Finance Committee on June 15th, 2021

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

My question was really this: Are changes to the law necessary, or is it a matter of...? I guess now you're getting into other reasons that are not rooted in changes to the law, so if changes to the law are not needed, is it just a question of resources, a question of willingness or a question of raising penalties?

[Prof. André Lareau]

The Income Tax Act contains a provision that targets tax advisors who engage in improper practices. But there are no criminal penalties, only administrative penalties. This is like telling tax advisors that this is the only penalty they will face if they commit a crime, but it isn't. There are legislative provisions that allow for tax advisors involved in the commission of the crime itself to be targeted as well.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thank you.

Mr. St-Jean, we've seen, over the last Parliament and in reports and whatnot in this one, terrible problems of basic competence at the CRA. The Auditor General's report on call centres pointed out that a full 30% of the answers given out at those call centres were false or that erroneous information was given to taxpayers. We've all seen that their website has incorrect information on it, which, if tax filers followed it, would lead to their actually being in breach of the Income Tax Act.

How does the quality of information and misinformation given out by the department itself erode confidence in the system and in fact the very nature of the self-reporting system that we rely on?

[Charles-Antoine St-Jean]

Thank you for this question.

There's no doubt, when we see those reports from the AG and others, that we have to say this is not helpful. The CRA, like other departments and all of us, needs to do better. They're investing in more people. They're investing in new information systems.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

I'm sorry, but my question was not really.... Recommendations to fix the problem were made, but I'm getting at some of the root causes of non-compliance.

Is there a risk, when the system doesn't work, that the incentive to comply will actually be eroded?

[Charles-Antoine St-Jean]

As we've said a number of times to members, we find the current tax code very, very complex. This committee has made a recommendation many times. By making it more complex, you're making it more difficult to comply. The average Canadian has great difficulty. It's a 3,000-page code. It's very difficult to comply with, and that is one thing that really does not help compliance.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Indeed.

I have one last question, and I'm not sure who to put it to. Maybe I'll go back to Mr. Lareau.

What do you make of the voluntary disclosure process? We heard from officials last week that they were not pursuing as many voluntary disclosure settlements as other jurisdictions were, and they cited that as justification for the relatively low numbers—well, the non-numbers—of convictions in the case of the Panama papers.

What do you make of this? Should we feel better that they're not letting these individuals off with voluntary disclosure agreements and just be more patient on actual prosecution, or is this just an outright failure to do anything about the Panama papers in particular?

[Charles-Antoine St-Jean]

I think we could ask my colleague to answer the question on voluntary disclosure.

[Bruce Ball]

Thanks.

As I sort of alluded to before, I think the issue that the CRA has been facing is an either-or kind of thing. On the one hand, they want people to come forward. If they're going to be penalized, they aren't going to come forward, so if someone's thinking that they'd like to become compliant, handing them a penalty if they do is not going to help bring them around.

I think the flip side is that people were critical of the CRA for allowing voluntary disclosures on international issues. I think that's what the CRA people were talking about last week—tightening up the rules so that doesn't happen, in other words, for people who are doing international transactions in particular, and there were some other things that they tightened up in the rules.

[The Chair, Liberal, Wayne Easter]

Mr. Lareau, go ahead on Pat's last question.

[Prof. André Lareau]

Voluntary disclosure will be done by someone who is feeling the heat.

As for international tax evasion, since the Canada Revenue Agency's record in this regard isn't very good, why would someone who has hidden their money outside the country agree to make a voluntary disclosure, when they know full well that the agency isn't going to take the necessary steps to retrieve it outside the country?

So people won't be making voluntary disclosures because they know that they won't be caught and that we won't try to find someone who has hidden money outside the country. So there is no incentive for people to make voluntary disclosures.

There have been quite significant voluntary disclosures in the past, of course. We remember Brian Mulroney, who voluntarily disclosed income several years later and paid half the taxes owing. These are sad situations, but people remember them.

It should also be remembered that the United States has had very ad hoc voluntary disclosure programs. The United States gave people three months to voluntarily disclose their income, after which it was too late to do so. Today, the United States has opened the doors much more and there is much freer voluntary disclosure.

Here in Canada, the measures are now more binding. That's good, but there still won't be voluntary disclosure until the Canada Revenue Agency is more proactive in investigating cases of international tax evasion.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We will go to Ms. Koutrakis, followed by Mr. Fast, and then Mr. McLeod will have to wrap it up. Then we will go to Gabriel's motion.

Ms. Koutrakis, you have five minutes.

[Annie Koutrakis, Liberal, Vimy, QC]

I'm going to take a few seconds to thank you, Mr. Chair, for being an amazing colleague and guide to me.

