THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, September 26, 2018
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to study Bill S-243, An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax); and, in camera, for the consideration of a draft agenda (future business).
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I welcome you to this meeting of the Standing Senate Committee on National Finance. My name is Percy Mockler, and I am a senator from New Brunswick and chair of the committee. On behalf of the committee, I wish to welcome all of those who are with us in the room and viewers across Canada who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online at sencanada.ca.
[Translation]
I would now like to ask the senators to introduce themselves, starting on my left.
Senator Bellemare: Senator Diane Bellemare from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
Senator Pratte: André Pratte from Quebec.
[English]
Senator M. Deacon: Marty Deacon, Ontario.
[Translation]
Senator Dalphond: Good evening. Senator Pierre Dalphond from Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicole Eaton, Ontario.
Senator Neufeld: Richard Neufeld, British Columbia.
[Translation]
The Chair: I would now like to introduce Gaëtane Lemay, the clerk of the committee, and Alex Smith, our chief analyst, who team up to support the work of our committee.
[English]
This evening, honourable senators, we continue our study of Bill S-243, An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax).
[Translation]
Bill S-243 was introduced in the Senate on November 22, 2017, by our colleague Senator Downe. It received second reading on June 5 this year and was referred to our committee the same day.
Today, we have before us three organizations that we invited to give their views on Bill S-243.
[English]
First, from Transparency International Canada, we have Mr. Bruce Moore, Member of the Board. Thank you, Mr. Moore, for accepting our invitation.
We also have, from Canadians for Tax Fairness, Mr. Dennis Howlett, Former Executive Director. Mr. Howlett, I’ll share this: You are not a newcomer to the committee, and thank you for again accepting our invitation.
[Translation]
And finally, from the Association pour la Taxation des Transactions financières et pour l’Action Citoyenne (ATTAC-Québec), we have two representatives: Claude Vaillancourt, its President, and Jacques Bouchard, its Secretary General.
Thank you both for accepting our invitation.
[English]
Welcome to all of you. We will proceed in the order that you were introduced, so therefore I would ask Mr. Moore to make his presentation, to be followed by Mr. Howlett and then followed by Mr. Vaillancourt. The senators will be asking questions after your presentations.
[Translation]
The floor is yours, Mr. Moore.
[English]
Bruce Moore, Member of the Board, Transparency International Canada: Good evening, Mr. Chair and members of the committee. Thank you for this opportunity.
TI Canada, a member of the world’s leading anti-corruption organization, with more than 100 chapters worldwide, works with civil society, the private sector and government to advance Canada’s anti-corruption and transparency agenda.
TI Canada believes that identifying the tax gap and reporting on actions to address it should be a priority for any government that is concerned about transparency, maximizing its revenues and ensuring the tax system is fair for all.
While the tax gap encompasses revenues lost due to both intentional and unintentional behaviour, including tax evasion, taxpayer error and, in some cases, unpaid and uncollectible tax liabilities, to the extent it can be measured, TI Canada also considers it important to know the amount of tax not paid as a result of aggressive tax avoidance by using measures which are technically legal but which are contrary to the intention and spirit of the law.
The tax gap needs to be measured regularly so as to determine, first, whether it’s increasing or decreasing; second, why; and third, to assist the agency in identifying ways to reduce the gap by improving compliance. I will later address one of the ways to enable reducing the gap.
As the agency’s own studies indicate, it is difficult to precisely determine the tax gap. This is, of course, not surprising. Tax evasion schemes, money laundering activities and terrorist financing use secrecy to avoid being caught. Tax evaders and others wishing to conceal ill-gotten gains aim to prevent tax authorities from locating the assets, investments and cash that contribute to the tax gap by using complex methods such as the formation of multiple shell companies, tax havens where secrecy is at a premium, and an array of enablers such as legal professionals and accountants who wittingly or unwittingly facilitate non-compliance.
TI Canada wishes to emphasize, first, that the tax gap is extremely large. It is estimated to be at $14.3 billion to $16.5 billion by the 2014 estimates of the CRA. That excludes domestic and international business income. This should, of course, be of very high concern at the federal, provincial and territorial levels. Second, while determining the tax gap may be difficult, it is very important to use the same methodology to estimate the gap and do so on a regular basis, the latter being the intent of Bill S-243.
Why should the tax gap be of concern? If reduced, it could add billions of dollars to the public accounts of the federal, provincial and territorial governments, thereby providing additional funding for health care, social security, education, infrastructure and other priorities of the government.
Moreover, tackling the tax gap and tax non-compliance will help to address growing concerns of fairness and inequality that have contributed to a wave of cynicism and populism in many Western countries, including our own. This cynicism has been engendered, in part, by a sense among many voters that they have not benefited from recent economic growth, from globalization or free trade, and that the bailout of financial institutions following the 2008 economic crisis largely benefited only the wealthy. Indeed, there is growing evidence that the wealthy are becoming wealthier and using their wealth to pay experts to evade their share of taxes in various tax havens worldwide.
TI Canada fully supports all elements of the current proposed amendments, including measuring the tax gap annually, reporting the amounts to the Parliamentary Budget Officer and reporting on the actions being taken to recover money that should have been paid.
