Finance Committee on June 7th, 2016

[Phil McColeman, Conservative, Brantford—Brant, ON]

Mr. Howlett, you just went public with this accusation. I'm curious. Does it apply to a specific period of time of a specific government, or is it a general comment of how the tax department works, in terms of your accusation regarding the connectedness of the political to the actual carrying out...?

[Dennis Howlett]

Our “What is Wrong at the CRA?” study was conducted during the spring and summer of 2015. It was based on interviews with 20-some CRA auditors. They were referring to cases that in some cases went back several years, so it would have covered a period of time.

We very carefully and deliberately did not ask, or refused to be informed of the names of any individual or corporation involved, because that would have contravened the law. We were very careful not to go there. I do not know the details—

[Phil McColeman, Conservative, Brantford—Brant, ON]

Thank you. That's enough information, sir.

I have a limited amount of time and I have a lot of other questions. I wasn't asking for it in depth.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Mr. Cockfield, you mentioned at the outset of your comments about the positive steps that have been taken, both in previous government and this government.

Throughout your comments, you mentioned problems with the coordination between ministries perhaps, or agencies, within government. Can you expand from your analysis where the most egregious disconnects happen?

[Prof. Arthur Cockfield]

Again, I began on a very positive note, but in my writings I've been quite critical of the CRA, at least in the last 20 years, ramping up to 2013.

One of the problems was revealed in the Liechtenstein leak. That came from 2007, where there were over 100 Canadian taxpayers with undisclosed offshore accounts in this European tax haven. There was a six-year audit by the CRA of these taxpayers. At the end of the day, only two taxpayers were referred to prosecution by the crown, and the crown, the Department of Justice, decided not to prosecute anybody. Here we have an obvious disconnect between the investigators of a potential crime or an alleged offshore tax evasion crime, and the folks at justice who need to prosecute them. I think embedding the tax lawyers at an earlier stage in the investigation helps to work against that disconnect.

In other cases, we have FINTRAC, which is absolutely swamped with these suspicious-transaction reports. They get hundreds of thousands of them. Sometimes in the research community we call this a “drinking at the firehose” problem. They're just overwhelmed with information. It's not clear to me that they're particularly well coordinated with the CRA to pursue offshore tax cheats.

Finally, the RCMP, our federal police force, has virtually no resources at all to investigate white-collar crime. They're primarily looking at cigarette smuggling, often via Indian reserves. In terms of cross-border financial crime, that's clearly an important file. But we really don't have a federal police force that can assist the CRA abroad and within Canada in pursuing these criminals.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Recently there was a news report, I think it was in Maclean's, but I'm not sure, that said that in the last period of the last government there was $1.57 billion recouped because of the initiatives taken. I wonder, on issues such as the offshore tax informant program, whether or not you're in favour of that program and other such programs moving forward.

[Prof. Arthur Cockfield]

Absolutely. I think that was a very positive legislative change. I think it was budget 2013 when that came about. I just think of the famous UBS Geneva case. There was a U.S. Senate investigation that revealed Canadians had stored in this one bank $5 billion offshore. We've never seen a penny of that, nor have we seen disclosure of the clients who have these undisclosed offshore accounts. In any event, the reason the Americans were successful is because one banker was paid a reported $100 million by the IRS to assist with the investigation, and that led to billions of dollars of deferred-prosecution fines by the U.S. Department of Justice. It's just one example of how successful the whistle-blower program can be. I think there's some evidence already in Canada, despite the fact it's so new, that it's helpful.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Good.

There's been a common thread across the discussion today on a couple of fronts. One is whistle-blowers. We just covered that off with you, Mr. Cockfield.

Mr. Lareau, you mentioned stiffer penalties. What do you think is appropriate, from your area of expertise? What should those penalties look like? Obviously, there's jail time, but can you elaborate further? In terms of the measures against the so-called facilitators that were mentioned in the presentations here, what would those stiffer penalties look like?

