Finance Committee on June 10th, 2021

[Ted Gallivan]

I think we have two forms of leads programs.

We have a classic leads program, in which people would write in and provide information. We're not able to keep in touch with those taxpayers. We're not able to tell them what the outcome is. Those vary, from some very good leads to perhaps just disputes between neighbours or family members. Some of them are of relatively low quality, and the information is not helpful to either start an audit or to finalize one.

The second is the offshore tax informant program that started in 2013. It's a very different program, under which we sign a contract with the informant. They receive a percentage of the funds collected. That's the program that already has almost $95 million identified directly, which is already billed, and that has another $100 million in the hopper.

I would say we have a two-tiered process. One is for serious offshore issues that involve financial reward, and then there is a more general program. There results of the two have very different flavours.

[The Chair, Liberal, Wayne Easter]

We will have to move on, Annie.

Mr. Ste-Marie, go ahead for two to three minutes. Then it will be the same for Mr. Julian followed by Mr. Falk.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

I have some questions for the Department of Finance.

My regards to you, Mr. McGowan, and to your colleagues as well.

Clearly, it's important to avoid double taxation in a company when there's real economic activity. This is usually written into the tax treaty between Canada and another country.

Why, in the case of almost all tax havens, has this agreement been extended to include tax information exchange agreements?

[The Chair, Liberal, Wayne Easter]

Who wants to take that?

Go ahead.

[Trevor McGowan]

I'll try, or perhaps Stephanie would like to take it? She's an expert on tax treaties.

[The Chair, Liberal, Wayne Easter]

Okay.

Ms. Smith, you're on.

[Stephanie Smith, Senior Director, Tax Treaties, Tax Legislation Division, Tax Policy Branch, Department of Finance]

I think you're referring to the domestic law provision that allows exempt surplus to be repatriated free of tax if it comes from a jurisdiction with which Canada has a tax treaty, or a tax information exchange agreement.

The underlying tax policy reason for that provision is to ensure that Canadian corporations can compete competitively and pay the same level of taxes in the jurisdictions in which they are operating. There are rules around the foreign affiliates system to ensure that only active business income can be repatriated tax-free. Any income that is passive investment income is taxed on an accrual basis.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

With all due respect, I would like to point out that, as a general rule, the rate in effect in these tax havens is 0%. We want to ensure the competitiveness of Canadian businesses, but, according to subsection 5907(1) of the Income Tax Regulations, the big Bay Street banks, for example, can artificially relocate the activities they carry out in Toronto or anywhere else in Canada to tax havens. Under the regulations you just explained, those banks pay about 0% on their most profitable activities, namely on those done here. Needless to say, I am not satisfied with the explanation given to us.

I should mention that, somewhat along the same lines, Barbados is one of the few, if not the only, tax havens with which Canada has a tax treaty. Article XV of that treaty specifies that a Canadian or other company cannot use the avoidance of double taxation as a reason for resorting to a tax haven, that is, to artificially relocate activities on paper only.

Subsection 5907(1) of the Income Tax Regulations struck down that article. It happened just when Paul Martin had registered his company Canada Steamship Lines there.

To your knowledge, what was the rationale for striking down article XV?

[The Chair, Liberal, Wayne Easter]

Ms. Smith, do you want to give that one a go?

[Stephanie Smith]

I can start. Unfortunately, I was just trying to pull up the treaty with Barbados so that I could confirm the reference to article XV.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

You can send us a written answer if you wish.

[Stephanie Smith]

Trevor, maybe we're best to do that, because in terms of trying to pull up both pieces of legislation, I can't off the top of my head remember. Article XV normally is about employment income, but it doesn't fit with the question.

[The Chair, Liberal, Wayne Easter]

We'll look forward to a written reply on that.

We will turn to Mr. Julian, who will be followed by Mr. Falk.

Peter.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thanks very much.

Ms. Smith, thanks again for having answered that question.

What you're doing is raising a very important policy question. What do you do with the Bahamas where a tax rate is zero? If income is declared there, is it not true that to avoid the double taxation and to be competitive, as you've mentioned, none of that income would be subject to tax here in Canada?

[The Chair, Liberal, Wayne Easter]

Ms. Smith.

[Stephanie Smith]

If there is real, active business activity taking place in the Bahamas, which they subject to a 0% tax and whose dividends they can repatriate tax free, there would be no additional Canadian tax. That's by virtue of Canadian domestic law as opposed to operation of the tax treaty specifically.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Yes, but you can understand how outrageous that is to Canadians. You have small businesses that are paying their fair share of taxes, and families that are paying their fair share of taxes. Regular Canadians are really struggling, particularly during the pandemic, and here you have big corporations that can declare active income offshore, pay zero tax on it, and because of the structure of both the tax information exchange agreements and the double taxation avoidance agreements, they don't have to pay income tax on it here.

It's a licence to avoid taxes, for tax evasion. We've structured a system that is basically encouraging the very wealthy and big corporations to take their money overseas. As the Parliamentary Budget Officer indicates, that's a $25-billion loss to tax revenue each and every year.

As the chair of the finance committee admitted, or just mentioned, it's $150 billion that could have gone into a wide range of things, such as education, health care, clean energy or housing over the last six years, by the end of the sixth year of the government.

What I'm interested in seeing is to what extent, both with the double taxation avoidance agreements and the tax information exchange agreements, there is accurate reporting and to what extent CRA is actually tracking tax dollars that are going overseas and never subject to the income tax that every Canadian family and every small business has to pay.

Could you tell us, under the current tax information exchange agreements and the double taxation avoidance agreements, how much money is basically being taken out of the tax system from CRA's standpoint?

As I mentioned, the Parliamentary Budget Officer estimates $25 billion a year.

[The Chair, Liberal, Wayne Easter]

Mr. Julian, who is that question to?

[Peter Julian, NDP, New Westminster—Burnaby, BC]

It's to whomever would like to answer it.

[The Chair, Liberal, Wayne Easter]

Okay. I guess that's Mr. Gallivan.

[Ted Gallivan]

Mr. Chair, yes, I'll make a start.

One of the things the CRA has done is to publish a series of tax gap studies. When you talk about offshore, there's definitely offshoring by multinationals and there's offshoring by high-net-worth individuals. For the individuals, I think our estimate was $800 million to $3 billion. The variability in that estimate underscores the difficulty of estimating something that people are deliberately trying to hide.

In relation to multinationals, it seemed to me that our estimate said there could be $16 billion in tax unpaid by multinationals, half or $8 billion of which the CRA identified and sought to make them pay. You're in the range of $11 billion at the outer edge, with CRA maybe finding half of it. I think those are order-of-magnitude estimates that are enough to frame it. I don't think those are accounting-level details.

I will also say that we've been tracking voluntary tax paid by taxpayers—and those payments were greatly exceeding GDP. A lot of factors go into tax revenue. Tax revenue is a trailing, lagging indicator. Those revenues were pretty good last year, despite COVID, because they lag. There is lots of multi-year stuff from the companies.

Over the last five years, the tax paid voluntarily by multinationals was greatly exceeding GDP, sending at least to me the message that multinationals were getting the message and cleaning up their act, but there continue to be far too many multinationals with an effective tax rate that approaches zero, so there continues to be a problem.

Hopefully I've explained it as best I can in terms of the CRA data or the numbers we look at.

[The Chair, Liberal, Wayne Easter]

Thank you all. We're well over, but—

[Gabriel Ste-Marie, Bloc, Joliette, QC]

A point of order, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Go ahead, Gabriel.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Let me clarify for Ms. Smith that the article I was referring to earlier is actually article XXX. My apologies.