Thank you, Mr. Chairman, ladies and gentlemen members of the committee. Special greetings to the women who are with us today.
I am very pleased to be here this morning. To begin with, I'd like to thank the committee for its kind invitation to take part in this meeting of the standing committee. As you said, Mr. Chairman, my name is Louise Champoux-Paillé. I am an economist by training, I have an MBA and I am a certified corporate administrator.
For almost 30 years now, I have been working in the financial services community: banks, insurance companies and securities dealers. From 1998 to 2004, I was President of the Bureau des services financiers du Québec, a regulatory agency which monitors personal insurance, property and casual insurance, financial planning and pool investment fund representatives.
As an administrator, I sit on several boards of directors, including the MÉDAC board, where I am responsible for coordinating shareholder proposal campaigns and carrying out studies relating to financial and trust ethics, compensation for senior executives of financial institutions, the representation of women on boards of directors and governance-related trends, both in Canada and the United States and in Europe.
Let me say just a few words about MÉDAC, the Mouvement d’éducation et de défense des actionnaires. Founded in 1995 by Yves Michaud, MÉDAC is a non-profit organization. It is chaired by Claude Béland, former Chairman of the Mouvement Desjardins, and is administered by an eight-member board of directors.
In practical terms, we carry out our mission of advocating for shareholders every year by submitting shareholder proposals to Canadian corporations, mainly dealing with sound governance. Since MÉDAC was formed, we have submitted more than 60 shareholder proposals to a dozen large corporations, making us the most active shareholder advocacy organization in Quebec and Canada. More than 50% of all the proposals submitted in Canada in the last 20 years were from MÉDAC.
Early last year, in January of 2010, we published a study on the effectiveness of shareholder proposals entitled Les propositions d’actionnaires: pilier de saine gouvernance. Our conclusion was that shareholder proposals contribute to better corporate governance, as evidenced by Board Games. Nowadays, the following features are among the best practices of large Canadian and Quebec financial institutions: a separation of powers between the chair of the board and the president and COO; disclosure of professional fees and independence of external auditors; and, something recently acquired, advisory voting on executive compensation.
Tax fairness for everyone has been one of our key lines of attack since 2002, with a particular focus on bank involvement in tax havens. We have prepared proposals on this theme on three occasions, in 2002, 2005 and 2011. We believe that our proposals are not unconnected to the fact that, since 2007, the National Bank has considerably reduced its involvement in tax havens. We are hoping the same action will be taken by the other banks, given that we have presented proposals in this area.
My opening comments will be in two parts. I will begin by presenting a brief overview of the current situation with respect to both individuals and businesses, and in the second part I will make some recommendations with a view to moving towards greater fairness with the next budget.
Let me begin, then, with an overview of the current situation.
Lord Dewar said or wrote that: “The only thing that hurts more than paying income tax is not having to pay an income tax.”
As their name suggests, tax havens are used to evade taxes or minimize them. In many places around the world, individuals and businesses can do what might be called tax minimization; however, for the vast majority of people, including most with decent incomes, the idea of tax minimization makes little sense: taxes are usually deducted from their pay, and their interaction with the tax authorities ends there.
For a lucky minority and most large corporations, however, tax minimization is a very important part of their business and personal activities.
American billionaire Leona Helmsley said during her tax evasion trial in 1989 that “Only the little people pay taxes.” At the very least, it seems that the most affluent pay the least in taxes. Far from being seen in the business world as reprehensible or morally unacceptable, growing your money under the shade of Caribbean palm trees, for example, seems to be the sensible choice of unethical business people.
Hillary Clinton herself said in a speech at the Brookings Institution, a Washington think tank, that “the rich are not paying their fair share in any nation that is facing the kind of employment issues the United States is, whether it's individual or corporate."
To really give you an idea of the problem posed by this unacceptable and aggressive international tax planning, by both corporations and individuals, here are some figures and quotations.
