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.
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.
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.
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.
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.
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.
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”?
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.
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?
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.
Budget 2013 included a number of measures that will help us in the fight against offshore tax evasion. I referred to a few of them in the opening statement such as the offshore informant tax program, and the electronic funds transfers that we are currently working on to set up a system to be able to receive the information starting January 1, 2015. There are a number of other measures such as streamlining the process to get unnamed person requirements to go to court once as opposed to twice before, and the T1135, which is a form for offshore holdings. Attached to that was the fact that anybody who doesn't do what they're supposed to, fills out the form incorrectly, or does certain things, the legislation extended the period of time for us to uncover and audit these measures. So budget 2013 had a number of very important, significant measures for us on the offshore front.
As I also alluded to a while ago, there was also a number of tax loopholes that were closed that are very important. But again I also have to mention the negotiation of TIEAs that started as far back as mid-2000. The TIEAs are a very important factor in the fight against tax evasion and offshore aggressive tax planning because the more tools we have, the more it gets out there that taxpayers have fewer ways to hide the information. That is why the voluntary disclosures continue to go up, because there are more and more measures that assist us to uncover offshore holdings.
Before I turn it over to Mr. Simms, I'd like to bring it to the attention of members that although Mr. Simms has been with us for a short time, a powerful time, he is actually now moving on to another committee. Ms. Jones will be our new permanent member. As a result of the scheduling, Mr. Simms is actually here as a substitution today.
I want to take this opportunity, on behalf of all members of the committee, to thank you for your time here. Your positive contribution has been much appreciated. Thank you, sir, for your time here.
You now have the floor.
Thank you, Mr. Chair, for the question.
On the criminal investigation front, in the courts, you have to prove something beyond a reasonable doubt. That's as opposed to the work we do in the audit world, which is civil assessments. You raise an assessment based on the preponderance of evidence. The people on the criminal investigation front have to look at whether there's enough evidence to support a prosecution. If that's the case, then it goes to public prosecutions, PPSC, to carry the ball from that point.
In the few cases we saw here in Liechtenstein, there was not enough evidence to support the laying of charges. That's because there was so little information on file, we were not able to pursue.
I would expect that the analysts will continue to use the excellent discretion that they've been using.
I think that your time on this committee has shown that the statement is not over the top. I would also point out, of course, that it takes a majority of the committee to approve something in the final committee report. There's a double safeguard, if you will, from concerns.
We will stop the clock here for a moment.
I think your concern is with somebody having the ability to say something and skew the report when the statement didn't have any factual basis, in your opinion, in where we are, or relevancy.
Your point is well taken. However, we do need to buttress that against the right of members, particularly at committee, to have that wide latitude. I know you support that because I've given you that latitude. I do think we have the checks and balances, but it's always worth underscoring these things.
Thank you for your point. Are there any further interventions?
Hearing none, please start the clock.
Mr. Giguère, you have the floor again.
That is an excellent question.
Indeed, I often discuss results with my boss. Results vary from year to year according to the economic situation and the context. The 2013 budget, which I referred to earlier, has closed several tax loopholes. As the person in charge of audits, I am very happy that the government has adopted these clauses which close these tax loopholes, but this will have an influence on our results. Certain audits that we did in the past gave results, but we no longer do them since the tax loopholes have been closed. However, because I am a fatalist by nature, I have no doubt that certain taxpayers will be able to find other ways to commit tax evasion.
When a government closes one door, professionals in the field find a way to open another. This is a game that is played in every country.
Thank you very much, Mr. Chair.
Thank you very much to the witnesses for appearing before this committee.
Being an engineer, I am humbled by and am enjoying this wonderful experience of being between lawyers and accountants.
Voices: Oh, oh!
Mr. Corneliu Chisu: I have a question for Ms. McMahon of the Auditor General's office.
International tax evasion is a very serious issue that was largely ignored in the past by successive Liberal governments. As a result, the Liechtenstein case was one of the first major compliance projects of its kind. Despite this, in general the opposition has been highly critical of the results of this investigation. In your report, you recognize that due diligence was done when deciding which files to pursue. Can you elaborate on this, please?
