Evidence of meeting #11 for Finance in the 45th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rules.
A video is available from Parliament.
Senior Economist, Canadian Labour Congress
I would need to look at the calculations. I trust the researchers who are there, so yes, I guess I would tentatively agree.
Liberal
Ryan Turnbull Liberal Whitby, ON
I notice that in July 2015, the Canadian Centre for Policy Alternatives wrote a paper called “The Big Heist”, and said that the Harper government signed tax agreements with notorious tax havens, such as Bermuda, the Cayman Islands and the Isle of Man, to effectively legitimize their use by Canadian corporations.
Would you agree with that as well?
Liberal
Ryan Turnbull Liberal Whitby, ON
Okay, so this problem didn't start with a Liberal government, as we would hear from the Conservatives regularly. They say that we've made no progress and that the Liberal government doesn't take this issue seriously. In fact, the opposite is the case.
I would like to get some information on the record.
Over the last 10 years, I understand that we've strengthened transfer pricing rules and had mandatory disclosure rules. We updated GAAR in Bill C-59. We added a 25% penalty on abusive tax avoidance transactions. I was part of that process, as I was parliamentary secretary at the time. We have EIFEL and anti-hybrid rules. We've participated in international leadership and co-operation in the OECD base erosion and profit shifting multilateral instrument. We've introduced a common reporting standard, or supported that. We played a leadership role in the Joint Chiefs of Global Tax Enforcement as well, and so on and so forth. There are quite a number of other things.
I want to get your perspective, Mr. Marley, on what progress we've made. Do you agree with all of the things I've laid out as progress in this matter? Are there any other things that we need to do?
Partner, Osler, Hoskin and Harcourt LLP, As an Individual
Progress depends on the specifics.
I agree with the various measures that you've mentioned. I do agree that those are all various measures to combat the improper use of offshore companies and to ensure that Canada's collecting more taxes. I do agree with that.
In some cases, I would say those rules are excessively complicated and could use some reining in. However, I do agree that, through mandatory disclosure and all the various other changes, it provides more access to information, and therefore, as Alex MacLean was mentioning last week, the CRA having an ability to better risk manage their audits and focus their attention.
Lastly, I think a question was asked earlier about whether companies are being audited appropriately. I'd just note that, in my experience, every large multinational has continuous audits. Everything they do is carefully audited.
The T1134 reporting is excessively broad and, if anything, should be carved back because it's so complicated and there's so much information provided to the CRA that I think a lack of information is not an issue.
Liberal
Ryan Turnbull Liberal Whitby, ON
Thank you very much for that response. I appreciate it.
Mr. Cochrane, can you also acknowledge that we've made some progress? I get that we need to make more and that's why we're studying this issue seriously in this committee.
Can you make recommendations as to where you think we need to go?
Senior Economist, Canadian Labour Congress
This is, I guess, a bit of shameless self-promotion. I have a chapter in a book called The Trudeau Record about the tax measures the Trudeau government brought in. I lauded what was good and said it just was never enough. It didn't do the big things. It was good at doing lots of these different little things, but it did have the effect of making our tax system even more complicated.
I think something that should be considered is a new tax commission. It's been 60 years since the Carter commission put out their report that was intended to try to simplify our tax system, make it more transparent, make it fair. In those 60 years, our tax system and our economy have just become so much more complicated that it might be time to consider a new commission.
Liberal
Ryan Turnbull Liberal Whitby, ON
I'll quickly say that Bill C-69 on the global minimum tax during the last Parliament received royal assent in June 2024. I say that in response to Mr. Lemire's comments earlier saying that we backtracked on that. I don't think that's true.
Thank you.
Liberal
The Chair Liberal Karina Gould
Thank you, Mr. Turnbull.
I would like to thank both of our witnesses.
We will now briefly suspend as we change over to the next panel.
Thank you so much.
Liberal
The Chair Liberal Karina Gould
Colleagues, welcome back. We will resume the meeting.
I would like to welcome our witnesses.
We have Dr. Jonathan Farrar, professor at Wilfrid Laurier University, and Professor Jinyan Li, professor at Osgoode Hall Law School at York University.
Both are virtual, as you can see, and they've conducted a mandatory witness onboarding test. I would like to make a few comments for the benefit of the new witnesses.
Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mic and please mute your mic when you are not speaking.
For our witnesses on Zoom, at the bottom of your screen, you can select the appropriate channel for interpretation: floor, English or French.
This is a reminder that all comments should be addressed through the chair.
We will give each of you five minutes for your opening remarks.
We'll start with you, Dr. Farrar.
Jonathan Farrar Professor, Wilfrid Laurier University, As an Individual
Good afternoon, Chair Gould and members of the committee.
Thank you for the opportunity to speak today. As a tax researcher, I conduct behavioural tax research in which I design surveys and experiments grounded in psychology theories to understand how individuals make tax-related decisions, including income tax reporting decisions. I would like to share with you some findings from three of my research projects.
