Good morning, committee members.
Good morning, guests.
Pursuant to Standing Order 108(2),
The committee is holding an information session on tax evasion and tax havens.
This morning we have witnesses from Canada Revenue Agency with us. Gentlemen, we appreciate your being here.
We have a wish to make a point of order from Ms. Wasylycia-Leis, which I'll get to in a moment, but first I'll finish welcoming the guests. We've designated time today from 11 until 1 o'clock. We'll see how that goes with committee members, and see whether that amount of time is required or not.
Also, I should mention that Finance officials notified us that they are not available until next week, so we will pursue that, but we do have a full panel for Thursday, so we look forward to that at that time.
Thank you, Mr. Chairman.
This morning I'm joined by a number of other officials from the Canada Revenue Agency, including Brian McCauley, assistant commissioner, legislative policy and regulatory affairs branch; Wayne Adams, chief technical officer for the Canada Revenue Agency and director general, income tax rulings directorate; as well as Fred O'Riordan, director general, international large business directorate, compliance program branch.
I would also note, given that we received the invitation to appear from the committee mid-morning yesterday, that we have a number of additional officials in the room who, depending on the question, and with the concurrence of the chair, could be asked to respond as subject matter experts.
Mr. Chairman, we are pleased to be here this morning.
The CRA is very active in taking action to identify, deter and challenge non-compliance with tax laws. We believe it is important to communicate more about what we do and why—to let taxpayers know about the risks and consequences of non-compliance, and to make sure that compliant taxpayers are fully aware that we do take action against those who do not comply.
On the subject of tax havens, I would like to share CRA's views, which are based on our role as tax administrators. Canada is part of a global trade and financial system. We know that countries compete to attract investors and trade partners, and we know that this competition extends to tax systems. Countries offer tax concessions and favourable tax rates to all or some industries and/or investors. Some of these competing countries are commonly referred to as tax havens.
Every country has the right to structure its tax system to meet its needs, and these are issues of tax policy for each country, not for tax administrations. Residents of Canada must report and pay tax on worldwide income. The CRA has no view on where Canadian businesses or individuals invest, so long as they report their income and pay taxes as required under Canada's tax laws. The CRA's concern lies not with the use of tax havens, but with the abuse of use of tax havens, for example, when taxpayers use bank secrecy laws or the absence of effective exchange of information provisions with other countries to conceal assets and income that should be taxed.
We are concerned where abusive schemes and transactions are being used to reduce, avoid or evade Canadian tax. We’re also concerned where these actions might influence others to do the same, or leave others with the perception that some are not paying their share of taxes.
We know that tax havens can attract tax avoidance promoters who actively provide opportunities to businesses and individuals so they can avoid their tax obligations. We are aware that unsophisticated investors can be lured into tax haven schemes and arrangements, where they ultimately lose their capital investment: this is not only damaging to the investors but also erodes the tax base.
We are also aware that advances in technology have increased the risks for both investors and tax administrations. For example, Internet access provides increased awareness of tax havens and allows promoters to actively attract individuals and businesses to avoid their tax obligations. Internet access also extends the prospect of abusive use of tax havens to middle-income Canadians. And electronic fund transfers facilitate the ease and privacy of transactions and make identifying transactions more difficult.
The issue of reducing, avoiding, or evading taxes through the abusive use of tax havens does not exist as a risk in isolation. It is an element of aggressive tax planning, which is one of the CRA's four key priority risk areas.
In general, the Canada Revenue Agency's strategy with respect to tax havens is to focus on schemes wherein people and businesses use a tax haven's bank secrecy laws and/or ineffective exchange of information provisions to hide assets and income upon which Canadian taxes should have been paid. Specifically, we have extensive audit programs, foreign reporting requirements, a number of specific anti-avoidance provisions in the Income Tax Act, and a broad network of 86 treaties.
We also have the general anti-avoidance rule, which is designed to prevent access to tax benefits that were not intended by Parliament.
Examples of these measures include our regular audits of small and medium businesses and large corporations, where the use of tax havens is an indicator of risk, and our more specialized audit programs that focus on international tax and tax avoidance issues.
