Finance Committee on June 10th, 2021

[The Chair, Liberal, Wayne Easter]

Thank you. We went a little over.

Next is Mrs. Jansen, followed by Mr. Sorbara.

Mrs. Jansen, go ahead, please.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Thank you.

My question is for Mr. Gallivan. I have to say, having been audited in the past, that the word “empathy” is never a word I've thought of when I have thought of the tax man. It's an interesting concept. Let's hope it actually takes.

We've seen CRA grow by 15%, give or take, over the past five years, and yet the revenues they've generated from those new employees haven't really grown at the same rate. Canadians can expect that these investments will lead to things like catching more tax cheats who are using offshore shell accounts to launder money, which then comes into our country and damages housing affordability. Instead, we've been seeing CRA going after small mom-and-pop shops during the pandemic. It looks as though CRA is more lenient on big tax cheats but throws the book at the little guy. It appears the government doesn't even have the will to go after those who have enough money to hide it offshore, and when they do catch them, they protect their identity and let them walk with a small fine. Compared to how other countries are dealing with the issue of offshore tax havens, Canada looks very permissive.

How can we fix this problem since throwing money at the problem hasn't made much of a difference with regard to taxes collected so far? Why should Canadians believe that adding more people would have any better results?

[Ted Gallivan]

Thank you, Mr. Chair.

Perhaps I will make a start. My colleagues might come in afterwards. follow me.

Again, I think it's the premise of the question. Aggressive taxpayers are certainly “voting” by coming in increasing numbers to make voluntary disclosures. They are disclosing their offshore assets. As I mentioned, that has roughly doubled.

Our revenue generated by audit is up more than 15%. In fact, the average dollar value of an audit has doubled. Again, I think that's a function of increased horsepower and better data.

It isn't the case that revenues are down or have failed to grow. They have grown. Taxpayers who are facing this are increasingly having to have recourse to the courts. I mentioned the doubling in the number of court cases. I think the fight has been taken to them.

Now, what's missing? Perhaps it's greater consequences. If you look at interest as being part of the consequence of a tax audit, when the interest rates were 10% or 14% and much more than the market returns, interest was probably a big part of the consequence of tax cheating and getting caught. Now, with the market exceeding the interest that we charge, maybe that deterrent value isn't there.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Yes. Thank you.

You were just mentioning that we have grown by 15%, but we haven't seen any actual increases, which is disappointing.

Debi Daviau, President of the Professional Institute of the Public Service of Canada, suggested at the finance committee that CRA's focus should be on wealthy individuals and powerful corporations who do the majority of the cheating.

I had asked her why CRA appears to be aggressively focusing on small mom-and-pop shops for audits during COVID and ignoring the wealthy individuals. She identified this actually as a real problem. Her response was the following:

I just don't think the Canada Revenue Agency is up—

[The Chair, Liberal, Wayne Easter]

Just hold on, Tamara. We're getting feedback from somewhere. Does somebody have their mike on?

Try it again, Ms. Jansen.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

I'm going to quote her:

...I just don't think that they have the same capacity to address international taxes that they do to address local taxes. ....certainly employees at the Canada Revenue Agency are up against, as I said, tax giants. These are people who have immense skill, technology, expertise and other big companies on their side.

It's interesting to hear how your testimony today asserts the complete opposite on how well CRA is doing on chasing down wealthy overseas tax cheats.

With the number of dollars that CRA has invested over the last years, why didn't you invest in the tools you need to go after the big guys rather than focus on those little mom-and-pop shops, especially during a pandemic?

[Ted Gallivan]

Thank you, Mr. Chair.

Let's start with one of the premises, which was COVID. During COVID, my colleague Alex MacLean, who looks after international tax and large business, never stopped. They never downtooled those audits. We continued to focus on those taxpayers while giving six months of a kind of hiatus on contact for small businesses.

The CRA did suspend its small and medium-sized enterprise audits for a full six months, and when we resumed, we did so on a more consultative basis, checking in with businesses to see if we could start.

It would be my testimony today that during COVID the situation has actually been the the opposite of the testimony you would have received. The CRA never stopped its work on high-net-worth individuals and big companies through COVID. We made a deliberate pause because we understood that small businesses were suffering during COVID. When we resumed, we tried to make it a more consultative process based on the readiness of that business to withstand an audit.

[The Chair, Liberal, Wayne Easter]

Did you want to add something, Alexandra Maclean?

[Alexandra MacLean, Director General, International and Large Business Directorate, Compliance Programs Branch, Canada Revenue Agency]

Thanks very much, Mr. Chair.

I just wanted to add how seriously we take our mandate in international and large business directorate. We have been staffing up and we have been focusing on training. As the member indicated, we are challenging very well resourced interests that have very well qualified advisors. They have very deep pockets. There is a strong focus on improving training and making sure our people are well equipped to take on the most challenging and complex tax situations.

We have also invested a lot in information technology. I think Mr. Gallivan has touched on that in some of his answers. The amount of data coming into the agency is better than it has been in the past by quite a lot. We're better able to detect relationships and transactions than we were in the past, for sure.

However, it is a challenging business. There's a lot of money at stake, as many people have mentioned during this afternoon's proceedings. A lot of resources are deployed, I guess, on both sides, but particularly in the interest of high-net-worth individuals and multinational enterprises.

