Finance Committee on Nov. 3rd, 2025

[Jonathan Farrar]

That's correct.

What I've found is that the average taxpayer does not understand, say, aggressive tax avoidance, using tax havens, which may by the letter of the law be technically legal. People tend not to perceive that as being legit, though. From their perspective, that is perceived as morally wrong, which is tantamount to tax evasion.

From the perspective of an observer, it's the perception I'm interested in. The perception is that if someone is using a tax haven, that is going to be viewed as something that is dodgy, if not outright wrong.

[Pat Kelly, Conservative, Calgary Crowfoot, AB]

At a minimum, they would think that's something not available to them as a less resourced tax filer.

[Jonathan Farrar]

That's correct because you would have to be a fairly privileged taxpayer to be able to afford the services of a high-priced accountant or a tax lawyer to set up some kind of offshore tax scheme.

[Pat Kelly, Conservative, Calgary Crowfoot, AB]

That's right. Then the end result, which was, I think, something you said you were concerned about, is how the prevalence of the use of offshore tax havens impacts domestic tax compliance.

[Jonathan Farrar]

That's correct. I'm concerned that if a number of the—

[The Chair, Liberal, Karina Gould]

Thank you, Professor Farrar and Mr. Kelly.

We'll now move to Mr. Leitão for six minutes.

[Carlos Leitão, Liberal, Marc-Aurèle-Fortin, QC]

Thank you, Madam Chair.

Good morning, Professor Farrar and Professor Li. Thank you for participating in our committee on this very important topic.

I think the rules on bank secrecy and information sharing have already, on their own, led to great progress in recent years.

Professor Li, you intrigued me a bit when you yourself described this as an intriguing matter. I'd like to give you the opportunity to continue your explanation of the need for a slightly more nuanced approach when it comes to tax havens and, above all, those that benefit the most.

Can you tell us more about that?

[Jinyan Li]

I find it intriguing because whoever will benefit from the use of tax havens would require a multi-layered analysis. One example might be Brookfield Asset Management Limited. This company has subsidiaries in Bermuda, and its investors include the Canada pension fund, the Ontario teachers' fund and many ETFs. According to The Toronto Star's reporting, many individuals, including some politicians, own ETFs, which ultimately own equity interest in the company that benefits from tax havens through using tax haven entities in Bermuda.

Tax havens are also known to the Canadian tax system. The Canadian exemption system uses some tax havens, in a way, to encourage competitiveness of Canadian businesses. The exemption system is one such example.

That's why I find the use of tax havens to be a very intriguing problem. There is no simple, straightforward fix to this multi-layered, complex problem.

[Carlos Leitão, Liberal, Marc-Aurèle-Fortin, QC]

Thank you very much.

As you also mentioned, in terms of the tax rules and tax laws in Canada, and I presume in other countries, we can only tax Canadian income or Canadian-sourced income. If Canadians, with their after-tax income, choose to invest in a mutual fund in the Japanese market, that's quite tricky for Canadian authorities to tax the gains from that investment. Is it not?

[Jinyan Li]

As a practical matter, yes, because in obtaining information and not knowing which Canadian is using their after-tax income to invest where, if the taxpayer does not voluntarily report that information, CRA has to rely on information exchanged in double taxation treaties or in tax information exchange vehicles. Therefore, getting information is very challenging when the information lies outside the Canadian political boundaries.

Also, CRA is prohibited by international law to go after events, accounts in Japan for instance. Even without bank secrecy laws, public international law has this revenue law doctrine that prohibits governments or courts of one country from helping another government in enforcing its revenue laws or its criminal laws.

[Carlos Leitão, Liberal, Marc-Aurèle-Fortin, QC]

Thank you.

Indeed, one thing I experienced from my days on the policy-making side at another level of government was that I noticed a huge increase in improvement in international collaboration and co-operation within the OECD context after about 2015 or 2016. There's a lot more international co-operation and exchange of information, with global minimum taxes and so on.

The question I have for you is this: Do you think all that progress over the last few years may now be somewhat in jeopardy given that one of the bigger players in the world economy, the United States, appears to be changing its views on international co-operation on tax issues?

[Jinyan Li]

That's a great question. I don't think the damage is as big as it might be, because the U.S. has always been an outlier in this global multilateral collaborative system. As far as information reporting goes, the U.S. benefits as much as Canada and other countries. I don't think President Trump is pulling out of those collaborative measures, but the U.S. has always been resistant to the global minimum tax. The pillar two global minimum tax future is uncertain. Its impact is uncertain.

