Finance Committee on June 7th, 2016

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order. Today's hearing is pursuant to Standing Order 108(2), a study of the Canada Revenue Agency's efforts to combat tax avoidance and evasion.

We have a number of individuals before us as witnesses. I'll introduce all of them first, and then I have a statement to make.

We have as individuals, Arthur Cockfield, professor, faculty of law, Queen's University; and André Lareau, professor, faculty of law, Université Laval. From the Canadians for Tax Fairness, we have Dennis Howlett, the executive director. We also have Scott Chamberlain, general counsel of the Association of Canadian Financial Officers. From CPA Canada, the Chartered Professional Accountants of Canada, we have Ms. Joy Thomas, the president and chief executive officer.

Welcome to the witnesses. We'll get to your statements in a moment.

You may have been wondering why we started with an in camera meeting. There is considerable controversy surrounding this hearing today and a lot of concerns raised about the possibility of either members' statements or questions, or witnesses' testimony affecting court cases that are pending.

I think, as probably most everyone would know, there is the sub judice convention. I'll quote from it:

During debate, restrictions are placed on the freedom of Members of Parliament to make reference to matters awaiting judicial decisions in order to avoid possible prejudice to the participants in the courts. This self-restraint recognizes the courts, as opposed to the House, as the proper forum in which to decide individual cases....

The sub judice convention is first and foremost a voluntary exercise of restraint on the part of the House to protect an accused person, or other party to a court action or judicial inquiry, from any prejudicial affect of public discussion of the issue. Secondly, the convention also exists, as Speaker Fraser noted, “to maintain a separation and mutual respect between legislative and judicial branches of government”. Thus, the constitutional independence of the judiciary is recognized.

I think all the witnesses here know that there are two court cases pending before the Tax Court of Canada with respect to whether the tax plan at issue complies with the Income Tax Act. The second one before the Federal Court of Canada is with respect to whether KPMG is required to disclose the names of its clients in connection with its tax plan.

The discussion we had in camera was to decide whether, given the risk of being prejudicial to a court case, we should remain in camera or go public. The committee decided that we would go in public.

There is some risk in doing so. To prevent any prejudicial comments being made that might affect the court case, the chair will rule fairly strenuously. If I believe a witness or a member is moving in a direction that could have implications for the court cases, rather than making generalities about combatting tax avoidance and evasion, then I will ask that that person's mike be cut, and we will go to the next question.

With those ground rules in mind, I would encourage witnesess and members in their comments not to say anything in their comments that could possibly be prejudicial to the pending court cases.

With that, we will start with our witnesses.

Mr. Cockfield.

[Prof. Arthur Cockfield, Professor, Faculty of Law, Queen's University, As an Individual]

Mr. Chair, ladies and gentlemen, good morning.

Thank you again for inviting me to appear before this committee. Though I've had the opportunity or privilege in the past to appear on a number of occasions, I thought I'd introduce myself to the committee members because only

Mr. Caron is still on this committee.

My education includes degrees from Western University, in finance and accounting from the Ivey Business School; from Queen's University law school; and I have a master's and doctorate from Stanford University, primarily focusing on international tax law. I'm the author/editor of 12 books and over 50 academic articles published in the world's leading tax journals. I've served as a legal consultant to the OECD, the Department of Justice, the Office of the Attorney General of Canada, the Department of Finance, and the Office of the Privacy Commissioner of Canada as well. My most recent article that's relevant to this committee is entitled “Big Data and Tax Haven Secrecy” published two months ago in Florida Tax Review. It involves the first analysis of the first mega data leak obtained by the International Consortium of Investigative Journalists, made public in 2013. In fact, I had been retained a year and a half prior by the CBC to assist the journalists in understanding that leak, and I've just published my research results.

In my brief comments, I thought I'd start by striking a positive tone in that for the last three years, beginning with the Harper administration and now with the Trudeau administration, we've actually seen some progress in this area. Some of the positive steps include the whistleblower laws, embedding tax lawyers at the CRA, bringing back the criminal investigation unit—that was critical—and the dedication of more resources to auditing.

