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.
Liberal
Liberal
The Chair Liberal Karina Gould
Thank you, Mr. Lemire.
We'll now go to Mr. Lefebvre for five minutes.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Thank you, Madam Chair.
Thank you to the witnesses for being here. I'm going to give Professor Li a bit of a breather, and I'll start with Professor Farrar.
We know that the Canada Revenue Agency's budget has increased by 70% in the last eight years under the Liberal government. There's been a decrease in the collections results, and you told us, Professor Farrar, that you found that very worrisome.
I'd like to know whether you think the Canada Revenue Agency effectively investigates tax evasion and whether prosecutions are conducted in the right way and at the right level.
Professor, Wilfrid Laurier University, As an Individual
It's a bit of a hard question to answer.
At the outset, I would expect, as I think you were implying, that there would be an increase in the number of charges laid if the budget to the CRA has increased. We would expect a positive correlation there. If we found the opposite, that definitely raises some issues.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Professor, that isn't the point of my question.
The budget has already increased by 70% over the past eight years, but the results are plummeting. Do you think the current way of doing things is effective?
Professor, Wilfrid Laurier University, As an Individual
If I had to answer that yes or no, I would say no. I don't know the exact reason why the number of charges is so low. From a purely layperson's perspective, an observer standpoint, because I don't know the internal workings of the CRA and how they allocate their audit resources, if I'm looking back asking why we have this decrease in charges yet this significant increase in funding, I'd think something doesn't seem to add up here.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
How could the government make Canadian tax law clearer and more direct when it comes to tax avoidance? What could be done to improve it?
Professor, Wilfrid Laurier University, As an Individual
Something that could be done is to simplify the tax system. I'm not the first person to suggest that. By simplifying I mean to maybe reduce the amount of language we have in the Income Tax Act. It's very immense. It has something like 1.3 million words. The average taxpayer is not going to have the time or make the effort to go through all those words.
Some of the legislation is very precise and very technical for very esoteric purposes, but for the average taxpayer the language of tax is not very accessible. Trying to find a way to make the language a little easier to understand, I think, would go a long way to improving compliance.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Earlier this year, the Prime Minister tried to defend the use of tax havens by Brookfield, where he was one of the chief executive officers, by saying that it was a method for taxes to be paid here in Canada.
Do you agree with the Prime Minister's statement?
Professor, Wilfrid Laurier University, As an Individual
I would say that it's a bit of a deceiving statement, because it still involves the use of a tax haven and, if the Prime Minister has a vested interest in a company, there seems to be a conflict of interest there. I would be skeptical of those comments.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Thank you, Professor Farrar.
Professor Li, you said earlier that there was ambiguity in the law. What do you think are the weaknesses in the law right now?
Professor, Osgoode Hall Law School of York University, As an Individual
There are so many. Transfer pricing rules have been touched on. Our transfer pricing rules can benefit from reform and make them better aligned with OECD guidelines. The GAAR has been improved, so I'm quite happy with the current state of the GAAR legislation. How the Supreme Court of Canada is going to interpret and apply it, especially in transactions and schemes involving offshore tax havens, however offshore tax havens are going to be defined, is yet to be seen.
Our tax incentive measure, the exemption system, I think, would also benefit from a very careful, systematic review as to whether the tax subsidy brings about a positive economic impact on the Canadian economy. Now the lines are drawn in a way that I don't think serves the Canadian purpose, so tightening up the exemption system will prevent that.
Liberal
The Chair Liberal Karina Gould
Thank you, Professor Li.
Thank you, Mr. Lefebvre.
I will continue with Mr. MacDonald for five minutes, please.
Liberal
Kent MacDonald Liberal Cardigan, PE
Good afternoon to our witnesses.
We've heard from previous witnesses that Canada should establish an independent tax fairness commission to review the corporate tax practices in Canada.
What's your opinion on that, Professor Li? Do you think there's any benefit to this, or is the current system of the Income Tax Act answering to the Parliament of Canada the way it should be done? What is your opinion on this?
Professor, Osgoode Hall Law School of York University, As an Individual
In short, I think yes, it is time to have a systematic review of the overall system, not only the corporate tax system but the system as a whole as to whether it is efficient and fair and serves the needs of Canadians in the new global geopolitical environment. The system we have was cast in the 1960s. The world is so different today.
Whether the party has the political capital and commitment to do it is difficult to say. It needs Canadians to have buy-in to revisit this most important fiscal instrument we have.
Liberal
Kent MacDonald Liberal Cardigan, PE
In terms of forming another commission, I don't know if you've answered my question on that. Can you say whether that's—
Professor, Osgoode Hall Law School of York University, As an Individual
Forming a commission is one way of doing it, I think. I think a commission like the Carter commission or Jack Mintz technical committee would be helpful.
Liberal
Kent MacDonald Liberal Cardigan, PE
I'll put the same question to Dr. Farrar on forming an independent commission.
What's your opinion on that?
Professor, Wilfrid Laurier University, As an Individual
I think it could be a good idea, if you have a directed panel of experts. I think we need to update some of the current legislation in light of the sweeping changes that have happened since our last big commission, which I think was the Carter commission.
Liberal
Kent MacDonald Liberal Cardigan, PE
Thank you.
Professor Li, we know that Canada's international tax system has evolved, and I'm asking a question that's been asked before. We had the reforms to the OECD put in on base erosion and profit shifting, but we're also hearing that there are still gaps in what we're doing to stop tax avoidance and tax evasion.
Can you speak to that? What other steps are needed?
Professor, Osgoode Hall Law School of York University, As an Individual
First, the BEPS project has two stages.
The first stage produced specific anti-avoidance rules, like the excessive interest and financing expenses limitation rule, EIFEL, that we have. There are hybrid entity rules and mandatory disclosure rules. All of those rules have been adopted into Canadian domestic law. Those rules are exceedingly complex, so it's a doubled-edged sword.
BEPS phase two involves pillar two, the global minimum tax, which Canada has also adopted. The intersection between the global minimum tax and the set of complex rules in the Income Tax Act is yet to be studied and assessed as to whether the combination of the two set of rules will work. It's hard to know. I think simplification and integrating the two mechanisms will produce better results for taxpayers and the tax system overall.
In terms of intangible property, I think Canada's rules are quite weak in the sense that if you have a corporation that receives generous tax subsidies for R and D in Canada and you create a patent, you can transfer your patent when it has no market value to your tax haven subsidiary, and your tax haven subsidiary's licensing, exploiting, royalties, all of that income is tax-free from Canada because of our exemption system.
Canadians subsidized the creation of the patent, but Canada can never tax that income. Is that fair? If that's not fair, we need a new rule to deal with it. So far, we don't have a rule. Canadians create and develop that income, but Canadians don't tax it. It doesn't make any sense.
If I had the opportunity, I would try to craft a rule to make sure Canadian income remains taxable in Canada.
Liberal
Kent MacDonald Liberal Cardigan, PE
Okay.
Quickly, what could Canada do to coordinate its tax enforcement with other jurisdictions better than we're currently doing?
