:
Thank you, Mr. Chair, for the opportunity to discuss the Canada Revenue Agency's ongoing effort to combat aggressive international tax planning and tax evasion.
The CRA is committed to protecting the integrity of the Canadian tax system by combatting tax avoidance and tax evasion on all levels. Briefly, I'd like to outline what we mean when we refer to tax avoidance and tax evasion.
Tax avoidance involves minimizing tax by contravening the object and spirit of the law but not the letter of the law. It can lead to significant financial penalties in interest. Tax evasion involves a deliberate underreporting of tax payable—for example, by concealing income or assets and making false statements. Tax evasion is a crime. So in addition to being reassessed for taxes, interest, and penalties, taxpayers who are convicted could spend time in jail and pay court-imposed fines of up to 200% of the tax they sought to evade.
[Translation]
The key to the CRA's domestic and international strategy to prevent aggressive tax planning and tax evasion, in addition to active enforcement, is to make it easy for taxpayers to comply with their tax obligations, while ensuring that the consequences of avoiding or evading tax are serious.
The problem of hiding income and assets in foreign jurisdictions is a serious one for many countries around the world, including Canada.
When Canadians don't pay their taxes, they take resources away from health care, child care, employment insurance, pensions and other programs. Companies that don't pay their taxes gain an unfair advantage over businesses that do.
We expect taxpayers to operate in good faith. If they enter into financial transactions where the express purpose is to avoid or evade taxes, we take action. And the consequences are serious.
[English]
Canada is not the only country combatting international aggressive tax planning and tax evasion. These are global problems.
Along with our partners in the Organization for Economic Co-operation and Development, Canada is a leader in setting and implementing internationally agreed-upon tax standards. The G-20 leaders, including Canada, announced an end to the era of bank secrecy in April 2009. They publicly committed to taking action against uncooperative jurisdictions, including tax havens.
Canada's close relationship with its international partners exemplifies how countries can use information exchange to uncover information relating to aggressive international tax avoidance schemes and information to combat tax evasion. This close relationship is founded upon Canada's network of 87 tax treaties, one of the largest in the world, which allows us to exchange information with other countries.
We are working hard to increase the flow of information by negotiating new tax information exchange agreements, including updating existing treaties and enhancing administrative arrangements with other countries. The CRA has increased the resources devoted to international tax issues. In the last five years, the number of full-time employees working in the CRA aggressive tax planning area has doubled, and the number of full-time employees working on international audit is up by 44%.
We have staff centres of expertise across Canada with senior audit professionals and specialists in international tax and tax avoidance. Since 2006 we have audited more than 6,700 cases, identifying $3.5 billion in unpaid taxes through our efforts to combat aggressive international tax planning. In 2009 alone, we uncovered $1 billion in unpaid tax involving international activities.
The CRA also combats tax avoidance in the courts. The “unnamed person” requirement is a judicial authorization that allows the CRA to obtain information. We also use it for tax avoidance schemes that rely on bank secrecy in foreign jurisdiction to hide income or ownership and control of assets. Using the unnamed requirement, we are able to require that a person or a company provide information regarding an unnamed third party. The CRA has used the unnamed requirement in many domestic and international cases.
Education is also an important element of our strategy. We use community visits, speaking engagements, publications, and our website to ensure that Canadians are aware of the consequences of evasion.
[Translation]
The CRA has been successful in communicating its message about those consequences. That is an important contributor to the significant increase in the number of taxpayers coming forward with previously undisclosed assets through the Voluntary Disclosures Program (VDP).
When taxpayers come forward through the VDP, and their disclosures meet the criteria requirements required to qualify for the VDP, they are still required to pay all taxes owing, plus interest.
The number of disclosures through the VDP has steadily increased over the past few years. Last year, the CRA received almost 3,000 disclosures resulting in $138 million in unpaid tax revenue, and the results so far this year show a continued increase.
Identifying and addressing international aggressive tax planning and tax evasion is a significant undertaking for the CRA. It requires a long-term commitment to gathering intelligence, building international partnerships and educating Canadians about the consequences of tax evasion and aggressive tax planning.
Each year, the CRA increases its understanding of tax avoidance and evasion schemes, the institutions involved in them and the best ways to bring them to an end.
As taxpayers become increasingly aware of the CRA's expertise and success in this area, the CRA moves closer to its goal of compelling all taxpayers to comply voluntarily with Canada's tax laws.
Thank you again, Mr. Chair, for providing this opportunity to discuss our ongoing efforts to combat aggressive tax planning. We would be pleased to answer any questions you may have.
