In giving context for their comments, the Committee’s witnesses provided their interpretations of the terms “tax avoidance,” “tax evasion” and “tax haven,” noted the value of assets in tax havens, spoke about the targeting of tax avoidance and evasion by governments, and identified international responses to tax avoidance and evasion.

A. Tax Avoidance and Tax Evasion

A number of witnesses appearing before the Committee highlighted the differences between tax avoidance and tax evasion. For example, a CRA official said that “tax avoidance” involves minimizing tax by contravening the object and spirit — but not the letter — of the law, and indicated that the CRA uses the term “aggressive tax planning” to refer to both domestic and international strategies to avoid tax through contravening the spirit — but not the letter — of the law. According to the official, “tax evasion” involves deliberate underreporting of tax payable by concealing income or assets and by making false statements. An official also highlighted differences between these terms in relation to prosecution, with successful prosecution of tax avoidance and tax evasion requiring proof on the balance of probabilities and beyond a reasonable doubt respectively. Penalties also differ, with the former requiring the payment of taxes and interest, and the latter resulting in incarceration and fines of up to 200% of the amount of tax evaded.

Robert Kepes, a lawyer with Morris Kepes Winters LLP Tax Lawyers who appeared as an individual, noted that the “object and spirit” of the law is not defined in legislation, which makes it difficult for taxpayers to identify legitimate tax avoidance. He indicated that tax evasion is fraud and that the Crown must prove, beyond a reasonable doubt, both that taxes were owed and that the accused knew that taxes were owed and deliberately avoided their payment. According to him, evasion of tax amounts owed that exceed $250,000 are prosecuted either by indictment under the ITA or as fraud under the Criminal Code; it is easier for the Crown to prove fraud under the Code.

Arthur Cockfield, a Queen’s University professor who appeared as an individual, told the Committee that tax avoidance involves taxpayers attempting to engage in tax planning while complying with relevant Canadian and foreign tax laws, while tax evasion involves taxpayers deliberately not disclosing income.

In speaking about the economic effects of tax avoidance, Paul Collier, a University of Oxford professor who appeared as an individual, mentioned that — at an international level — tax avoidance may result in the misallocation of economic activity due to the practice of conducting business activity in one jurisdiction and reporting income in another, so that the reporting of profit becomes a voluntary activity. Similarly, the Tax Justice Network told the Committee that tax havens distort markets.

B. Tax Havens

In its appearance before the Committee, the Organisation for Economic Co-operation and Development (OECD) indicated that — in the 1990s — it defined the term “tax haven” as a jurisdiction without: taxes, transparency in relation to tax information, the exchange of tax-related information and “real business activity.” It highlighted that a lack of transparency in certain jurisdictions is currently an issue, as taxpayers can conceal funds in these jurisdictions in order to evade taxation.

The Tax Justice Network identified tax havens as jurisdictions that intentionally create legislation for the primary benefit and use of non-resident individuals and entities. According to it, this legislation undermines the legislation of other jurisdictions. It also believed that tax havens may have secrecy rules that conceal the identity of the beneficial owners of an account or corporation; these jurisdictions are sometimes known as “secrecy jurisdictions.”

Some witnesses mentioned the use of offshore financial centres, which — in their opinion — are used for legitimate activities, while other witnesses referred to such jurisdictions as tax havens. For example, Walid Hejazi, a University of Toronto professor who appeared on his own behalf, told the Committee that offshore financial centres are used by Canadian businesses to gain access to the global economy by reducing their costs of financing. Gilles Larin, a University of Sherbrooke professor who appeared as an individual, stated that offshore financial centres lack transparency regarding their legal and administrative systems; in his view, a lack of transparency is one hallmark of a tax haven.

A number of witnesses commented on foreign investment in certain jurisdictions and the resulting economic activity. Paul Collier indicated that foreign investment in Barbados and the Cayman Islands does not result in jobs in those countries, but instead is used to avoid the payment of taxes in Canada. Luis Carlos Delgado Murillo, Ambassador of the Republic of Costa Rica to Canada, told the Committee that foreign investment in Costa Rica has resulted in jobs in the services, advanced manufacturing and medical devices sectors.

