Public Accounts Committee on Dec. 11th, 2014

[Michael Ferguson]

In fact we do have a protocol in place. I don't have all of the specifics of it, but it allows us to communicate directly with the deputy minister and then directly to PCO for them to consider. Again, obviously it is considered inside the government, but there is a process to do that.

As well, discussions are under way with PCO in particular with regard to that protocol to see if there's anything else we can do to strengthen it, but I think that as a basis, the protocol is a good way to approach the issue.

In this case, they did provide us with information to describe the process along with some other bits of information, but fundamentally we felt some of this analysis should exist in documents that were not connected to cabinet confidence documents given the type of analysis it was. I am not questioning whether it was or was not in a cabinet confidence document. What I'm saying is that in future cases some of this type of analysis could be done and documented in a way that is outside the cabinet confidence documents so we would have access to that type of information.

[Malcolm Allen, NDP, Welland, ON]

Thank you. I appreciate that.

Ms. Anawati, the Auditor General talked and you talked briefly about NRAM. I think that is the acronym for the program. Mr. Gallivan may have identified you as the person responsible for the program. I noticed that the Auditor General's report said you were actually looking at the effectiveness of that program. I recognize that through your action plan you are working toward that. Can you give me any sense of where you are with that now? I recognize that some numbers or some dates were thrown around. End dates can mean a number of things. Does that mean a certain percentage are actually going to be trained at that point in time? Are all going to be trained at that point in time? Give me a sense of how that's going.

[Ted Gallivan]

First of all, the effectiveness of the risk assessments we're talking about—not the effectiveness overall of the program, because we have some different numbers that speak to that—in terms of the national risk assessment module, which is a new, more systematic way of grading files and deciding who is the riskiest and where that risk is, we spent a number of years implementing that new, more rigorous approach. Right now we are in the process of automating that system so we actually have a new interface that allows the auditors to see those results very graphically to help improve the process.

This fiscal year we're doing a comparison between what our risk indicator told us and the actual audit result. We're going to have that done this fiscal year. It's going to tell us, if we thought this was high, whether we are getting a high audit result. If it said it was in the middle, was it in the middle? We don't look at the low.

Going forward, we're going to actually drill down, because the system has roughly 90 algorithms. The next piece of work, which is going to take a little more time, is drilling down to see which algorithm of the 90 is off, or is leading us astray, to look into the guts of the mechanism.

[Malcolm Allen, NDP, Welland, ON]

You'll probably need a 14-year-old, because they're good at algorithms.

The other piece on training is on page 9 at the top. You mentioned some issues. The Auditor General mentioned some issues that were really about tracking who had what training. He pointed out that it was kind of inaccurate, and I know you said you're now trying to track it better. As well, one specific part of the problem was computer system limitations. Have you solved that issue? Clearly, you can track on paper, but if you're using a computer and it still has limitations, you have a bunch of paper not in the system, and that means somebody has the paper and not necessarily the person who needs to look for it.

[Lisa Anawati]

We have actually been putting more energy into that since the Auditor General's report came out. While there are systems limitations, the agency had also been relying on our regional operations, which coordinate the training for us and also are responsible for conducting the audits, to do that monitoring.

Now what we're trying to do is match the two from a regional and headquarters perspective. We have started piloting and are using the system to see how the courses that we are meant to deliver are actually delivered to the aggressive tax planning auditors against their learning plan. In our view, that is a very effective way of using the system. We're hoping to be able to roll it out to more programs after this pilot, which we're doing right now.

[The Chair, NDP, David Christopherson]

Very good. Thank you.

The time has expired.

Next in the rotation is Mr. Carmichael.

Vice-Chair, you have the floor, sir.

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

Thank you, Mr. Chair.

I welcome our guests today.

Mr. Ferguson, if I could begin with you, sir, I have a specific question. In your conclusion, you state, “We concluded that overall, the Canada Revenue Agency's Aggressive Tax Planning (ATP) program has tools to detect, correct, and deter non-compliance.”

Specifically, in the report you talk about the CRA's field auditors and the income tax rulings directorate and how they are able to help when it comes to detecting aggressive tax planning schemes.

Could you elaborate briefly on how both the CRA's field auditors and its income tax rulings directorate are equipped to deter aggressive tax evasion schemes? Could you also provide the committee with examples of how CRA's field auditors and its income tax rulings directorate have been effective in detecting these aggressive tax schemes?

[Michael Ferguson]

Mr. Chair, I guess I would suggest that probably CRA can give you much more detail about how these operate, but we did identify that CRA has a number of ways of detecting aggressive tax plans.

Referrals from auditors of the income tax rulings directorate were certainly one of those. We've identified the directorate as a source of business intelligence, particularly because they give advance income tax rulings, which would help them get some insight into the types of tax plans that people are considering. Again, we identified it as one way that seems to be effective for the CRA to gain the knowledge of the types of tax schemes that people are putting in place.