In terms of the road ahead, some of the recommendations that I would offer this committee would be an ongoing commitment from the senior leadership at CRA to tackle the problem of offshore tax evasion. I think there is a problem with the coordination among the federal agencies—FINTRAC, CRA, and Justice and so on—which could be improved. The incentives for the crown prosecutors need to change. I'd like to see more penalties when warranted by the CRA for gatekeepers, accountants, and lawyers who engage in reckless, negligent, or willful blind advice to their clients.

In the past I've recommended consolidated reporting for multinational corporations. We have something similar that's arisen, namely country-by-country reporting. I have technical recommendations to make in that area, but I'll just mention one today. Specifically, in meeting with FINTRAC recently, I only then became aware that we have suspicious transaction reports that trigger FINTRAC's interest, but, more importantly, there is no law that triggers a suspicious activity report that gives a bank official the ability to report an activity. U.S. prosecutors and prosecutors elsewhere have relied on these for successful pursuit of offshore tax evaders.

Those are my comments. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Cockfield.

Mr. Lareau.

[Prof. André Lareau, Professor, Faculty of Law, Université Laval, As an Individual]

Good morning to you all.

Good morning. My name is André Lareau. I am a professor of tax law at Université Laval. I was the faculty dean. I earned my bachelor's degree in law at the Université de Sherbrooke, my master's degree at Osgoode Hall Law School and a master's degree in American tax law at the University of Miami School of Law. I also accompanied Radio-Canada to the Isle of Man for the investigation last year.

Tax laws are complex, and the Income Tax Act is very different from what it was several years ago. Why is it so long? The reason is the complexity that has become necessary because of the actions proposed by tax experts, who find a way to create strategies to circumvent measures that require new provisions to counter the provisions implemented by the tax experts.

In 1985, the judgment in the Stubart case indicated that the Department of National Revenue, now known as the Canada Revenue Agency, could not take on a transaction made only for tax purposes when the transaction complies with the other guidelines in the act.

In that regard, the general anti-avoidance provision was created in 1988 and is contained in section 245 of the Income Tax Act. It is understood that this is a general anti-avoidance provision, not an anti-evasion one.

Since I was asked to appear here to speak about KPMG in the Isle of Man, I will humbly submit that the strategy put in place by KPMG does not fit—

[The Chair, Liberal, Wayne Easter]

I would prefer that you really don't get into the KPMG case. That is the one before the courts. If you want to want to talk of tax avoidance in general, that's fine, but I don't want to go down a path that's going to cause trouble.

[Prof. André Lareau]

Mr. Chairman, I was invited to speak about KPMG, but I'll speak generally.

If an accounting firm or a tax firm creates a scheme whereby a sum of money is eventually owned by an offshore corporation, and this money initially comes from a donor in Canada and then the money comes back to Canada, that is not covered by GAAR.

This is not an amount that is subject to the general anti-avoidance rule. Why? Because there is no tax avoidance, but rather tax evasion. Don't try to see avoidance or an application of section 245 of the Income Tax Act here. It is not included in that respect.

What we are talking about is tax evasion. We are talking about a situation in which someone tries to cover money transfers by indicating that they are donations, when that is obviously not the case.

What is a donation? It is a divestiture of a sum without anything being expected in return. As soon as something is expected in return, as soon as the money comes back to the owner or the owner's immediate family or individuals dependent on the owner, it is an amount received and, therefore, not a donation.

For a tax strategy to be valid, it must respect the tenets of the act. In this case, of course, the tax strategy would not respect the letter or the spirit of the act.

Furthermore, I would invite the Minister of National Revenue to be very careful in all circumstances involving voluntary disclosure. Since voluntary disclosure is governed by purely administrative rules, I would invite the Minister of National Revenue not to exercise her discretion in the case of sums that come from abroad and that, obviously and in some circumstances, may be the product of fraud against the act. Therefore, administrative discretion should not be exercised in that regard.

