Proceedings of the Standing Senate Committee on
National Finance
Issue No. 74 - Evidence - September 25, 2018
OTTAWA, Tuesday, September 25, 2018
The Standing Senate Committee on National Finance, to which was referred Bill S-243, An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax), met this day at 9:30 a.m. to give consideration to the bill.
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, senator from New Brunswick and chair of the committee.
[Translation]
I’d like to welcome all those who are present in the room as well as all the Canadian men and women who are watching us on television or online.
[English]
Also, as a reminder to those watching, the committee hearings are open to the public and also available online at SenCanada.ca. At this time I would like to ask the senators to introduce themselves.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Forest: Éric Forest from the Gulf region of Quebec.
Senator Moncion: Lucie Moncion from Ontario.
[English]
Senator M. Deacon: Marty Deacon from Ontario.
Senator Marshall: Elizabeth Marshall from Newfoundland and Labrador.
Senator Eaton: Senator Eaton from Ontario.
Senator Neufeld: Richard Neufeld from British Columbia.
The Chair: Thank you. I would also like to introduce and recognize the clerk of the committee, Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who team up to support the work of this committee.
This morning we continue our study of Bill S-243, An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax).
Bill S-243 was introduced in the Senate of Canada on November 22, 2017, by our colleague Senator Percy Downe. It received second reading on June 5 and was referred to the Standing Senate Committee on National Finance the same day.
Honourable senators, last week we heard from Senator Downe, the sponsor of the bill. Today we will hear from individuals and organizations who have a vested interest in the study of the bill.
For the first 45 minutes of our meeting this morning, we will hear from an expert on the tax gap issue, a chartered accountant and a political economist. Our first witness is Richard Murphy, Professor of Practice in International Political Economy at City, Director, Tax Research, University of London. He is appearing via video conference from the U.K.
Professor Murphy, thank you. Can you hear us?
Richard Murphy, Professor of Practice in International Political Economy at City, Director, Tax Research, University of London, as an individual: I can. Thank you for inviting me.
The Chair: Thank you for being with us this morning. Please make your opening remarks, which will be followed by questions from the senators.
Mr. Murphy: Thank you for asking me to talk about the tax gap. It is something I have been researching for more than a decade, and it is a core part of my current academic research work. I have, in that work, looked at tax gaps across Europe, in particular, but also elsewhere, so I’m interested in the bill that you are discussing.
I have reviewed the legislation you sent to me with care, and I have noted the legislation’s draft definitions, which I would say I welcome, but which I would also say are, to some extent, problematic. I think I would like to draw your attention to those issues where I think greater attention is required to make sure you get the outcome you want.
I stress that what I am interested in is the provision of decision-useful information so that you know what is really going on, as does everyone else.
My first concern with the drafting that you have is that it only considers any taxes that are under your Income Tax Act. Now, if there are other taxes, they do therefore fall outside the remit of the provisions that you are looking at. I am aware that most countries have a number of taxes that will come under other types of legislation. Tax gaps do not exist just in income taxes, capital gains taxes and corporate income taxes or on dividends and so on as the draft bill suggests, nor are they just for some types of foreign income, as the draft bill also suggests. They can be elsewhere as well, so I think that you need to wonder whether the drafting is wide enough in that sense.
Second, I’m a little concerned with the drafting as it stands because it appears to quite ably identify what might be called tax evasion, in other words, fraudulent nonpayment by those who choose not to declare their income or make false claims for expenses, and those two do make up tax evasion. It also successfully identifies tax that is not paid but that is due. In other words, it has been recognized as payable but it is not collected, which is bad debt in accounting terms.
What I am not convinced about with regard to the definition is whether it successfully identifies tax avoidance. That is often the use, by sophisticated taxpayers, of the services of professional advisers to not pay tax because they have used loopholes in the legislation in ways that you as legislators did not intend. To me, it is not at all clear that the definition will cover that arrangement. I think that’s a significant weakness.
Third, I think there are also other dimensions to the tax gap that you might wish to consider. Whilst many people think that the tax gap is the difference between the tax that will be owing using current legislation compared to tax actually paid, I believe that if legislators and policy-makers are really to understand the tax gap appropriately, they should be aware of the value of all allowances and reliefs that are provided by you, by choice, within the tax system. So for example, how much does it cost to give various allowances and reliefs and lower rates, but also how much do higher rates of tax collect over and above standard rates, for example?
Now, the reason for this is that some of that measurement will pick up tax avoidance — I think that’s important — but you also need to understand the total scope of tax that is available within the colony to decide how best to use resources. Obviously, collecting tax unpaid is important, but understanding how much tax is unpaid as a result of your choice is also important.
The IMF and the European Union, who look at this issue with regard to our value-added tax, which is common to all 28 member states — or maybe 27 in the future, of course — call this a tax policy gap. I think that you aren’t identifying that, and I believe that it would be extremely useful if you did extend the definition and require an annual assessment of that as well, because then you would be better informed to make decisions on your overall tax system.
So I believe it would significantly extend your understanding if those three issues were really addressed.
I am also concerned about the way in which the draft legislation proposes that the tax gap data should be estimated. What you are doing is what we in academia and elsewhere call a bottom-up approach. The alternative is, by the way, a top-down approach. There are fundamentally only two, but I will explain what a bottom-up approach is first because it is what you’re using. Fundamentally, it asks the tax authority to look at the tax returns that it gets, and then, having looked at those tax returns, audit some of them and then estimate the total error rate across the population of tax returns received.
Now, frankly, I think the likely risk in that should be fairly obvious from the description. The risk is that, of course, many tax evaders try not to submit a tax return at all. The latest estimate of the shadow economy in Canada that I have seen, which is in an International Monetary Fund paper published, I think, late last year but actually having a 2018 reference by two academics, Medina and Schneider, suggests that the Canadian shadow economy is 13.92 per cent of the total economy of Canada. In other words, one dollar in seven is not being declared.
My suggestion to you is that the bottom-up approach that you are proposing is very useful in terms of appraising the risk within the tax returns that are received, and in appraising the adequacy of the resources that are given to your tax authority to audit those tax returns, and even to estimate the yield that might arise by giving your tax authority more resources to audit those tax returns; but it is insufficient as a basis for estimating the total tax gap.
Work in this area is exploratory at the moment. I fully admit that. The IMF has encouraged countries to look at this area more thoroughly. The basic approach is to actually look at the gross domestic product figures for the country. That is problematic because, does that sufficiently include the shadow economy or not? One has to consider that issue. To look at the GDP and say, actually, from this top-down macroeconomic approach, looking at the whole economy, what the potential tax yield would be, then to also compare that with the total tax collected, you would end up with a different number. The top-down approach and the bottom-up approach very rarely reconcile, and there is a good reason, which is that so many tax evaders do not submit a tax return at all. Estimating a number for doing that is very hard. Let’s not beat around the bush. This is difficult stuff to do, but that is the virtue of a top-down approach.
I would suggest to you that, given that you have a good national statistics authority and that you have good data on GDP — I’m aware of that, I have seen it, I know about it — it would be wise to include a requirement of your tax authority to also look at a top-down measure from GDP downwards.
Now this is familiar to those in the area with regard to sales and turnover taxes. It’s less familiar with regard to things like income taxes. I am doing experimental work on it, and I believe it is possible. I would be willing to share some of that work with the committee if you were interested, but my point is that this would definitely provide you with more decision-useful information.
If you are measuring the tax gap, not to criticize anybody but to instead to make useful decisions about the allocation of resources — and I presume that is your goal; I do not see any other reason to do it, it costs money to do this work, and you want to increase yield — then I believe that would help.
In summary, in regard to my epic comments, I welcome what you are doing. I think if you only did what was on the table, it would be useful. I do, however, think you could go much further, and in the process you could beat much more Canadian tax abuse and create a fairer, more equal society, in particular with regard to honest businesses who lose out so badly from tax abuse because they are undermined by their competitors who are cheating. If you did that I believe you would end up with a better economy in Canada as a whole, which is what motivates my work. Thank you.
The Chair: Thank you, Professor Murphy.
Senator Eaton: Thank you, Dr. Murphy. I was reading an article in the Guardian that says you’re largely responsible for Corbynomics. The article says the central planks of the Liberal Party are to close the tax gap. It’s money that you have identified as lost through tax avoidance and evasion by high-net-worth individuals and corporations.
I was wondering, looking at it perhaps from another way, if I was a government, at what level do you think or have you been able to determine that people actually look for ways to avoid taxes? Is there a percentage? Is it 55 per cent or 50 per cent where people say, “Enough, I’m going to look for ways to not pay taxes”?
Mr. Murphy: If I might answer first of all, Jeremy Corbyn and I do know each other. I’m not a member of the Labour Party, and I am not a politician. They borrowed my ideas. I didn’t write them for him. I didn’t act in a political capacity when creating that idea.
With regard to when people evade, some people evade all taxes. It is just, literally for them, an issue of, I will not pay tax. I have certainly come across people who declare no income to avoid paying tax.
