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.
Professor, Osgoode Hall Law School of York University, As an Individual
I can't think of much. We have the legal apparatus already, so now the CRA needs to actually act upon the information to use it to audit and to detect non-compliance.
Liberal
The Chair Liberal Karina Gould
Thank you, Professor Li.
Thank you, Mr. MacDonald.
Mr. Lemire, you have the floor for two and a half minutes.
Bloc
Sébastien Lemire Bloc Abitibi—Témiscamingue, QC
Thank you, Madam Chair.
Professor Li, Canada facilitates tax avoidance for multinationals, particularly through subsection 5907(11.2) of the income tax regulations, which we discussed earlier. That provision makes it possible for income repatriated from countries with low or no taxation to be exempt from tax, provided that a tax information exchange agreement is in place, even if there isn't any real economic activity in those territories. Canadians are the ones who pay those taxes that the large corporations don't pay.
Why did the Department of Finance draft a regulation that allows for tax avoidance?
Professor, Osgoode Hall Law School of York University, As an Individual
It's an excellent question.
The original intention of these rules was to make sure Canadian companies can compete overseas on the same level playing field as multinationals owned by the Japanese, the Americans and the Germans in the new markets like mining companies and financial institutions that are carrying on business. It's like BlackBerry operating overseas.
If we tax that income in Canada when the corporation is trying to compete with other companies, that will weaken the competitiveness of Canadian corporations. Exporting Canadian technology and productive capital not only is good for the corporation but is good for the Canadian economy. We want to export as much as possible. The tax rule is designed to achieve that goal.
The idea is a good one, but then what do we do to translate the idea into operational rules? We cannot qualify each country, each business and each corporation to see whether they fit, so we use proxies. The proxy is whether the foreign country is a reliable country. How do we know? We have a treaty with them—
Bloc
Sébastien Lemire Bloc Abitibi—Témiscamingue, QC
Thank you. I'm going to interrupt you, because I want to ask you one last question.
Liberal
Bloc
Sébastien Lemire Bloc Abitibi—Témiscamingue, QC
Okay, Madam Chair.
You were a very influential adviser within the Department of Finance. Earlier, you said that making information on corporate tax public could threaten their competitiveness.
Are you saying that the European Union is also threatening the competition within its own market?
Professor, Osgoode Hall Law School of York University, As an Individual
I assume that's a question addressed to me.
I don't have any detailed information about the impact and analysis conducted in the EU, so my answer about the potential impact and—
Liberal
The Chair Liberal Karina Gould
Thank you, Professor Li. I'm going to have to end it there.
Thank you, Mr. Lemire.
We'll continue with Ms. Cobena for five minutes.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
Thank you, Madam Chair.
My question is for Professor Li.
You've mentioned how complicated the tax code is, and you've tried to simplify it for us. I think Mr. Farrar mentioned that there are about 1.3 million words in the tax code. When the tax code is that complex and becomes a bit of a playground for the privileged in the sense that you need to be highly knowledgeable or able to afford to pay a professional who knows the code very well, it really becomes a bit.... It rewards those who can afford to pay for the interpretation of the complexity of the current rules.
Would you say that allowing those with resources to hide behind the complexity of the tax code actually disproportionately benefits those who have the resources, like the money to pay for those professionals?
Liberal
The Chair Liberal Karina Gould
Professor Li?
Is she frozen? I think she might be frozen.
It looks like we have—
Professor, Wilfrid Laurier University, As an Individual
Well, I would rather Professor Li answer that question, but if you want a yes-or-no answer, I would say that, yes, it certainly is a privileged system. If you can afford a high-priced lawyer and a high-priced accountant to save you considerable sums in income taxes, why wouldn't you do that? Then, of course, the general public is going to look at that as something that's unfair because it's very much a class-based system.
Liberal
The Chair Liberal Karina Gould
We're trying to get Professor Li back, but she's not connected at the moment.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
Okay.
My next question was also for Professor Li, but I'll switch to Mr. Farrar.
If corporations continue to be rewarded for not paying taxes in Canada, won't this issue just continue to get worse because there is no deterrence, as you mentioned in your remarks?
Professor, Wilfrid Laurier University, As an Individual
Yes, I think it would only continue to get worse.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
What would you consider an effective deterrence to be?
Professor, Wilfrid Laurier University, As an Individual
Well, if I could maybe indirectly answer that question, I think a possible solution would be to reduce corporate tax rates, as well as personal tax rates, so that the incentive for using these offshore tax havens would be somewhat reduced or maybe significantly reduced. I say that because it's very difficult for tax authorities, whether it's the CRA or someone else, to effectively enforce any kind of offshore tax scheme because the line between tax avoidance and tax evasion is not crystal clear. If we could take away the incentives for using these offshore structures, I think we could solve the deterrence problem at the same time and maybe make things simpler.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
Do you believe that the CRA's enforcement capacity is adequate to deal with the complex international tax avoidance schemes we currently see?
Professor, Wilfrid Laurier University, As an Individual
I would say probably not, given the fact that the number of charges seems to be relatively low and the fact that the budget for international enforcement has increased. I don't think we're seeing a good bang for our buck.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
Thank you for that.
I guess Dr. Li's not back yet.
How effective do you think Canada's current legal framework is in addressing the aggressive tax avoidance through offshore tax havens?
Professor, Wilfrid Laurier University, As an Individual
I would say that it's probably as effective as it's going to be. I can't see it really changing anytime soon. That's in part because the rules as we currently have them are a little bit antiquated, and case law has shown us that it's very difficult to achieve a clear-cut prosecution for anything that is aggressive tax avoidance that borders on evasion.
Conservative
Sandra Cobena Conservative Newmarket—Aurora, ON
Could you speak to the gaps in Canadian tax law that make it particularly vulnerable to profit shifting or the use of tax havens?