The Committee’s witnesses spoke about a number of measures designed to reduce aggressive tax planning and tax evasion, including additional rules to close tax loopholes, whistleblower programs, amnesty measures, initiatives in relation to tax advisors and corporate directors, and changes to the roles of existing international groups.

A. Additional Rules to Close Tax Loopholes

Some of the Committee’s witnesses argued that additional tax rules could help to reduce either tax evasion or the amount of tax that is evaded. For example, the OECD suggested that all business expenses should be disallowed for tax purposes in the foreign jurisdiction where evasion is suspected. It also supported the introduction of a reverse onus provision for transactions occurring in a tax haven, so that the taxpayer would be required to prove to the tax authority that there is a legitimate reason for using the jurisdiction. Arthur Cockfield said that the denial of business expenses in foreign jurisdictions by the CRA could be difficult to implement without coordination with the foreign tax authority.

Don Johnston stated that tax authorities need increased transparency regarding tax information so that information regarding tax evasion schemes is available as new rules for the prevention of tax evasion are being drafted. A Department of Finance official suggested that the creation of additional rules would not reduce the number of taxpayers who do not file a tax return, and would not increase the amount of income reported, as tax returns are completed by the taxpayer.

In its brief to the Committee, the Mouvement d’éducation et de défense des actionnaires supported the repeal of tax rules allowing Canadian corporations to deduct the interest paid on funds borrowed to invest, either directly or indirectly, in foreign affiliates. An official from the Department of Finance highlighted that Canadian changes to the taxation of foreign branches of Canadian corporations and the Canadian branches of foreign corporations would be inconsistent with taxation by other countries, as all developed countries treat foreign income identically by not taxing the income in the home jurisdiction. In his view, changes to Canadian taxation of foreign income earned by a domestic corporation may reduce the competitiveness of Canadian businesses.

Regarding the taxation of international income earned by resident corporations, H. David Rosenbloom suggested that Canada should conduct a systematic review of rules relating to cross-border activity, with special rules for tax havens. As an alternative to the arm’s-length principle currently used for companies located in other jurisdictions, he provided the example of special transfer pricing rules for transactions involving corporations located in tax havens; these special rules would take into account the worldwide income of the corporation. The Tax Justice Network noted that transfer pricing rules that use the arm’s-length principle result in under-taxation, and suggested the creation of a unitary basis for taxation of multinational corporations that would apportion the profit earned by a corporation to its economic presence in a jurisdiction to determine the taxable income in that jurisdiction. H. David Rosenbloom felt that the arm’s-length principle was not working, and suggested a formulary regime, while Arthur Cockfield advocated a more precise definition for the term “fair market value.” Finally, Brigitte Alepin argued that a centralized tax system or a single worldwide tax should be created.

The 2013 federal budget announced measures that would reduce the use of certain aggressive tax planning schemes by corporations, such as loss trading, thin capitalization and the conversion of business income into a capital gain.

B. Whistleblower Programs

In his appearance before the Committee, Robert Kepes highlighted the whistleblower program in the United States. This program awards compensation — ranging from 15% to 30% of the amount collected — to individuals who provide information to the IRS, provided the information results in the collection of taxes from a non-compliant taxpayer; he suggested the creation of a similar program in Canada. Paul Collier also supported the creation of a whistleblower program in Canada. In noting the increase in voluntary disclosures in the United States after the disclosure of secret financial information through that country’s whistleblower program, Don Johnston said that a whistleblower program can deter tax evasion. The 2013 federal budget announced the Stop International Tax Evasion Program, which would enable the CRA to compensate individuals with knowledge of major international tax non-compliance; compensation would be up to 15% of the tax collected as a result of the information provided.

C. Amnesty

Some of the Committee’s witnesses commented on granting amnesty to tax evaders who negotiate lower penalties or who do not pay the full amount of tax owing to the CRA. Accountability Research Corporation felt that granting amnesty from future prosecution would not result in disclosure by individuals who obtained the undeclared income through criminal activities, while a Department of Finance official suggested that amnesty for these individuals would reward their non-compliant behaviour. Arthur Cockfield supported a temporary amnesty from future prosecution, as the main reason for disclosure is the possibility of amnesty from criminal prosecution, while Stephen Jarislowsky was opposed to granting amnesty, believing that tax evaders would just wait for the next amnesty program in order to disclose undeclared income; as well, he did not support reducing tax owed as a means of encouraging disclosure. He favoured harsh penalties if amnesty is misused by the taxpayer, and indicated that undeclared income should be taxed and interest assessed from the time at which the income was earned, regardless of statutory time limits. In his brief to the Committee, Robert Kepes indicated that a “blanket amnesty” would result in taxpayers evading taxes and waiting for the next amnesty program before disclosing undeclared income.

D. Tax Advisors and Corporate Directors

A number of the Committee’s witnesses shared their views about the regulation of tax advisors and about methods to ensure that these individuals share responsibility when their clients engage in tax evasion. Arthur Cockfield mentioned that the accounting profession could be better regulated, with more disclosure by accountants to the government of tax evasion schemes, but argued that such disclosure by Canadian lawyers and accountants would not reduce tax evasion due to the provision of offshore tax services through the Internet. Accountability Research Corporation said that accountants and mutual fund organizations need third-party oversight, and argued that a single securities regulator would not necessarily solve the problem of tax evasion that is associated with securities fraud, as there is no guarantee that more prosecutions would occur with a single regulator. The Mouvement d’éducation et de défense des actionnaires suggested that higher penalties for tax advisors whose clients are found guilty of tax evasion would deter them from creating tax evasion schemes, while the OECD informed the Committee that other jurisdictions — such as the United Kingdom — have implemented penalties for tax advisors who urge their clients to engage in tax evasion.

A Department of Finance official noted that Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation, contains provisions that would create a reporting regime for taxpayers involved in aggressive tax avoidance transactions, with penalties for taxpayers who fail to report.

In its brief to the Committee, the Mouvement d’éducation et de défense des actionnaires requested amendments to the Canada Business Corporations Act in order to define the role of corporate directors with respect to their corporations’ tax strategies, as the consequences of aggressive tax strategies could affect the financial viability of the company. In a related suggestion, the OECD suggested that corporate governance legislation, such as the Canada Business Corporations Act, should include tax compliance as part of good governance.

E. International Groups

Some of the Committee’s witnesses suggested that, due to its current influence in the global community, the Group of Twenty would be a good forum for the creation of a tax law enforcement working group; this group could pursue coordinated, multilateral enforcement strategies that could be broader in scope than the OECD measures. To include developing countries in the tax enforcement process, the Halifax Initiative and the Quebec Association for the Taxation of Financial Transactions for the Aid of Citizens supported transformation of the United Nations Committee of Experts on International Cooperation in Tax Matters into an intergovernmental commission. Finally, Scotiabank mentioned that the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes should be used to enforce transparency in relation to bank information.