[Prof. André Lareau]

We have seen that in 2005 there was a fine of more than $400 million U.S. against KPMG, and other penalties after that for other accounting firms. This has not been a deterrent.

There is so much money involved here that the only way that tax evaders will understand that tax evasion is stealing money is if they lose their freedom. When you're stealing money, say when you go to rob a bank, you just cover your face. When your rob your neighbours, when you rob your family through the tax system, when you hide behind a tax haven, and when you hide behind a corporate shield, then you're just hiding the same as when you rob a bank. The only way that you understand you're cheating the system is by having your freedom taken away from you. To me, this is the only measure that will work. Not only should those who signed legal opinions and accounting opinions be covered by these jail terms, but also the high members of these firms, because they are responsible for what their firms are doing.

One other aspect that should also be mentioned is the voluntary disclosure system. It is too easy and too simple to say, “Well, I'll hide for a while, and then I'll come back into the system whenever I feel it's time to come clean.” There are no penalties associated with that. If you compare that with other countries, where they have windows of opportunity to come clean, you have three months to come clean usually or you will face very stiff penalties.

In the States you have a permanent system, but at the time of the UBS case in 2009, you had three months' time to come clean. You had stiffer and stiffer penalties for that, whereas here, you can come clean any time you want. There are no penalties. What sort of message does that send to other people?

[The Chair, Liberal, Wayne Easter]

We'll have to cut you off there. We're well over time.

Mr. Caron and Mr. Dusseault, you're splitting the time I understand.

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

I will share my time with Mr. Caron.

My first question is for you, Ms. Thomas, and it has to do with the penalties or disciplinary action that could be taken against members of your professional association.

Could members of your profession face disciplinary action if a court of law found their tax plans abusive and illegal? Do accountants who prepare these plans also have obligations toward your professional association?

[Joy Thomas]

Just to clarify, CPA Canada is not a regulatory body. The regulation of the accounting profession, like all professions in Canada, is through provincial legislation.

That said, the provincial regulators for the accounting profession take their accountability to the public very seriously, and we have harmonized codes of professional conduct across the country that meet or exceed the codes of professional conduct put out by the International Ethics Accounting Standards Board of the International Federation of Accountants. We have high best practices in terms of our codes of conduct.

Those codes of conduct clearly lay out that illegal practices are not acceptable. There is a disciplinary process. It begins with a complaints inquiry process, then an investigation, and finally a disciplinary process.

There are a number of sanctions available to the provincial regulators in that regard, including monetary fines and expulsion from the profession.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you for your answer.

Prof. Cockfield, are you aware of agreements that some taxpayers sign to avoid penalties and interest when it is fairly clear to the Canada Revenue Agency that tax evasion, an illegal act, is taking place?

Have you often seen secret agreements like this during your career?

[Prof. Arthur Cockfield]

Merci.

There are thousands of settled cases between CRA and taxpayers each year. I don't know any data offhand concerning that.

In terms of aggressive offshore tax avoidance or tax evasion, again I don't have any data, but it's not unusual for the government to enter into a confidential agreement with a taxpayer. It's somewhat like a guilty plea by an accused person. I think 95% of individuals who are accused of breaking criminal laws in our country go for a guilty plea. There is a public forum where the judgment is rendered, but for the most part the public doesn't follow that. Again, some newspapers publish it.

So yes, it is par for the course entering into these sorts of settlements. One can query whether the settlement is too lenient, but that's a whole different kettle of fish.

Thank you.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

I'll now turn to Prof. Lareau.

Suppose that, in 2016, I divest myself of all my possessions and legal authority over certain funds that belong to me, and I give them to a company outside the country. I would subsequently no longer have any legal authority over what is done with that money, but five years later, I happen to receive a donation from a foreign company. In 2016, would the Canada Revenue Agency consider it a donation and not income?

[Prof. André Lareau]

I don't know what the position of the Canada Revenue Agency or the court would be in this case. All I can tell you is that a donation is a divestiture. There must also be an intention to donate. There is a maxim in law that states, “donner et retenir ne vaut”, which means that someone cannot, at the same time, give something and be certain or almost certain of receiving something in return. The donation involves a divestiture or a cut in respect of the property that someone has divested.