Mr. Chairman, I have one further point. Of the many factors that contribute to the tax gap, a key element is the frequent use of complex structures, including shell companies, trusts and hidden beneficial ownership. One way of deterring such activity is by ensuring that the beneficial owners of these structures are known. Today, CRA audits and investigations are stymied when the beneficial owners are not known. Similarly, when the RCMP or local police investigate money laundering and terrorist financing, they often lack the information needed to follow the money trail to the beneficial owners.
Not only should this information be provided to tax authorities and law enforcement, but also to financial service providers such as banks, insurance companies and security dealers that are now obliged to collect such information under very difficult and expensive circumstances. TI Canada further believes that such information should be available publicly so that businesses, suppliers and lenders can perform due diligence to reduce financial and reputational risk and so that civil society and journalists can assist the authorities in their efforts to uncover tax evasion and criminal acts.
On their own, in our opinion, the CRA and law enforcement are incapable of making sufficient progress on tax evasion and money laundering. For example, the Panama Papers describe in vivid detail how one law firm in only one country dealt with 500 banks, approximately 16,000 companies, and an array of wealthy individuals and world leaders, their friends and families, to defraud their own governments. It was not the tax or police authorities who brought these events to light, but a whistle-blower, together with investigating journalists and civil society. Without a public registry of beneficial ownership, sophisticated individuals, their enablers and tax haven jurisdictions will continue to keep ahead of any CRA or police investigations.
Thank you.
Dennis Howlett, Former Executive Director, Canadians for Tax Fairness: Thank you for this opportunity to address this committee and speak about Bill S-243.
I am representing Canadians for Tax Fairness, a non-partisan advocacy group campaigning for fair and progressive tax policies aimed at building a strong and sustainable economy, reducing inequalities and funding quality public services.
Canadians for Tax Fairness supports Bill S-243. In 2012, we launched the Tackle Tax Havens Campaign, which aimed to raise awareness and advocate for action on the growing problem of tax havens. The very first objective of the campaign was to get the government to publicize an official estimate of the size of the tax evasion and avoidance problem. We said this estimate should include domestic practices and the impact of tax havens, and that it should report on the cost to federal, provincial and territorial treasuries. We are very pleased that this issue is now being taken seriously.
Over half of the OECD governments measure tax gaps for one or more areas, and a little less than half publish their analysis. Governments have found that tax gap estimates are helpful in identifying the areas where most tax revenue is lost, which in turn enables them to prioritize and deploy resources where it will achieve the best results and reform tax policies to make them more effective. A 2017 OECD report on measuring the tax gap observed:
Whilst year on year changes are limited in meaning, there are benefits of maintaining a series over time and as up to date as possible.
Bill S-243 may be asking too much by requiring annual reports on the tax gap, but requiring a comprehensive tax gap report every two or three years would be a reasonable and valuable condition to include in this bill.
The CRA has actually begun publishing tax gap reports, starting with a conceptual study on tax gap estimates in 2016. Later that same year, they published a tax gap estimate for the GST and HST. A year later, in June 2017, they published a report on domestic personal income tax compliance. In June of this year, they published a report on the international tax gap for the personal income tax system. Next, they plan to release a report on tax non-compliance by small- and medium-sized enterprises and large corporations.
While this is a welcome development, tax gap estimates produced on a piecemeal basis provide only a partial picture and don’t allow one to make comparative analyses to determine where most revenue is being lost and where it would be best to prioritize and deploy additional enforcement resources. A comprehensive tax gap analysis comparing all the components of the tax system is needed. Maybe we will get a more complete picture when the next study is released, but the studies are all based on the 2014 tax year and are now getting out-of-date.
The CRA tax gap reports also do not include revenue loss estimates for provincial and territorial governments. The CRA collects taxes on behalf of all provincial governments except Quebec, and the full size of the tax gap is not clear without including revenue lost by provincial and territorial governments as well.
There is a value in establishing a baseline to evaluate the effectiveness of the additional resources that have been committed in recent years and new enforcement strategies that have been employed by the current government, but the CRA needs to get on with producing a more up-to-date and comprehensive tax gap study that would provide not just a snapshot but reveal the trends over time.
If the CRA has already begun producing tax gap estimates, one may wonder why we need Bill S-243. I believe legislative requirements are still needed to ensure that tax gap studies continue to be produced and published even if there are changes in government.
There is also a value, as the bill suggests, in having the Parliamentary Budget Officer produce an independent tax gap estimate. Again, this need not be done every year, but an independent analysis — which may employ some different methodologies and assumptions, is not biased as the CRA is in maybe diminishing the size of the problem — would provide policymakers and the public with a different and complementary perspective to better understand the tax gap problem.
But the most important reason for ensuring regular tax gap studies are produced and made public is to ensure that the public and policymakers’ awareness of tax effectiveness and fairness is refreshed and public pressure is harnessed to make governments and the Canada Revenue Agency more accountable for the job they do in making government and the social services we all depend on possible by raising tax revenue.
Thank you.