The 1989 report by the Auditor General in Ottawa showed that tax evasion involving international transactions was expected to grow in the following years, spurred by the growing complexity of those transactions. Thus, in 2009, Canadian foreign direct investment was more than $593 billion. Of this, $78.4 billion, or 13%, was invested in Barbados, Bermuda and the Cayman Islands.
Furthermore, the current tax rules encourage tax evasion. Those rules allow tax-privileged entities in those countries that have signed a tax treaty with Canada to bring income into Canada tax-free.
The five Canadian banks with foreign subsidiaries benefit from a tax exemption in the order of $2.5 billion, which amounts to 37% of the tax paid by these banks. Given that the average Canadian family paid $31,714 in taxes in 2009, this tax exemption is equivalent to the taxes paid by 80,000 Canadian families.
According to the Conseil des Prélèvements obligatoires français—this is data for France—multinationals pay 2.3 times less tax than small- and medium-sized businesses. Only businesses with fewer than nine employees truly pay the 30% tax rate; for the very large corporations in France, the rate drops to 8%. In our opinion, that is unfair and a distortion of competition. Perhaps it would be helpful to make a similar comparison for Canada.
A report showed that, between 1998 and 2005, a quarter of the largest companies in the United States paid no tax at all. Add to that individual tax evasion worth $250 billion in lost tax revenue worldwide every year, and the total is about $1 trillion of illegal money flows every year, according to the American think tank Global Financial Integrity. This situation could perhaps be a result of the rich having more influence over government policy than the poor or the middle class, the rich enjoying the opportunity to influence governments in order to secure certain tax privileges and benefits.
Indeed, Dominique de Villepin said this:
||The problem with allowing and tolerating tax havens is obviously a political one. The world of finance is often closely connected to the world of politics. That is even more true in the current context, making this a very complicated issue for governments to tackle [...]
Thank you for the opportunity to appear before this committee to give my thoughts on the role that offshore financial centres play in the Canadian economy.
I apologize for not being able to travel to Ottawa, but I have several other commitments here in Toronto today that I could not rearrange.
I am a professor at the Rotman School of Management in the University of Toronto. I have been a professor at the university since 1995. I have written extensively on Canada's competitiveness and the role of international trade, foreign direct investment, and, as well, the role of offshore financial centres.
These writings include academic articles and studies written for the Department of Foreign Affairs and Industry Canada. I have shown empirically that the use of these offshore financial centres by Canadian companies to access the global economy has in fact enhanced the competitiveness of those Canadian companies, and that's enhanced Canada's exports, employment, and investment levels.
The impact on tax revenues to the Canadian government as a result of the use of offshore financial centres by Canadian companies is by no means clear. It is incorrect to assume that tax revenues flowing to the Canadian economy are lower as a result of the use of offshore centres by Canadian companies.
There are many positive effects that result from the use of these offshore centres that enhance Canadian tax revenues. For example, when Canadian companies operate in the global economy, they are more competitive because of the lower tax they have to pay on repatriating those profits to Canada. When those profits return to Canada, they are ultimately paid out to shareholders of these widely held Canadian companies.
When shareholders receive a dividend payment, they in fact pay tax on that income. Similarly, when Canadian companies do very well in the global economy, that enhances access for Canadian exports. It increases head office functions within the Canadian economy and so on. So the net impact on tax revenue in Canada is by no means clear.
I can elaborate on this later if you would like, but I think it's incorrect to assume that the effect on tax revenues is negative, because that has not been shown to be the case. The abuse of these jurisdictions by individuals or organizations to hide income or assets from legitimate tax authority has resulted in a negative view of all such jurisdictions.
Let's be clear: the use of these jurisdictions by any organization to evade paying taxes that should be paid is illegal and such organizations should be prosecuted. But as in the case of purely domestic scenarios, taxpayers have the right to arrange business affairs in such a way as to minimize the tax burden by legal means. Tax minimization does not mean tax evasion.
There will also be those international investors who use creative ways to reduce taxes owed to legitimate tax authority, and in that sense, OFCs are the same or are no different from what we see in a purely domestic environment when people use these creative ways.