The first project, completed in 2023, investigates how the general public responds when they learn that wealthy individuals go unpunished after engaging in aggressive tax avoidance using tax havens. The general public perceives aggressive tax behaviour as tax evasion. I designed an experiment using a scenario based on the KPMG Isle of Man tax scheme, which may be familiar to you. I was simply interested in knowing whether observers' tax compliance intentions would differ if a wealthy tax evader was punished versus unpunished. The results showed that observers' tax compliance intentions increased when a tax evader was punished versus unpunished. Put differently, failure for a tax authority to punish what members of the general public perceive to be an unfair tax violation in a tax haven setting has a negative impact on everyday taxpayers' compliance attitudes.
Members of the general public tend not to understand the distinction between aggressive tax avoidance and tax evasion. To them, the perception is that wealthy taxpayers are doing something wrong and are getting an unfair advantage by paying less taxes than they should. Thus, for everyday taxpayers who have opportunities to engage in tax reporting non-compliance, such as from side hustles or upselling World Series tickets, there are negative spillover effects on them from media stories about tax havens in which perpetrators of egregious tax avoidance schemes go unpunished.
A second project I did, completed in 2021, analyzed a 10-year sample of all media conviction notices published by the Canada Revenue Agency, or CRA. For purposes of this presentation, I will simply note that there were zero reported convictions for offshore tax evasion. That number may have changed a little bit since then, but not by much.
A third project I have recently started required me to make an access to information request from the Public Prosecution Service of Canada, or PPSC. I requested records about the charges laid by the PPSC relating to the Income Tax Act from January 2010 through May 2025. High-level findings from this data reveal that only about one-third of the charges laid by the PPSC relate to tax evasion in some form, in section 239 of the Income Tax Act. The remaining charges are for failure to file a tax return, in section 238 of the Income Tax Act.
The number of charges overall have dropped from a high of 2,397 in 2010 to only 43 in 2023 and to 47 in 2024. Furthermore, the average number of days from tax evasion charges to sentencing is well over 2,000, and in some cases exceeds 3,000, depending on the specific provision in section 239. Thus, it can take many years for a tax evasion case, almost all of which could be domestic tax evasion, to work its way through the court system.
The takeaway from these three projects is as follows: prosecution in Canada for tax evasion is uncommon, and for offshore tax evasion appears to be virtually non-existent; prosecuting tax evasion is a very slow process; and prosecutions for tax evasion appear to have dropped drastically in recent years, which raises serious questions about the CRA's enforcement efforts. Exacerbating the situation is that the general public's perception of a lack of punishment for offshore tax evasion can have negative influences on domestic tax compliance, which is arguably a bigger issue than offshore tax evasion.
Whilst on sabbatical in 2023, I had the opportunity to work part time at the CRA in their audit, evaluation and risk branch. Overall, I was very impressed with the agency. Thus, my comments should not be misconstrued as an implied criticism of the CRA or the PPSC. Enforcement activities related to offshore tax havens require a delicate balancing act between limited enforcement resources and the risk of setting an unfavourable precedent under common law if a prosecution were to be unsuccessful.
Finally, Canada, like other countries, uses deterrence as one approach to improve tax compliance. Another approach, and one that I think Parliament might be advised to consider, is to reduce the incentives for using offshore tax havens. If incentives for using tax havens could be reduced, offshore tax activities would be curtailed and thus offshore tax non-compliance would be curtailed. Currently, corporations and high-income individuals have incentives to use tax havens because tax rates in Canada are much higher than tax rates in tax havens.
Professor, Wilfrid Laurier University, As an Individual
Yes. I have two last sentences here.
Thus, the problem of tax havens may not be as much enforcement-related as it is tax system-related. My suggestion would be to reduce both corporate and personal tax rates.
Thank you.
Liberal
The Chair Liberal Karina Gould
Thank you, Dr. Farrar.
Next is Professor Li for five minutes. Thank you.
Jinyan Li Professor, Osgoode Hall Law School of York University, As an Individual
Thank you, Madam Chair and the committee for inviting me.
I listened to part of the hearings before my session, so I'm aware of the interactions between the committee and the finance and CRA officials. I listened to part of Patrick Marley's testimony as well.
I'm going to focus, in my remarks, on the rules in our income tax law about dealing with tax havens.
Before I do that, I want to provide some background and also a footnote that I have provided a 10-page note to the clerk. After today's session, I will probably revise it and turn it into a brief, so the committee can have a fuller explanation of the complex rules that I'm going to touch on.
Let me turn to some background. The use of offshore tax havens is a very intriguing problem as a matter of law for several reasons.
First, the term “offshore tax haven” is not defined in the Canadian Income Tax Act or Canadian tax treaties. There's no definitive definition of this term.
Second, every country has sovereign right to choose the kind of tax system they want to use. Every country can potentially be a tax haven. In fact, many countries are tax havens in one way or the other.
Third, assessing the fiscal impact of the use of tax havens in Canada is beyond the realm of my research and expertise, so I'm not going to touch on that, but I do want to highlight the fact that estimating the amount of tax lost depends on complex and sometimes challenging statutory interpretations and availability of reliable data.