This is my first mandate, as you know. I was elected in October of 2019. This is the first time I'm sitting on a standing committee at Parliament, and I couldn't be luckier or more honoured than to count you as my new friend and mentor. I will come to visit you in P.E.I, but as elections are going to happen in 2023, I still have another two years to serve with you. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

[Annie Koutrakis, Liberal, Vimy, QC]

At this point, it's important to put on record that once we've identified that fraud has happened, the investigation is not taken over by the CRA but is referred to the RCMP for further investigation.

I'd like to ask either Mr. Lareau, Mr. St-Jean or Mr. Ball to weigh in on that and say if you would agree with the statement that there's only so far that the CRA can go with investigations, and it then goes over to the RCMP.

[Prof. André Lareau]

In my opinion, the Canada Revenue Agency must demand more information. The agency may, pursuant to subsection 239(1) of the Income Tax Act, file criminal complaints against any tax criminal, including tax advisors. Of course, in criminal matters, Justice Canada will take over. Otherwise, if it's deemed to be more expeditious and more appropriate, the RCMP can deal with it. I don't know about that.

One thing is certain: we need more information now, either from the RCMP or the Canada Revenue Agency. I think the agency still has a lot of work to do on that front. It also takes a willingness to act. For the time being, that will is lacking. We need only think of all the transactions that have taken place with taxpayers or of the lack of willingness to prosecute KPMG for the time being. All of this leads me to say that the Canada Revenue Agency is not playing its role adequately at this time.

[Annie Koutrakis, Liberal, Vimy, QC]

I'd like to hear the thoughts of Mr. St-Jean and Mr. Ball on the same question.

[Bruce Ball]

I'll jump in on this one.

I generally agree with that. I think that the CRA stays involved, though, because they have the expertise on tax matters. I'll be honest with you that I'm not quite sure how other legal authorities are brought into the process, but I think the CRA remains part of it.

One of the key things is that the CRA's rules in terms of gathering information and that sort of thing change significantly if they think criminal charges are involved, but I've never dealt with this, so I really don't know how the process works.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you for that. I'll continue with Mr. St-Jean.

What are the most common forms of aggressive tax planning that we are seeing today? What steps should the federal government be taking to close loopholes that support these tax planning strategies?

[Charles-Antoine St-Jean]

On that note, I would turn to my colleague, my tax expert.

[Bruce Ball]

It's actually difficult to say what the key ones are. Maybe I'll deal more with what should be done, because it will probably be the same steps no matter what the issue is.

We've talked about tax evasion a lot. We've talked about tax avoidance. Strictly speaking, tax avoidance is reducing your tax legally, at least under the international definition. The CRA uses a slightly different one.

Then there's aggressive avoidance. I think the big rule there is the general anti-avoidance rule. That's the rule that will apply if your tax position technically meets the rules but is outside the object and spirit of the tax rules. I think that'll be something that the government will be looking into more.

Using Quebec as an example, Quebec's consequences around the general anti-avoidance rule go further than the federal rules do, so I would imagine that would be something the federal government will be looking at when they do their review.

[Annie Koutrakis, Liberal, Vimy, QC]

From the private sector perspective, I heard in your testimony, Mr. St-Jean, that we need an overhaul of our tax rules and that a reform is needed, but Canada's taxation system must have evolved over the past 20 years. In your view and from your experience, have there been any major changes in the system?

[Charles-Antoine St-Jean]

I may just make a few comments. Again, I'm not the tax expert; my colleague is.

Every year the tax code is getting more complex. You're adding pages every year. Over the last 20 years, I don't know how many pages have been added, but there have been new provisions in the Income Tax Act, so it's not getting simpler year after year. It's just getting more complex.

This problem is not going to go away. My colleague was talking about a tax review. The last time the tax review was done was in 1967, if I recall, and it took 10 years back then, so it's been more than 50 years. In the last 20 years, it just got more complex to deal with.

Those are probably the comments I would make, but maybe my colleague could add another layer.

[Bruce Ball]

I think the issue is that there have been more changes, and they do layer them on top. I think that's the issue.

We were talking about interest deductibility last week with a group and there are three or four different sets of rules that apply when you're talking about international interest deductions. Rather than putting different rules on top of each other, does it make sense to go back and look at it from the beginning?

I look at it almost like computer software: If you keep adding different layers of programming on top of the old, eventually it breaks down. I think what we need to do is reboot the tax system and start from scratch and see what makes sense.

[The Chair, Liberal, Wayne Easter]

That would be an interesting reboot, for sure. That's good terminology, Mr. Ball.

We'll turn to Mr. Fast, and then Mr. McLeod will have to wrap it up.

Ed, you're on.