There is no evidence that there is a particular tax rate that encourages or reduces tax avoidance. The Laffer Curve, which is meant to indicate when there is a disincentive arising as a result of high rates of tax, is, in my opinion, a myth, and Arthur Laffer and I will be debating that issue at the OECD next week, which will be quite fun, at least from my perspective. I do not think that, for example, 50 per cent is the reason why somebody would evade tax. The same person who would evade tax at 50 per cent might well evade tax at 20 per cent. There is no evidence, for example, that the rate of corporate tax avoidance or the actual number of tax avoidance schemes has gone down because corporation tax rates have been cut around the world on a steadily declining trend. That has not stopped corporate tax avoidance. So my answer is that it isn’t the tax rate that persuades this. Some people seem inclined to pay no tax at all and will use whatever measures they must to get around it. Others are completely inclined.
I will share a discussion I had with a very senior tax official, whom I won’t name, in the U.K. He thought 50 per cent of taxpayers were always inclined to pay their taxes. Between another 30 per cent and 40 per cent could be persuaded to pay their taxes, and 10 per cent were absolutely fundamentally opposed to any tax, whatever it was, whenever they saw it. I sort of have a sense that that’s right. But to get to 90-plus per cent collection is the goal, and I very much doubt that Canada is there at present.
Senator Eaton: Do you feel that our tax system is too complicated? Would it be simpler if we went to some kind of flat tax and didn’t have any loopholes?
Mr. Murphy: A flat tax is the greatest opportunity for tax abuse I’ve ever come across. It was created by two gentlemen, Hall and Rabushka. Their system of flat tax is a tax avoider’s gift because all income arising outside a country is not subject to tax. All you have to do is ship income out of the country and you never pay tax on it. It would always undermine any tax system. Flat tax is, again, a misnomer. It simply talks about a tax rate.
As somebody who has prepared many thousands of tax returns in his life, and I have — I was previously a senior partner of a firm of accountants and I have been responsible for thousands of tax returns — calculating the actual tax due is the easiest part of the tax return. The complexity is actually preparing the set of accounts to determine what income is. Most tax rules for most taxpayers are actually remarkably straightforward. Admittedly, for large corporate taxpayers, they are not. Large corporates can handle complexity. If you can do a merger and acquisition deal where, quite often, 10,000 to 20,000 pages of documentation are involved in the completion of such a deal, and I have done them, then you can handle the complexity of the tax system.
Complex tax systems represent complex commercial transactions, which are a fundamental part of modern capitalist society. So I don’t think we can simplify very much at all. Flat taxes are a tax avoider’s delight.
Senator Eaton: Thank you.
Senator Pratte: Professor Murphy, you have expressed some concerns regarding the definition of the tax gap in the bill that we’re studying, and also the suggestions of the method of estimating the tax gap. I know there are other countries that measure or estimate the tax gap and publish the results, but are there other countries where this requirement of measuring the tax gap is in legislation? Where could we find a definition or a method of calculating the tax gap that is in an act, so that we could maybe get some ideas for this bill?
Mr. Murphy: That’s an excellent question. You know, I don’t know the answer to it, so I’m going to be completely honest. I cannot think of any country that has actually legislated a requirement to calculate a tax gap. In some ways that may be one of the weaknesses of the bill you have, that you actually would be too prescriptive at this stage, because experience might suggest that your revenue authority would want to expand and develop the methodology over time, and this might actually stop them from doing so.
The U.K. has the most frequently published tax gap data. I admit I am quite critical of it partly because it does not do top-down analysis, and partly because 10 years after they started doing the work, many of the figures in that tax gap remain what they describe as being “indicative estimates,” which the Financial Times newspaper described as figures they made up, which wasn’t polite of them because I’m sure they did something better than that, but they are nonetheless pure estimates and nothing much better. It does dramatically underestimate the size of the U.K. shadow economy on any known data. I mean, these claims that only 7 per cent of tax is not collected in the U.K — that’s utterly implausible, particularly when 11 per cent of our value-added tax on sales is not collected. You can’t not collect 11 per cent of sales tax and then actually collect the vast majority of income tax. It just isn’t possible.
I am quite critical of the data because it’s very silo driven. I have also said one of the problems was that this may not cover enough taxes. You have to realize that there is a tax spillover effect. In other words, if you lose a sales tax, you will lose an income tax. If you lose an income tax on employment, you might also lose a related social security or payroll tax contribution that is owing as well.
If you have income misreported in a corporation, you might lose the sales tax; you’ll also lose a corporation tax on the profits. So it is very rare that actually there is one tax loss for one transaction. That is just speaking as an accountant.
So I would encourage you to think broadly and not be too specific, and that’s why I would suggest working on this top-down approach instead, which looks at these spillovers from one tax to another tax. That’s an area I’m now working on, and I would suggest you would be wise to ask your tax authority to actually appraise the risk that one tax creates for another tax in your system. For example, if you have a low corporation tax rate, so that it’s easy to incorporate — I’m sorry; I’m not an expert on all aspects of Canadian tax — then obviously that undermines the income tax. Or if it’s too easy to recategorize income as capital gains, that undermines the tax. So you need to have all those things taken into account as well. That’s why a statutory definition of what the tax gap is may be quite hard and hasn’t been tried elsewhere.
Senator Pratte: Thank you for this comprehensive response. Is there any evidence that countries that have estimated the tax gap and published results regularly over the last few years have gotten any kind of benefit from it? For instance, has the tax collector become more efficient, which would be the simplest, most evident advantage of doing this?
Mr. Murphy: I have been looking at some data on this issue this year. Actually, the data is, in statistical terms, pretty messy. If I look across the European Union where there is a tax gap estimate for 28 countries, at least with regard to the VAT, there is little statistical relationship between the amount of spending by a tax authority and the size of the tax gap. But that is because I have only got data for VAT. I need data for all the tax gaps, and I haven’t got that.
If we look at, for example, the U.K., where we have perhaps the most comprehensive data, despite which the IMF suggested it could be improved, as I have, then it is clear that it does help the direction of allocation of resources within the authority. There is no doubt, for example, that they have paid a lot of attention to debt recovery as a result of realizing that that was a weakness. They have also identified certain types of schemes with regard to tax avoidance and taken, I think, a much more aggressive approach than they would have done until they realized that the losses they were looking at ran into many billions of pounds a year. It encouraged a different management approach. That is what I call decision-useful information. I think that it has proved to be decision-useful for the U.K. I think it could be improved, but I would be very surprised if there were the slightest difference between me and our tax authority on the fact that it has undoubtedly focused their attention.
Senator Marshall: Thank you, Mr. Murphy. That was an excellent presentation.
I want to continue with the question from Senator Pratte. Once you identify the tax gap and you know that you have so many billions of dollars out there that you estimate are uncollected, what are the strategies to actually bring that tax revenue into the government coffers? It’s great to know that the tax gap is $50 billion, but what are the strategies to actually collect the money?
Mr. Murphy: I think that’s a question I have been asking myself, having looked at this for some time. It’s an excellent question. My belief is that this would actually also require a tax spillover analysis. Now actually, it’s my suggestion to you that frankly people in Canada know how to avoid and evade tax. Your accountants will know what is going on amongst their client base.
So the next stage is actually saying: We have a problem. It’s X billion dollars — and it will be billions of dollars — and, therefore, we want to tackle it. What is the low-hanging fruit? What are the easy issues that we could address?
Now, as I have said, I’m not an expert on the Canadian tax system, so I can’t tell you the answer to that.
What I can say to you is that you need to then do a risk assessment of what mechanisms are the most common. I can give you a U.K. example, which is that cheats incorporate their businesses. They form companies to run their businesses, because companies are harder to trace than individuals. Ownership is difficult to identify. Accounts that aren’t submitted by limited companies are subject to quite low penalties. Tax authorities that don’t get accounts from companies tend to be quite lenient, and they try to get rid of the company rather than actually collect the tax. That is a massive problem in the U.K., by the way. It’s also probably a massive problem in Canada because U.K. companies are so readily available to Canadians because you can form one for £15 in the U.K. with no evidence required as to who you are, let it trade in Canada and never tell the Canadian authorities, and the abuse will go on.
It’s that sort of risk assessment as to how we identify who the cheats are that is the next stage in the process. So, again, I would be happy to share with you work I’m doing at the moment on how these risk assessments could be undertaken, because then you’re making a decision as to where we get the best return for our money in tackling this. That’s the criteria you’re really looking for. You identify that you lost X billion of income tax and Y billion of capital gains tax. Although the capital gains tax might be lower, it might be the best thing to go at because it’s the easiest one to collect. As to the risk assessment of the spillovers between the taxes, I doubt you could work that out. So it’s a two-part process. By itself, your bill will not solve that. You have to go further.
Senator Marshall: To your knowledge, is there a particular country that has started this that stands out that we could look to for guidance or as an example? I get the impression Great Britain is not one of them.