As part of our strategy to combat aggressive tax planning, the CRA established 11 centres of expertise across the country in August 2005, creating teams of experts from the specialized audit areas of international tax and tax avoidance to, among other things, combat aggressive tax planning and the inappropriate use of tax havens and tax shelters, both at home and abroad.
We know that the abusive use of tax havens is an international issue, and we are working with other tax administrations and organizations to address it. For example, the CRA works with the Organisation for Economic Co-operation and Development, including its seven-country tax haven working group, and the Joint International Tax Shelter Information Centre, or JITSIC. Indeed, the Canada Revenue Agency leads the seven-country tax haven working group. The group exchanges information and approaches to dealing with compliance challenges associated with the abusive use of tax havens. It comprises Australia, Canada, France, Germany, Japan, the United Kingdom, and the United States.
The second organization is the Joint International Tax Shelter Information Centre. It was established in April 2004, when the revenue commissioners from Australia, Canada, the United Kingdom, and the United States signed a memorandum of understanding to increase collaboration and coordinate information about abusive tax transactions. The centre became operational in September 2004 in Washington, D.C. The CRA has had a delegate there since that time, staffed on a rotational assignment basis.
JITSIC's objectives include enhancing compliance through real-time exchanges of information, improving knowledge of how promoters operate, identifying emerging trends and patterns, and sharing best practices for identifying and addressing schemes.
Mr. Chairman, the CRA recognizes the challenges associated with the abusive use of tax havens and tax avoidance. This has been a long-term challenge, and we must continue to take the long-term view in addressing it, as initiatives, such as working with other countries and tax organizations, take time to bear results. We have been aggressively pursuing such abuses, and we intend to continue doing so.
We have some indicators that our actions are having an effect. For example, during 2005-06, the CRA assessed additional taxes of $174 million directly related to aggressive international tax planning, including the abusive use of tax havens. And in the first six months of 2006-07, the CRA assessed additional taxes of $215 million.
Mr. Chairman, that concludes our opening remarks.
Thank you, Chair.
The nickname “double-dip” is jargon for a financing structure that attempts to take advantage of the fact that one has a choice when raising capital. They can either raise capital by way of debt, where they have to pay interest, or raise it in equity by issuing shares, and there's no interest charge there but there's an expectation of the person who advanced the money to receive dividends.
In a closely related group, it provides some tax planning opportunities where one is in a position to have interest expense reflected in countries that have higher rates of tax and the interest income in countries with lower rates of tax.
In the example that we have for starters, with the alternate structure, if within a group you had one foreign company, say, named Tax Haven--and Tax Haven Company is just an expression there, it could be a company in Ireland, the Netherlands, or any other country that might have lower rates of tax--wanted to finance a factory, let's say in the United States, it could have made a $200 million loan at 10% interest. The United States company would have interest expense of $20 million, and the Tax Haven Company would have interest income of $20 million.
The double-dip is that within that same corporate entity, on the chart headed up “Double-dip Structure”, the same originating point of $20 million lends the money into Canada, and that would create an interest expense in Canada of $20 million; and if the year before it had had $20 million of taxable income, it would now have no taxable income.
Thank you, Mr. McCallum.
My concerns centre not so much on you going after the abuses, but that the current rules, by some definitions, may be interpreted as abusive in and of themselves. I'd like to address that issue.
The fact that money is shifted offshore doesn't concern me. The fact that it's shifted offshore to reduce Canada's tax obligation, or the obligation to Canada, does. The fact that it is then shifted to a jurisdiction where basically little or no tax obligation is incurred is a reality around the world. I know money will flow to those types of jurisdictions, so we shouldn't kid ourselves or buy the argument that what we're talking about in whole is going to reduce Canada's ability to expand its business efforts in the Barbados, which has a population of half of Ottawa. That's not why. Between 1990 and 2005, about a 4,000% increase in money going from Canada to Barbados occurred. It didn't go there so we could invest in Barbados, it went there so that these companies could pay little or no tax. That's why it went there.
