Public Accounts Committee on Feb. 26th, 2014

[The Chair, NDP, David Christopherson]

I now declare this 16th meeting of the Standing Committee on Public Accounts in order.

Colleagues, we are here to hold a public hearing on chapter 9, “Offshore Banking—Canada Revenue Agency”, of the fall 2013 report of the Auditor General of Canada.

A couple of minor housekeeping matters before we begin.... Welcome, Mr. Chisu, who is here today and subbing in. Welcome, sir, I hope you enjoy your time with us.

Also, colleagues, you will recall just two days ago we had another public hearing, and at that time, because we had to move, we lost some time and we agreed we would try to hold that business meeting that was scheduled for then today. So there has been some consultation with caucus leadership and it's my understanding that we are in agreement that whatever comes first, the full rotation of the speakers or 5:15, I will end the public session and move us into a business session where we will then review the scheduling going forward.

There's another thing that will complicate things, and I'll just say it in case people see the commotion. The bells are going to ring at 5:15, too. That's why I needed unanimous agreement for us to continue past because members have the right to say I want this over and I'm responding to the bell. My understanding is that we have agreement, and at 5:15 to no longer than 5:30, the scheduled end of our meeting, we will conduct committee business.

Do I have that correct? Have I got what we are...? Is there anybody who wants the floor to argue differently?

Hearing none, I will declare that we have unanimity on our approach today.

With that, we will now commence the focus on chapter 9.

I will welcome Marian McMahon, the assistant auditor general. Welcome. You may introduce your delegation and then we'll be going over to the Canada Revenue Agency, Mr. Montroy, to do the same thing.

Ms. McMahon, you have the floor.

[Marian McMahon, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair. Thank you for the opportunity to discuss our audit of the offshore banking.

I am accompanied today by Heather Miller, the director who was responsible for this audit.

For our chapter on offshore banking, we focused our activities on the Liechtenstein bank list. This list was received by the Canada Revenue Agency from an informant in 2007. The agency has since received other similar lists.

We looked at whether the agency had a sound approach to deciding who to audit on the Liechtenstein list. We also examined the agency's audit files on those taxpayers, to see whether the agency followed its standard procedures.

In addition, we examined how the agency used the intelligence gained from this project to change how it finds Canadian taxpayers who may have unreported income in offshore accounts. We also looked at the changes to procedures for auditing this type of taxpayer.

The agency had not audited every taxpayer on the list. Nevertheless, we found the work it had conducted was sufficient, given that some names on the list were not Canadian residents and some could not be identified. Without additional information, there was little more the agency could have done.

The agency followed its standard procedures in most of the audits and conducted them without undue delay. We found that standards had not been established for the time it should take to complete files. As a result, we could not conclude on whether any delays caused by the agency were excessive. Standards for completing files on time would allow staff to gauge when their work may be taking too long or when they may need to change priorities.

We also found that the agency agreed to waive its ability to refer taxpayers for criminal investigation in some cases. It did so in exchange for information it may not otherwise have received. For example, by making these arrangements the agency learned how the offshore accounts were set up. Agency management told us that these agreements were only being used for the Liechtenstein list and that they were not being offered to those on subsequent lists. We are concerned, however, because we found that agency staff continued to make such agreements with some taxpayers whose names appeared on a more recent list.

We recommended that the agency analyze how it makes agreements with taxpayers it is auditing to ensure that these agreements reflect agency project and program objectives.

Since receiving the Liechtenstein bank list the agency has received additional lists and information about taxpayers who may be Canadian residents and who may have offshore accounts. As well, changes in legislation will give the agency access to information about international fund transfers of more than $10,000. The agency needs to formalize its approach to dealing with the increase in its workload resulting from these developments.

We recommended that the Canada Revenue Agency ensure that its objectives and audit procedures for offshore accounts reflect lessons learned. They should be documented and understood by staff so that staff members are ready for the projected increase of work in this area. The agency agreed with our recommendations and made several commitments in its response. We received a copy of the action plan the agency submitted to the committee and found it consistent with our recommendations.

Mr. Chair, this concludes my opening remarks.

We would be pleased to answer the committee's questions.

[The Chair, NDP, David Christopherson]

Thank you very much.

Mr. Montroy, you have the floor, sir.

[Richard Montroy, Assistant Commissioner, Compliance Programs Branch, Canada Revenue Agency]

Thank you, Mr. Chair.

I am here today with Ms. Gina Jelmini, who is our director of the offshore compliance division in our branch.