So there are benefits that do flow from the use of offshore financial centres by Canadian companies. The use of offshore centres for illegitimate purposes is minimized when there are agreements on transparency and the exchange of information between such jurisdictions and home economies. As is clear from the OECD's most recent list, many, but not all, jurisdictions have in fact moved in the direction of enhanced transparency and disclosure.
There are also benefits that flow from transparency and disclosure of information that I must highlight. The greater the transparency and disclosure of information between, for example, Canada and any particular offshore financial centre, the less likely bad things are going to happen and the more likely that the OFC is being used for a legitimate purpose that serves to enhance the competitiveness of the Canadian economy.
Canadians have a love-hate relationship with foreign investment, but there are a lot of benefits that come when we have foreign investment in the Canadian economy, including the impact on employment, on earnings, on productivity, on capital formation, and on the ability of Canadians to tap into global supply chains. But these benefits are up against the whole issue of hollowing out the Canadian economy. That's on the inward side.
What many Canadians are unaware of is that Canada now has more investment abroad than there is foreign investment in Canada. Canadian companies continue to expand globally at a faster rate than foreign companies are coming into Canada. Today we have about 20% to 25% more investment abroad than there is foreign investment in Canada.
The Government of Canada's website states that direct investment abroad by Canadian business is part of its strategic effort to increase market share and stay competitive in foreign markets. Companies are increasingly using outward investment to strengthen their operations, penetrate new markets, and acquire new technologies, resources, and skills. Over one-third of global trade is in manufacturing and is undertaken between related parties; hence the role of multinationals is even more important. In short, Canadian investment abroad has enhanced the competitiveness of the Canadian economy.
When you dig down into the data, you see about 20% of the investment abroad is actually going through offshore financial centres.
The objective of the research I have done is to go beyond the view that simply because there's a tax advantage associated with using these offshore centres, somehow they're bad.
What are the positive effects of using these offshore financial centres? Offshore financial centres represent conduits for Canadian businesses to gain access to the global economy. This point is important. It allows Canadian companies to go into less traditional, more risky and emerging markets, and to diversify away from the U.S. market. Given the current environment, that's incredibly important.
Canadian companies experience a reduction in the cost of capital when they use these offshore financial centres, and hence they're more competitive when they operate globally. This improvement in the competitiveness of Canadian multinationals generates many gains for the Canadian economy. Limiting the ability of Canadian companies to access the global economy using these offshore centres would significantly impede their competitiveness and would have, in my opinion and supported by my research, a negative impact on the Canadian economy.
One piece of research that I'm currently working on but which I have not yet finished, and I think the speculation is very important for this committee's deliberations, is the following. When Canadian companies use offshore financial centres for legitimate purposes to access the global economy, there are lots of gains that come back to the Canadian economy. When these offshore jurisdictions are used for illegitimate purposes, I don't support that. I think people who use offshore financial centres to evade taxes should be prosecuted.
It is my speculation that the more enhanced transparency and disclosure is between Canada and any particular jurisdiction, the more likely the activities taking place in those jurisdictions will in fact be legitimate and therefore will generate significant benefits to the Canadian economy.
To summarize, there are many benefits that flow to the Canadian economy when our companies use offshore financial centres. Any moves to enhance transparency and exchange of information are likely to be positive and good for Canada, as long as they do not limit the ability of Canadian companies to use these jurisdictions for the legitimate purpose of accessing the global economy with the reduced cost of capital and hence be competitive relative to corporations from other jurisdictions that have access to similar financing structures.
Thank you very much.
I'm very proud to be able to talk to you about this. I have not prepared a formal text, because I am not an expert on the topic, really. Basically, what I can talk to you about is on the basis of my experience as an investment counsellor—we have clients, obviously, who are well-to-do—and also as the result of my having been a corporate director of some 20 corporations, most of which had operations abroad.