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

All right. Thank you.

To the officials, I opened with the conclusion. For your benefit, I'll state it again: the CRA's “Aggressive Tax Planning (ATP) program has the tools to detect, correct, and deter non-compliance.”

Specifically in this report, the Auditor General reviewed the CRA's approach to four types of aggressive tax planning. I wonder if you would be good enough to speak to the four types of tax planning schemes, and hopefully as briefly as possible, that were looked at in the report. Are these aggressive tax planning schemes something which the CRA is used to dealing with? You mentioned the high skills and specialization of the individuals who are dealing with these issues. Perhaps you could address that. Could you also outline some of the successes that CRA is enjoying right now as a result of this monitoring and the work that's being done?

[Ted Gallivan]

Mr. Chair, the CRA focus—and I believe it's an interest shared by most taxpayers—is early certainty. We see our income tax rulings and other functions as a kind of early warning area. For areas that are grey, where there's an ambiguous position or a desire for certainty on the part of the taxpayer, there can be a dialogue. We provide that almost from a service perspective.

However, that's also business intelligence. The agency has made using and mining business intelligence a huge priority. When we look at our rulings function, we don't just look at how quickly and how accurately we provide the rulings, but we also say this tells us what's on the mind of taxpayers. This tells us about the positions that may be at risk and about which we should be informing ourselves and understanding the full implications.

In terms of the four specific examples, I think that brings it up to a strategic level, where one of the objectives of the agency is to modify people's behaviour towards compliance. In each of the four cases, either through the legal system or through work in the Department of Finance, we found practices that we felt were non-compliant, and through a combination of interventions and tools, those practices are no longer occurring. From that perspective, we see it as a strategic success.

However, we also generate revenue: “revenue” is in the name of the agency. In this program, from 2006 to today, we've had roughly 8,600 audits yielding $5.6 billion in additional revenue. When you do the math on that, you're somewhere between $600,000 and $700,000 per file. When Canadians see the CRA pursuing some lower-income Canadians, there's often a lot of concern that CRA just picks on Canadians of modest income. In this space, when you crunch the numbers and you look at the number of audits we're doing and the dollar value, you can see that we're well north of $500,000 per audit on average.

Both from a strategic perspective in terms of curbing behaviour and also from a revenue generation perspective, we do have a track record of results, but as the OAG has pointed out, there are opportunities to improve.

[The Chair, NDP, David Christopherson]

Thank you. Time has expired. Sorry, but it goes by quickly.

Monsieur Giguère, you have the floor, sir.

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

Thank you, Mr. Chair.

My thanks also go to the witnesses for appearing before the committee.

My first question is about point 3.18, which deals with the challenges of identifying high-risk cases of major corporations.

I called on an outside tax expert, Mr. Léo-Paul Lauzon, the director of the UQAM Laboratoire d'études socio-économiques. His analysis was published under the title Le réel taux d'imposition de grandes entreprises canadiennes : du mythe à la réalité. It is based on data from the Canada Revenue Agency for three years, from 2009 to 2011 inclusively.

Before me I have the net tax rate of Canada's 99 largest corporations. I see that TransCanada Corporation has made a profit of $5.9 billion, but has paid only 1.7% as a real tax rate. Clearly, there has been aggressive tax planning.

Macroeconomic trends in paying taxes are as follows: companies are paying less and less tax while individuals are paying more and more, especially those who cannot afford a tax expert. So there clearly is an abuse. That is quite clear.

Are you able to curb this trend or are we always going to be trailing behind and having to rectify abusive situations as they arise?

[Ted Gallivan]

I will start by talking about point 3.18, which deals with the data from the CRA. I think having those data is important in terms of risk assessment.

The agency has over 90 national-level arrangements with other governments. It has 20 other less detailed arrangements with other jurisdictions. The arrangements dealing with exchange of information are very important for the CRA because it receives more information about the source of a transaction. When a Canadian corporation operates abroad, transactions may take place in other countries. When you don't know the rationale and the details of those transactions, you have to address the lack of information, as the OAG indicated in point 3.18. The agency feels that it is able to have more and more information with the ever increasing number of arrangements.

On another note, the CRA has set up an information line for reporting and for cash payments if the agency recovers money. The telephone line has been active since January 1. The agency has received many calls. It has more than 100 actual files with numbers. The agency sees it as one more tool in its tool box.

The Minister of Finance has been very active in that sense. Over the past five or six years, the government has made a number of legislative amendments for the benefit of the CRA.

Finally, let me mention that the CRA will have access to all overseas transactions over $10,000 after January 2015. It will therefore have more information to be able to target risks more effectively. We are gaining access to more and more tools.