:
My name is Brian Ernewein. I'm the general director in the tax policy branch at the Department of Finance. I'm joined by my colleague, Alain Castonguay, who's the head of our tax treaty and tax information exchange agreement section at Finance.
Thank you very much for the opportunity to appear before the committee today to discuss the subject of offshore bank accounts held by Canadians, the actions being taken by Canada to combat international tax evasion, and Canada's involvement regarding the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
Since 1996, the OECD project on harmful tax practices, with Canada's participation, has identified a lack of transparency and of exchange of tax information as undermining the ability of tax administrations to enforce their tax laws and to combat international tax evasions.
By way of context for this, a number of jurisdictions have maintained bank secrecy laws that made it an offence for any bank to share information about its clients with anyone, including foreign governments. Such laws can encourage Canadians to use banks in these jurisdictions either to hide money or to earn investment income that they don't intend to report in Canada. This, of course, is fundamentally unfair to the vast majority of Canadians who report all of their income and pay their taxes.
In 2000, OECD and non-OECD countries, including Canada, formed a Global Forum on Transparency and Exchange of Information to promote the OECD standards of transparency and effective exchange of tax information—what we refer to as the OECD standard.
[Translation]
Basically, the OECD standards with regard to bilateral agreements posit three simple ideas. First, a country should provide another country with tax information when such information is pertinent to the administration of tax laws in the other country.
Second, the exchange of tax information should not be covered by any domestic legislation that guarantees tax secrecy.
Third—and this applies particularly to countries that do not impose any taxes—a country should provide tax information notwithstanding the fact that it might not have any domestic interest in the requested tax information.
[English]
The OECD standards implemented through the conclusion of tax treaties and tax information exchange agreements—TIEAs, as we call them—enable tax authorities to access information relevant to their tax matters in order to better enforce and administer their tax laws and to help prevent international tax evasion. The Global Forum drafted the text of a TIEA that has since been used by most jurisdictions, including Canada, as a model to negotiate bilateral tax information exchange agreements.
The turning point in the implementation of the OECD standard was the 2009 G-20 summit in London. In April 2009, the leaders of the G-20 stated that they stood ready to take action and deploy sanctions to protect the public finances and financial systems of their countries against jurisdictions and tax havens that have either not committed to the OECD standard or have failed to implement it.
Since that time, the pace of negotiation of TIEAs and of protocols to incorporate the OECD standard in tax treaties has increased dramatically. We've checked back, and as of April 2009 there were 65 TIEAs and protocols that had been negotiated internationally. As of October of this year, that number is above 560.
What are we doing to combat international tax evasion here in Canada? In Budget 2007, the Government of Canada announced a policy that introduced incentives to have non-treaty countries enter into TIEAs with Canada that include the OECD standard on tax information exchange. The 2007 budget also stated as a government policy that all new treaties and revisions to existing treaties would also have to include the new standard for tax information exchange.
To date, we've signed 11 TIEAs, and we hope all of these will enter into force next year so that CRA can start to rely on them to obtain information from the jurisdictions they cover. We've also been involved in TIEA negotiations with 14 other jurisdictions, and we hope to conclude negotiations and seek approval of these TIEAs so that they may be signed as soon as possible.
Of Canada's 87 tax treaties in force currently, all but seven meet the current OECD standard regarding exchange of tax information. Of those seven that do not, we've recently signed a protocol with one of them—that is Switzerland—to bring the new standard into play and have commenced negotiations or renegotiations with each of the other six to update the exchange of information provisions in those treaties so that they meet the OECD standard. Again, we hope to conclude negotiations and seek approval of those revised treaties as soon as they can be signed, and we hope that signature comes as soon as possible.
Finally, there are other provisions in our income tax laws, either in force or currently proposed, that can be important tools in dealing with international tax avoidance. These include our foreign reporting rules, the taxation of investments in foreign investment entities, proposals to tighten our non-resident trust regime, and new reporting obligations in the last budget for those who participate in aggressive tax transactions.
I won't review the details of any of those rules in my opening remarks, but perhaps there's an opportunity to discuss them during the questions today.
Thank you.
:
That's right, you don't.
CRA was farming out to agencies—to accounting firms, to people who had knowledge of it, who were in the business—to do the audits on a client basis: “Here's somebody. Go and have a look at it.” When I was on the finance committee last, back in the late 1990s, the return reported was 1,700%.
That makes a lot of sense to me, compared with having full-time employees.
Maybe you would understand the question this way. You have this 44% increase in full-time employees. What return have you received on that increase in the number of employees, then?