Mr. Chair, thank you for the question.
Actually, that is a very good point about what happened in the past. I would have to say that it's easy today, in 2014, to say that this happened and that happened, but if you take a step back.... I was lucky enough to be one of Canada's representatives on the Forum on Harmful Tax Practices, where we looked at what so-called tax havens did and at countries involved in bank secrecy.
It's no secret that Switzerland was one of those countries. I would say that in the mid-2000s, when I was a member of the Forum on Harmful Tax Practices, I never thought for a million years that I would see Switzerland sign an amended treaty with Canada for article 26, which is the exchange of information. Also, a year or two years ago, whatever the case may be, Canada signed a new treaty with Switzerland that includes the OECD standard for article 26, and we now exchange banking information with Switzerland.
Things have changed dramatically in the last few years, and I think they will continue to change dramatically. The ex-head of the OECD, Mr. Owens, said that for a lot of the stuff that the OECD and the treaty partners were doing, their ultimate goal was to ensure that nobody has room to hide money anywhere in the world. I think the OECD and its member countries have done a very good job in a relatively short period of time.
I would say the biggest change is that there are a number of countries...and I'll use one as an example, the Isle of Man, which was one of the first five countries that Canada negotiated with. The Isle of Man was considered a tax haven and they truly wanted to change the way they were seen in the international community. There are a number of countries, the Isle of Man is one of many, that have wanted to legitimize their economies and wanted to be seen well in the international community.
I would say over the last five years or so, that is probably the biggest thing, that a number of countries have stepped to the front and genuinely want to change the way things work.
The biggest challenge, I would say, Mr. Chair, is that taxpayers and their advisers continue to use every way to impede giving the CRA access to information. So we do spend a lot of time and resources going to court, trying to force institutions and entities to give us the information. It's a very slow process, so I've learned in my job to be very patient. It's a long game, but we now have the tools in place to deal with those issues.
I just want to thank all of our witnesses here today. Specifically I'm going to direct my first question to Assistant Auditor General McMahon and perhaps Director Miller, whoever can best answer.
First of all, I understand through the report that there were some legitimate concerns raised about priority-setting at the onset of the list becoming known and also about some aspects of it. Some of the criticism I have heard from the opposition is that CRA didn't treat this kind of behaviour with the seriousness...or had properly committed to resourcing.
When I read through this, particularly since the development of such a substantive list had never been seen before, I don't think this kind of audit has actually been undertaken by a previous government. Would you agree that CRA did take this most seriously and diligently set out to see this through?
For the benefit of the public, I would like to come back to the last bit of information presented by Mr. Albas.
Tax avoidance by way of abusive tax planning is not illegal; tax evasion is. Tax planning, even if it is very abusive, which then leads to tax avoidance, is legal. That is why you cannot prosecute a person for tax avoidance. What the law does not prohibit is permitted. Therefore, the information presented by Mr. Albas was not appropriate. That can be confirmed by Revenue Canada or the Office of the Auditor General.
My question is about the lists. I would like to know what is the evidentiary value or weight of evidence produced by a whistleblower. A list can very well contain all kinds of numbered data, but how would the agency alone be able to give enough evidentiary weight to the list so that it may lead to an assessment and a penalty, including the payment of interest, as the case may be?
We have concluded a full rotation of our questions and by previous agreement we will move forward, but beforehand, first of all, on behalf of the committee let me thank our guests today and let me also emphasize the appreciation we have for both the fulsomeness but also the tightness of the responses, which is not easy to do. So very well done.
Thank you so much for being here. We appreciate it. You may now leave and head home to your families.
Colleagues, you're not quite so fortunate. I will suspend this meeting for a few moments to allow people who are not included in the business section of our meeting to leave, and also to allow the technicians to reset. We will reconvene in a couple of moments in camera to do committee business. This portion of the meeting now stands suspended.
[Proceedings continue in camera]