Mr. Murphy: I’m not saying Great Britain has got everything wrong. You know, I have friends and good relations on occasions with the revenue. I am critical of some aspects of their work.
The answer is no, not yet. This is all relatively new. If we go back a decade, this work was virtually unknown — completely unknown. This is a reaction to the global financial crisis that the tax gap is on the agenda. The work on considering impacts of taxes on taxes, for example, is only four years old at most. And the IMF started it and tried to do it econometrically. That didn’t work very well, by the way. I’m not criticizing the IMF. What they are trying to do is an international appraisal, but I don’t think the statistics would withstand the analysis. That’s why we started looking at ways to do this process.
Canada could be at the forefront here, and I don’t think it would cost you very much to try it. I believe there is a real opportunity to get something good going. I am getting lots of interest. I’m having the discussion I’m having with you, for example, with some members of the European Parliament on Thursday morning, so this is a new area where everybody is suddenly realizing there is money, and we need money.
Senator Marshall: You mentioned tax evasion and tax avoidance in some of your remarks. It seems like you put them in one pot, but tax avoidance is in accordance with the law, even though it might be aggressive tax avoidance, whereas tax evasion is different. Why do you lump the two together?
Mr. Murphy: I don’t lump them together, if I can be honest. I think they are clearly different, although I would also suggest that the boundary between the two is quite vague. A great many people who think they are tax avoiding don’t know whether they are tax avoiding. They have simply gone to an accountant or lawyer who’s told them that might be okay. But that’s a judgment. They don’t know, and they won’t know until it’s been litigated.
You do have an unfortunate experience with the general anti-avoidance provision in Canada. I don’t think yours worked particularly well. I think that, in general, there are better experiences than you had, and you were early into that game. But I would suggest you might need to go there again to get that one.
If I talk about the scale of the two issues, by the way, I think that’s important. In my estimation, tax evasion is probably 85 per cent of the problem, and tax avoidance may be 15 per cent of the problem, which is very different from popular perception.
Popular perception — and I admit I was involved in creating things like the Google story quite a long time ago — would have it that it is all multinational companies doing tax avoidance that is the problem we are looking at. That’s true; there are still multinational companies using tax havens that have shifted income, and we all know about Apple and the stories going on with the European Union. But in practice, I believe that tax evasion, which is very much more in the local economy, and it’s more domestic, is a bigger issue — with one exception, which was identified by Gabriel Zucman, an academic who has done some great work and who is linked with Thomas Piketty, whom you might have heard of. He has identified that the very wealthy — we’re talking about the 0.1 per cent — do evade substantial parts of their liabilities, and he believes they’re the biggest evaders of all because they are still heavily invested in tax havens and are using really quite esoteric methods to evade tax now, including things like investment in artwork, which is now a very common mechanism for avoiding tax and transmitting value.
But those apart, for me the biggest problem would be in your domestic economy and literally cash circulation in that economy, or unrecorded bank circulation in corporations who never file.
Senator Marshall: The underground economy. Thank you very much.
Senator Andreychuk: Just following on that. Perhaps it’s my own lack of understanding, but it seems to me that you have to start at some point on the tax gap. I think the issue to me is whether it should be in legislation or just policy, because this whole avoidance of tax and evasion of tax is just going to grow further and further. One of the other things is that if you have our services in Canada, CRA, assessing, it is a constant dialogue between lawyers, accountants and the department as to the interpretation of the bills. It’s not all tax avoidance; it’s just trying to understand. You get one ruling at one time and another at another time, and this goes on and on and on.
If I were the bureaucrat that had to put it to paper that this is outstanding money by way of avoidance rather than evasion, I would be a little hesitant to do so. There is a whole sort of judgment or discretion call built into this that the broader it is, the more vulnerable your statistics are that you will be providing to parliamentarians.
Mr. Murphy: I think you are absolutely right. I would agree with you completely. I think you have to be careful about categorization. Here I would say that the U.K. does provide an example of tax avoidance. They actually identified schemes, particularly marketed tax avoidance schemes, which were obviously designed to exploit loopholes that the law never intended. Those they call aggressive tax avoidance, and they put a value on those.
They have been quite successful in beginning to contain those schemes. The number of schemes identified is going down because they have been so good at pursuing them, and full marks to them for that. I think the tax gap analysis helped that.
There is that second category, which you just alluded to, which is where — let’s be honest: I have been there; I have done it — where a tax official has written to me and said, “I believe the law says this,” and I’ve written back and said, “I don’t think so. I think it says that,” and we have had to try to agree on what the law meant with regard to a particular situation.
This is true of large parts of law, to be honest. It is not like the car speeding ticket. You were either driving too fast or not, and the speeding camera has caught you or not. We are dealing with the uncertainty of language, and it is very grey in some areas.
Our tax authority in the U.K. actually calls that the tax gap due to disputes on legal interpretation. In fairness, at any point in time they appear to keep a log of the value of disputes that they have ongoing with regard to legal interpretation, and they have put in place measures to reduce the uncertainty about legal interpretation as a result. In that area, I would applaud what they have done. I would suggest it is worth talking to them because they have been very good at trying to close that down and collect the money early so that these disputes do not drag on for many years, which otherwise they used to.
So legal interpretation and tax avoidance are not quite the same. Tax avoidance is definitely trying to get around the rule. Let’s be clear: The accountant and the taxpayer who are doing tax avoidance — particularly the accountant or lawyer — know that they are creating risk. They are moving into an area of grey uncertainty. That is capable of identification. Legal interpretation is slightly different. It is genuinely uncertain, and there is a dispute, and very often it has to be resolved by law.
Senator Andreychuk: Following up on that, there is still an implication in what you are saying about tax avoidance that leads to that you’re taking advantage or you’re cheating the system, and that’s the problem that we have in multi-faceted tax reforms as you add credits and special exemptions for people. You used the term “avoidance.” It plants in the minds of the public that this is wrong, when in fact it’s perfectly legitimate and it was intended to do so within the act.
Do you have that same problem in your case in Britain? Because that’s certainly the thing. When I practised, it says you are an exemption; you could be exempted because you want to take that advantage for your client. It’s not avoidance; it’s your entitlement to do so. That language of avoidance has a taint in Canada, leading to tax cheats, in my opinion.
Mr. Murphy: There was a lot of discussion about tax avoidance. I frequently debate with people who say, for example, that putting money into a pension fund in the U.K. is tax avoidance because you pay less tax as a result. Well, hands up. I put money into my pension fund and I pay less taxes as a result. Because the law very clearly says that if I give up my income now, I will get tax relief now but will be taxed in the future, if and when I ever get to claim a pension. I don’t intend to retire for as long as possible, if I can avoid it. I don’t like tax. Perhaps I’m the exception.
But that is not tax avoidance, nor is putting your savings into a tax-exempt account, which Parliament has declared is tax-exempt, tax avoidance because you are following the will of Parliament. I can’t see how anybody can say that reducing your tax bill by following the clear will of Parliament is tax avoidance.
For example, we have seen schemes where people have claimed reliefs for making donations to charity, where actually they were gifting assets of extremely dubious value and then manipulating those values through minor stock exchanges, for example, to try to claim enormous amounts of tax relief which they simply weren’t due. Now, that was cheating. It was still, however, legal. They were not tax evading because technically it was within the law. But it was clearly not what the law intended.
So we have had to come up with, and we do have, a general anti-abuse rule in the U.K. I was involved in its drafting. I think it’s okay. I would make it stronger, but I was reasonably satisfied with it. It has put into place what is called a double reasonableness test: Is it reasonable to think that a reasonable person would think this person is avoiding tax? Now, that might sound convoluted, but actually we are really doing what in British law is called applying the law of the man on the Clapham omnibus. The language is old and sexist, but it was called “the man on the Clapham omnibus” when it was originally created.
We do have this concept of the reasonable person in law, and I think that test works, and a lot of people can actually do it. It’s a smell test: Does it smell wrong? If it does, then it’s probably tax avoidance; it is cheating. I think that has been quite a significant deterrent.
It has been used very little, by the way. It hasn’t seemed to have been needed to be used precisely because it actually works. People know when they might be on the right or wrong side of it now. There’s some evidence that it is reducing tax avoidance.
Looking at your general anti-abuse rule to see whether you could put in a smell test might be a good way of dealing with it.
The Chair: With that, Mr. Murphy, thank you very much for participating in our study of Bill S-243, An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax). As we conclude, do you have any short comments before we say goodbye?
Mr. Murphy: I think you have covered some enormous ground and you are clearly asking the right questions, so I think you are heading in the right direction in what you are doing. Please do go, but be broad-minded. Don’t constrain what your tax authority needs to do by being too tight in the definition. Think widely because this issue is big, and they need to be able to develop this over the coming years without you having to go back to give them another round.
The Chair: Thank you.
Senators, we will now welcome our next panel of witnesses.
[Translation]
We now have with us three organizations, and we will invite them to comment on Bill S-243.