[Translation]
Claude Vaillancourt, President, Association pour la Taxation des Transactions financières et pour l’Action Citoyenne (ATTAC-Québec): I represent the Association pour la Taxation des Transactions financières et pour l’Action Citoyenne. We are in favour of the proposed measures, but we have come to realize that they are not enough. The most significant problem arises from the social inequalities created when finance is out of control and when the financialization of the economy creates those inequalities. This leads us to focus on the issue of tax havens.
ATTAC is an international association that exists in about two dozen countries. We believe that the problem has to be solved internationally as well as nationally. We are a citizens’ association, trying to create a link between the work of experts and the public: we are somewhere between the two. We provide as much education and information as we can on these very challenging subjects.
For the purposes of this discussion, we would like to remind ourselves that the problem of tax evasion is very real, but there is also a problem of tax avoidance. For us, the difference ben the two is significant. Tax evasion is clearly fraud: it is about hiding or knowingly understating the income one declares. Tax avoidance is more subtle: it is about taking advantages of weaknesses and gray areas in the legislation to legally reduce the income that one has to declare. Tax avoidance perverts the principle of progressive taxation on income and provides affluent individuals and large private companies with legal ways to circumvent their tax obligations.
This is why we are affirming that tax avoidance may comply with the letter of the law but it does not comply with its spirit. It is difficult to get a proper idea of the extent of the phenomenon of tax leakage. A number of estimates suggest that almost half of the world’s financial transactions go through tax havens, not counting the illicit transactions for drugs, weapons, human trafficking and financial crimes. This is a major problem.
In a report made public in June 2018, the Canada Revenue Agency estimated that rich Canadians have hidden between $1 billion and $3 billion in income overseas. We are not talking about private companies, but tax evasion. We have no choice but to consider this figure as a small portion of the fiscal shortfall.
This is the context in which we submit to you our thoughts on Bill S-243. We have followed in the footsteps of Quebec’s Committee on Public Finance, which has devoted a lot of thought to the issue. We do not find it entirely adequate, but it is solid enough to provide us with support. My colleague Jacques Bouchard will present our ideas in Bill S-243 to you..
Jacques Bouchard, Secretary General, Association pour la Taxation des Transactions financières et pour l’Action Citoyenne (ATTAC-Québec): Good evening. As you will gather right from the outset, we are going to proceed clause by clause, so that we can present our comments quickly.
First, we find that the title of the bill in no way matches the objective of the proposed amendments. We feel that tax avoidance has to be included, given that the bill deals only with tax evasion.
As regards clause 2, which seeks to amend subsection 88(2), we are happy that the Canada Revenue Agency’s activity report will inform parliamentarians and Canadians about the results of the agency’s work, including convictions for tax evasion. We support the fact that the CRA will be providing Parliament and Canadians with statistics in order to focus regulations and legislation to effectively combat tax fraud.
We will be making the same comments on the substance of clause 3. We propose going even further by adding to the list any professionals—lawyers, bankers, accountants—who have participated in the process of any tax evasion for which there has been a conviction. We remind you that tax evasion is theft and that it is normal for individuals and companies that profit from it to be convicted and identified. It should be just as normal that the individuals and companies that knowingly participate in the fraud by aiding and abetting those companies and individuals should also be prosecuted and identified in the report. We believe that the message sent by including those professionals in a public report in this way will, in the short and medium term, encourage them to stop aiding and abetting individuals and companies in the practice of tax evasion.
As for clause 3, which amends the definition of “tax gap”, we regret the limited, very strict definition of tax evasion that ignores the whole issue of tax avoidance and aggressive tax planning. The CRA must have the mandate to estimate and include in its records the annual profits made by multinationals located in Canada that adopt different strategies, of various degrees of sophistication, to dodge their fair and equitable share of taxes where they do business.
As the journal Alternatives économiques has once more concluded, in its most recent September issue, we are convinced that fight against tax evasion must involve a complete re-working of the way in which multinational companies are taxed. Unlike profits, consumers cannot be easily moved away. This simple observation points out that the real activity, the sales and the sales revenue, must be considered rather than the profits, which can easily be manipulated. The challenge is simultaneously to understand the companies’ tax avoidance strategies and to establish a legal and political reform that will involve renegotiating tax agreements. We feel that the CRA’s duty is to inform Parliament and Canadians of these practices and the ways in which to combat them.
Finally, we believe that the amendments to the legislation should also give the CRA the mandate to create a registry of information on the final beneficiaries in order to combat the trusts and anonymous shell-companies. In this, we echo recommendation 32 in the Committee on Public Finance’s report on tax havens used for tax evasion and tax avoidance, and the recommendations from experts on the matter, such as Gabriel Zucman. He considers this approach to be one of the three indispensable solutions in starting an effective fight against tax evasion.
In this context, we remind you that, when the Senate was studying the Cannabis Act, it already proposed the creation of a registry of final beneficiaries in order to break through the banking secrets of tax havens and reveal the identity of investors.Unfortunately, the amendment was defeated. It seems to us that the Senate’s sensitivity to the issue should extend to all revenues and investments from tax havens.
Finally, as for the proposed amendments to the act that allow information to be distributed, we are in full agreement that information should be available and analyzed. It is important for us that information can reach Parliament and the public so that we are able to make informed decisions as much as possible. That is our position in a nutshell.