I would say, first of all, that there are legitimate reasons, which were just brought out by the last speaker, with which I totally agree. A company such as SNC-Lavalin, on whose board I sat for 20 years, would not have had the relative growth it has had unless these possibilities existed outside, possibilities that are basically known to the Canadian government.
It seems to me that to the extent that others are using these same types of facilities.... We are operating out of a high-cost economy today worldwide, compared with China, India, and many other countries, including the United States, in which we have had a re-evaluation of our dollar from 67¢ to $1.03. It is obvious that unless we want to send all our jobs abroad, our companies have to take advantage of these types of competitive advantages, which are being used by any international company in the world. As far as I'm concerned, that chapter should be absolutely self-evident.
Cases of individuals hiding their money, formerly in Switzerland, now less so, but also still in other offshore situations, should, I believe, be prosecuted to the utmost, and I believe that one should not go from one amnesty to another in this respect; one should go back and tax these types of totally illegitimate gains right from the beginning.
Having said that, I'd also like to make another statement. That is that in the Bible, in the Lord's Prayer, we say, “Do not lead me into temptation, but deliver me from evil.” The temptation for people to take their money outside of this country, either legitimately or by becoming non-resident citizens, and paying their capital gains tax here when they get older—especially for wealthier people—is pretty obvious to me.
I live in Quebec. I pay 50% tax on my revenue. Unfortunately, I'm very wealthy, but I have never chosen to have any tax shelters for myself, nor do I have any money abroad, other than investments in which the facilities are abroad, but for which my certificates are at the Bank of Nova Scotia or in my safety deposit box here.
To the extent that Canadian taxes are extremely high, especially in provinces such as Quebec, where I pay on average 50% straight tax on my income.... Even if I incorporate, which I have to do in order to avoid U.S. estate tax these days, that tax basically in the long run comes to the same amount. In this province, 42% of the population pays no income tax whatsoever. I don't think that is correct, and I do believe that the temptation for people, if something isn't correct, leads to more attempts to try to get out of the taxation.
I would go further and say that at the present time, if you have investments in Canada, except for the appreciation currently of the stock market, which is engineered largely by the Federal Reserve Bank in New York, it is very difficult to have a good savings pattern for yourself, if you are not very rich, that is going to lead to the equivalent of a pension.
We're competing in Quebec with the 24% of the population that works for government and gets $100 a week more than the other 75%, on average—and that includes me—and at that gets indexed pensions, which the rest of us don't, except for the Canada and Quebec pension funds.
Today, in effect, if you leave your money in the bank, you have a guaranteed loss of about 2% at least from inflation, and by and large you get no money from the bank in interest. On the other hand, you get an enormous number of service charges, which have augmented over the last 50 years that I have been in business from nil to enormous amounts, despite the fact that computerization makes the process far cheaper today than it was at that time.
I would say that if you have a bond that pays 4.5%, between inflation and taxation you end up with nothing. If you have a mutual fund that yields 8%, which is way beyond the average over a long period of time of mutual funds, in effect, after a 3% management fee, taxes, and inflation at 2%, you end up with one-half of 1%.
Capital gains are taxed in Canada, and the inflation effect on the capital gains is also taxed at the half rate, so if you bought something 40 years ago, as I did, and you sell it today, you're paying on that entire inflation, which is probably about 95% or more, in capital gains tax.
So there is an enormous temptation for people who want to have some money left to do something that is probably illegitimate or that is not acceptable. I don't condone it; I've never advised any of our clients to do it; I believe that it's not a good idea to have to worry every day whether there's a letter in your mail saying, “Please appear before the revenue department and explain what you're doing abroad.” But I do believe that this type of taxation, which makes it quasi-impossible to have a retirement income other than what you put in—because the revenue really doesn't exist—is definitely an incentive for many people to be tempted to take a first step into something that is illegitimate. It's the old saying, which I quoted, “Lead me not into temptation, but deliver me from evil.”