[English]
First, from the Department of Finance Canada, we have Brian Ernewein, General Director, Legislation, Tax Policy Branch; and Phil King, Director General, Sales Tax Division, Tax Policy Branch.
Thank you for being here.
[Translation]
Afterwards, from the Canada Revenue Agency, we have Ms. Mireille Éthier, Director General, Agency Change and Innovation Directorate, Service, Innovation and Integration Branch, Canada Revenue Agency.
[English]
Finally, we have with us Ted Gallivan, Assistant Commissioner, International, Large Business and Investigations Branch. We are also pleased to welcome, in his first meeting with a committee of Parliament, Yves Giroux, Parliamentary Budget Officer.
Thank you for being here, and we are honoured to have you for your first appearance to this committee, sir.
He is also accompanied by Mark Mahabir, Director of Policy (Costing) and General Counsel.
The chair has been informed that the officials from the Department of Finance defer to Canada Revenue Agency as the lead department on this bill, and therefore they will not have an opening statement. However, they are ready, honourable senators, to answer questions that may arise from the presentation of Ms. Éthier.
[Translation]
We will hear Ms. Éthier first, followed by Mr. Giroux, who is appearing for the first time before a parliamentary committee.
[English]
For the record, the PBO took office on September 4, and on that we want to congratulate you, Mr. Giroux. There is no doubt we will be working together.
Ms. Éthier, please make your presentation, to be followed by the PBO and then questions from the senators.
[Translation]
Mireille Éthier, Director General, Agency Change and Innovation Directorate, Service, Innovation and Integration Branch, Canada Revenue Agency: Thank you very much, senators.
[English]
Just before I make my remarks, I would like to say two things. I would like to thank the committee for allowing us to listen to Professor Murphy’s presentation. That was very interesting. Second, I would like to thank you for giving us the opportunity to speak to the tax gap. Tax and tax gap are matters I’m passionate about, but I don’t admit that in many circles because it’s a negative thing for most people.
My directorate has the mandate of fulfilling the government’s commitment to establish and publish the tax gap, while Mr. Gallivan’s branch is responsible for the delivery of programs to combat international tax evasion and aggressive tax avoidance.
In April 2016, the Minister of National Revenue committed to estimating the tax gap, and since then I have had a dedicated team of specialists and experts in my directorate who work on that.
Let me take a few minutes to go through the main findings of the four reports that we’ve published so far. We’ve forwarded to you copies of these, but we realize this is not necessarily bedtime reading.
We released in June 2016 the first tax gap report, which was a conceptual study that provided a definition of the tax gap, discussed the challenges with estimation and talked about how tax gaps can be used in administering taxes. We also looked at other countries, and we spoke to many other countries as well to see what’s good and what’s not about various approaches.
It is notable that few countries produce and publish tax gaps for all major taxes. The OECD found that only seven did in 2015 before Canada joined them, so we are eight now.
Also released in June 2016 was a Goods and Services Tax and Harmonized Sales Tax gap estimate, which was produced jointly with the Department of Finance. To do this we used a top-down approach, which Mr. Murphy spoke about, and we can talk about it later in questions if you wish. We estimated the gap to be $2.9 billion for the taxation year 2014 in the context of the GST.
We then published a third report in June 2017 about domestic personal income tax, which we estimated at $8.7 billion. This $8.7 billion is actually the sum of two gaps, one related to the underground economy, which we have estimated using Statistics Canada’s estimate, again from a top-down approach very much like what Mr. Murphy spoke about, estimated at $6.5 billion, and we estimated a payment gap of $2.2 billion.
You will notice that we have estimated all these things for 2014 with a view to adding them as we go through the various taxes to get to the overall tax gap. So the fourth report released this year estimated the international personal income tax gap using the Gabriel Zucman approach that Mr. Murphy spoke about, and we estimated it at between $800 million and $3 billion, depending on the assumptions that are made on the various parts of this estimation. It should be noted that we are the first administration to publish an offshore tax gap.
I would also add that, in the spirit of transparency, the two personal income tax reports that we have published so far went beyond tax gap and actually presented additional analytical work. In the domestic personal income tax report, there was an analysis of the proportion of income, credits and deductions that we consider as assured, in that there is a high confidence that individuals are complying with the law.
The OECD has talked about tax assured as a measure of the performance of tax administration. We didn’t get much coverage on this one, but I think it’s positive that, without doing a lot of things that are clear to the taxpayers, we get 86 per cent of income that is actually verified.
In our most recent report, offshore compliance statistics were presented, as well as the results of recent offshore audits. These reports are actually distinctive compared to our international counterparts in that they provide the public and parliamentarians with a broader analysis of compliance and non-compliance than just the tax gap. Together, these reports have estimated between $12.4 billion and $14.6 billion so far in potential loss to revenue.
Currently we are working on estimating the corporate income tax gap, and that report will be published in 2019.
It is important to note that we are taking a step-by-step approach to estimating Canada’s tax gap as it takes time to develop appropriate and robust methodologies. For each type of tax the methodologies differ, and sometimes a single tax needs more than one approach.
In this regard the CRA’s tax gap team has been collaborating closely with experts from academia and our international partners, particularly the United Kingdom, the United States, Denmark and Australia, to share best practices and to develop the best methodologies possible.
The CRA, in collaboration with the Canadian Tax Foundation, also held a conference in June 2017 where we brought experts and international government officials together to share perspectives. Right now we have people from my shop who have been invited to a conference in the U.K. as one of the lead countries actually doing tax gap estimation.
On the data side of things, in February 2018 we provided the Parliamentary Budget Officer with the data requested to undertake his own tax gap analysis while protecting the confidentiality of taxpayer information. Subsequent discussions were held to discuss the data.
In closing, I would like to reiterate that estimating the tax gap is complicated. Not many countries do it. We are taking a methodical approach to ensure our estimates are robust, and we want to provide information on what it is we do.
[Translation]
I’m ready to answer your questions and I thank you in advance for them.
Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Thank you.
[English]
Thank you for the invitation to appear today regarding Bill S-243. I’m pleased to be here in my first official appearance before this committee as Parliamentary Budget Officer, and it seems fitting that the first appearance is at this committee, considering the topics that you consider.
With me I have Mark Mahabir, who is the Director of Policy and also General Counsel.
[Translation]
The section of the bill that is of particular interest to me and my office is the proposed additional requirement that the minister collect, compile, analyze and abstract statistics on the tax gap in respect of individuals and corporations on an annual basis. This new requirement would ensure the availability of pertinent data required to support further analysis. The provision of more precise and timely estimates of the tax gap provide a useful indicator of the effectiveness of the tax system. Tax gap estimates are also useful in informing parliamentarians and Canadians on the extent of evasion and non-payment of taxes.
[English]
The other part of the bill that is of particular interest to me and my office is the proposed new subsection of the Canada Revenue Agency Act that would require the minister to provide the PBO with data on the tax gap, as well as any additional data that I consider relevant to conducting further analysis on the tax gap.
This new subsection would strengthen my ability to obtain timely access to the information needed to conduct the analysis and provide parliamentarians with a timely, independent estimate of the tax gap of this country.
It is important to note that any tax gap data that I receive from CRA under the bill would be treated in accordance with other provisions of the Parliament of Canada Act. This means it would still be limited by restrictions under section 19 of the Access to Information Act.
The restriction of the disclosure of personal information under section 19 of the Access to Information Act poses a potentially significant impediment to our analysis. Under Bill S-243, this exception would still apply to the data collected by the minister and transferred to me on the tax gap.
For example, section 241 of the Income Tax Act prohibits an official or other representative of the CRA or other government departments or agencies from disclosing taxpayer information unless specifically authorized by the Income Tax Act. Since the Income Tax Act does not authorize the provision of taxpayer information to me and my office, I would not be able to obtain additional information that could directly or indirectly identify specific taxpayers, that is, individuals, corporations or trusts.
Similar provisions can be found in the Excise Tax Act and the Excise Act, 2001, which cover the GST as well as excise duties.
[Translation]
Further, the language in the bill limits the scope of the PBO’s analysis of the data by omitting any reference to access to taxpayer information for other purposes relevant to the PBO, such as for creating or refining any economic models used for economic projections or for the costing of proposals.
In summary, I believe that Bill S-243 would strengthen the PBO’s ability to access the data on the tax gap required to conduct an independent analysis. I also believe that such an analysis would greatly benefit parliamentarians, and more importantly, Canadians. As I stated a moment ago, refinements to the bill to clarify the PBO’s entitlement to access to information would strengthen its effectiveness and enable me and my office to provide timely and relevant analysis to parliamentarians.
[English]
I would like to thank you once again for allowing me to provide my view on Bill S-243. Mark and I will be pleased to answer any questions you may have.
[Translation]
The Chair: Thank you, Mr. Giroux.
[English]
Senator Marshall: My first questions are for the Parliamentary Budget Officer. Welcome to the Senate Finance Committee.
The data that was promised to the former Parliamentary Budget Officer in February by the Canada Revenue Agency — have you received that information now?