[English]
Senator Eaton: Thank you very much for your testimony.
Mr. Moore, you said in your remarks that the CRA was not looking at the tax gap between the provinces and territories and that our tax gap was between $14 billion and $16 billion a year. There are different estimates from different people, but it’s very large. Why do you think governments of all stripes aren’t showing more concern? That’s a lot of money for health, education, military procurement and infrastructure. I’m stunned. Why do you think they are so laissez-faire, if I can say that about it? What have you thought about this?
Mr. Moore: Other than not being able to ask ourselves a question and finding difficulty answering it — as is the case with you — it seems to us that there are powerful vested interests, both political and in the economy, who believe that change is not necessary, who are not accepting this loss and the penalty that would bring to other ways in which those same investors would or would not invest in Canada. It’s difficult to understand this beyond basically saying it’s not understood.
In our organization, we know our legal and financial committees are made up of some of the largest legal firms in this country, organizations of extremely high repute. They report within their industry the extent to which they have people who provide these enabling services — legal, financial and others — to industry and individuals of wealth and are actually benefiting by providing this service. If we were to look at our interest in combating corruption, one might say that these people are themselves involved in activities using the law against the spirit of the law and are encouraging that this activity continue because of the gains they’re achieving. But that answer is not satisfying because there’s not a clear answer to your question.
Senator Eaton: I just thought you might have some thoughts. That leads me into my next question, which any of you can answer. Is there a ceiling where people look to avoid taxes? Should we simplify the tax system by, say, going to a flat tax where there are no loopholes? Do you all want to answer?
Mr. Howlett: I’ll answer that. I would not advocate a flat tax because that would be unfair in terms of accentuating income disparities in Canada. However, eliminating some of the tax loopholes would be a very good idea, especially to tackle the problem —
Senator Eaton: I don’t think you can have one without the other.
Mr. Howlett: Well, the personal income tax system has all kinds of tax expenditures, they’re called, which mostly benefit the rich and make the tax system unfair, but also make it much more complex and difficult to enforce.
Similarly, with the corporate tax system, the rules are fuzzy. There is, for example, something called the arm’s length rule. Companies that have transactions within a group of companies should have a price that would be similar to what would happen if it were an arm’s length company. But now, so much of the trade is within companies that it’s really hard to enforce that kind of rule, so companies get away with using tax havens to lower their tax.
Senator Eaton: But is there a ceiling, do you think, that pushes people to go offshore, to start looking, getting very aggressive?
Mr. Howlett: The wealthy are the ones who use tax havens the most. Ordinary taxpayers do not use tax havens.
Senator Eaton: I will not press. Okay. You haven’t answered my question, but thank you very much.
[Translation]
Mr. Vaillancourt: We are completely against the idea of having a single tax bracket. We find it completely unfair that a low-income person has to pay the same rate as a high-income person.
Senator Eaton: It does not need to be a single tax bracket.
[English]
You can have a flat tax for income below that and you can have another tax level for income above that.
[Translation]
Mr. Vaillancourt: We would like to see more tax brackets, with new brackets added for higher incomes. The focus on tax avoidance and tax evasion has to be more on higher-income people as the priority. They are the ones who use tax havens the most. In our view, Canada has not done enough in this regard.
Senator Pratte: Mr. Bouchard, I gather from your comments that you find the definition of tax gap in the bill to be much too narrow.
[English]
I have a question for Mr. Moore and Mr. Howlett. What do you think of the definition of the fiscal gap that we find in the bill? Is it too narrow?
[Translation]
Let me ask Mr. Bouchard too. How do we define it? In a bill, we cannot just talk about tax evasion, because that is a little vague. The definition has to be more precise, and that is where things get complicated.
[English]
Mr. Howlett: I would support making the tax gap include aggressive tax avoidance. There is a legal definition. It’s a bit vague, but it’s more than just avoidance, aggressive tax avoidance, and there is in Canadian tax law the anti-avoidance rule. There are some court rulings and so on that help define that somewhat, still a little bit fuzzily, but that should be included in tax gap estimates. The problem arises most seriously in the area of corporate use of tax havens, because many corporations use tax havens to shift profits but are able to do that within the fuzzy definition of the current corporate tax law, so that needs to be tightened up by reforming the tax law and making it clearer, but also the tax gap estimate should include both actual illegal activity as well as another figure perhaps for what the estimate is for tax losses due to aggressive tax avoidance.
[Translation]
Mr. Bouchard: As for the way to include the definition in the bill, I am not a lawyer so I would not be able to come up with an idea for you.
However, if we are talking about the principle of tax evasion, most tax experts, most people, know exactly what it is about. Basically, they are practices that alter the spirit of the legislation and lead people to interpret it as they see fit. That is where things get very complicated.
Moreover, the CRA spends a huge amount of time in court to determine whether a tax practice is aggressive or not or whether it is legal or not. There are endless debates on the issue. I still feel that it is important to include a definition in the legal text and I trust our lawmakers to find the appropriate terms.
[English]
Senator Marshall: This bill, if it passes, is really the first step. You measure the tax gap, and we think it’s going to be, say, $15 billion, but the objective at the end of the day is to collect the taxes, so this is just step one.
