Finance Committee on Oct. 29th, 2025

[Steeve Lavoie, Liberal, Beauport—Limoilou, QC]

Thank you.

Mr. Lemieux, how does the CRA determine which sectors or countries to give priority to when investigating offshore tax evasion? What's the procedure?

[Marc Lemieux]

We use risk models to identify places we believe represent the highest risk, and that's how we determine which audits to conduct. That is the procedure, but I will ask Ms. MacLean to provide more information on the method we use.

[Alexandra MacLean]

All right. I'm going to answer in English.

For the large business population we risk-assess 100% of the population. We use about 250 algorithms to assess the data that arrives and to develop a risk ranking. We deploy our audit resources in accordance with the risk, as determined by.... The algorithms were originally developed by human tax experts, but they then run on the data.

Added to that, we now have additional information sources, which we're quite excited about. Marc mentioned the mandatory disclosure rules that have recently been introduced, and we now have a number of disclosures that we are reviewing, categorizing and assigning for audit based on the risk that we see in those reports. That's an introduction.

[Steeve Lavoie, Liberal, Beauport—Limoilou, QC]

Thank you.

[The Chair, Liberal, Karina Gould]

Thank you, Mr. Lavoie.

We now go to Ms. Cobena. No, I am mistaken. It's Mr. Simard's turn. My apologies.

[Mario Simard, Bloc, Jonquière, QC]

How quickly you forget me.

[The Chair, Liberal, Karina Gould]

Never, Mr. Simard. Go ahead.

[Mario Simard, Bloc, Jonquière, QC]

Thank you, Madam Chair.

Mr. McGowan, first, I want to apologize for not being as knowledgeable as the member who is usually here instead of me, Jean-Denis Garon, an economist. I hope my questions won't come across as too simplistic.

I will preface my questions by telling you that, from the outside, it often looks as though there's a double standard when it comes to tax evasion and tax avoidance. While the average taxpayer would probably have a hard time finding a tax haven, both the finance department and the CRA are more willing to think about ways to make life easier for major hedge funds and multinationals.

I say that because, given what I know about tax evasion, I am gathering from various sources that you put a mechanism in place allowing multinationals to bring tax-free money back to Canada from tax havens, thanks to the elimination of double taxation on income tax. A regulation was introduced to that effect. Ordinary taxpayers, who don’t have an economics or tax background, see the mechanism as a way to avoid paying taxes.

I would therefore like you to explain what section 5907 of the income tax regulations seeks to achieve, because it lets companies bring tax-free money back to Canada. If the department drafted such a regulation, I assume it benefits somehow. Now I’d like to understand how taxpayers benefit from the regulation on a day-to-day basis.

[Trevor McGowan]

I’m going to answer in English, because I want to make sure I use the right terminology.

I think there were three issues raised.

The first is the distinction between tax evasion and tax avoidance. Tax evasion is, of course, a crime, and it's dealt with largely through information sharing. Tax avoidance is the legal avoidance of tax. Where it is aggressive or inappropriate tax avoidance, then typically the government responds and tries to shut it down.

The question, of course, is absolutely correct and, I think, insightful. There are greater opportunities for international tax avoidance, depending upon the size of the enterprise. That is, for example, part of the reason pillar two—the global minimum tax, which would serve to impose a minimum tax rate of 15% on all the companies within a multinational group, regardless of what country they're in—applies only to the largest multinational organizations, those with gross revenues in excess of 750 billion euros. Those rules apply to the largest companies, not only in response to the fact that they have the capacity to bear the additional compliance burden but also out of recognition that they do more of this type of planning. It would provide the greatest impact fiscally.

Finally, in terms of the specific regulation mentioned, I believe the question relates to our exempt surplus system. That is a set of rules within the Canadian income tax system that allows active business income earned in a treaty partner or tax information exchange agreement country to be repatriated to Canada tax-free. The policy underlying that set of rules allows Canadian businesses to compete on a level playing field with their competitors in foreign jurisdictions.

If there's tax imposed in the foreign country on that active business income, then that is the tax that applies. It's called a territorial system, where Canada taxes our companies on their worldwide incomes, but active business income earned in our treaty partners and in tax information exchange agreement partners can be repatriated tax-free. That allows for a level playing field and a separation of taxing rights between Canada and other countries.

Finally, I think it's important to note that it applies only to active business income. It doesn't apply to passive income. Those are the kinds of passive investment returns that can be more easily shifted to a foreign jurisdiction, and those are taxed on a current or accrual basis in Canada under what are called our foreign accrual property income rules.

Effectively, tax repatriation applies to certain active business income from foreign affiliates.

I hope that answers the three parts.

[Mario Simard, Bloc, Jonquière, QC]

Thank you, Mr. McGowan.