Mr. Giroux: Yes, we have, senator.
Senator Marshall: Nothing is lacking? You can go ahead now and calculate the tax gap?
Mr. Giroux: There is still additional information we would need to further refine our analysis, but what was asked for in February was indeed received.
Senator Marshall: The additional information that you need, is that required from the Canada Revenue Agency?
Mr. Giroux: Yes.
Senator Marshall: Is there a commitment that you will receive that by a certain deadline?
Mr. Giroux: There are discussions under way as to what is feasible, whether it exists in the form we require it, and whether it will be the data that we indeed do need to perform our analysis. There are good discussions under way with the CRA. We have good collaboration with them.
Senator Marshall: Do you have enough data to start calculating the tax gap, or is it of a nature that you need that additional information before you can start your calculations?
Mr. Giroux: I will let Mark answer that question.
Mark Mahabir, Director of Policy (Costing) and General Counsel, Office of the Parliamentary Budget Officer: Regarding the data, we need additional information before we can commence our analysis.
Senator Marshall: I’m trying to get a handle on the timelines. The former Parliamentary Budget Officer estimated that it would take six to eight months to calculate the tax gap once he received all the information. Would those timelines still stand?
Mr. Giroux: Right now, based on what we see as needed to estimate the tax gap, we are currently envisaging being in a position to provide a first estimate in the spring of 2019. That’s our timeline for now.
Senator Marshall: My next question is for the Canada Revenue Agency. Can you give us insight into when the information that still has to be provided to the Parliamentary Budget Officer will be provided?
Ms. Éthier: As Mr. Giroux mentioned, there are discussions under way. Sometimes we are being asked about information that we don’t have in the form it’s being asked for. Sometimes it’s information links between things that we don’t do, necessarily. We should be able to resolve this in the near future.
Senator Marshall: And in the spirit of cooperation.
Ms. Éthier: And in the spirit of cooperation, indeed.
Senator Marshall: You mentioned, Ms. Éthier, the work you had done already. You said you have calculated I think it was $12 billion to $14 billion so far, and you’re taking a step-by-step approach.
Seeing that you have done those studies — about five or six of them, I think you mentioned — what work is being done within the Canada Revenue Agency? Because once you get the high level, you identify the gap, you still have to do something to start collecting the taxes that are owing. Could you give me some idea of what you’re doing with the information that you have now at a high level and how it’s going to roll down?
Ms. Éthier: Thank you for this question. This is an excellent question because, as was discussed earlier in the previous session, it’s not because we identify X billion dollars that we can go and collect it the next day. The tax gap doesn’t identify the individuals who are non-compliant, for example. So we have an estimate. It does inform, though, the various risks. It can inform certain sectors, for example, where the resources could be allocated this way. But there is no direct translation between a tax gap and a collection right after.
I will ask my colleague Ted Gallivan, from the programs area, to complement this answer, if you agree.
Ted Gallivan, Assistant Commissioner, International, Large Business and Investigations Branch, Canada Revenue Agency: The way to think about it is as a strategic versus a tactical indicator. The agency, a number of years ago under the current government, started to focus on certain sectors in the UE, like residential real estate development, ramping up efforts vis-à-vis multinationals and bolstering offshore. Those remain an area of focus. Over the last four years, what we have immediately identified in terms of gross unpaid taxes has grown from $10 billion to $14 billion.
Where the tax gap helps us is do we have that trade-off between the domestic economy, where there may be more money and a pretty good ROI, versus offshore investments or ultra-high-net-worth individuals, which may not have the same ROI but really question the fairness and integrity of the regime. So we take the tax gap data, but we also have to look at ceasing certain behaviours.
The professor talked about marketed schemes. We had something with gifting tax shelters in this country, and in the last two years nobody has marketed a gifting tax shelter scheme. The practice has ceased.
The tax gap information helps tell us whether we should be focused here or here, but we don’t blindly make just a money decision; there have to be decisions about the fairness of the regime. That’s sometimes why we’re putting more money into offshore even though the underground economy is larger. It goes to the fairness of the system.
Senator Marshall: I think you mentioned that the tax gap looked at the underground economy, but you must be doing some work in that area now. You are not just waiting for the tax gap. Because the impression that’s left with many taxpayers is that you’re picking the low-hanging fruit, the student who is moving out to Calgary to get a job and is claiming their moving expenses. But then you see all these people who are providing services, and they are not paying income tax.
Is there something ongoing now? I’m trying to get a handle on how you’re going to link up this identification of the tax gap with how you’re going to pursue individual taxpayers or corporations, and what you should be doing now, like work on the underground economy.
Mr. Gallivan: The way the compliance function would use the tax gap is, first of all, to see if things are getting better. In recent years there has been increased attention and focus on multinationals and high-net-worth individuals with offshore accounts.
In several years, when the tax gap looks back to 2017-18, we would get a sense of whether those increased measures are working or whether we need to make increased investments. So the tax gap really is about strategic adjustments of the mix of our efforts between multinationals, individuals and the underground economy.
Last year, overall the agency identified gross $24 billion in unpaid taxes, but $14 billion was from SMEs and multinationals. Within that $14 billion, $9 billion was from the multinationals and offshore, and the rest from SMEs. We disproportionately focus on multinationals and high-net-worth individuals. Those audits take a lot of resources, whereas for fewer resources we can mail out letters to individual taxpayers. So it feels to the individual taxpayer like the CRA is disproportionately focused on them because we’re mailing them a letter and we’re asking them for receipts, and we do that 2 million times. We audit 300 multinationals and get far more revenue from it, but Canadians don’t necessarily appreciate that.
Senator Marshall: For individual taxpayers, that’s simpler than corporate taxation. Is that an issue within the Canada Revenue Agency that employees are better trained with individual taxation as opposed to corporate taxation? Is that limiting the work that you’re doing on the more complex tax avoidance or tax evasion?
Mr. Gallivan: We have a pretty good pipeline for developing auditors. We’re very fortunate to have people who love tax from an intellectual curiosity perspective, and they stay with us. There is quality of life. There are practitioners in private practice who have a moment at 3 a.m., when they haven’t slept in five or six days, who come and join the agency. We do very much feel that we have the technical capacity that we need.
We’re noticing a spike in litigation, and we’re working to give more funds to the Department of Justice to deal with litigation. Because as the agency has cracked down on multinationals and high-net-worth individuals, they have pushed back through the courts. They are resisting our efforts to audit them, and they are challenging the issues that were described as the grey area through the courts. So we’re having to push more money into Justice, absolutely.
I don’t think there is a question of getting the right talent. I think there is a question of whether $1 billion received from regular T4-earning Canadians is the same as $1 billion received from a multinational, and making those judgments.
Senator Marshall: The low-hanging fruit. Thank you.
[Translation]
Senator Pratte: Ms. Éthier, did the agency evaluate the impact the adoption of the bill as it stands would have on your work? Because earlier, Professor Murphy was worried about what deemed an overly narrow definition of the tax gap in the bill. If we were to adopt the bill, of course, we would not want it to constrain the work of the agency to such an extent that you could no longer measure the overall gap to be filled. If we adopted the bill as it stands, would that have any effect at all on your work, aside from forcing you to prepare a report once a year?
Ms. Éthier: Thank you for your question. Cabinet did not discuss the bill. I cannot provide my general opinion on the bill. However, I think that Mr. Murphy’s comments this morning were about methodologies, for the most part. The bill does not discuss methodology. In a world where methodology has to differ according to the different types of tax, it may be difficult. We sometimes have to use several methodologies to arrive at a tax gap. We adopted an approach that does not only assess income tax; we also use the GST and HST.
Senator Pratte: You began this work two years ago. Obviously, the first time one begins such a complex task, it’s always longer. Once you have finished, would it be possible to produce a similar estimate every year?
Ms. Éthier: That’s an interesting question. The only country that does this every year is the United Kingdom. In fact, it follows a three-year cycle to produce the estimates. It’s very expensive to do it every year. Moreover, it does not necessarily provide many advantages, because many external factors that are not related to tax administrations, have an impact on the tax gap, including the economy.
The tax gap is an interesting tool to track the trends, as Mr. Gallivan mentioned. It’s more of a long-term indicator, to the extent that often the fiscal gap is not a reflexion of the current year, but of the previous ones. Doing this every year may not be the best approach. None of the other countries we consulted said that this was a very interesting approach. However, if it is necessary, that is what we’ll do.
Senator Pratte: Aside from income tax — in your publications, if I remember correctly, you mentioned income tax, the GST and HST — are you considering examining other taxes? I’m thinking of the excise tax on tobacco, alcohol, and so on.
Ms. Éthier: In the short term, by 2019, we will have finished with corporate income tax. We will have dealt with the tax cycle that generates the most revenue. There are also changes to be made to the tobacco tax, and so on. We will eventually examine these other taxes, but basically we will have the major part of the revenue next year. However, nothing prevents us from examining other taxes as well.