What are your expectations of what will happen once the bill passes and once the Parliamentary Budget Officer does his calculations? Does it just sit on the shelf? What would be your expectations of, for example, the Canada Revenue Agency?
Mr. Moore: We think that this will give them more tools to pursue their objectives. When we have met with them, their real concern, as expressed by others, is having the resources to look more deeply at how to close some of the loopholes. Whatever the tax system is, it’s always going to be prone to that, but there is good knowledge of what many of the loopholes in fact are.
When you talk about this being the beginning, for us, you will not be able to proceed as far as many would wish if we do not set up registries of beneficial ownership, because people will be able, through profit shifting, as Mr. Howlett has mentioned, and other mechanisms, divert funds into these mechanisms. We will not address this problem unless we look at how to address the issues of those companies that operate in cyberspace, like Google and Amazon, which are avoiding taxes by using these havens. We haven’t figured out how to deal with this new international world of the way business is being done. But this remains a very important first step because it’s a signal to all those, and those potential partners, to help in identifying what the loopholes are and ways to close them.
Senator Marshall: Thank you.
Mr. Howlett, I’d like to hear your views. I want to mention that I read an article on your website, What is Wrong at the CRA? And How to Fix It, so I’d be interested in hearing your views.
Mr. Howlett: The CRA itself is starting to measure the tax gap and they have admitted that they’re losing, even just in the studies they’ve done so far, about $18 billion. That is 8.6 per cent of the personal income tax system. We’re talking about a huge problem here, but it’s an issue that was not given due attention because it wasn’t clear how big the problem was. When they complete their study of the corporate tax, my guess is that will add at least another $6 billion to lost revenue, and we’re getting close to $25 billion. That should create some pressure on policymakers to do something about it.
Now, I am pleased that the current government did take some of the recommendations in What is Wrong at the CRA? And How to Fix It, especially on the enforcement strategies, prioritizing offshore and corporate and wealthy individuals. That’s a good move. But the next step is to reform the tax code — to simplify it, make it clearer, make it easier to enforce and make it fair at the same time. That would be the next step. When we’re looking at potentially $25 billion, there is good reason to make that a top priority for legislative action.
Senator Marshall: Thank you.
Mr. Vaillancourt and/or Mr. Bouchard? It could be both of you.
[Translation]
Mr. Vaillancourt: No, that’s fine.
The Chair: You have no comments?
[English]
No comments, Senator Marshall. Another question?
Senator Marshall: No, but I must say either Mr. Vaillancourt or Mr. Bouchard did make some comments in their opening remarks, so I’ll go back and look at those.
[Translation]
Mr. Vaillancourt: I would like to comment. We believe that tax fraud must be condemned. However, behind the tax fraud is an entire infrastructure of people who allow the tax fraud to take place. Any additional steps in the legislation would be to target those responsible for that as well.
We have heard accounts from people who consult others who may not be fraudsters, but who suggest ways for them to get round paying tax. We believe that the legislation should target those people too.
Mr. Bouchard: You can also go on the Internet; it is very easy.
Senator Bellemare: I feel that it is important to understand where the shortfalls come from in order to know how to tackle the problem. I gather that we have estimates here. Mr. Howlett, for example, was talking about a tax gap as high as $16 billion.
Here is my question. Does a lot of this tax gap come from tax avoidance and tax havens? Could it be linked to the underground economy? If so, we are not going to apply the same measures in solving the problem. With the underground economy, we can take much more positive measures, as Sweden has already done. But tax avoidance is something else.
According to your estimates, could you tell us where the tax gap comes from? First, we know that your estimates are based on individuals, not companies. Is that the case?
[English]
Mr. Howlett: The figures that I shared were the figures in the CRA tax gap reports. They have identified $2.2 billion not collected and $6.5 billion under-reported income, which includes criminal income, so that totals, on the personal income side, $8.7 billion. Then they did a separate report on the nonpayment of GST and HST, and they concluded that that came to about $7.8 billion. Then the most recent report on international tax evasion was 0.8 to $3 billion. Those are the studies they have produced so far. I did my estimate on the international tax avoidance, and I think it’s more like $10 billion to $15 billion. The assumptions and the methodologies differ. If anything, these, in my view, are low figures, and they don’t include the forthcoming study on corporate tax.
With the corporate tax, the majority of it is probably avoidance, but with the personal income tax, what we’re mostly talking about there is evasion, either criminal evasion or non-reporting of income.
When you add it all up together, it’s a huge number. I don’t know what methodology they’re going to use for the corporate income tax, but that’s where it becomes very important to look at aggressive tax avoidance as well as evasion. If you look at the aggressive tax avoidance, I’m sure the total will come to over $6 billion, and the grand total will be very close to $25 billion.
Mr. Moore: When you examine this problem by asking how we divide it, however we divide it, it’s clear with CRA and other officials that it’s being able to understand its nature, not just how much is in which category.
It’s clear that Canada is among the lowest-ranked countries in conforming with agreements that we signed onto with the G20 about beneficial ownership. By not acting in this area, we’re allowing a lot of money to come into the country, and often it is money that has gone out of Canada into tax havens from criminal activity in our own country and brought back into our country and whitewashed by being invested in legal enterprises.