:
If you will, I would like to follow up on that. There were some rather startling statements in the opening remarks of the Canada Revenue Agency.
I will begin on page 5. It states that "since 2006, the CRA has audited more than 6,700 cases, identifying approximately $3.5 billion in unpaid tax..."
If my arithmetic is right, if you divide $3.5 billion by 6,700 cases, that gives you an average of approximately $525,000 per case.
Then Mr. Montroy said that your Voluntary Disclosures Program was quite effective, that it was a huge success. The 3,000 disclosures helped you recover $138 million. That amounts to $46,000 per case, or 11.5 times less than the previous amount.
Taxpayers are not asked to file voluntary tax returns; they are required to do so. And yet here, you pat yourselves on the back, boasting that you recovered an incredible $46,000 on average per voluntary disclosure. However, in the same text, you state that when cases are prosecuted and analyzed, when you go full out, you can recover $525,000, or 11.5 times more.
Jean Drapeau already tried to impose a voluntary tax to pay for the Olympic Games, or Expo 67, I forget which it was.
When dealing with tax matters, I do not think we should be using voluntary measures; we should be prosecuting people more.
I would like to hear your comments on that.
Thank you to the witnesses for coming forward.
I think there are two purposes for our being here. First, we're trying to understand the magnitude of this, whether you want to call it tax evasion or offshore bank accounts—but basically, tax evasion is tax evasion. The way I see it, there are basically two types of tax evasion, domestic and international.
I can't believe that there is no estimate. I guess our first priority would be to determine how much the amount would be, and then after that what kinds of tools we can provide you with so that you can go after that money. I think it's a very basic philosophy of what we're trying to do here.
I can't believe we don't have numbers. We do see different numbers, whether it be from OECD-independent professors making estimates or from elsewhere. My question was going to be, how are these calculated internally? There must be an amount that you calculate. I'm sure the Department of Finance does it for the CRA.
So my question would be, how do you calculate tax evasion, whether it be domestic or international? I understand it's not going to be a hard number, because if you actually had the hard number, then you'd actually have the dollar amounts in your bank account. Isn't that correct?
:
May I just make a comment about that?
Mr. Massimo Pacetti: Yes, go ahead.
Mr. Brian Ernewein: First, yes, it is the case that we have a very good exchange-of-information procedure with the U.S. In many cases, information with the U.S. is exchanged automatically. My colleagues can speak to that, but it's very advanced, if you will.
The second point is in relation to the new jurisdictions, if you want to call them that, which are coming on and agreeing to an exchange of information, perhaps for the first time, with us and other countries. Yes, there is a concern that, to be blunt about it, they may not be committed to doing this or may not have the capacity to actually deliver on exchange of information when asked to do so.
Part of the work of the Global Forum is a two-stage analysis that is under way now. It will first go through and review every jurisdiction's—including Canada's—legal architecture to see whether it has the laws in place and the agreements in place to exchange information.
Then the second phase, taking place for some now and others in the next year or two, will be to analyze and assess their on-the-ground performance with respect to exchange of information to make sure that everybody who is committed to exchange of information is actually delivering on that exchange.
Good afternoon, ladies and gentlemen.
Ms. Ricard, the figures you have shown us are, in my view, astounding. On page 6, as a matter of fact—I will come back to that—you say: "In 2009 alone, the CRA uncovered $1 billion in unpaid taxes involving international activities". It is extraordinary to learn such a thing.
If you put yourself in the position of taxpayers who are currently listening to us, I think that this reflects badly on us as a government. Of course we have caught those people, but the fact that we discovered a billion dollars means that much more money is hidden. I am wondering what the problem is.
Have you called on the government to fix the problem? In my view, it doesn't make sense that, after having reviewed the files, we suddenly discover a billion dollars in unpaid taxes at some point during the year. When you think of all the headaches regular taxpayers have to put up with when they deal with the Revenue Agency, I think it makes much more sense to find greater amounts elsewhere. Are you making a recommendation to us?
The first two pages of your statement say that everything is great, everything is fine, everything is truly wonderful, but if you look at the numbers you are presenting, the situation, in my view, becomes dramatic. I would like to know what kinds of recommendations you will make to the government to improve the situation.
I want to thank our guests for coming today and providing the information.
In this area, as in many areas, numbers can be thrown around and put before the public, and let's be frank, the public doesn't have a great understanding—and neither did I, until I started looking at the issue—of what actually is happening; I think that's only fair.
For example, we had a comment about recoveries. It could have been about collections and not about audits of international activity that are happening. I don't know what happened 15 or 20 years ago, when that minister was there, but I'm guessing it was about collections.