My understanding from your presentation is that this money then can go from that jurisdiction to an affiliate company in another jurisdiction where they can also deduct interest expense for that money again. So Canadian-based corporations that have affiliate companies in the U.S. could actually reduce the tax obligation in Canada, move the money to a tax haven country or a low-tax jurisdiction, whatever semantics we like to use, and lend it again to a U.S. affiliate, where they would also be able to lower their tax obligation there. Is that correct?
I'll just make a brief comment, Mr. Chair, before turning it over to Wayne.
I think a number of the observations you made relate probably more to tax policy than to tax administration. That being said, in all fairness, the agency does take this issue very seriously. The government has made significant investments over time. It's certainly, as John said, one of our top four priorities that we focus on.
I would note that in the last Auditor General's report, which perhaps doesn't happen all that frequently, we really got good marks in terms of the efforts we were making within our responsibility as an administrator. So we are doing our best, but it is a difficult and, I would note too, long-term challenge.
It was interesting. We were looking at the issue of exchange of information agreements, and someone noted that the U.S. has 20 information exchange agreements, and we're still working on our first. We then pointed out to the individual that the United States started in 1983 and didn't sign the first agreements until, I think, the early 2000s, if I remember.
I thank the panel members for their contributions here today. They are certainly shedding some light on this issue.
In your notes, you spoke of a number of issues. Certainly tax fairness, I think, is the overriding objective of what we're trying to achieve. Certainly if you look at why we audit in the first place, it's to ensure that everyone who is a taxpayer in Canada can be reasonably certain that everyone, be they corporate or individual, is contributing their fair share of taxes. That's why we audit, because it is an honour system, as the chair pointed out. Ultimately we want to make sure everyone has confidence that nobody is skipping around the rules.
I was concerned about a couple of things. First of all, there are some pretty big numbers as to money that we've actually been able to pick up in additional taxes--$215 million in this recent quarter. We've also talked about how the Internet is making access to tax havens, or at least promotion of them, easier. We heard about some unsophisticated investors being taken advantage of and potentially losing capital because of the understanding that they can skip out on some taxes.
Are we just scratching the surface on this? What is your feeling on this? How big is this market? Do you have any scope or any idea of what we're really talking about?
Thank you, Mr. Chairman.
Perhaps this is the point that was getting to, and I think a few others, but we're sort of getting away from what we're trying to do here. We're trying to find ways in which we can help your job to increase collections and, hopefully, have Canadian taxpayers, whether they're in Canada or not, pay their fair share. I think we're having a bit of a problem between tax avoidance and tax evasion, and where some of these transactions cross a thin line and we're not sure if they are tax avoidance or tax evasion. But everybody seems to be talking about tax avoidance like it is tax evasion and vice versa. So we're asking for your help.
From what I've heard today, I haven't heard anything that we can put into a report or say this is what we should be doing to help Revenue Canada. We've had Revenue Canada, CRA, come before the committee numerous times in the last couple of months. We did the five-year review, and we had CRA come before the committee when we looked at money laundering and anti-terrorism, and there were some additional items or tools that I wanted to provide to give Revenue Canada the ability to look at certain transactions, but there doesn't seem to be a willingness.
Can somebody help me out here? What can we do? I understand that you have laws you have to abide by--rules, regulations--but with all the capacity and all the resources that you have, you're only able to win 50% of your court cases. I understand the complexity, but I don't think that's acceptable. And who knows how many others there are that you didn't decide to pursue because you didn't think you had a chance of winning?
So who is winning on this side? Is it the guy doing the avoiding, or the girl doing the avoiding or the evading, or is it us? Are we handicapping you guys? Can we help you, so that Canadians, whether they live in Canada or not, are paying their fair share? That's the question.
Mr. Chairman, I'd like to switch the channel a little bit.
We've been talking about corporate tax avoidance, but it's come to my attention that there are grassroots tax avoidance schemes. One was in the media last week, I think; donations were funnelled through a particular church group, and it turned out not to be a legitimate arrangement.
Another one came to my attention. It was, again, donations to a charity. Participants were largely people of faith. The result was that families paid no tax, actually. Then there was another one that came to my attention through a colleague, another sort of charitable arrangement, which I got an opinion on through the department.