We have a lack of being able to know who the owners are of all the real estate in Toronto and Vancouver. In studies of our own that the government at the highest levels thinks are very accurate, those housing prices and the market is being highly distorted by money that’s been laundered outside through tax havens and brought back in to buy real estate, and our laws do not require that the actual real beneficiaries and owners of those properties are known. The same applies with buying companies and making other forms of investments where the enablers are sometimes lawyers or banks and others.
But it’s not a matter of putting the finger on the individuals. As we’ve tried to point out to you, we can identify the issue, but there is not a single silver bullet to resolve it. In our view, unless we have a way to know who is making these investments — “know your client” as the terminology goes. Banks have ways to do that for the RCMP and those people skilled in trying to look at money laundering, the use of tax havens and ways they have to be registered.
It is very sad that we, along with Brazil and South Korea, are the only three countries of the G20 that receive the lowest rating for enforcing the agreements on beneficial ownership, and we fell from being in the higher category to the lowest in the latest ratings.
These things, in our view, are related. It’s not to make less of your point of understanding the breakdown that Mr. Howlett has explained, but some of the tools to deal with it are not necessarily only about coming at it through each individual area, because the RCMP and other police officials are saying beneficial ownership would be a tool that would allow them to get on with doing the job because people would not be able to whitewash their money in Canada because it’s so easy to register a business or other forms of trusts and investments.
Senator Neufeld: Thank you, gentlemen, for being here. Some of the things you say are interesting to me.
I get the theme from all four of you that you’re looking at tax havens, large companies and rich people. Would that be correct? I kind of got that feeling. You all said it enough. It’s rich people, it’s tax havens, and it’s large companies.
I live in a province that has a sales tax. Right next door, 100 miles away, is a province that doesn’t have a sales tax. A lot of average citizens go to that other province to buy fridges, stoves, building products, all that kind of thing. Is that in your estimate too? I don’t know how you come up with all the dollar amounts. I’m not disputing the number. I’m just trying to understand. Do you look at those kinds of things too? Because that’s the average person working in places like that. Do you call that tax avoidance? Do you call that not paying your fair share, or is that not what you’re talking about?
Mr. Howlett: What I was referring to was the Canada Revenue Agency tax gap reports, and the one they did on the GST/HST would not include those in Saskatchewan or B.C. going across the border into Alberta. That would not be included. But they would look at plumbers or other tradespeople who don’t collect GST if they get cash. That kind of thing would be included.
For the most part, the biggest areas of tax evasion are wealthy individuals. Because if you are employed, your employer tells the CRA what your salary is. If you say anything different on your tax return, they’ll ask you questions, so the opportunity to avoid or evade taxes is not available to 80 or 85 per cent of Canadians. We’re talking about, to some extent, self-employed, small business people who have more ways to under-report their income, and it’s harder for the government to catch that.
But for the really large numbers, we’re talking about those who use tax havens. You can’t do that without the enablers. Most people can’t go to the Cayman Islands and set it up. They need tax accountants and accounting firms and lawyers to be able to do that for them. That’s why it’s so important to go after those enablers and not just the individual. I have heard from individuals who have said, “I didn’t want to avoid taxes. I didn’t want to evade taxes, but my tax accountant talked me into it.”
Senator Neufeld: That sounds good to me. I have a bridge for sale.
Mr. Howlett: You have to look at the big picture and nip it in the bud, so to speak, and go after the tax enablers.
Senator Neufeld: I have one more question. You’re not talking about underground activities, then?
Mr. Howlett: The CRA report did include looking at illegal activities. Illegal sales of drugs would be included in the estimate. They would estimate what tax they should have paid if they were paying tax on that economic activity, so those illegal activities are included. They do try to make some estimates for some of the money laundering and other illegal activities, but as Mr. Moore pointed out, it’s very difficult to have accurate estimates about that because Canada is one of the worst countries in terms of having that information available to law enforcement and tax collection officials.
[Translation]
Mr. Bouchard: Basically, you are also raising the problem of what is called tax competition between provinces and between countries. Here is what enters into that discussion: Apple, which sells products all over Canada, uses tax avoidance to its advantage by a policy of transfer pricing. The result is that they do not pay a lot of tax in relation to their sales figures. Tomorrow morning, if we taxed Apple on the amount they sell and not on the profits they declare, would they leave Canada because they no longer wanted to do business with our consumers? That is not even a question. When we talk about tax avoidance and tax competition, those factors have to be considered.
I would also like to answer Senator Bellemare’s question. It is very difficult to try to establish the amounts lost by means such as transfer pricing and the various techniques of tax avoidance. There are people, whistleblowers, who point to huge amounts of money, amounts we cannot even imagine.
For example, that is how we found out that Apple has a secret agreement with Luxembourg. So, because it is a multinational, it declares its profits for its actual activities in Luxembourg and pays no taxes because of the secret agreement. So it is very difficult to establish exact amounts. All kinds of techniques and calculations are involved, so it is very difficult to answer your question.
Mr. Vaillancourt: I would like to add something about that. As an international organization, we are often in contact with our European colleagues. With tax avoidance, we have come to realize that they have much more data than we can get here. If there is a job to be done in Canada, it is to find out about the real consequences of tax avoidance.
