Public Accounts Committee on Dec. 11th, 2014

[Ted Gallivan]

The Canada Revenue Agency deals with boards of directors through its programs for big international companies. One of the very important aspects of our risk management program has to do with providing feedback to the boards of large corporations. When the risk level of a company is determined, especially if it is a high risk, we officially meet with its board of directors or its representatives and explain the situation.

I think we all agree that the board of directors has a certain responsibility. Right now, providing feedback is a tool we use. Some corporations are supportive. In fact, they disclose the feedback from the agency in their financial statements.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

I am not interested in those who pay their taxes. I like it when people pay their taxes, but the issue is with those who do not pay them.

Clearly, the study in front of me is describing an appalling situation. Just in the financial sector, between 2009 and 2011, Canada's 11 main financial institutions have more or less ripped off Canada by $9 billion. That is huge. If I had $9 billion, I can guarantee you that social housing and hospital wait-time problems would be solved. So there is a problem.

You talk to individuals and some of them can change their behaviours, I agree. However, others will not change. Will your legislation provide for a penalty for those people?

[Brian Ernewein]

I hope it's all right if I respond in English. There is some detail that I would like to add that I wouldn't provide very well in French, I'm afraid.

First of all, to the point that there are large corporations that are evading taxes, I think that's, let me say, unlikely to be the case. I think large corporations pay particular attention and retain some very expensive advice to try to make sure they are operating within the terms of the law. Sometimes they are able to come up with plans that push the law to the limit. I think that is right. They do that on the basis of pretty good legal advice. Sometimes they're wrong, but I don't think that makes it evasion. That's point one.

Point two is that I think the examination of just a percentage of tax paid fails to capture, in many cases, the reasons there are lower taxes. There could be loss carry-forwards, foreign income that's not subject to tax, or inter-corporate dividends. Sometimes there are incentives in our own system that corporations as well as taxpayers can avail themselves of. I think it is important to be mindful of that as well.

Another point I will make on large corporations, particularly on cross-border or international income, is that the OECD, and we as part of the OECD, are concerned about some of the transactions and structures that are being undertaken to minimize tax. The so-called BEPS exercise, the base erosion and profit shifting undertaken by multinational corporations, is something that the OECD has been working on. It has been the subject of G-20 commentary and support, and indeed there are G-20 countries participating with the OECD to try to develop proposals to constrain base erosion and profit shifting, the sort of tax minimization that happens internationally.

The final point I would make is about the third party penalty rule that the honourable member has identified. I think you should be happy with this rule. We have criminal rules, that is, criminal sanctions for those who evade taxes. We also have criminal rules for those who aid and abet in the evasion of taxes. We had, up until 15 years ago, a civil penalty that applied only to the taxpayer for misrepresentation or other tax non-reporting that was judged not to meet the threshold of tax evasion, but we did not have a civil penalty that applied to the person helping that person avoid taxes. These third party penalty rules that are discussed in the Auditor General's report, the applicability of which is judged by a Canada Revenue Agency committee, are the answer to that. I will note that these are actually under challenge right now in the court, but in terms of the honourable member's question, just based on his stated view, he should be supportive of these because they do help ensure that taxes are paid and that people don't facilitate others avoiding taxes.

Thank you.

[The Chair, NDP, David Christopherson]

Merci beaucoup. Time has expired.

Now we'll go back to Vice-Chair Carmichael.

You have the floor, sir.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Mr. Chair.

Thank you for that comment, Mr. Ernewein. I want to just add onto it, because I think this is a very good discussion.

My colleague has spoken to boards of directors dating back to the Enron scandal with regard to some of the difficulties that were held by corporations in the U.S. early on. We saw a lot of press around that, but out of that has come great education. Organizations like the Institute of Corporate Directors, originally out of U of T, spread across the country and now are educating those who want to participate on a board of directors as to what their obligations are. If you're going to participate on a board today, you'd better know what the rules are and what your obligations are so that the company is operating at a standard that's not going to put you or any of your colleagues into an area that is going to have you under review.