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

Point 3.37 talks about the penalties for third parties. You are penalizing the external factors, if you will, but you do not mention the internal factors. There is no lifting of the corporate veil that is protecting some administrators and board members. A relatively effective solution would be banning them from boards of directors in Canada if they authorized aggressive tax planning. I do not see any such measures. Freelance tax experts are being punished but the boards of directors are not. The members who gave the authorization are not being held accountable.

[Ted Gallivan]

Right now, the CRA is after the promoters. I am talking about those who convince Canadians to make charitable donations and participate in charity schemes. The number of participants has been reduced by 95%.

In court proceedings and criminal investigations, we have been focusing on promoters. Right now, we are keeping a close watch on those promoting aggressive programs and taking advantage of them.

[The Chair, NDP, David Christopherson]

I'm sorry, but your time has expired.

Mr. Hayes, you have the floor, sir.

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

I want to focus a little bit on tax evasion versus tax avoidance. Specifically, I want to look at the areas studied, which were aggressive tax planning, offshore insurance, RRSPs, stock dividend value shifts, and tech wrecks.

Initially, would they not have been legal, i.e., classified as tax avoidance as opposed to tax evasion? Then, based on the diligence of the Canada Revenue Agency in going to Finance Canada and saying, “Hey, look what we uncovered”, Finance Canada made legislative and budgetary changes that made these items illegal. Therefore, they are now classified as tax evasion as opposed to tax avoidance. I want to understand that relationship from your perspective.

[Lisa Anawati]

Mr. Chair, I'll start by clarifying our definitions of tax evasion versus tax avoidance, and note that, as mentioned in the Auditor General's report, the Auditor General focused on aggressive tax avoidance and not on evasion.

As far as what we see as tax evasion goes, it's when somebody intentionally under-reports revenue or over-claims expenses. There's often a criminal intent to deceive. In the case of avoidance, however, taxpayers in Canada can legally avoid their taxes in a number of ways. Avoidance is provided for in the legislation. RRSPs are an example. However, when somebody interprets the legislation and goes beyond the intent of that legislation, that's what we call aggressive tax avoidance. The four issues described in the report are examples of what we at the agency see as aggressive tax avoidance.

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

That being said, when I looked at the intent of these RRSP strips in particular, I said, “That's tax evasion, plain and simple.” In 2011 the federal budget stopped the use of these plans. If the federal budget stopped the use of these plans, yet I'm getting the sense that people are still able to use them, what is the process for eliminating these altogether? It seems to me it's blatant tax evasion if somebody's using the RRSP strips.

[Alexandra MacLean, Director, Tax Legislation, Tax Policy Branch, Department of Finance]

I'm from Finance. Maybe I'll take that one.

RRSP strips are a good example of something on the border between evasion and avoidance. Some of the first-generation structures were so aggressive that CRA argued that, under existing rules in fact the tax plan was not effective and just not legal, and that would tip you over to an evasion category. Nevertheless, the planning was quite widespread and promoted. It got more sophisticated. The more sophisticated versions of the plan exploited weaknesses in some of the rules, and then you were into avoidance.

Budget 2011 introduced new anti-RRSP strip rules, which were clearer and more specific and which carried more serious sanctions. I'd say that now the issue has been addressed. Whether it was a case of evasion or avoidance before, it's now quite clear under the law that the plans are not effective.

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

Would that be the same with the stock dividend value shift? Kudos to CRA for uncovering this. I'm a CPA. You have good staff, obviously, to have uncovered some of this stuff. For the stock dividend value shift, the courts ruled to deny the tax benefit. Now that the courts have ruled, if anybody is again using that methodology for tax avoidance, is that now tax evasion?

[Brian Ernewein]

Thank you for this follow-up question, because it was a comment I was hoping to jump in on earlier.

I don't think the fact that a transaction is not actually found by the CRA or by the courts to work, if you will, technically, makes it tax evasion. There may be circumstances in which a taxpayer takes a position that the tax payable is such and so because of the transaction they've undertaken and their interpretation of the law. They may file a full report of that in their return of income. The fact that CRA disagrees, challenges it, and wins does not make that tax evasion on the part of the taxpayer. There can be other circumstances in which the taxpayer seeks not only to take a position but also to hide that position, which could move it over to being tax evasion, but just losing to CRA does not make it tax evasion per se.

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

Thanks, Mr. Chair.

[The Chair, NDP, David Christopherson]

Thank you. Time has expired.

We move over now to Madam Jones.

[Yvonne Jones, Liberal, Labrador, NL]

Thank you all for your presence today.

I have a couple of questions with regard to paragraph 3.62. You note it as a “subsequent event”: “The federal budget tabled on 11 February 2014 proposed changes to address offshore insurance plans”. Has there been any advance made with regard to that? What's the plan to roll out that particular initiative in the next year?