With tax evasion, we are making useful progress and the bill certainly moves in that direction. However, with tax avoidance, we do not have the information we need. We were actually quite shocked to see the extent to which the Europeans have specific data and specific amounts that they can evaluate with any given major transnational company. Over here, when we tried to conduct research to find the equivalent information, we simply got nowhere.
The Chair: And they had the information?
Mr. Vaillancourt: Yes, and for very specific companies.
[English]
Senator M. Deacon: Thank you for being here this evening. I’m hoping I’m staying on script, but I’ve been thinking about this. We are talking about a pretty important issue. The numbers continue to rise, and they’re not in the millions but billions.
Next Tuesday in the Senate, we have the opportunity of having the Finance Minister in for Question Period. It’s a routine opportunity on Tuesday afternoons. I’ve been thinking about what I would like to ask him. If you had the Minister of Finance in the room, what would you be asking him on this topic?
Mr. Moore: We each seem to have our particular issues. Because of our focus on transparency, we would be asking the minister why his government is not complying with agreements with the G20 and following the example where the European Union has, in its 28 member countries, decided to establish public registries of beneficial ownership as a way to deal with anti-money laundering, use of tax havens, et cetera. What is it that is preventing us, when all of our allies are moving forward, from establishing these registries as a tool to facilitate our law enforcement and tax agencies being able to reduce the amount of tax gap?
Mr. Howlett: I would ask whether the minister is prepared to look at reforming the Canadian corporate income tax law to make it clearer and to make it more difficult for them to shift profits to tax havens in order to lower their tax bill. There are some excellent examples of other countries that have reformed their corporate tax law to do precisely that, and Canada lags behind in that regard.
[Translation]
Mr. Vaillancourt: We would actually like to ask the Canadian government why it continues to sign tax agreements with tax havens, tax agreements that include provisions on double taxation. What does that mean? For example, it means that if a company pays tax in a tax haven with which we have an agreement, it does not need to pay taxes here. With tax agreements signed with other countries that have a tax structure the equivalent of ours, we have absolutely no comment. We believe that that is perfectly proper and perfectly understandable. However, in tax havens where almost no tax is payable, it means that huge amounts of money can be transferred and that is money lost to Quebec taxpayers, because the money never finds its way into our tax income.
With all the scandals involving tax havens, why does the Canadian government continue to sign those agreements? It leaves us just speechless.
Mr. Bouchard: Perhaps I could add a comment. With bilateral and trilateral agreements, some things could be negotiated in terms of enforcing tax legislation. Currently, no one is doing anything about that.
[English]
Senator M. Deacon: I think I can work with this.
Senator Moncion: I can answer the second question about looking at Canadian corporate income tax. I think he tried, and there was a very big backlash in the last year. I understand where you’re coming from. I’m just not thinking that it might be done in the near future.
I have just a question from your comment about transparency. You were talking about the beneficial ownership. In what year was the international agreement established? You’re saying that Canada is not part of that agreement.
Mr. Moore: No. Canada did sign an agreement with the other G20 leaders related to 10 principles that would govern how beneficial ownership would be addressed in each of the countries. Canada signed on to that in 2013. In each of the assessments since that time, we seem to be falling lower and lower in terms of how we measure up against the other countries. In fact, it’s not even against the other countries, because there are seven countries that are not members of the G20 who asked the G20 leaders if, when they were being assessed, whether their countries could be included in the assessment, thinking this would be an international tool to encourage all governments, therefore 27 governments, to come up and try to be measured by the same standard. So we fell lower not within the 20 but within the augmented 27 countries.
Senator Moncion: Thank you.
My question is about some of the comments that were made about the lawyers and accountants who do fiscal planning. They use what is available in the law to do fiscal planning. When we talk about tax loopholes, it’s even part of your own personal financial planning. You find ways of investing, making more money and finding ways of paying less income tax. If you have a very good financial planner, they will find ways for you to save. It’s the same when we’re looking at accountants and lawyers who specialize in tax planning. I’ve heard a lot of negative comments about these groups, and I just want you to go a little bit further into what you’re getting it. It’s as if we’re putting all our eggs in the same basket and saying what’s out there is not very good, or am I mistaken?
Mr. Howlett: Well, I personally helped to expose the Isle of Man scam that KPMG facilitated. There was a wealthy family in Victoria who were convicted of tax evasion using this scheme. I worked with the CBC to expose this, it got lots of media attention in a documentary, and the government has collected some taxes owed by these wealthy individuals. But though the court documents and the evidence that was presented in this case against the wealthy Victoria family, many tax lawyers say there was sufficient evidence to have convicted KPMG for facilitating tax evasion, which is another criminal activity. The government has yet to bring them to court to charge them, and I don’t understand why.
When I appeared before the House of Commons Finance Committee that actually had a whole study on this issue, the day I was to appear, the House of Commons committee was served with a warning letter from the lawyers of KPMG and I wasn’t allowed to talk about the KPMG case. They are very powerful, and yet the government hires KPMG to do accounting services. They give them millions and millions of dollars, even though I think companies like that are under suspicion. I know they are not guilty until proven in court, but at the very least they should be taken to court and let a court determine what they’ve been doing.