C. Value of Assets in Tax Havens

According to some of the Committee’s witnesses, two major — and related — problems with attempting to measure the extent to which taxpayers evade the payment of taxes owed are the lack of information available to tax authorities and the reluctance of taxpayers to disclose information voluntarily. Witnesses had wide-ranging estimates of the amount of assets held by Canadians and non-Canadians in offshore financial centres and in jurisdictions formerly considered by the OECD to be tax havens, although the term “tax haven” continues to be used.

In a brief submitted to the Committee, the Mouvement d’éducation et de défense des actionnaires stated that the world’s wealthiest individuals hold $12 trillion in assets in offshore bank accounts located in tax havens or offshore financial centres. Arthur Cockfield cited a Boston Consulting Group report that estimated the total amount of assets in tax havens or offshore financial centres to be between $5 trillion and $38 trillion. Canadians for Tax Fairness cited a Tax Justice Network study that estimated that between $21 trillion and $32 trillion has been transferred from low- and middle-income countries to more than 80 offshore tax havens. The Tax Justice Network told the Committee that, according to its research, it is primarily high-net-worth individuals — individuals with more than $1 million in liquid assets — who are involved in tax evasion. David Sohmer, a lawyer with Spiegel Sohmer who appeared on his own behalf, estimated that Canadians hold assets valued at $100 billion in offshore bank accounts.

Following its appearance, the CRA provided supplementary information indicating that Canadian-resident individuals, corporations and trusts who own “specified foreign property” with a total value exceeding $100,000 at any time in the year are required to disclose certain information about the property to the CRA on Form T1135. Table 1 presents, for the 1999–2009 fiscal years, the number of T1135 forms filed, and total and average annual taxable income resulting from foreign assets reported on the forms. Table 2 shows, for the 1999–2009 fiscal years, the number of Canadian-resident individuals reporting foreign assets valued at more than $1 million in that year on T1135 forms and the locations of those assets.

Table 1 — Number of T1135 Forms Filed by Canadian-Resident Individuals, Corporations and Trusts, and Total and Average Annual Taxable Income Resulting from Foreign Assets Reported on T1135 Forms,1999–2009 Fiscal Years

Source: Canada Revenue Agency, Data provided to the House of Commons Standing Committee on Finance, 22 March 2011.

Table 2 — Number of Canadian-Resident Individuals Reporting Foreign Assets Valued at More than $1 Million on T1135 Forms, Total and by Foreign Location of Those Assets,
1999–2009 Fiscal Years

Note:    A Canadian-resident individual may own assets in multiple jurisdictions and may move assets from one jurisdiction to another during the fiscal year, resulting in assets being reported in more than one jurisdiction.

Source:       Canada Revenue Agency, Data provided to the House of Commons Standing Committee on Finance, 22 March 2011.

D. The Targeting of Tax Avoidance and Evasion by Governments

1. Tax Revenue and the Tax Gap

According to some of the Committee’s witnesses, one of the reasons for the recent targeting of offshore bank accounts by various governments is the need to increase tax revenue due to the global financial and economic crisis. These witnesses did not, however, provide a consistent estimate of the amount of tax revenue that is not collected — the “tax gap” — as a consequence of tax avoidance and evasion.

An official from the CRA told the Committee that the CRA does not estimate the tax gap. However, since 2006, the CRA has audited 8,000 cases and identified $4.6 billion in unpaid tax. A Department of Finance official indicated that other countries do not estimate the tax gap related to the international activities of taxpayers and that, in any event, it would be too difficult to obtain an accurate estimate for Canada. That said, the Quebec Association for the Taxation of Financial Transactions for the Aid of Citizens felt that the federal government should prioritize fighting tax fraud and the use of tax havens, and suggested that the government should fund studies to determine the level of tax avoidance and evasion in Canada.

In its appearance, the OECD stated that the tax gap is difficult to calculate, and said that determining the tax gap is not necessary for measuring the effectiveness of tax authorities. It also indicated that tax avoidance strategies make it difficult to calculate the tax gap. Nevertheless, the Tax Justice Network detailed various methods that can be used to calculate a country’s tax gap, and said that it estimated the level of tax evasion in the United Kingdom by examining the amount of value-added tax that is not paid; the U.K. government has previously used the level of incorrect income tax returns to estimate the tax gap. Using the estimated global tax gap as reported by the Tax Justice Network, Canadians for Tax Fairness predicted that Canada may be losing between $5.3 billion and $7.8 billion annually in tax revenue as a consequence of tax evasion.