Furthermore, in terms of files that may be outstanding with respect to amounts from the Isle of Man, I would also invite the Minister not to negotiate arrangements and not to conclude agreements so that the files can be submitted to the court and we can get to the bottom of this.

Lastly, I would say that the tax strategies highlighting donations do not stop at those we know about. Tax strategies highlighting donations can be carried out as part of Canadian corporate asset freezes, while the added value of these companies goes abroad in the form of donations to the benefit of donors. All the profit of a Canadian company eventually comes back as donations, which is demonstrated in the documentation that has been provided to you.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Lareau.

From Canadians for Tax Fairness, Mr. Howlett, the floor is yours.

[Dennis Howlett, Executive Director, Canadians for Tax Fairness]

I'll start, and then my colleague, Scott Chamberlain, will complete our presentation.

I'm very pleased that this committee is holding hearings on this matter, as I was involved. I was the recipient of an anonymous phone call in March of 2015 regarding a court case involving an accounting firm that was stalled in court.

I began an investigation and—

[The Chair, Liberal, Wayne Easter]

Dennis, I'd prefer that you didn't talk about individual cases, even if you don't name them. If you can be fairly general....

[Dennis Howlett]

Okay.

That's what led to our being here today, and I am pleased to be able to speak to the issues that arise.

We all know that a lot of revenue is lost to both provincial and federal governments. In my brief to the finance committee in 2013, I estimated that the losses annually were between $5.3 billion and $7.8 billion. Since then there have been other investigators who have come to similar conclusions. One I'd mention is Gabriel Zucman in his recent book called The Hidden Wealth of Nations, who also concludes that there must be about $300 billion, or 9% of total Canadian wealth, held offshore. That is much higher than for the United States. In the United States it is only about 4%, so Canada actually has a serious problem here.

Individuals and corporations would not be able to use tax havens to hide their wealth without the encouragement and assistance of facilitators. The facilitators include banks, financial institutions, wealth management firms, law firms, and accounting firms. We need additional legislative controls to regulate this industry, and the government must be much more aggressive in going after facilitators. That's the best way to do it, and would in fact be far more effective than using additional auditors. If you cut off the facilitators, you cut off more than half the business, and half the problem is solved.

I believe there are a number of very dedicated CRA staff. They have, with great difficulty, uncovered some serious cases of suspected tax evasion only to find, in many instances, that their cases were not followed through by CRA management, for whatever reason. We did a study called “What's Wrong at the CRA and How to Fix It.” I've given copies, both in French and English, to all members of the committee. It was based on interviews with quite a few CRA auditors. It's clear that some of them felt that there was political interference resulting in cases being dropped, even though they felt there was a strong case to be made. There really is a question about how the CRA management is pursuing some of these cases. Why would they go to a court to try to get names of clients when they could serve a search warrant and get the information that way?

We also continue to call for better protection for whistleblowers. Because of the media profile that I've achieved, I get a lot of people coming forward to me. There are a lot more whistleblowers and cases that have been revealed to me, and I am working with media and the authorities to try to help them pursue those cases.

The particular case that we're not supposed to refer to is only the tip of the iceberg. There are a lot more serious problems at stake, and the government has to do a lot more to get to the bottom of the problems of the CRA and to take on the serious challenge of dealing with tax evasion and tax fraud related to tax havens.

Scott will continue our presentation.

[Scott Chamberlain, General Counsel, Association of Canadian Financial Officers, Canadians for Tax Fairness]

Thank you, Dennis.

I would like to draw your attention to what we view as a fundamental gap in the tax system that contributes to excessive tax avoidance in the industry, and can be easily closed without the industry having to breach accountant-client privilege, a privilege that is both a misdirection to this committee and a fiction, by the way.