In the Isle of Man case, they told people to donate money to an agent in the Isle of man, say it’s a charitable donation and then get your money back at any time you want. I’m sure that won’t pass muster in a court of law, yet they haven’t taken them to court. This is the kind of thing that really needs to be addressed, and even though governments go after some individuals, they have not gone after the facilitators for the most part.
[Translation]
Mr. Vaillancourt: I feel that you are right to say that we all try and play cat and mouse with the taxman. The problem is one of proportion. Let me tell you a story. A business man came to me one day to complain. He said: “it costs a lot of money to not pay tax.” There is a whole system behind it. It means that that person was ready to pay a lot of money to save even more money. If the system works like that, we have to ask, whether it proves that something is basically wrong.
That is why we are so insistent that the issue of tax avoidance is fundamental. Yes, we have tax evasion, but tax avoidance is even more evasive because, basically, the organizations that my colleague was talking about are legitimate ones, developing extremely complex systems. That is why we believe that our real efforts should be made there, so that we do not say: “everyone is doing it, so go ahead”. Instead, we should be saying that, at some point, it has to stop.
This is even more so because there is no commonality between the small adjustments made by someone earning $40,000 per year and those made by a large multinational making billions of dollars in profits each year. We have to deal with those big boys because that will have an impact on the state’s revenue.
Mr. Bouchard: Let me quote recommendation 24 of the report by the Committee on Public Finance in Quebec. It reads as follows:
[to acknowledge] in the appropriate legislation that professionals involved in tax evasion or abusive tax avoidance are involved in criminal activity.
The Criminal Code is clearly federal, but, all the same, that is what Quebec parliamentarians feel.
The Chair: Thank you. If you could send the report to the clerk as information for the committee, it would be appreciated.
[English]
Mr. Moore: I would hope the comments we’re making in no way detract from the importance of this particular bill. We have to work away at these things over time and we have to make progress where it is possible. The area that I think we’re all concerned about — tax avoidance — is the most complicated. We’re going to have to find a way to address that by closing the loopholes that allow this legal activity to go on.
We talk to many people in industry who say, “We hear the debate, but we’re getting a little bit exhausted being told we’re doing something wrong. Change the laws and we will change our behaviour.” I would hope the others will join me in saying that as you deal with this bill, what may be more important is that you start to create a commitment to some of the other areas that need to be addressed. We’ve each mentioned the ones that for our organizations are similar but different. When I talk about beneficial ownership and this organization talks about it more through the tax orientation, at the end of the day, it’s public revenues that we’re losing. In our case, when we meet with government, the lack of beneficial ownerships means that our governments are contracting people, spending public money to buy services and goods and do not necessarily know who are the beneficial owners of many of these entities that are qualified under our current system to compete for public funding and public projects.
These are all contributing factors, and hopefully part of your report will be to outline those you want reviewed more deeply.
Senator Andreychuk: Thank you, Mr. Moore. You’ve made my question much shorter. It is exactly that. We’re studying a bill. We keep talking about tax evasion and tax avoidance. We’re talking about the enablers, et cetera. The bill is rather specific and is a start, but I also hear you saying transparency. Is there any way that this bill should be improved on the issue of transparency?
Just as a preface, I think you’re going to get a pushback from a lot of professionals because they are honest, by and large. They have their own disciplinary committees, et cetera. When you say they’re enablers, all of them, it starts a different dialogue than we need. You cast a wide net, and we’re eventually going to have to do it all.
I would add one other thing: We need more international agreements to coordinate, because I would have a lovely debate with you about Europe and how evasion and avoidance continue there. It’s not over there either.
Is there a way that we can look at Bill S-243 as a start and add something more with transparency while we start looking at criminal activity, evasion and then, I think as a separate category, the avoidance, et cetera? It’s too much for the public to absorb and certainly this committee and the bill.
Mr. Moore: We did not look at this in terms of how it could be improved because we’ve often seen things stalled as soon as people want to make it more than what it was intended to be. If this committee’s work is going to continue before the bill will go forward for final consideration and you would like that information, we’d be happy to provide that. However, we’d prefer to have more of the stepping stones built for this larger debate, and on that basis we’re quite satisfied with this bill.
Mr. Howlett: There is one small thing I would suggest, and this could be a small amendment that might improve it. That would be to clarify that the tax gap should include provincial and territorial revenue that’s lost as well as the federal. It’s not clear in the wording of the bill, and I think it would be better to have the complete picture.
The Chair: That note will be taken by our analyst, Mr. Howlett. Thank you.
[Translation]
Mr. Vaillancourt: We find that it is clear too. It is a step in the right direction, without doubt, but we would like you not to stop there and to consider everything we have said so that there can be some progress in this file, which we consider to be fundamental.
Mr. Bouchard: The solution does not come from other countries. Canada must play a role, especially by including this struggle in our foreign policy, since it is so important for all Canadians.
[English]
The Chair: Thank you very much, witnesses, for sharing your recommendations and your opinions.
Honourable senators, we will now suspend in order to go into an in camera meeting for items of information and decisions.
(The committee continued in camera.)