I believe there are many other factors, which deal with the cost and expense that people incur, especially today in an environment in which high unemployment does not permit people to have very much left in savings. We are also a nation that has way overspent, in which our percentage of debt to revenue of individuals is now higher than in the United States. Obviously, this is only sustainable with very low interest rates. The moment these interest rates go up, we will definitely have a problem. With the rise in oil prices and other prices of commodities and food, again as you have less left, there is an incentive to do something that you shouldn't be doing.
My basic conclusion from what I've said is that yes, there should be strict enforcement. Just as I believe that there should be extremely strict enforcement—and the Coalition for Good Governance, which Claude Lamoureux and I started, is totally in favour of strict enforcement in the investment area—there should be strict enforcement for people who cheat or take money out illegally. But on the other hand, I think Parliament must also realize that in Canada taxation has become extremely high.
I want to throw another item into this, with respect to tax evasion; it concerns, certainly in my province, the question of construction and doing things for your house and your garden. In the area of my country place, I cannot get somebody to do something for legitimate reasons. They will only take my money and paint my house if I pay in cash. That is the result of a stranglehold by unions in Canada, especially in Quebec, of this whole area. I can pay $20 in cash, whereas if I use union labour, I might have to pay $60 per hour.
That is something that is a major gap in Canada from the point of view of taxation. That's all I have to say.
Thank you, Mr. Chairman. I would just like to begin by stating that I am neither a direct or indirect relation of Mrs. Champoux-Paillé, even if her arguments are worthy of her second family name. I also convey my greetings to Mr. Jarislowsky, who described the situation in Quebec.
Mrs. Champoux-Paillé was saying that there is no easy way out, except the one we accept, and since you have spent pretty much your whole life in Quebec, you are probably in a place where you have been delivered from evil. The fact that there has been unionization or that the government is using its political weight is a whole other debate. Things really are not so bad on the Island of Montreal.
To begin with, I would like to try to summarize two points. All three of you have shown the difference between attempting to avoid paying too much tax and tax evasion. We may all avoid a brush with police, but escaping from prison is another matter. The common thread between your three positions is that you believe that any form of tax evasion is illegal and that those who ultimately do not pay their fair share, and try by every possible means not to pay taxes, should be prosecuted. All three of you made particular mention of the connection with individuals.
I understand there may be ways of avoiding paying tax if you're the chief financial officer of a company. Everyone knows that the CFO of a private company focuses, not on maximizing profits, but on minimizing taxes. It's not the same for the CFO of a publicly owned corporation, which has to maximize earnings per share.
You say we should avoid a situation where people are paying as little tax as possible. We are part of a globally competitive system where the ability to secure capital is very important. So, there have to be rules.
My question is about individuals and businesses. Do you think the Canada Revenue Agency has the necessary resources to combat tax evasion? Is criminal prosecution not enough?
Do you not think the Canada Revenue Agency is amateurish in its approach to people who are trying to avoid paying tax, in the sense that it wipes the slate clean and forgives people who try to do that? What do you think Mrs. Champoux-Paillé?
I'd like to thank the witnesses. Certainly we're seeing a real diversity of viewpoints today.
First of all, in response to Mr. Paillé's comments with regard to the resources needed to go after the offshore accounts, I find it somewhat ironic that when we do estimates and look at the small marginal increases for supporting increased investigations and increased manpower, we are criticized for that. Then at the next meeting, we don't have enough resources.
Perhaps when we're looking at our budget for Canada Revenue Agency, we need to also look at what our outcomes are. When we bring in significant additional money by putting in some modest resources, perhaps we shouldn't be looking at them in isolation.
In terms of what Canada has been doing since 2006, we've increased the number of workers by 44% in this area. And an additional $30 million has been allocated to going after this issue, with some success. We've had a lot of money come back to Canada. I'm not sure that people are fully aware of the actions we've taken in moving this forward.
I'd like to make a few comments. If we look at the issue of evasion, it sounds as if we have everyone agreeing on the evasion issue. We and many other jurisdictions believe that the first step should be a voluntary disclosure program. It's been somewhat successful. People pay their penalties.