Just give me some examples. Based on what you've responded to other members, we don't—or your organization doesn't—waste a lot of time trying to come up with a guesstimate number on what the outstanding numbers might be. You're actually going after those who are either avoiding taxes—which is not a criminal offence, but there are penalties and so on, and we need to get that money back—or those who are purposely not paying taxes, and that is a criminal offence. Based on the answers you've given here today, you're actually actively pursuing those avenues.
Based on the numbers you've told me, back in 2005 and 2006 it looks as though there were about 278 cases, and about $175 million was recovered—found, recovered, paid back, or whatever. By this time last year there were about 1,250 cases and about $1 billion.
Is that because you have more resources? Have we been spending more money in this particular area, with more people doing it? Is that what is generating that tremendous increase in recoveries?
And thank you to our witnesses.
This is a very enlightening discussion for a lot of us. I think we've all heard about some of these issues that are going on, and we are all rather offended. The honest Canadians pay their taxes—not that anybody likes paying their taxes, but the honest Canadians do. I applaud your work in trying to follow those who don't.
Following up on some of these agreements, then, I believe it was in October that our Prime Minister signed an agreement with my friend, Madame Leuthard, in Switzerland. Is that the type of agreement the OECD is encouraging?
Mr. Ernewein, perhaps you could reflect on that one, if you would.
:
That's a fair question, and it's certainly the case that we do want to be attentive to the system we've got in place to essentially help CRA in its ability to enforce Canada's laws.
First and foremost, I'd say Canada has a self-assessment system. For the most part, honest Canadians declare their income and pay their taxes. For those who don't, writing more rules doesn't necessarily help in terms of tax evasion. If you write another law saying you really, really owe the tax, that doesn't necessarily advance matters. For the group who seek to evade tax, it's necessary to put in other rules that come about it in a different way, or give Revenue more information that allows them to try to identify these taxpayers.
Now in the context of international tax, which I think is the focus of today's discussion, I identified a few different things in my opening remarks. We have had foreign reporting rules for a number of years. They aren't rules requiring a declaration of income; they require a declaration of the existence of foreign assets, as another way of trying to get at this thing.
We've had rules for some time that deal with the taxation of investments in so-called foreign investment entities—
:
It's a thought. If they're a good trading partner and it's a partnership worth having, then we should be working together in our best interest.
Finally, let me deal with all of these Internet businesses that send millions and millions of messages into Canada to everybody, saying your TD account has a problem, it's been shut down, contact us immediately to fix it. It's got the logo on it. And it's the same with Scotia, with RBC, with every one of our national banks.
These are all outside the reach of Canadian law, but there's no question in my mind that they are defrauding a lot of Canadians. That's just as bad as the tax evasion and illegal avoidance.
How does that work into your consideration of international dealings when many of these countries, like an India, a China, etc., are hotbeds for these massive telephone and Internet banks that are bombarding Canadians with attempts to defraud?
:
Thank you very much, Mr. Chair.
And thank you to our witnesses for being with us today.
Ms. Ricard, in your opening statement, you stated:
The key to the CRA's domestic and international strategy to prevent aggressive tax planning and tax evasion, in addition to active enforcement, is to make it easy for taxpayers to comply with their tax obligations, while ensuring that the consequences of avoiding or evading tax are serious.
You also stated, “We expect taxpayers to operate in good faith”, and that if they enter into financial transactions for the express purpose of avoiding or evading taxes you take action. In another statement you talked about the difference between tax avoidance and tax evasion, and that tax avoidance is about contravening “the object and spirit of Canada's tax laws”. I'm assuming “evasion” would be that you actually contravene the letter of the law.
Once it has been determined that the letter of the law has been contravened and an investigation needs to take place, what triggers that? Then I want to ask some questions about tax evasion convictions.
:
Thank you, Mr. Chairman.
Mr. Ernewein, first, I will spontaneously invite you to come back before the committee with Léo-Paul Lauzon and the team from the Université du Québec in Montreal, since your colleagues from the other place have not had time to read their study. You generally dismissed their study out of hand by claiming that their approach is not sound. I am looking forward to hearing you justify your position with substantial arguments, because the study carried out by the Université du Québec in Montreal seems fairly valid to me.
So I am inviting you unofficially, but rest assured that this will be followed by a more official invitation.
[English]
I'm going to go down the list of a few different cases very quickly and just try to get an answer from the people at Revenue as to where things are.