I also think that type of education has taken us away from the days of “the rubber stamp environment”. When we saw in the newspapers and the media what came of those early scandals, it was disheartening to everybody out there and certainly to those who might be in the investment world to see the type of mismanagement that was going on within those organizations. Today we're in a better place because of some of that. You talked about some of the learning at CRA and in some of the organizations. I think that is a positive solution.

Mr. Gallivan, in your opening comments you talked about TEBA, and some of the benefits of TEBA. I wonder if you could expand on that and talk to us a little bit about how you measure that, how that works, and whether CRA uses TEBA to leverage and improve upon audit activities that it conducts.

[Ted Gallivan]

What the CRA is trying to assess is the direct tax assessment, the actual audit result, in the here and now, so the entry that we would post to the taxpayer account.

Certainly with businesses it's a little more complex than that, though. They have loss carry-forwards and other pools that are multi-year in nature. The tax earned by audit tries to abstract the predicted value of that to give us a sense of the economic impact of that audit. We use that number to tell us whether our audits are being efficient. It is a fairly good efficiency indicator, but we also try to complement it with effectiveness indicators.

We talked about practices that have disappeared. Earlier in my remarks I talked about the gifting tax shelter. Gifting tax shelters were a phenomenon in Canada, with a large number of participants. A lot of parties and stakeholders put a lot of effort in. Basically the practice has wound down. We now have 95% fewer participants. We went from roughly 50,000 participants to 2,500 participants in those gifting tax shelters. That reduction in the participation would be, to us, more of an effectiveness indicator.

Our TEBA results have been trending upwards, up into the $10-billion range per year. As an organization that tells us we're being more efficient. But we're also working hard to develop other indicators, because at some point we'd like TEBA to go down. That would tell us that we're being strategically successful.

We have recently implemented something called the liaison officer initiative. We took 120 auditors and said, “Look, we don't want you to do audits anymore. We want you to go out to businesses and talk to them about common mistakes and errors. Schedule appointments with taxpayers and help them to get it right from the start.”

We've done some control groups, and we will do statistical sampling. We'll follow the people we visited in the control groups and we'll make sure there was a tax lift from those visits. We'll assess that. We'll do the math.

It is that kind of measurement we are trying to do at a strategic level. We're very happy, at an efficiency and tactical level, when TEBA goes up. In aggressive tax planning, for example, we went from $1.2 billion in fiscal year 2012-13 to $1.7 billion in fiscal year 2013-14. It went up by $0.5 billion. That's an operational success. But strategically, five or six years from now, I'd like to be before this committee telling you that it's actually gone down because we've stamped out the practices.

[John Carmichael, Conservative, Don Valley West, ON]

Excellent.

Do I have time left?

[The Chair, NDP, David Christopherson]

You have a couple of seconds.

[John Carmichael, Conservative, Don Valley West, ON]

Okay. Thank you.

[The Chair, NDP, David Christopherson]

Moving along, then, we'll go back to Mr. Hayes.

You have the floor, sir.

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

Thank you very much. I really appreciate that, Mr. Chair.

[The Chair, NDP, David Christopherson]

You're welcome, Mr. Hayes.

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

I didn't think it was my turn so quickly. We'll just jump all over that.

Auditor General Mr. Ferguson, I want to talk about paragraph 3.32. You mentioned that you looked at how the agency informed its ATP staff about the four selected aggressive tax plans described in the chapter. Could you comment on how the agency informs the staff and what your findings were?

[Michael Ferguson]

In paragraph 3.32 we do talk about how they inform their staff. We found that they had communicated to the ATP auditors through technical news bulletins, information sessions, or webinars to make them aware of the nature of the plans and how they could be identified.

We said that we found that the agency adequately communicated to their auditors the information related to the four selected aggressive tax plans. They're using a variety of different ways to make sure their auditors are aware of the types of tax plans that are happening.

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

That's a good segue into my next question.

Mr. Gallivan, I want you to talk about some of the ongoing emerging issues surrounding tax avoidance. This report studied four issues. I expect that you guys probably have sunk your teeth into another issue at this stage of the game. I want to understand really what the department is doing to identify new and emerging issues. What is the process to develop an aggressive tax plan surrounding a new issue?

With regard to Mr. Ferguson, he is pleased with the way you would communicate that, so as step three of the question, I would want you to tell the committee how you would go about communicating that said plan to your staff.