I'd like a comment from each of the witnesses. It sounded as if Mr. Jarislowsky thought we should be prosecuting to the full extent of the law.
Could you each give me a thought with regard to voluntary disclosure versus going in with the big, full force of the law and all the costs associated with that?
Perhaps I can start with Mr. Jarislowsky.
That's a lot of pressure. But one thing I would say is that the returns are taxable, so.... Anyway, that was a joke.
As we talked about corporate tax rates going down and moving us in the right direction, we know that reducing taxes, corporate and personal, move us in the direction towards reducing the size.
But let me speak to the legitimate use of these offshore centres. I'm going to give you a few numbers. We have about $500 billion in the global economy; about 20% goes through offshore centres.
Let's say there's $100 billion. Let me just put some rough numbers to this. If I have $100 billion going through offshore centres...and suppose the return, the income generated, is 8%. So there's $8 billion a year generated in income from those investments we have in those offshore centres.
Let me throw a 40% tax rate on there. So I have $100 billion in offshore centres, I have an 8% return, so $8 billion in revenue, and I have a 40% tax rate. Many people believe that if we could tax all of that income that's generated in offshore centres, that would be about $3.2 billion. That's the sort of number I've seen thrown around by some people. That's sort of an upper bound. If the Canadian government were to limit the ability of Canadians to use those offshore jurisdictions, many people I've talked to think Canadian tax revenue would go up by about $3.2 billion. I argue it would go down. I argue it would go down because the income generated would fall because Canadian companies would not be as productive and competitive.
Secondly, many Canadian companies would actually leave Canada—
Thank you, Mr. Chairman.
I'd like to thank our guests for coming this morning. It has been a very interesting conversation.
I'm going to focus, I think, a number of my questions to Ms. Champoux-Paillé. I have to speak in English, I'm sorry.
I think the fundamental discussion thus far has been that there is a difference, my view included, between tax evasion and tax avoidance.
Every year at this time many of my colleagues and residents in my area are putting money into RRSPs. I would say they are trying to avoid paying more tax. It's not necessarily thinking about the long-term benefits of saving for their retirement but really sort of an immediate reaction, that “Hey, I have to put some money in an RRSP, I have lots of room, and it will help me save a few tax dollars.” So that's tax planning, tax avoidance. I don't really think there's anything wrong with that.
Personally, I would prefer a flatter tax system with a lot fewer deductions in it. But that isn't going anywhere. The system is the way it is, and it is tax planning.
I had an event this past week with 260 seniors at it, a tax planning seminar put on by CRA and Service Canada, where they were the speakers and we had 260 people. There were some questions from the audience that were on tax planning issues, and they could not answer because they have to have a financial adviser giving out that information.
This leads me to my question about your organization. I'm a little confused based on your.... You say “its mission, as the name indicates, is educating and advocating for investors”. In terms of the organization, does that not include—in informing and educating investors—tax planning and tax avoidance issues, not just tax evasion? Does your organization make a significant...?
I love your question. I think it's a terrific question, and I wish I had an hour, but I know I only have a minute.
To follow up on the last comment, “as long as politics...”, when you have people standing up and talking about tax evasion, tax havens, multinationals not paying their fair share, and then when you ask a broad cross-section of Canadians, it appeals to their...I'm not sure what the term is, but....
What we want to do as policy makers is create an informed decision. We don't want to make a decision only to get votes or only to appease a wide part of the public who may not understand fully the issues before us.
I believe we get tax fairness when we create an environment in which our companies are able to be globally competitive. There's a $10,000 prosperity gap between Canada and the United States: the average American earns $10,000 more than the average Canadian. If we could create an environment that is globally competitive and close that prosperity gap—raise the level of income in Canada to the level it is at in the United States—then with the same tax rates that we see today, the tax revenues we would generate would be so substantial that we could fund all of the initiative the government has before it.
So the right way to get the tax fairness is to think about the economics, create an environment that creates the biggest economic pie, and then take the tax revenue that's generated from it and use it for the initiatives that we have before us.