[The Chair, Liberal, Karina Gould]

Thank you, Mr. Simard.

Ms. Cobena, we'll go over to you for five minutes.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Thank you, Madam Chair.

Canadians pay taxes when they earn a paycheque, when they buy a house, when they own any property, when they spend money and, of course, even when they die. It does feel, for the average Canadian, that there's no way to avoid the taxman, unless of course you're wealthy enough to set up an offshore tax haven.

Canadians were shocked to learn that the Prime Minister once chaired a pension fund that was deliberately based out of Bermuda, which is one of the world's top tax havens, to avoid paying the taxes—the same taxes that every Canadian family would have to pay.

Could you please explain, in plain terms, what a tax haven is, why corporations use them and what challenges the CRA faces when trying to collect taxes from entities that operate in Canada but shift their profits abroad?

[Alexandra MacLean]

I'll start on that one.

“Tax haven” is a term for a jurisdiction that imposes low, minimal or no income tax. It's often corporate income tax, but it can be personal income tax as well. Sometimes it's a special regime that's available only to foreign entities with the objective, occasionally, of attempting to attract investment income from other countries. That's the definition of a tax haven.

You asked, just to get your question clear, about challenges the CRA encounters.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

I asked why corporations use them and then about the challenges.

[Alexandra MacLean]

Why do corporations use them? In my experience, corporations generally are motivated to return profits to shareholders. That's their bottom-line objective most of the time: to benefit shareholders. They look to provide the highest after-tax returns possible, so they're looking for low tax rates. That's a reasonable objective for business people.

Our challenge at CRA is to make sure that profits attributable to Canada are properly reported in Canada, and that profits that belong to other countries, such as important trading partners like the United States, the Europeans, the Japanese and the Koreans, can be taxable appropriately in those countries as well.

We have some tools. Currently, we use transfer pricing rules consistently with other countries that require that intragroup transactions occur at arm's-length prices, so really at commercial terms within a multinational group across its supply chain.

My colleague Trevor mentioned the foreign accrual property income rules. Canada has a policy of requiring that passive income that's earned offshore by Canadian multinationals and Canadian high-income individuals is taxable on an accrual basis in Canada as a general matter.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

May I ask a follow-up question?

Would you agree that ordinary Canadians don't have the luxury of setting up these complicated offshore tax structures in countries like Bermuda to avoid paying taxes? They're not simple structures.

[Alexandra MacLean]

There are certain transaction costs that have to be taken into consideration for offshore structures.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Would you say that ordinary Canadians would not have the luxury to set up those structures, then?

[Alexandra MacLean]

I think that's fair.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Would you agree that when high-income individuals or corporations move taxes offshore, the burden doesn't actually disappear and that it actually shifts onto the shoulders of working Canadians who don't have access to these schemes?

[Alexandra MacLean]

The CRA is very active in applying Canada's tax rules to ensure that all Canadians are paying taxes appropriately under our laws. We have a lot of good new tools, and we're experiencing a lot more success than previously, so I guess I would just say that it's not the case that rich people can simply shift funds offshore and avoid detection and avoid the law.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

You explained that there are transactional costs to setting up these structures. In other words, you have to be able to afford an expensive lawyer and an expensive accountant to set them up. That, oftentimes, is not accessible to an ordinary Canadian.

On that basis, then, these structures are not available to ordinary Canadians. It's only for the wealthier—

[The Chair, Liberal, Karina Gould]

Thank you, Ms. Cobena. That's your time.

We're going to move to Mr. Sawatzky now for five minutes.

[Jake Sawatzky, Liberal, New Westminster—Burnaby—Maillardville, BC]

Thank you, Chair, and thank you to all of the witnesses.

One of the things that makes Canada such a special place to live is the opportunity for everyone to have a fair chance at success. This is a very important discussion to make sure that we are keeping things very fair. A just taxation system is essential to building a fair economy that works for everyone.

To start, one of the questions I have is, how does Canada compare to other advanced economies in dealing with tax evasion?

[Eric Ferron, Director General, Criminal Investigations Directorate, Compliance Programs Branch, Canada Revenue Agency]

For tax evasion, Canada is part of probably the most sophisticated group internationally, which is called the J5. If I compare us to our partners in the J5—America, Australia, the Netherlands and the U.K.—I would say that we perform very well. Obviously, we all learn from one another. Having five jurisdictions with a lot of expertise at the table allows us to learn from one another, share information and also work on operations together.

When we go to the OECD, I must say that internationally a lot of countries come to us asking us for advice. We are always very pleased and eager to help and share that information. We're seen, I would say, as one of the five leading countries internationally when it comes to tax evasion, because of the J5.