We have examples both in Canada and the United States, and we've provided a document to the committee, an academic paper, on that. Attached to it are the details of various examples. In particular I would draw your attention to some cases in the U.S., starting at page 19, where “facilitators”—as Dennis has described them—conceive of, develop, get legal opinions on, sell, market, promote, and profit from tax products that have not been vetted by the Canada Revenue Agency.

Early on in my practice I was a labour and employment lawyer, and I had the occasion to negotiate wrongful dismissal settlements. In late 1999 and the early 2000s the questions of retirement allowance and deductibility came up frequently. I had occasion, as a first-year lawyer, to write to the CRA for an interpretation of a tax structure that we were thinking of in order to minimize tax for our wrongful dismissal clients. This is a well-known, oft-used function of the CRA. Any lawyer or any accounting firm can write the CRA and get an opinion as to the applicability of the tax laws to a plan.

What we see is an industry that is not using this function. In the United States it is an obligation under legislation to register all tax products. Again I can refer you to the same paper that makes reference to that law, but also the U.S. Senate standing committee had a report on this as well that describes it requiring all tax products to be so registered and vetted prior to being implemented.

Essentially Canadians for Tax Fairness believes it's time to prioritize the public interest over the cloud of secrecy and the confidentiality in the tax industry.

We have a number of recommendations that are included in our submission to you today, and I'll just briefly go through them.

The first is that the government should consider legislating a duty on lawyers and accountants under the Income Tax Act to report suspected avoidance and evasion, and to register all tax products. These aren't novel. Registering tax products is already in place in the United States, and the duty to report tax evasion and aggressive avoidance is already in place in the U.K. under the 2002 Proceeds of Crime Act. All lawyers and accountants in the U.K. who suspect aggressive tax avoidance, or evasion, have a duty to report that to the revenue agency, and a duty not to advise the client that they have done so. That's punishable by a jail term of up to 14 years.

In terms of registering, this could be CRA or an independent body of the Tax Court charged with giving these interpretations.

Second, we'd like to see an independent study of tax avoidance/evasion investigations initiated by CRA to ascertain the rates of penalties imposed, interest applied, rates of settlements reached, and convictions secured, by the amount of tax in dispute. From recent surveys in the press, even just yesterday, Canadians believe that there's one set of rules for the rich and another set of rules for the poor. We'd like to see the investigations that have been completed. How many lead to convictions when it's lesser amounts of money as opposed to higher amounts of money, based on those criteria?

Third, we'd like you to introduce a stop corporate tax dodging bill, building on MP Murray Rankin's previously introduced private member's bill, the economic substance bill.

Fourth, we'd like to see criminal investigations called in appropriate circumstances.

Fifth, we think this committee should call on the Office of the Conflict of Interest and Ethics Commissioner of Canada to investigate the highly unusual hospitality practices of senior CRA executives.

I'm a negotiator. I negotiate with Treasury Board officials. I negotiate contracts in my day job. I can tell you that Treasury Board negotiators know not to accept even a cup of coffee from me. We may go out, meet, and talk, but they'll buy their coffee and I'll buy mine. You don't buy drinks for public servants. It's a very clear rule.

Second to last, we'd like to see the government commence the long overdue legislative review of the Public Servants Disclosure Protection Act. This is the whistle-blowing act that applies to the public sector, and it needs to apply to the public sector and the private sector, as is the case in other Commonwealth countries, such as New Zealand.

I'm on the commissioner's public sector disclosure advisory board. This is four to five years overdue. Whistle-blowers need greater protection. They need to be rewarded for doing the right thing. They need to be encouraged to come forward.

Finally, we encourage this committee to continue this hearing and to call a number of witnesses, including U.S. whistle-blower Michael Hamersley and perhaps the professor who is the author of the article we've shared with you today.

Thank you for your time.

[The Chair, Liberal, Wayne Easter]

Thanks very much, Mr. Chamberlain.

We'll turn to Ms. Joy Thomas, president and CEO of the CPA.

Ms. Thomas, the floor is yours.

[Joy Thomas, President and Chief Executive Officer, Chartered Professional Accountants of Canada]

Good morning, Mr. Chair, members of the committee. Thank you for inviting CPA Canada to participate in today's hearing.