Senator Pratte: Fine, thank you.
[English]
Senator Eaton: Ms. Éthier, your website says, “Of note, no country to our knowledge is currently publishing a separate tax gap estimate related to offshore non-compliance.” Why do you think that is the case when you think of the Paradise and Panama Papers? Wouldn’t governments be eager to investigate a little bit and find out how many people are sitting offshore comfortably?
Ms. Éthier: Thank you for the question. Actually, the reason why we were able to do it is because Gabriel Zucman and his associates and the Bank of Italy just devised a methodology using data on deposits and assets offshore. They developed a methodology to calculate how much money is actually held by citizens of all countries outside of their jurisdiction.
We used this new methodology, and in order to do that, we had to make certain assumptions on the share of Canada, on rate of return and things like that. That’s why we have this range of estimates, but that’s the reason why nobody else has really done it so far in terms of tax administration. When Gabriel Zucman did this, it was more from an income distribution point of view. They estimated how many assets were held outside, and if you look at his results from the 52 countries he looked at, we are the seventh lowest. We are the lowest of the OECD countries in terms of assets abroad.
Senator Eaton: What is it again?
Ms. Éthier: It’s the assets that are held by domestic residents abroad. We are the lowest one of the OECD countries.
Senator Eaton: What do you estimate those numbers to be?
Ms. Éthier: It’s in the report, but I’ll be happy to forward it to you and to the committee.
I think that there is a methodology now. Other countries are looking into it. We did exchange with the Bank of Italy as well on the methodology and how they would apply it.
Senator Eaton: Now that you have the methodology, will you pursue anything? Will you just have the numbers in a lovely tax gap, or will you actually try to follow up?
Mr. Gallivan: We had been active vis-à-vis Panama as a jurisdiction prior to the publication of the Panama Papers. In fact, one of our criminal investigations is already in court in B.C. right now.
As the media covered this issue, we made the decision to restrict voluntary disclosure and to audit everybody. That wasn’t an ROI decision. We could have spent some of those resources in chasing taxi drivers or in other sectors, but given how the Panama Papers had a high profile and shook the confidence of the public, our approach was to audit everybody who was named — risk-assess them and audit those who were non-compliant. That goes to how the tax gap is a very useful input into the decision making. We would be much better equipped to make those decisions with tax-gap type information, but it’s only one input. I think the fairness in the regime and the high profile given to the Panama Papers kind of drove us to act there, even ahead of having information from the tax gap.
Senator Eaton: Should we see some results in the next couple of years?
Mr. Gallivan: Absolutely. To that point about the delay, our critics are understandably frustrated about the slow pace of the work, but again, we made a strategic choice to restrict voluntary disclosures, which is something we used in the past, which got quick cash in the door. But we saw through public accounts testimony and from media coverage that Canadians weren’t happy with sophisticated taxpayers getting a bit of a discount to collaborate. They really wanted the full weight of the consequences of full audits. So yes, in the next few years, you should see those numbers, and I think there will be more deterrent value from the slower approach.
[Translation]
Senator Eaton: Mr. Giroux, what amendment do you suggest? If you had the opportunity of suggesting some amendments, what would they be?
Mr. Giroux: Thank you for that very relevant question. Indeed, I would have a suggestion to make which would be to amend section 241 of the Income Tax Act and the corresponding sections in the Excise Tax Act, so as to allow the Parliamentary Budget Officer to have access to Canada Revenue Agency tax data. This would make it clear that the provisions of the act apply to the tax data of the Canada Revenue Agency. By amending section 241 of the Income Tax Act and the corresponding sections of the Excise Tax Act, you would eliminate any uncertainty concerning the Parliamentary Budget Officer’s right of access. I would also clarify the definition of the tax gap.
Senator Eaton: If you could put that in writing and send it to us, that would be very useful.
Mr. Giroux: Certainly, I will send that to the clerk of the committee.
Senator Forest: Thank you for your presentation. I see that the agency is firmly determined to tackle the tax gap and measure it. Earlier, Mr. Murphy was proposing an upstream approach, that is to say, an assessment of the scope of the GDP, and of the amounts we should be collecting, as compared to those we collect in practice. Does that seem like an interesting method to you, given the very large estimates of black market work and work abroad? Is that an approach that seems promising, to get a read on the scope of things?
Ms. Éthier: Thank you for the question. In fact, that is the approach we used to calculate the tax gap for the underground economy. We used macroeconomic data published by Statistics Canada. We developed an estimate that includes undeclared income. In that case, that is what we did.
We did the same thing for domestic personal income tax. For the international side, we used macroeconomic data from Gabriel Zucman’s work. We used what he called the “top-down” approach in his presentation this morning for most of our estimates, and contrary to the United Kingdom, which has adopted a different approach using audits that are then applied to the entire population for personal income tax, using data from people who were audited. Our assessments include the underground economy, in the way Professor Murphy suggested.
Senator Forest: Thank you. In your comments, you quite rightly targeted the multinationals and the one per cent higher-income bracket. You have been doing this work for two years. Have you identified some legislative improvements that could be very useful to the agency and facilitate its work? This is an area where interpretation is rife, and where there are grey areas. In light of the work you have been doing, would you have any suggestions to improve the tax legislation in a way that would allow you to have a more effective legislative environment, and allow you to reach the goal of recovering the public funds that should normally belong to all Canadians?
Mr. Gallivan: With regard to our audit work, several cases are before the courts. The Minister of Finance sits on the committee where we discuss the negative decisions that must be appealed. The Minister of Finance has an annual suggestion submission process. We are in very close contact with the Minister of Finance. Since he sits on some of our audit committees, he can see what is going on for himself. We have a good pool of files to examine at this time. We take note of any suggestions regarding the legislation.
Senator Forest: In light of the challenges you referred to, a permanent follow-up is done to ensure that the act is less permeable and provides you with the necessary legislative support.
Mr. Gallivan: The Minister of Finance and Mr. Ernewein are an inherent part of our committee on negative decisions; there, we examine how our country’s judges interpret the acceptable limits to abusive planning.
Senator Forest: Thank you.
The Chair: On this issue, Mr. Ernewein would like to add something.
[English]
Brian Ernewein, General Director, Legislation, Tax Policy Branch, Department of Finance Canada: If I may add to that, consistent with what has been said, the reason we didn’t have the opening remarks is because the bill before you is a question of measuring the difference between what the law requires by way of taxes to be paid and what taxes are being collected. That’s fundamentally a question of tax administration.
We have great interest in how the administration unrolls to ensure that we collect taxes that are owed. In that regard, consistent with Mr. Gallivan’s comments, we are very connected with CRA in trying to establish and identify cases where there need to be legislative changes or additional funding to support CRA and its efforts. Indeed, there has been substantial funding over the last several years.
We also give CRA support by making changes, whether it’s additional information requirements, enhancing that extended reassessment period sometimes where the information isn’t coming to the agency as quickly as possible, support for international action and the common reporting standard. The intergovernmental agreement that the chair may remember with FATCA, the Foreign Account Tax Compliance Act, a number of years ago led to a broader process internationally for a common reporting standard on information which supports the fight against tax evasion. So on many fronts we work with CRA to support them and their administration to reduce the tax gap.
The Chair: Thank you very much for the clarification, Mr. Ernewein.
Senator Andreychuk: You’re tracking money that has left Canada. Are you finding evasion, avoidance or just information?
Ms. Éthier: In the context of the tax gap, we do not differentiate between avoidance and evasion, but Gabriel Zucman in his work assumes that the only reason why you would want to have assets of the type we’re looking at abroad would be because you want to evade taxes.
In the international report, we’re showing the evolution of the form, where Canadians have to declare their assets abroad. What we’re finding is a lot of people have properties abroad, for example, and that’s not taxable. So we have to be careful when we talk about assets abroad. There are assets that are not taxable. We are seeing, when we are looking at the provincial distribution, that B.C. and Ontario have a high proportion of people with assets abroad, and it’s likely linked to the new kind of mosaic of Canada to a certain extent and people having assets abroad.
In the work we are doing on the tax gap, we are focusing not on properties, for example, but on things that are taxable. That’s the distinction. I don’t know whether I’m answering your question.
Senator Andreychuk: Part of it. I’m still concerned that this not become a chance to blend evasion and legitimate use of the tax law. The term “avoidance” has troubled me. I don’t think anyone likes paying taxes. Some of us feel morally responsible to pay them because we think it’s better for society, et cetera, but we are not particularly, on April 30, happy about paying them.
How you collect the money and what the government uses it for, is it fair? You’re going to be targeting one group, and already you find there is a pushback. If I understood Mr. Gallivan, he said people were somewhat upset with the Panama Papers, so you zeroed in on those as opposed to others. I think you’re going to have a lot of that because it is a public policy issue.