The CRA is pleased to have the opportunity to come before the committee today to speak about the Auditor General's report, chapter 9, “Offshore Banking”, which dealt with the Liechtenstein list received by the CRA. We appreciate the opportunity to highlight the CRA's efforts in combatting offshore tax non-compliance and to once again thank the Auditor General for his recommendations.

International tax evasion and aggressive international tax avoidance using offshore accounts are worldwide concerns and Canada is among the many countries taking action to fight this complex problem.

In 2007 the CRA was provided with a list containing information on individuals identified as potentially having undeclared income in offshore accounts in Liechtenstein. This was the very first time that such a list had been received by the CRA. Through its management of the list the CRA gained valuable intelligence about these types of offshore investment structures. This intelligence will assist the CRA in further detecting taxpayers who may have undeclared offshore income.

The Auditor General's report stated, “Overall, the Agency managed the Liechtenstein list as intended, with the information and tools it had.”

The report listed three recommendations, all of which were accepted by the CRA. The agency is taking a number of steps to address the issues identified in the report including establishing and communicating timelines to both staff and taxpayers involved in carrying out audits related to offshore accounts, analyzing its use of agreements with taxpayers under audit to ensure that their use reflects agency offshore project and program objectives, and ensuring that its objectives and audit procedures for offshore accounts reflect lessons learned and are documented, communicated and understood by staff.

In addition, new measures announced in the Economic Action Plan 2013 will provide the CRA with additional tools that will further build the CRA's capacity to combat international tax evasion and aggressive international tax avoidance.

These new measures include the following ones.

There is a new Offshore Tax Informant Program, or OTIP, which was launched in January of this year. The OTIP will pay individuals with knowledge of major international tax non-compliance between 5% and 15% of the federal tax assessed and collected as a result of the information provided.

We will require financial institutions and others to report information on international electronic fund transfers greater than $10,000 to the CRA.

We will also introduce enhanced reporting requirements for Canadian taxpayers with foreign income or properties, as well as extend the amount of time the CRA has to reassess those who have not properly reported this income.

The Canadian government has also committed $30 million over five years in support of these new measures to increase compliance efforts.

To oversee the implementation of these new measures, the CRA has established the offshore compliance division, which is a dedicated team that will be composed of 70 CRA employees with expertise in the fields of data analysis and auditing. This division will work with specialized teams whose focus will be on identifying individuals who engage in international non-compliance, developing and implementing effective strategies and program activities to counter offshore non-compliance, and increasing the CRA's overall ability to pursue cases of international tax evasion and aggressive tax avoidance.

Information sharing and international cooperation are key. The CRA has significantly improved its ability to obtain tax information from other jurisdictions through revised tax treaties and tax information exchange agreements, otherwise known as TIEAs, with non-treaty countries. Canada has one of the most extensive tax treaty networks in the world, with 92 tax treaties and 18 TIEAs now in force. All 18 TIEAs, it is important to know, have entered into force since 2008, as did four new tax treaties and eight updated tax treaties.

On November 21, 2013, Canada ratified the Convention on Mutual Administrative Assistance in Tax Matters. This convention is a multilateral instrument, whose purpose is to improve international tax cooperation and exchange of information between taxation authorities, in accordance with international standards, with a view to combatting international tax avoidance and evasion.

The CRA has a solid record in finding and resolving cases where individuals were participating in or promoting aggressive offshore tax avoidance, and we are seeing results. Since 2006 the CRA has audited nearly 8,000 cases suspected of having an aggressive international tax component and has identified approximately $4.58 billion in additional federal taxes from these compliance activities.

Through the CRA's voluntary disclosures program, taxpayers have an opportunity to correct their tax affairs prior to being audited by the CRA. It is the most efficient way for the CRA to address unreported income. Since 2006 the CRA has seen a dramatic increase in the use of this program, including those involving offshore accounts or assets, from 1,215 disclosures in 2006-07 to close to 4,000 in 2012-13. Total unreported income for this period was $1.77 billion, with just over $470 million in federal taxes owing.

Whether it’s a complex corporate scheme or individuals using tax havens to avoid or evade paying tax, the CRA is committed to ensuring that non-compliance is identified and addressed through education, research, international collaboration, supporting legislative change, communication, audits, and other compliance activities.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

Thank you very much.

I might also just say before I move to our first speaker that, given that this is an oversight committee, compliance with our rules and procedures is very important. We are very quick to lower the boom on anybody who shows up here without an action plan. I want to thank you and underscore the respect you show not only by providing it to us, but by providing it not even at the last minute, which some do. You did it in a prompt, timely fashion that allowed us to send it out to the members so they could review it. I hope everybody takes note of the right way to provide action plans to this committee, and I specifically want to thank the CRA for adhering to the detail and the spirit of that request.