My name is Joy Thomas. I am a chartered professional accountant, and effective April 1, 2016, I became the president and CEO of CPA Canada.

CPA Canada is the national professional body representing more than 200,000 Canadian CPAs. Our responsibilities include the development of the CPA education program, as well as continuing professional development programs. CPA Canada also supports Canada's internationally respected, independent standard-setting process, and provides guidance to support high-quality corporate reporting and business practices in Canada and globally. We do this in the public interest.

CPA Canada was created in 2013 as part of the nationwide unification of Canada's provincially regulated CAs, CMAs, and CGAs. In the spirit of collaboration, we created one profession carrying one designation: chartered professional accountant.

I'm here today in that spirit of collaboration.

At home and abroad, we have a long record of working constructively with those who develop the programs and the policies that are essential economic, social, and competitive tools for all governments. This collaborative approach is strongly endorsed as a best practice by the OECD. This is particularly important when it comes to ensuring tax policy is aligned with the changing business environment.

Examples of our collaboration include our representation on many government panels and committees such as: the advisory panel on Canada's system of international taxation; the minister's underground economy advisory committee; the CRA/CPA Canada framework agreement, to help Canada maintain a world-class tax system; and Finance Canada's public-private sector advisory committee on anti-money laundering, anti-terrorist financing. These are just a few examples of how we have collaborated with the government to implement tax reforms, and to combat tax evasion and other illegal practices.

Our position on tax evasion has always been clear, and it was set out in a 2013 white paper, “Tax evasion is Illegal. Illegally avoiding tax—by disregarding the law, by not reporting taxable income, and by hiding funds offshore”—is harmful to our economy, to our society, and to the rule of law.

At the same time, taxpayers have always been entitled to plan their affairs to reduce the tax they owe, provided the steps taken comply with the law. We all do this, even when we contribute to an RRSP, for example. Still, tax law remains very complex, so it should come as no surprise that there are times when the taxpayers and the CRA will disagree.

Continuing in the spirit of collaboration, I'd like to briefly set out some suggestions to address these issues going forward. First, income tax law is extremely complex. Simplifying the act needs to be on the agenda. Second, along with other national associations, academics, and think tanks, we have called on an overall review of our tax system. Third, we continue to support investment in CRA's enforcement efforts as set out in budget 2016. Fourth, it is important for us to have a good discussion about balancing CRA's need for objective information with the taxpayer's right to confidential advice, to maintain a healthy self-assessment tax system. Finally, the government needs to consult widely with taxpayers and various stakeholders as it moves forward.

CPAs work with millions of Canadians each year. Chartered professional accountants volunteer countless hours at tax clinics and financial literacy sessions in communities across Canada, and we hear directly from Canadians and gather feedback to support and inform our participation on committees such as this one.

Canadians have the right to demand a fair and equitable tax system, one that attracts both businesses and talent. CPA Canada advocates for a tax system that reflects the best interests of all Canadians. We are pleased to engage with this committee and the government in a respectful discussion about tax policy, and we appreciate this opportunity to contribute to the ongoing discussion.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Thomas. You certainly made one person on committee smile when you said “overall review of our tax system”. That would be Mr. MacKinnon, and he's first up.

Mr. MacKinnon.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses for their presentations. They provided a wealth of nuance and information. The committee has been well served by the evidence you presented today.

I'll start with Prof. Lareau and Ms. Thomas. No one will be surprised that I am starting with this issue.

Ms. Thomas, perhaps you could expand on your comments about the complexity of the tax code as it has evolved over the years and how that has contributed to tax avoidance and tax evasion. More generally, if you were to give guidance to this committee on conducting a review of such a thing, where would you begin?

[Prof. André Lareau]

As I mentioned, the provisions of the act have become increasingly complex, given the ability of some firms to show a fertile imagination to create increasingly complex strategies. Some of these strategies are valid. We're talking about tax optimization in this case. Other strategies are more on the border of what is between the spirit and the letter of the act. So we are talking about tax avoidance, which will be sanctioned by the court when there is an abuse involving the act.