Fourth, another reason why tax havens are an intriguing problem is that using tax havens is not universally bad, wrong or inappropriate. Canadian tax law actually kind of approves or even encourages the use of tax havens in some cases to advance Canadian tax policy objectives. It requires a nuanced analysis of who actually benefits from the use of tax havens. If time permits later on, I will come back to this issue.
Finally, I find the problem to be very intriguing and complex because it is not a new problem. It has been a problem for a very long time. The Canadian tax law has provided some countermeasures, but there are some serious limitations on what Canadian tax law can do.
As a law professor, I will focus on the law. First, as a matter of law, Canadian tax law can only tax what the law can identify as Canadian income. Canadian tax law defines Canadian income by reference to the Canadian residence of a corporation or an individual, or a Canadian source of income. Neither concept—residence or source—has an ironclad definition. There are ambiguities in this fundamental connecting concept.
Second, Canadian tax law cannot operate on its own. It has to depend on private law to operate and for fundamental definitions, like what a corporation is. Is a contract a contract for tax law purposes? There are no straightforward, simple answers in many cases.
Third, tax law does not...totally depends on private law. It neutralizes the private law's effect only in specific circumstances. We call them specific anti-avoidance rules. The FAPI rule and the transfer pricing rule are such rules. All specific anti-avoidance rules are double-edged rules. They shut down specifically defined tax avoidance schemes, but they also pave a way for tax planning because as long as the tax structure is safely on the right side, they can do it.
Last, Canadian tax law is limited by public international law. Canada can only tax what belongs to Canada—
Liberal
Professor, Osgoode Hall Law School of York University, As an Individual
Yes.
Given these limitations, Canada's laws have various anti-avoidance rules that you already heard about: transfer pricing rules, FAPI rules, GAAR and mandatory information reporting rules.
I hope I can explain the complex [Inaudible—Editor] reasons later.
Liberal
The Chair Liberal Karina Gould
Thank you, Professor Li.
We have to move on to questioning now.
We're going to start with Mr. Kelly from the Conservatives for six minutes.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Thank you to the witnesses.
Professor Farrar, you had a lot of statistics in your opening statement. I'd like you to unpack the decline in successful prosecutions for tax evasion. You said that in 2010—and I'm not sure we know the number of convictions—there were 2,300 charges laid. It sounded as though this was down to 43 in 2024. That's a shocking decline in the number of charges laid. In addition, you said there were zero convictions reported.
Last Wednesday, I asked officials how many there were in the most recent year of reporting, and they answered by saying there had been 14 over the last five years.
Could you walk us through some of the numbers in terms of the decline in tax evasion prosecutions for offshore evaders, which was the point of my question on Wednesday?
Professor, Wilfrid Laurier University, As an Individual
Sure.
To address your first comment, the study I did that I was referring to was a sample of all the media conviction notices. That was from 2006 through to 2015. My point was that, in the 10-year window, there were zero convictions for offshore tax evasion. I understand that since then, there may have been a handful, but it was a 10-year sample that I had access to.
In terms of what I was referring to about the charges laid, 2010 was the first year for which I had data. I found that there were 2,397 charges for tax evasion in 2010, and that number had dropped precipitously to 43 in 2023 and 47 in 2024. That seems to be a fairly drastic decline, and I don't know the reason for that. Over the 15 years that I have data for, you would see very much a downward trend in the number of overall charges that have been laid for tax evasion.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
The overall trend over 15 years is downward quite shockingly, it would seem. Is that because there were fewer offences?
Professor, Wilfrid Laurier University, As an Individual
It's a hard question to answer. I don't know the answer to that.
It could be because the number of offences is declining, but my sense is that, if anything, they would be increasing or at least stable. I wonder how willing the CRA is to go after some of, for lack of a better word, the low-hanging fruit, the everyday taxpayer who would be engaging in activities that would not be subject to third party reporting. For example, if you have a chip wagon or something like that, the CRA tends not to go after the small fry, no pun intended.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
If they're not going after either the small fry or succeeding in prosecuting the large offenders, what is really going on here then?
We assume that there is a tax gap, that taxes are evaded and that offshore havens are used in furtherance of that evasion, yet there appears to be minimal enforcement, at least as evidenced by criminal conviction, or even charges in recent years.
Professor, Wilfrid Laurier University, As an Individual
That's correct.
I would like to know from the CRA the answer to your question about why there has been such a drastic decline in the number of charges laid for tax evasion. It's very high-level data, and I don't have access to the details about each of those charges, but it's a trend analysis that would be concerning from an observer's perspective.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
You've given us a reason for concern that hasn't come up in previous testimony. You referred to egregious avoidance. You used the words “egregious” and “aggressive”, as well as “evasion”.
Can you comment further about the impact this has on compliance? Canadians are willing to pay their taxes, and they understand that it's a basic responsibility, but your research indicates that when taxpayers learn that wealthy, complicated, high-level aggressive avoidance and evasion take place, that has a negative impact on their willingness to comply.