In terms of information exchange, collaboration in gathering information, and even administrative assistance among participating parties, I think that is progressing. I hear from U.S. scholars that the U.S. Treasury benefits quite a bit.

[The Chair, Liberal, Karina Gould]

Thank you, Professor Li.

Thank you, Mr. Leitão.

Mr. Lemire now has the floor for six minutes.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you, Madam Chair.

Professor Li, I was also surprised by your opening remarks. I'd like you to talk about that more.

Can you tell us which parts of the Income Tax Act encourage the use of tax havens?

[Jinyan Li]

Yes. I was intrigued by that discovery myself.

You are aware of the exemption system. Subsection 113(1) of the Income Tax Act exempts dividends received by a Canadian corporation from their foreign subsidiaries, including foreign subsidiaries located in tax havens, as long as the tax haven subsidiary is earning income from active business defined by Canadian law. Regulation 5907 provides detailed rules for tracking and identifying what kind of income earned by which subsidiary qualifies as active income.

The definition is not airtight. Let's say there's a Canadian subsidiary in Bermuda or the Cayman Islands. Both have TIE agreements with us. They're designated treaty countries. The subsidiary in those countries can earn income. As long as that income is not caught by our FAPI rules, that income is exempt and it's not taxable in that country. It's not taxed in Canada when it's earned and it's not taxed in Canada to the shareholder when it's paid as dividends.

This was a deliberate policy choice made by Canada when the new regime was introduced as a result of the 1972 tax reform.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

You stated that the Income Tax Act doesn't include a definition of certain concepts, such as offshore tax havens.

Shouldn't those gaps be addressed as quickly as possible? We're getting the budget tomorrow. Does that also mean that the Income Tax Act is incomplete and that it's easy to slip through the cracks in the system, when the act should be protecting the interests of Canadians, particularly with a budget for which a monstrous deficit is expected to be announced?

[Jinyan Li]

I think it's a good idea. Whether a good idea can be translated into enforceable and legal rules is a different matter. There's a big gap between them.

In my view, I think it will be very difficult to define which country is an offshore tax haven. Many high-income countries, such as Luxembourg and the Netherlands, qualify as offshore tax havens for certain purposes. There's Bermuda and the Cayman Islands, of course. Barbados is in a different category. It is really hard for me to draft a definition that has legal effect and can be enforced within Canadian boundaries but also under public international law.

Canada is not alone. Other countries may counteract. International tax problems are complicated, because they're reflecting not only economic interest, fiscal interest and a sense of fairness among Canadians but also international relations. After all, tax law is an instrument. The Canadian government needs to do the delicate balancing that Jonathan referred to. It's a delicate dancing act. Canada needs to consider the multidimensions of the problem.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

I'm intrigued by your answer, and I'd like to ask you the question I asked Mr. Cochrane earlier.

The European Union has adopted a directive that requires multinationals with sales of more than 750 million euros to publish their tax data directly, country by country. That can obviously include Canada, but we don't have that kind of oversight reporting.

Should we make that information public to ensure better tax fairness for Canadians?

[Jinyan Li]

I actually overheard your exchange with Mr. Cochrane. I thought that was very illuminating.

In addition to making the data public to empower the public to be a better contributor to the tax policy debate and maybe provide some oversight, there is the other side that Patrick Marley mentioned: the importance of secrecy for our self-assessment systems, secrecy and competitiveness of Canadian systems as a whole, the signal that we give to other countries.

In the international tax policy arena, economic clout matters. Canada's clout versus the U.S.A., which is U.S.-EU, is not equal. When the EU and U.S. do something, they think they can do it without too much negative impact. For Canada, the calculations need to be done very carefully. It's not a straightforward answer. If the EU does it and it's good for Canada.... The DST is an example. The EU is going ahead with the DST. They thought they could resist Trump first, but Canada pulled out from the DST, because it's a complex trade negotiation between Canada and the U.S. The calculation needs to be done in a way that serves Canada's overall interests.

[The Chair, Liberal, Karina Gould]

You have 30 seconds left, Mr. Lemire.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Do you think the Canada Revenue Agency is an effective deterrent to tax evasion and tax avoidance?

[The Chair, Liberal, Karina Gould]

Give a brief response, please.

[Jinyan Li]

Is that a question for me?

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Yes.

[Jinyan Li]

I think Jonathan is a better expert than I am on this.

In my view, observing CRA from afar, I think they seem to be doing a very good job.