However, the burden of proof lies with the Canada Revenue Agency, which must demonstrate that abuse took place. We have a real problem here because this burden of proof is difficult and complicated to establish. That is why I am not at all convinced that the general anti-avoidance regulation, which came into effect in 1988, was the right answer, given that an additional burden was created for the Canada Revenue Agency.

In other situations, some tax experts take fewer precautions, cut more corners and move more toward tax evasion. Clearly, under the Income Tax Act, we can't counter each tax evasion strategy. It would be impossible for the act to specify not to do one thing or another. The act therefore provides penalties for tax evasion. However, the complexity of the act and the complexity of tracing large-scale—international, obviously—tax evasion are such that the only tool to counter it is tougher penalties for the architects of these tax tools.

In many cases, the clients aren't the ones who have designed the tax strategy. I'm not talking about simply hiding undeclared money in a bank account in the Bahamas. I'm talking about complex tax strategies where there are candidates for an administrator position and people who are behind the screens. In those cases, the only way to make the architects of these tax gimmicks understand that they have gone past the limit allowed would be to deprive them of their freedom. Imprisonment should be seriously considered.

The Canada Revenue Agency has the duty to prosecute individuals and entities in general, to the extent of the act. These aren't just people who have signed a document, but also people responsible for the actions of a firm that must face justice. Financial penalties are too light for a major firm. No matter how many millions of dollars the financial penalty is, it will never be enough. Loss of freedom will be the only appropriate punishment in many circumstances.

[The Chair, Liberal, Wayne Easter]

We like to try to keep the answers relatively the same length as the questions.

Mr. MacKinnon, do you want to ask your next question or do you want to go to Ms. Thomas?

[Steven MacKinnon, Liberal, Gatineau, QC]

I do have one further question.

I'll ask Ms. Thomas to keep her response relatively succinct. I'm sure we'll be able to come back to this theme and other questions.

I have one other quick question, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Go ahead, Ms. Thomas.

[Joy Thomas]

Thank you.

There's no question that the tax system is very complex in this country, and that's not unusual to other countries as well. It has become very complex. One of the reasons is that it is such an important mechanism, an important policy lever, for stimulating the economy and the overall prosperity for Canadians.

Over the years, it has become very, very complex. However, there has not been a full review of the income tax system in this country since 1966, with the Royal Commission on Taxation. CPA Canada has long called for a review, top to bottom, of the income tax system, in addition to some of the other reviews that are going on.

The reason that we called for a complete review of the Canadian income tax system is to reduce that complexity, to help make it more competitive, to help make it more efficient and effective and fair for Canadian taxpayers.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Be fairly quick.

[Steven MacKinnon, Liberal, Gatineau, QC]

Yes.

Mr. Howlett, I'll get right to the point. You alleged that there was political interference in the Canada Revenue Agency. That's a pretty serious charge. How do you substantiate that?

[Dennis Howlett]

We've talked to quite a few auditors who, in some cases, were not sure how high up the orders came, but they suspected that some of the cases they were investigating were involving well-connected companies or individuals. They felt there was a very strong case, and for some reason they were told to stop the investigation. They were very serious.

Our advice was that one of the best ways to get to the bottom of this would be to encourage CRA staff to go to the Public Sector Integrity Commissioner who has the authority to investigate, and he could find out exactly where this came from. We would encourage the new minister to encourage CRA staff, if they have concerns related to that, to use the independent office, so it would be free from current political interference of a new government. That would be the best way to get to the bottom of this.

We don't have sufficient evidence, and we did not go publicly in the media about this because we felt it needed to be investigated. We've encouraged the CRA staff we've spoken to to take advantage of that independent officer of Parliament.

[The Chair, Liberal, Wayne Easter]

We'll have to cut you off there.

Mr. McColeman, for seven minutes, please.