[Lisa Anawati]

I'll answer that question, Mr. Chair.

In terms of the first part of the question on what we're working on and how we're finding new schemes, we have what we call centres of expertise for aggressive tax planning. That's where we have auditors who are very well trained and experienced in identifying potential schemes.

We have aggressive tax planning auditors across the country, and various tax services offices as well. They are an excellent referral to our centre of expertise. The centre of expertise does data mining of our tax returns and the forms that are available to us. Whether it's information forms relating to assets or income from other countries or from domestic measures, this group will analyze various forms of business intelligence. They'll get referrals from our tax rulings department.

Once they identify a potential scheme, we may go about creating a pilot whereby we will select a certain part of our taxpayer base and conduct some test audits to see whether those schemes are indeed considered aggressive tax planning. If there is aggressive tax planning, at that point they may go to the GAAR committee. We will at that point often advise the Department of Finance of our findings in order to identify a potential tax loophole. Sometimes the case is litigated through the courts, etc. That's the process we use to identify.

In terms of communicating, as soon as we do identify, we do pilots, as I've said, but in other cases where we have more certainty, we have what's called a “Wiki”, which is an electronic means of communicating with our auditors in real time. Our auditors have access to real-time updates on what we're finding with regard to potential schemes. We receive information from our treaty partners, and we are part of JITSIC, the Joint International Tax Shelter Information Centre, where we also exchange specific tax avoidance information. As soon as information is identified, it's communicated.

We have regular round tables with our tax auditors across the country as well.

[The Chair, NDP, David Christopherson]

Thank you.

The time has expired. We're right on the button.

We'll go back to you, Monsieur Giguère. You have the floor.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you very much, Mr. Chair.

The International Consortium of Investigative Journalists (ICIJ) has drawn our attention to one of Bombardier's tax practices. Bombardier received assistance from the accounting firm Ernst & Young. The practice has to do with turning profits of $500 million into a special dividend through a complex transaction.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

I have a point of order, Mr. Chair.

On the point of relevance, we're here to discuss the Auditor General's review of the aggressive tax planning regime that is operated by the CRA. With regard to bringing in other companies that are beyond the scope of this particular report, I don't think this is the proper venue for these kinds of discussions, Mr. Chair.

[The Chair, NDP, David Christopherson]

I hear you and I'll take it under advisement.

I would ask Monsieur Giguère to keep that in mind. I'll give him the benefit of the doubt and—

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

[Inaudible—Editor]

[The Chair, NDP, David Christopherson]

Hang on. I'm not done, and then it will be your turn. Okay? That's how we do this, especially since I'm ruling in your favour.

I'm going to listen to what Mr. Albas has said and keep it in mind, and I ask you to do that also, but I'm going to hear the conclusion of your question to see how close it is to the actual matters before us.

That said, you now have the floor again.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

At the moment, we are talking about prohibited tax practices and about transferring share value through dividends. That is basically what we are discussing at the moment.

In my opinion, there is a problem with a transaction like this because the justification that the representatives from Luxembourg and from Bombardier came up with is that these fiscal tactics are approved by the federal government.

In one of the tables we were shown, this tax avoidance and aggressive tax planning are expressly prohibited. However, at the moment, we have a clear case of this technique right before our eyes. People are defending it on the pretext that companies see it as a way to handle international competition that is supported and approved by the federal government.

Can anyone explain to me how we can prohibit something and, at the same time, allow it because of the fact that this company is facing international competition?

[Ted Gallivan]

Mr. Chair, it would be completely inappropriate to comment on a specific taxpayer. I can tell the committee, however, that the agency uses all the information put at its disposal by virtue of its arrangements with other governments, and because of information that is publicly available.

[The Chair, NDP, David Christopherson]

I want to stay clear here. I accepted no comment on individual cases. Had that continued down that vein, I would have ruled it out of order, but as it pertains to policy, then I think that's fair game.

I'll go back to Monsieur Giguère, and if he does talk about the policy, then I would direct that you need to respond to a question of policy, but I do support your sense that we're not going to talk about individuals here at all.

With that, Monsieur Giguère, you have the floor again.