If I have recently come to know of three of these kinds of arrangements, there seems to be a proliferation of these tax avoidance schemes through good, well-intentioned charitable donations. How do you try to advise taxpayers not to get caught up in these schemes?
These are good people. They're well-meaning people. They've been told these are legitimate schemes. Do you just wait and nail them after the fact, or are you proactive in trying to get them not to get involved in the first place?
I gave notice of the motion. You have it before you. I will not read the motion, since I assume everyone has copies.
It is based on the hearings that we held with respect to ATMs and electronic payments. It requires this committee to request some information from the major chartered banks regarding costs of providing service through ATMs, the fees involved and the profits entailed. So it is a basic motion and request that this information be provided to this committee by the end of May, and that then be considered by this committee in terms of its further deliberation on the study and a report to Parliament.
Just by way of elaboration, let me say the following. First of all, the motion that was originally adopted by this committee called for a study. It didn't call for a set of hearings and to hear some witnesses. A study has usually been meant by this committee to mean a beginning, a middle, and an end.
I know that because it didn't technically raise the suggestion that this committee report back or have a concluding statement and a report to Parliament on our study, some members of this committee have felt it advantageous to try to ignore any further deliberations on this matter. But I want the committee to know that in fact it is not uncommon for motions to come before this committee calling for a study, and it's not uncommon, then, for the committee to conclude its deliberations. Having tested this at the steering committee last week, around which we didn't have a final discussion or conclusion, it was my feeling that I had to make sure that our motion entailed that concern.
So I have tried in this motion to deal with a very important outstanding concern, which is that of all of our witnesses, except for the big banks, suggesting this committee do its work and get information about the fees of ATMs, the costs involved, and the profits that follow. That, of course, Mr. Chairperson, you will know came from every organization, including the Canadian Consumer Initiative, the Community Coalition for Reinvestment, the Option consommateurs, and our economist Mr. Lew Johnson. Even the Consumers Association of Canada, I might add, felt that the least this committee could do would be to get the information and then make further determination about what we do with the information and how we take this issue further.
The motion does not suggest that we breach confidentiality, it does not specify that banks make this information publicly wide open. There are ways that we can receive the information and deal with it that won't breach confidentiality, so I hope the committee members won't use that excuse as a way to defeat this motion.
I will just conclude, Mr. Chairperson, by saying that I think it's imperative for us to do everything we can to convince the banks to follow some basic standards of transparency and accountability. So when it comes to asking for information around ATM fees, I should think, Mr. Chairperson, we don't want to just accept the tired rhetoric of the banks, who say they can't possibly provide this to us, and roll over and play dead. I hope that we will at least ask for the information and then see where it takes us.
I appreciate the very brief discussion we've had on this issue; however, I feel we've not done our work as a committee to thoroughly investigate this matter or to live up to the spirit of the motion that we agreed to.
I would say to committee members that it was fine when folks were here to question people about what they assume to be the average cost for the banks, without any verification, and to be very critical of the suggestions that in fact there's a huge profit margin and price gouging. But then not to ask for the facts and to get the banks to in some way or another give us the information so that we can make that determination is an absolute abdication of responsibility.
We have a Bank Act for the very specific reason of holding banks to account, so that we represent the public's interests and we do our job as parliamentarians. For this committee not to even ask the banks for information pertaining to bank fees specifically relating to ATMs is, to me, just beyond comprehension, in terms of our role as members of Parliament.
I'm not saying we should ask them to break confidentiality. I'm not saying we should do something that's unheard of. The finance committee has in the past taken very seriously its responsibilities around the Bank Act and done thorough investigations.
Here, we have a request to simply get some basic information, to ask the banks to provide us with some information that's quite possible given the fact that, as the CBA has said to us clearly, there is no cross-subsidization between different departments of each bank. So it's not impossible. It's readily available. I'm not suggesting it be done to breach any privacy or secrecy or affect the competition between the banks. It is for us to do our job in terms of the fundamental role we have, which is to protect the public interest.
I would hope that members here would see the light of day and support this very basic motion.