Mr. Gallivan: On the point you closed with, the taxpayers named in the Panama Papers, we’re getting resistance at the audit stage where they are not interested in cooperating with the audit, which means simply providing financial information so that we can make an informed judgment as to whether it’s evasion or avoidance or actually compliant behaviour. So that would suggest to us that those taxpayers do know they have taken a risk and they have some exposure, otherwise you would see no reason why they wouldn’t provide the information we’re asking for.
Senator Andreychuk: If you clearly understood that it was information that you’re obliged to give — isn’t that part of the problem, the interpretation of the act and its complexity?
Mr. Gallivan: In one case, it was a Charter challenge. In the second case, it was an allegation that we were fishing for a criminal investigation using our civil powers. Again, I would argue these are fine points of the law that very sophisticated taxpayers are trying to leverage, even before we get the facts on the table so that the agency can make an informed decision about what range that lies in. We can’t even get to that point, which suggests there is probably something there. Why would the taxpayer issue a Charter challenge before we have even reassessed them?
Senator Andreychuk: I think it is privacy rights and rights as a citizen not to have the government intrude. I think that’s a value judgment that you’re going to have to make on every case. The fact that there is money overseas and they are not providing it to you, I don’t think you can make the assumption they have something to hide. I think many people would.
Mr. Gallivan: I think the agency’s approach has been to gather information because there are cases of tax avoidance and evasion with those listed with that firm, and, we believe, to assess risk and decide who needs to be audited and who does not, we require information.
Senator Andreychuk: With that particular firm, that may be a fair assessment, but going on, where money will be travelling all over the world, I’m not sure that is a fair assessment. As you said, you were responding to the pushback in Canada, and I agree with that and I think it’s good that you responded that way, but I don’t think that then becomes the rule.
That comes to the second question, if I may, to Mr. Giroux. Welcome to our committee. We are pleased that you are here first.
What privacy issues do you want more information about from CRA regarding individual tax? Again, I think we’ve encouraged people to provide information to CRA, and once we broaden the scope of who has access to it, the vulnerability of that information is there.
What is it you need particularly that perhaps is not in the bill that we are studying?
Mr. Giroux: That’s a good question, and it allows me to clarify the information requirements of my office.
I don’t need individual taxpayer information. However, in the course of providing my office with information, the CRA doesn’t have to provide me with any identifier. But let’s say, for example, if they provide information on a big multinational based in New Brunswick that has gross income over $1 billion, it’s pretty easy to identify which one it is. Under current legislation, the CRA could not provide me with that information because even if the names and addresses were removed, it would be fairly easy to infer which corporation it is.
The same goes with individuals. Even though I don’t need specific taxpayer files, the granularity of some information we need could lead to the identification of specific taxpayers. Public servants, being risk averse and wanting to avoid going to jail and breaking the law, will tend to restrict the dissemination of that information to be on the safe side, which I understand.
So the amendments that would clarify that would allow the PBO, my office, to get that information to prevent such cases of residual disclosures.
Even though I don’t need to have individual taxpayer records, it would allow CRA to work more seamlessly with my office and be reassured that even if there was to be an accidental residual disclosure, for example, in that case, they would not be subject to the penalties of the Income Tax Act.
Senator Andreychuk: Would you care to draft those provisions?
Mr. Mahabir: The Parliament of Canada Act provides for confidentiality. Section 79.5 of that act ensures that any information we receive from CRA is kept confidential. We do have a provision to protect that information once we receive it from CRA.
Senator M. Deacon: A number of nuances have been described this morning, and I’m going to defer because I think Senator Marshall and Senator Pratte covered a good part of the questioning I was looking at earlier, so thank you.
Senator Moncion: My question is for Mr. Ernewein.
You mentioned FATCA and common reporting. I thought that FATCA was a provision between Canada and the U.S. How does FATCA come into play when you speak of international tax evasion? Are you saying that this information is provided to all countries?
Mr. Ernewein: I will try to explain. FATCA was the U.S. law enacted by Congress to require foreign financial institutions — that is, non-U.S. financial institutions — to provide information in relation to U.S. tax residents, which, in the case of the U.S., almost uniquely includes U.S. citizens. There are many Canadians who, perhaps, have lived here all their lives who are U.S. citizens and were swept up in that.
While the prior government supported the idea of enhanced information exchange, they were troubled by the impact on Canadian residents who are U.S. citizens, and so too were the citizens themselves. That was quite a difficult exercise in trying to negotiate with the U.S. some provisions which did not follow the congressional law altogether. They varied it in certain respects to make it more practical and limited in scope.
However, following the interruption of FATCA, or the enactment of FATCA, and the consequent U.S. negotiations with many countries of a so-called intergovernmental agreement, which moderated that effect, other countries, such as Canada, took what we thought were the good parts of FATCA, which were better information collection and exchange from financial institutions — but not connected to citizens, only connected to tax residents — and tried to put together a common reporting standard whereby we would all collect the same type of information and share it automatically or spontaneously with our tax treaty partners, at least where we judge that the information would be kept protected for tax purposes.
So to summarize that, if you took FATCA and took away the citizen bit of it, we essentially implicitly thought it was a good idea and sought to support it, so now the common reporting standard is in place in perhaps more than 100 countries.
Senator Moncion: Agreement exists among the countries to give the information to other countries?
Mr. Ernewein: That’s correct. It requires both domestic legislation to collect the information and a tax treaty or exchange agreement — but in Canada’s case it is almost exclusively with tax treaties — to share that with other countries’ tax authorities and to get it from them.
Mr. Gallivan: I would just clarify that as of this fall, the CRA will automatically be receiving worldwide banking information from close to 100 jurisdictions. We receive that information and risk-assess those for Canadians to decide whether that offshore asset has been reported and whether that matches with their income tax returns. That starts this fall.
Senator Moncion: When FATCA came into play, financial institutions had to put programs in place to collect the information, so we did it for the U.S. citizens. We haven’t done it with people from France or other countries, so how is that information being collected or provided?
Mr. Ernewein: In fact, we have. It’s just that Canadian financial institutions are required to collect this information with respect to non-resident bank account holders and not limited to the United States.
Senator Moncion: That has been done forever.
Mr. Ernewein: Enhanced reporting has been required regarding asset values and the like. The reason that may not be apparent is that it is much less intrusive than the citizenship requirements that FATCA and the intergovernmental agreement with the U.S. required.
Mr. Gallivan: That information has always been available on request. What is new is that tax authorities are sharing it across the board automatically. We are getting it all. Back to your example with France, all of the information collected by Canadian financial institutions on people with ties to France has been collected, and the French government is receiving the complete list, which helps us with that targeting question: Which taxpayers give us pause and need to be audited, and which seem to be consistent with their tax filings?
[Translation]
Senator Moncion: So, we should be seeing some positive results from all of this exchange of information; not only as regards your obtaining data, but there will also be progress in collecting these amounts of money.
Mr. Gallivan: Yes. Under our voluntary disclosure program, during the five years prior to 2016-17, the number of disclosures abroad tripled. I think people saw this bill coming and tried to comply.
Senator Moncion: But if they tripled, that takes us to three —
Mr. Gallivan: No, it was $300 million a year, and it is now $900 million, almost a billion dollars through voluntary disclosure, per year.
Senator Moncion: Are we talking about money or the number of people?
Mr. Gallivan: Money.
Senator Moncion: My other question concerns what you said regarding the Personal Information Protection and Electronic Documents Act, the PIPEDA.
Mr. Giroux, you said that when you have dealings with a corporation, to go back to your New Brunswick example, since the enterprise can easily be identified, the people who work there can also easily be identified, and that prevents you from obtaining information on that corporation. Did I understand you correctly?
Mr. Giroux: Yes, in fact, that is because the Income Tax Act prohibits the disclosure of taxpayer information to anyone outside of the CRA, with the exception of a few people who have particular duties. So disclosure is forbidden, and the Canada Revenue Agency’s approach is very restrictive and cautious. Because of that, even if it can provide information that does not include an address, name or postal code, if we could then indirectly identify a taxpayer, corporation, individual or trust, the agency will refuse to give us the information.
I gave the example of a multibillion dollar enterprise in New Brunswick; it’s an extreme example of a case where it would be quite easy to determine the nature of the business and to identify it specifically. As an added example, take the case of a very young individual in a province like Nova Scotia, for instance, who has a multi-million-dollar income from performing. It would be easy to identify him by looking at public data.
Those are extreme examples, but it’s easy to imagine several other situations where there is residual disclosure, and that is why the CRA is reluctant to provide us with non-aggregated microdata.
Senator Moncion: However, this is a federal government agency providing information to another federal government group. The information is not published. You don’t publish lists.
Mr. Giroux: And that explains my office’s frustration at not having access to this type of information to do its work. I can’t speak on behalf of the agency’s people, but since the law is the way it is, it limits my office’s capacity to receive information held by a federal entity.
Senator Moncion: Thank you.
Senator Bellemare: My question may be slightly off-topic, but this is bothering me anyway, and the next question will depend on the answer to the first. The underground economy is difficult to evaluate. What hypotheses do you work from for your top-down evaluations? Do you feel those hypotheses are very solid?