Please pass that along, sir.

With that, we will now commence our rotation, beginning with Mr. Hayes.

You have the floor, sir.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

Thank you for your presentations. My questions will be directed to the CRA officials.

The report states that auditing based on such extensive informant leads for offshore accounts was a new audit area for the agency and that the agency produced some new audit procedures, and that the work that has been initiated on detecting non-compliant taxpayers is promising. Can you describe some of the new procedures to the committee that resulted from your undertaking this audit?

[Richard Montroy]

Thank you, Mr. Chair, for the question.

There are a number of procedures and things that have happened in recent years that help us on the offshore front. First and foremost, on the TIEA, the Tax Information Exchange Agreements that we have, we're now up to 18. As I pointed out in my opening remarks, they all come into force after 2008, so it will still take some time to get the information.

The bottom line in the audit world: information is key. The more information you have, the easier it is to do your work. So with the 18 TIEAs that we have with the so-called tax havens, we now have the ability to go to these countries to request information, banking information usually, to help us complete our audit.

There is also, since 2007, the Liechtenstein list, and a number of other measures, be it budget 2013 that brought in the electronic funds transfer that will help us immensely starting next year. But there are also a number of other measures that have been brought in in recent years that counter the aggressive international tax flavour of transactions. To put it in layman's terms, there are a number of tax loopholes that have been closed in recent years. So I would say those are three big elements.

We've also created the new offshore tax compliance division that Ms. Jelmini leads, and that area will have the strict focus on international offshore transactions. So we've decided within the agency to create a separate group that will work specifically on those activities.

So I think all those issues put together is what helps us combat offshore tax evasion.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Now, this next question you may have answered already, but I'm going to ask it just the same because there may be more you can add to it.

The Auditor General states that one of the goals in this audit was for the Canada Revenue Agency to learn how offshore investments were structured and how taxpayers set them up. I'm wondering if you can explain what you might have learned with that experience in terms of how these were set up and if there's something you've gained again that you can use moving forward.

[Richard Montroy]

Thank you.

Again, in 2007, this was the first time we'd ever received the list and there was very little information other than names and perhaps, on the odd occasion, a social insurance number, so we're basically starting from scratch. What we learned from the first list by looking at things is how people structure their affairs to get under the radar screen. Again to put it in layman's terms, it's what transactions they do, what countries they go through to hide their assets, whether they use intermediaries or tax professionals, and how they go about conducting the business to ensure that the money is kept offshore and that we have not identified it initially.

So I would say the Liechtenstein list helped us immensely by seeing the psyche of people trying to avoid paying tax.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

I have one final question. I just want to understand this whole process of informants. How does the agency receive information from informants, i.e., if I were an informant and I wanted to bring information forward, what would the process be? What would you do with that information once you received it?

[Gina Jelmini, Director, Offshore Compliance Division, Canada Revenue Agency]

We have a new offshore tax informant program that was launched on January 15, which now pays a reward for individuals who have information that leads to the collection of federal taxes owed in excess of $100,000 that is linked to international taxes. We have also set up a 1-800 number as well as a local number that can be dialed anywhere in the world. That's the first step, making that phone call.

We explain the parameters of the program, the requirements, the eligibility criteria. Where an individual appears to meet the program requirements, they are given a case number and they're invited to provide us with a full submission. We make an assessment of the submission, and if they appear to meet again the criteria for the program, we would enter into a contract with the individual. At that point, we would do the compliance action and follow the case through the full compliance cycle.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

Very good, thank you and time has expired, so perfect.

Thank you so much.

Moving along, we go to Mr. Allen.

You have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair, and thank you to our witnesses today.

I guess my question is to Mr. Montroy.

I don't actually see it in the report so I'm not sure whether the information is available to you or not, but in the Liechtenstein example that's used in this report it talks about reassessing a total of $24,651,000 in taxes. Do we actually collect the whole lot?

[Richard Montroy]

Thank you, Mr. Chair, for the question.

We have collected roughly I'll say $10 million of that total. The other $14 million is currently under appeal. So the way the rules work in the Income Tax Act is that if a taxpayer appeals or objects to an assessment we are precluded from collecting. So the amounts that have not been collected so far are purely because the taxpayers have availed themselves of their rights to object and appeal.

[Malcolm Allen, NDP, Welland, ON]

That leads me to the next page. Sorry, I should have referenced the page. In the English edition of page 7, now page 8, there's a great chart the Auditor General laid out that talked about the two streams of folks who voluntarily decided to come into the system and say, “Okay, I'm not going to fight here. I'm going to give the information up. If it's me, yes, okay, how do we work this through? Let's do this.”