To answer your question, if we make a donation but a portion or all of the amount comes back to us, I do not think see that it would be a donation.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you. I think it all depends on the intention of receiving something in return.

I will now turn things over to Mr. Caron.

[The Chair, Liberal, Wayne Easter]

I think you wanted two minutes, and you have them.

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

Thank you, Mr. Chair.

My first question is this.

When taxpayers make a mistake on their income tax return, they are set straight by the Canada Revenue Agency and fines apply. However, when there are significant mechanisms like the ones we have talked about, they are often asked to repatriate the money and are not fined.

I would like to know where the limit or the bar is for this. Why should Canadians have to pay fines when people who placed money outside the country are asked to repatriate the money and are not fined? After they were caught or risked getting caught, they simply pay the tax they would have otherwise paid. Where is the limit on this? Why is there a distinction like this?

Prof. Lareau and Prof. Cockfield, I invite you to answer the question.

[Prof. André Lareau]

The United States has an interesting system called streamlined procedures. As long as the amounts in question are low, there is good faith on the part of the taxpayer and the situation is not repeated, non-U.S. residents may not be fined and Americans would be fined 5% of the amount due. The fine is very low because this is a case that is outside a criminal or almost criminal context. It's an honest mistake. For someone—an immigrant, for instance—who does not understand the law very well and does not know how to apply it correctly, the fines are low. However, in all the cases where significant amounts come from offshore accounts and where there is camouflage, those are not covered by these streamlined procedures, and the fines are high.

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

Thank you.

Prof. Cockfield, do you have anything to add?

[The Chair, Liberal, Wayne Easter]

No, I have to cut it off there.

Ms. O'Connell.

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

For my first question, I want to get back to the question of ethics. It's my understanding that tax professionals, accountants, etc., do have professional conduct standards that are set for them as CPA professionals. It says in here that they should at all times act “in a manner which will maintain the good reputation of the profession and its ability to serve the public interest”.

To Ms. Thomas, and then perhaps if I have time we can hear from others, in what scenario would tax avoidance schemes, even if not in advance determined to be illegal, act in the public interest?

[Joy Thomas]

I can't really get into the specifics. I'm not quite sure how to respond directly to that question, because I don't know what the specifics of the situation would be. I think what has to occur in all circumstances is that through the complaints inquiry process and the investigation, the facts of the situation have to be laid out. Part of our challenge here is that this tax law is so complex, determining what is acceptable and unacceptable tax planning can be a challenge.

In any case like that, there would have to be an investigation to determine if it did err on the side of bad judgment and there needed to be some sanctions put to it. But we have to get back fundamentally to the root cause of all of this, which is that we are dealing with a system that continues to grow in complexity, that is international in scope, and that we really do need to think about having a full review of it. We need to think about how we are entering this dialogue between CRA and the taxpayers and the tax preparers, to make sure that tax payers and tax preparers fully understand and can interpret some of this very complex law.

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

Could you perhaps build on that, Mr. Cockfield, if you can?

It seems to me—and not being a CPA or a lawyer—that even the professional standards are only applied after a scheme, say, is deemed illegal, but when you get into the law of it, and I think this might be somewhat of a silly or exaggerated example, but if you look at the Criminal Code and you look at an egregious offence, let's say assault or murder, it doesn't specify all of the ways that somebody would have to murder somebody for it to be deemed illegal. It's the end result and the spirit of the law.

Again, from the testimony I'm hearing and everything we're talking about, it seems like here's the letter of the tax law and anything that's not in black and white is the way, perhaps, that all of these loopholes can be created. Why does it seem that tax law is applied in an absolute letter of the law way, and that if all of these examples of schemes or loopholes are not explicitly laid out, the spirit of the law and the outcome are weighted differently than—again, my perhaps exaggerated example—in other areas of criminal law?