper—and this is really not particularly original—is that we benefit from this strange system. Last year alone, $1 trillion has left China, according to The New York Times.

We are beneficiaries of this system, and I think our legal regime is indirectly encouraging it. For instance, the Panama papers leak revealed that the Panamanian law firm was recommending Canada as a good place to base your ultimate investment because our laws don't necessarily reveal the beneficial owners of these investments, and of course, if you're coming from a rough place and you're investing in Canada, you don't want your home government to find out about it. Because of this phenomenon, Canada again has benefited.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

You have also highlighted that a country can exhibit tax haven behaviour even if it has a high income tax rate, and you're looking at the United States. Many OECD countries serve as a form of tax haven, because they do not disclose tax or financial information. They have very tight secrecy laws about sharing information of clientele. This often encourages, I guess, a lot of this offshore tax evasion and allows crime. You even, in your article, highlight the potential for the financing of terrorism.

[Prof. Arthur Cockfield]

Yes, it's a more recent concern that tax haven conduits are being used to facilitate terrorist financing. I'm working on a paper—I have a grant for that—with Christian Leuprecht. We're putting together some research in that area.

The traditional concerns are offshore tax evasion and international money laundering. Yes, I do believe that countries such as Canada are not quite as egregious as the Americans, using Delaware limited liability companies that completely mask and anonymize the non-resident investor. We're not quite that far. But our laws could be changed to prevent this. Yet it's almost understandable. We like the inward foreign direct investment and portfolio investment. It's benefiting our economy, frankly. That serves as a disincentive, as I discuss in my research.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I was interested in talking about the whistle-blower legislation. In some jurisdictions, from whistle-blower legislation, you can actually receive a benefit payment if you squeal someone out, shall we say.

Do you think it's high enough here in Canada? Do you think it should be around 50%? Do you think that would allow some accountant to say, “Look, there's my client. He's clearly conducting illegal activity. It's worth $2 million or $3 million. If I were to get 50% of that, maybe I'd be more inclined to react to my code of professional conduct and fulfill my obligations to my professional order and actually say what's going on and talk to the CRA and give more information”?

[Prof. Arthur Cockfield]

I think the answer is clear. In our country it would be unconstitutional to require lawyers to rat on their clients.

We had a case last year—

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Not clients; rather, professional financial advisers.

[Prof. Arthur Cockfield]

It would be contrary to our rules of professional obligation to reveal confidential information.

There was a case last year, the Federation of Law Societies of Canada versus the Queen, where it was held to be unconstitutional to require lawyers to report some client information to FINTRAC in some circumstances.

As for accountants, there's more leeway to regulate them, but I think most accountants would be very reluctant to go down this road.

Our whistle-blower program, again, is a good idea. Maybe it ought to be tweaked. It's still too new to see whether it will bear fruit, but I absolutely think it's a positive step.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Nater.

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

Mr. Howlett, for the study that you conducted, you mentioned that you conducted about 20 or so interviews with CRA auditors. How were those auditors selected?