Regarding the tax gaps in relation to domestic activities and international activities, Arthur Cockfield stated that the majority of a country’s tax gap is the result of domestic tax evasion, such as non-compliance with a goods and services tax. In the view of Walid Hejazi, more tax abuse occurs domestically than in offshore financial centres; he suggested that the amount of tax revenue not collected because of tax evasion has been exaggerated by some commentators.

Don Johnston — a lawyer with Heenan Blaikie, former Secretary-General of the OECD and former President of the Treasury Board of Canada who appeared on his own behalf — shared his view that honest taxpayers should not be subsidizing individuals who do not pay their fair share of taxes. Similarly, the OECD said that the tax burden should be fairly shared, and that companies that pay all of their tax owed should not be at a disadvantage when compared to companies that do not do so, as these latter companies reduce their tax owed through the use of tax havens.

2. Secrecy Jurisdictions

According to a number of the Committee’s witnesses, the disclosure of once-secret banking information in relation to banks located in Liechtenstein and Switzerland has contributed to a more accurate understanding of the magnitude of income that may not be taxed by any jurisdiction or that may not be appropriately taxed. Don Johnston said that, in certain jurisdictions, it is difficult to determine whether the beneficiary of a bank account is a Canadian resident, and indicated that informants have played a major role in increasing tax compliance and in the sharing of information regarding undeclared income. Scott Michel, a lawyer who appeared on behalf of Caplin & Drysdale, estimated that the United States has prosecuted 25 UBS account holders since the identities of account holders were released to the U.S. Internal Revenue Service (IRS) in 2007. A CRA official informed the Committee that the CRA has conducted 47 audits based on leaked information regarding accounts in Liechtenstein banks, and has identified $22.4 million in unpaid tax.

E. International Responses to Tax Avoidance and Evasion

1. Tax Avoidance

In its appearance before the Committee, the OECD highlighted the issue of “double non-taxation,” which involves the legitimate use — by multinational corporations — of certain jurisdictions, tax treaties and domestic legislation to eliminate tax owed or to reduce income taxation significantly. In the OECD’s view, international tax conventions, guidelines and other standards should not result in a situation where an entity can avoid paying tax in any jurisdiction or can report profits only in a jurisdiction with no or low taxes through the use of affiliated companies in such jurisdictions. As stated by the OECD in its report entitled Base Erosion and Profit Shifting, international efforts are being designed with a view to ensuring ensure that at least one jurisdiction is able to tax the profits earned by a multinational corporation; the ability to do so may occur through the development of rules that address the reporting of income, such as “transfer pricing” or the pricing of goods and services between affiliated corporations.

2. Tax Evasion

The OECD spoke to the Committee about recent international efforts to reduce tax evasion and the use of offshore accounts, noting that these efforts have focused on increased transparency through an international standard for the exchange of information among tax authorities, as well as between financial institutions and tax authorities. Through the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, the Group of Twenty nations has played a role in implementing the international standard through peer review of the legal and regulatory framework of member countries. The standard is based on Article 26 of the OECD’s Model Tax Convention and the 2002 Model Agreement on Exchange of Information on Tax Matters, and requires Global Forum members to:

• exchange information, on request, where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the other jurisdiction;
• ensure that there are no restrictions on the exchange of information resulting from bank secrecy laws or domestic tax policy;
• ensure the availability of reliable information and the powers to obtain that information;
• respect taxpayers’ rights; and
• maintain strict confidentiality in relation to the information that is exchanged.

The OECD said that Global Forum members have signed bilateral tax information exchange agreements (TIEAs) with tax havens and offshore financial centres; the TIEAs contain the international standard on transparency and the exchange of information. The Committee was also informed that, since 2009, more than 550 TIEAs have been signed by Global Forum members. According to a Department of Finance official, Canada has 16 TIEAs in force and is currently negotiating 12 additional agreements.

The OECD also told the Committee about the steps to be taken after effective tax information exchange mechanisms are established; these steps include joint audits by tax authorities in other jurisdictions, the sharing of information regarding types of tax planning schemes, and multilateral conventions regarding the sharing of tax administration and collection. On the issue of multilateral conventions, Arthur Cockfield advocated ratification of the Convention on Mutual Administrative Assistance in Tax Matters, which was signed by Canada in 2004.