So clearly we have $24.6 million that's assessed, $10 million collected, $14 million outstanding, and we decided for valid reasons—and I want to say that publicly, the CRA took the correct approach for valid reasons—we're not going to prosecute. CRA said, I want to learn how the information in the system works so I'll not prosecute. I'll go this route instead. I have to tell you that the good folks from Welland would see this as wriggling off the hook. They'd be saying to me, really, we let them wriggle off the hook and then they went ahead and appealed it.

I recognize, sir, that you don't have the choice. It wasn't your choice to appeal. It's their choice to appeal. But it seems to me that in some of the cases, should it not be that if you're letting them wriggle off the hook away from potential criminal prosecution, they ought not to be appealing what basically is a reassessment done based on money that they indeed, according to what the data you've been provided, were hiding from CRA in the first place? Is there any sense that as we go forward...? As you've laid out, you intend to do better at this because this is a learning piece and you've learned from it, and I think the report says that. Is there a piece for me to go back and tell the good folks of Welland, “Don't worry, they won't wriggle off that hook again, and then go ahead and appeal basically and drag it out with some high-priced lawyers”?

[Richard Montroy]

Thank you, Mr. Chair.

As the AG's report pointed out, at the time in 2007 when we received this list we made agreements with a number of taxpayers not to prosecute in exchange for full payment, no objection appeals, etc. Again, that was done at the time because this was the first time we'd ever received this list. As I explained earlier, we didn't know the background behind it.

Since that time, I would say times have changed immensely. I referred a while ago to the TIEAs, the fact that we have a number of dedicated individuals working on this on the offshore compliance. I would say that I've been in the compliance game for a number of years now and certainly in the last few years I don't recall any deals where we have said to someone, give us the information and we won't prosecute.

The rules of the game have changed. If you are a tax evader and we can prove it, we will prosecute people to the full extent of the law. We have access to information now that we did not have six or seven years ago that will enable us to be able to prosecute if need be.

[Malcolm Allen, NDP, Welland, ON]

I appreciate the response because when folks ask me at home about these sorts of things, one of the things they want to know is.... “When I owe my taxes, I have to pay it because I don't have the luxury of an offshore tax account, and for those who do, if it looks like they're wriggling their way.” Clearly folks get annoyed.

My last question would be about something in your chart on page 7, where it says reassessed was $15,951,000 and resolved was $1.4 million.

I'm sure, Madam McMahon, you can explain to me exactly what those numbers mean. I think I know what it means, but it would be helpful if I actually was told out loud. It's on page 8 of the English of the Auditor General's report.

[Marian McMahon]

Yes. We indicated for resolved that they were either reassessed down to zero or were paid, and the $14.5 million, as Mr. Montroy said, is still in appeals and not collected.

[The Chair, NDP, David Christopherson]

Sorry, Malcolm, we're well over time.

[Malcolm Allen, NDP, Welland, ON]

I thought that's what it was, but thanks for telling me.

[The Chair, NDP, David Christopherson]

Okay, great. Thank you so much.

Moving along, Mr. Aspin, you have the floor, sir.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Thanks, Chair.

Welcome to our guests. Thanks for helping us understand the wonderful world of offshore banking.

You've indicated in your submission that, “To oversee the implementation of these new measures, the CRA has established the offshore compliance division, which is a dedicated team that will be composed of 70 CRA employees".

Have you in the last little while, when you've established these new programs and populate them with employees, ever done any cost-benefit analysis as to what it costs versus what they discover or bring in, in terms of revenue?

[Richard Montroy]

Thank you, Mr. Chair.

I would say that it's pretty standard practice in the compliance world to always examine the cost-benefit ratio. We have all sorts of statistics in the agency that show that, if you invest one dollar in a certain field, you get a rate of return that depends on whether the area is in a small, medium, international, or large file. Certainly in the offshore area, the rate of return is fairly significant. We're usually talking of—and I'm using ballpark figures here because it depends—a rate of return of 8:1 or 10:1, easily.

The difficulty in these areas is that a lot of these structures that are set up are very complicated, and if we do end up reassessing and going to court, it takes a substantial amount of time to work the file, to litigate it, so that obviously cuts into our cost-benefit. But for the most part, in the offshore world, it's money well spent.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Thank you.

You concluded that CRA was diligent in its approach and benefits from the intelligence that you gathered during the Liechtenstein investigation. This government has continued to build on this success and has introduced a slew of measures to strengthen the CRA's investigative abilities, which you outlined in your submission.

Based on your review of the Liechtenstein project, do you feel the measures introduced in the last budget economic action plan 2013, the one before the one we just released, will improve this likelihood?