I wonder if my colleagues from Finance want to highlight.... We are quite excited about some of the budget 2021 initiatives that will help us deal with base erosion.

[The Chair, Liberal, Wayne Easter]

Base erosion....

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Do I still have time?

[The Chair, Liberal, Wayne Easter]

No, Tamara. You're way over time.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Oh, I was going to ask a question again.

[The Chair, Liberal, Wayne Easter]

We might have time for supplementary question at the end, when we get the next witnesses on.

Trevor, did you want to add one thing? You're leaning forward.

[Trevor McGowan]

I was going to pick up on my friend Alex's suggestion that Finance could provide information on some of the tax integrity proposals in budget 2021 if the committee wanted.

[The Chair, Liberal, Wayne Easter]

We'll come back to that later. We might run out of time. We'll hold that in abeyance for the moment.

We'll go to Mr. Sorbara, and then Mr. Fast. I'm not sure whether Mr. Fraser wants in.

Mr. Sorbara, you have five minutes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair, and good afternoon. It's great to be here.

Ms. MacLean, you said two words, “base erosion”. I'll just add the other two words, “base erosion and profit shifting”, which we as a government signed on to address, along with our OECD partners, and I think many other countries. That was from the [Inaudible--Editor].

How important is the BEPS sign-on for fighting tax evasion? Then going to some of the measures that were in budget 2021, could you comment on how they'll help aid in our fight against base erosion, transfer pricing or whatever you want to call it, that we need to ensure we're winning?

[Alexandra MacLean]

I'll start, but I'm going end up throwing this over to my colleagues in Finance because these are really policy matters that are in development to a large degree. There are some important tools, at least in the development, discussion and early implementation stage, that should help address some of my mandate in terms of tax compliance for multinational enterprises: for example, the interest deductibility proposal in budget 2021 and the anti-hybrid debt measure.

I'll stop so that Trevor can highlight some of those, but the recent G7 announcement on the international scene is also very significant for Canada and other nations.

[The Chair, Liberal, Wayne Easter]

Trevor, it's over to you.

[Trevor McGowan]

Thank you very much for the question.

I'd probably put the budget proposals into a couple of different categories that help tax evasion and aggressive tax avoidance. The first is informational, making sure that the Canada Revenue Agency and the tax authorities have the information they need to detect and challenge aggressive tax avoidance and tax evasion.

In that respect, we've already mentioned some of the beneficial ownership announcements, building as well on beneficial ownership announcements from budget 2018 relating to trust.

Budget 2021 announced a reform of Canada's mandatory disclosure rules, which in part came out of the base erosion and profit shifting process that would provide more meaningful and more relevant disclosure of aggressive tax planning, or tax planning anyway, to the Canada Revenue Agency, along with penalties to help ensure compliance.

In addition, there's a measure relating to audit authorities, helping the Canada Revenue Agency get answers to their appropriate questions when they're being asked.

That builds also upon a number of other important international efforts that have been implemented in Canada from previous years, such as country-by-country reporting and the common reporting standard, again to ensure that the right information is provided.

The second category relates to the integrity of the tax rules to ensure that they operate as intended and to ensure that taxpayers can't exploit loopholes, to use the common term, in order to avoid taxes.

Alex mentioned a couple of them coming out of the base erosion and profit shifting project, limiting excessive interest deductions so that debt can't be essentially placed into Canada so that the interest deductions can erode the Canadian tax base and be paid offshore. Hybrid mismatch arrangements can help ensure that complex cross-border transactions that are treated one way in one country and another way in another country don't lead to inappropriate tax avoidance.

In addition, we have upcoming consultations relating to the general anti-avoidance rule in the Income Tax Act, as well as Canada's transfer pricing rules.

There were a lot of important tax integrity measures announced in budget 2021 that should help ensure the fairness of the Canadian tax system.

[The Chair, Liberal, Wayne Easter]

Your clock is starting to run down, Francesco. You're going to have to be fairly rapid.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I have just a quick question for Mr. Gallivan.

In your comments today, you mentioned a couple of times the litigious nature of how the work is going in response to individuals practising aggressive tax planning, especially with those with the wherewithal choosing to pursue the court method instead of potentially coming to an agreement with CRA.

Why do you think that is happening. Is it that the stakes are so high?

[Ted Gallivan]

It certainly would be my observation that the stakes are high enough. If somebody is facing a $40-million bill, $4 million in legal fees to either reduce that or have it go away seems reasonable.

We're seeing more and more cases where taxpayers are spending $5 million, $10 million. There are a couple of cases that are well over $20 million in professional fees.

I think from a taxpayer's perspective, it's straight math. They think that either the bill will be reduced or they may be successful, and so they spend the money opposing us.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Fast.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you. I've been listening very carefully.

Mr. Gallivan and Ms. MacLean, thanks for coming prepared and providing us with a lot of good information.

Mr. Gallivan, you mentioned a list of tools you use to go after tax evaders, fraudsters, those who are improperly avoiding tax. You mentioned, I believe, the paid informant program. There's a leads program, the related party initiative that you mentioned. There are criminal investigations and many more tools that you have in your tool kit.

Of all of those tools, which one has delivered the greatest returns for the resources invested?