Ms. Éthier: We based our evaluation of the underground economy-related fiscal gap on Statistics Canada data, and made certain adjustments to include things that are deductible. So, our hypotheses are as solid as Statistics Canada’s estimates, and they invest a lot of money in them. In order to publish the GDP, for instance, the agency must estimate it. On the basis of that estimate, we applied a tax rate according to the type of underground economy we were looking at. That is as robust as the Canadian GDP estimate.
Senator Bellemare: Thank you.
My second question is very subjective, but when I look at this whole tax gap estimate exercise, when there is a very large tax gap —Last week, as an example, we heard about a Conference Board tax gap assessment of between $40 billion or less than $10 billion, so it was huge. I’m putting myself in a citizen’s shoes. If the sense is that the tax gap is enormous, do you think this could jeopardize the credibility of our tax system in our citizens’ eyes? Couldn’t this create a kind of —
Senator Eaton: A feeling of “why me”?
Ms. Éthier: That’s a very interesting question, but in the interest of transparency, it is important that we determine how much money we are not recovering. It is certain that publishing that may have the opposite effect. Citizens may react by saying they should do the same, or they will want us to take action against these entities. I don’t think there is a simple answer.
Senator Pratte: Briefly, Mr. Giroux, I’d like to gain a better understanding of why you need these microdata to estimate the tax gap. I’m not sure I understand. The aggregate data isn’t enough? Especially if you use the top-down approach, rather than asking for microdata that could lead to some taxpayers being identified.
Mr. Giroux: The microdata aren’t needed with the top-down approach, that’s true. When we examine the GST tax gap, the top-down approach seems quite effective to me, probably more effective than the reverse. But as for the international tax gap, we aren’t talking about just millions of corporations or millions of GST-HST agents, we are looking at 1 per cent, or even 0.1 per cent or 0.01 per cent of taxpayers. The taxpayer pool at that level is very small, and you quite quickly get to cases where the taxpayers, corporations and even trusts can be identified indirectly, even if you remove the identifying information.
There are even more problems when we ask about audit data, the number of audits, or audit and recovery-related actions taken by the agency. You quickly enough get to data that is not just numerical, but qualitative, where the agency could inadvertently include information that could make identification possible. The agency employees get very cautious at that point and greatly restrict the quantity and nature of the information they give us. It’s not that we want to know how much someone earns or has declared, that is absolutely not our focus, but the CRA’s intrinsic caution is at play.
Senator Pratte: I understand that section 241 of the Income Tax Act is an important section and that its purpose is precisely to ensure that that information does not become public, and also that as few people as possible have it in hand, aside from what is needed for the purposes of the act. I believe I understood that you will be submitting a draft amendment to us that would create an exception for your office. Personally, before adopting such an amendment, I would think about it carefully, in order to make sure that we would not be creating an exemption that could lead to disadvantages. You must be very careful about the way the amendment is worded; the text has to be very narrow, so as to be used only for its intended purpose, and not others, potentially.
Mr. Giroux: The Office of the Auditor General has access to taxpayer information, and they don’t want to go and check out taxpayers’ files either. The idea, rather, is to help support their role as watchdog of the public funds, and their function as external auditor of the agency. Similar provisions exist for other officers of Parliament. The decision, of course, rests in the hands of the committee and of Parliament.
Senator Pratte: The Auditor General has an exemption under section 241, correct?
Mr. Giroux: That is what I understood.
[English]
Senator Marshall: I wanted to pursue something that Mr. Gallivan said in response to Senator Andreychuk about when the Canada Revenue Agency has difficulty getting information from taxpayers. I think the mindset of the Canada Revenue Agency is that it is probably tax evasion. Is that the normal culture or attitude of the Canada Revenue Agency? I would think that the Canada Revenue Agency is sometimes overly aggressive, and there is also the possibility that many taxpayers, when they are asked for information, just come to the conclusion, well the less information we give you, the fewer questions you’ll have. It’s like the government with accountability information; if they don’t give it to you, all you can say is the government is not providing accountability information. Once you get the data, the questions are endless.
What is the mindset of the Canada Revenue Agency when you are experiencing problems? Is it that you automatically jump to tax evasion?
Mr. Gallivan: Absolutely not. We are structured so that we have different points of focus for different clientele. The compliance team that looks after T4 earners and regular taxpayers is different from the team that looks after regular, small and medium enterprises. First, we segregate by clients, and, going in, we know we’re dealing with a certain client.
We would start with education. Even with multinationals, we go to the Canadian Tax Foundation and we talk about what we’re seeing. We try to give feedback so that we can deter and get people to comply voluntarily in the first instance. We spend a lot of time on guides, information and giving advice to the Department of Finance when they are crafting legislation.
In all instances, we try to help people get it right from the start. Then we move into that deterrent when we’re sending notices, warnings — people renting out space in their home, for example — information letters and encouraging them to comply.
When we get to very sophisticated multinationals, who know that to get an accurate assessment of transfer pricing we need to do functional interviews with top executives and we have difficulty, our sense is, yes, there is a game being played out. There is a sophisticated taxpayer who knows that we are probably going to court, and in court it’s evidence that counts, and the less evidence we have, the greater their chances of being successful.
We always start out to help and to support, but in some segments — and I would say with multinationals in particular — we kind of know we will end up in court. Increasingly, we are bringing Department of Justice lawyers in on the offshore and multinational files right from the audit stage, because everybody knows this will probably have to get litigated. The taxpayer certainly has their lawyers in from the outset, and increasingly we have learned that we need to have our lawyers in from the outset as well.
Senator Marshall: Even at the preliminary stage when you start out asking questions, I don’t think anybody or few people think that the Canada Revenue Agency is there to help, but thank you for your explanation.
Senator Andreychuk: Ms. Éthier, the tax gap is just one part of a problem that we are now facing internationally.
Regarding money laundering, it goes out, sometimes in numbered companies, and it’s coming back and being cleansed and used.
How are you looking at the tax gap along with money laundering and those issues? We have had a chance to look at some of the issues with marijuana and international companies and some being offset. Are you looking at the whole circle, or are you just looking at the tax gap at this time?
Ms. Éthier: Right now, we are looking at the assets of certain types outside of Canada. To the extent that the laundered money comes back into the normal economy, it’s not part of the tax gap because it would be subject to whatever taxation there is.
In Gabriel Zucman’s work, a lot of consideration is being given not only to money laundering but also to criminal activities more generally. Also, he is looking at all the countries in the world, including places where people put even the government’s money outside the country for personal reasons. There is a lot of that there, but it is taken into account to the extent it is possible in the estimates that we do.
Remember, this was only for individual income tax at this stage.
I don’t know if that answers your question.
Senator Andreychuk: It reassures me that you are thinking about that part. I’m not sure we are there yet.
[Translation]
Senator Forest: That is exactly the point of my question. I’d like to know if an evaluation is done, either by the Department of Finance or the Canada Revenue Agency.
Tax relief is not fraud or avoidance. Certain tax relief programs are designed to encourage research and development. Does the CRA do any cost-benefit analyses to determine the cost of the program versus the benefits?
That question is adjacent to the topic of this morning’s meeting.
Ms. Éthier: The Department of Finance publishes the Report on Federal Tax Expenditures, which provides costs by tax category.
I’m going to let Mr. Ernewein answer your question.
Mr. Ernewein: Ms. Éthier gave you my answer.
[English]
It’s exactly what I was going to say. We do evaluate tax expenditures. We have a long list. We publish annually a report detailing the costs. We tried studies on specific aspects of it a couple of years ago. There was a more detailed internal analysis of tax expenditures with some external advisers helping us with that. It is very much an important feature of our review of our system.
The Chair: As we conclude, I have a few questions.
CRA, you do publish on your website cases of people, corporations and trusts convicted in the courts for tax evasion or for failing to file income tax returns when required.
First, would there be any constraints, in your experience, on including this information in the CRA’s annual report, as Bill S-243 would require?
Second, why do you not also include convictions for international tax evasion?
Mr. Gallivan: I’ll answer your second question first. The focus on offshore and international tax evasion was relatively recent. As has been pointed out, we have a relatively small number, so that’s the reason the numbers are not there. It’s because it’s a relatively recent focus, so that will grow in the future.
To come back to your first question, the government has not finished its full analysis of the bill, so I can’t speak to that, and I don’t want to compromise the government’s position. I will say the CRA struggles with the question of pardons, kind of decided on a five-year period or a 10-year period, because people convicted could seek a pardon. We are mindful of that fact when we consider what kind of information we put in the public domain.
The Chair: Thank you very much. With your experience across Canada, do you have any suggestions as to witnesses the committee could or should invite for our study of Bill S-243?
Ms. Éthier: Can we think about it and maybe send some suggestions to the clerk?
The Chair: Yes, and please do send them to the clerk.
Honourable senators, I now declare the meeting adjourned. To the witnesses, thank you very much, very well done and professionally.
(The committee adjourned.)