[Translation]
In an investigation carried out by France with regard to a Swiss branch of HSBC, it was discovered that over a billion dollars had been hidden in Switzerland by Canadians. You are investigating this matter. How far along, specifically, is your investigation? Is this, in fact, the matter you said you have been meaning to investigate since last spring, and for which you have no follow-up information to provide us with today? Is that correct? Fine.
There is also the case of RBC Dominion Securities. I have an affidavit here which was signed by one of your auditors. I'm sorry, but it is in English. This is what it says:
[English]
...Canadian residents are using structures involving Liechtenstein entity account holders and offshore accounts, allowing them to masquerade as non-residents, hiding their investments and other income from the CRA, and neglecting their obligation to pay Canadian tax....
[Translation]
This was in the Globe and Mail and on the CBC. What are we doing with regard to Liechtenstein?
:
I would like to go back to the statement made by Mr. Ernewein about information that we apparently do not have regarding banking institutions in particular. That really surprises me because under the Bank Act, which is under the purview of the , banking institutions must submit a report every year. Some of them have already published the October 31, 2010, report and I am presuming that both the Department of Finance and the Revenue Agency have these reports. One thing is clear, we have all of the reports for October 31, 2009. I find it strange that you are saying we do not know what these figures are.
For example, on page 133 in the Scotiabank annual report, it says that there were 10 tax havens and that resulted in a Canadian tax savings of $325 million. On page 128 in the RBC annual report, it says that this bank has 28 subsidiaries in tax havens which resulted in a Canadian tax savings of $360 million. These reports are not talking about taxes on income, but rather taxes owed. As for TD, on page 129 of the report it states that it has four subsidiaries resulting in a savings of $450 million. With respect to the CIBC, on page 150 it states that there are 12 tax havens and that savings amounted to $118 million. These people are not very effective. With respect to the Bank of Montreal, page 152 refers to three tax havens and $212 million. Finally, on page 144 of the Banque Nationale report, the bank states that, with only two countries, it saved $45 million. So, in total, we are talking about 59 countries, including 9 on the grey list; 11 of them have signed agreements with Canada that have not yet come into force and 14 have not signed agreements but are currently participating in negotiations. This represents $1.5 billion for 2009. I am very surprised to hear you say that we do not have information.
Why is it that the left hand of the is not able to tell the right hand that $1.5 billion are available? We say this every year, and I will bet you my shirt—although you may not want it—that it's going to be even worse yet for October 31, 2010. In my opinion, negotiating an amnesty is tantamount to becoming amnesic. It is as though we are saying that everything is going well and that all is forgotten.
Why do you not go after this information, which is available, or why do you appear not to know about it?
:
Thank you very much for the question. I appreciate the opportunity to come back to this, because I think it's an important point.
First, if I've given the impression that I thought we didn't have information relating to our banks, I didn't mean to say that. I don't believe that's true. I think the honourable member has demonstrated that indeed we do have the information on Canadian banks.
My point earlier was that we don't have information on tax evasion, which might mean we don't have information about what foreign banks hold by way of investments from Canadians. But I don't believe that's true in relation to Canadian banks. As their own reports put forward, we do have that.
Point two, I don't think this is a matter of tax evasion. This is a matter of our Canadian banks having operations in Canada and outside of Canada, and in relation to their investments and operations outside of Canada they don't pay current Canadian tax when those operations are subsidiaries. I think that is the same rule that applies in every country in the world. As far as I'm aware, only one country ever sought to tax the business income of foreign subsidiaries, and it has stopped doing that. No one else does. Our system is very much like that.
So I think the characterization of that as tax avoided or even evaded is wrong. It's actually income earned in a foreign jurisdiction and is subject to the tax laws we impose in that jurisdiction.
:
Thank you. I'll just take a moment to elaborate a little bit on what we have in the international context. There are obviously others that apply domestically.
There have been foreign reporting rules that have been in place for a number of years and these are not, as I said earlier, declarations of income but rather simple declarations of the existence of foreign assets, which can be used as an indicator for the Canada Revenue Agency as to whether to conduct further investigations to determine if all income associated with those assets is being reported.
We also have rules in place dealing with investments in so-called foreign investment entities—offshore mutual funds and the like—where a tax is payable if the investment was tax motivated. There are proposals pending. There were some modifications to these in the 2010 budget to tighten our non-resident trust regime to ensure that people don't...not evade, because these are people who are seeking to be compliant with the law, but in terms of making investments in non-resident trusts, that a fair amount of tax is paid even when investing outside of Canada through a non-resident trust.
And finally, in the 2010 budget we have a proposal to institute new reporting obligations for those who participate in aggressive tax transactions. If the transactions with which they're involved have some confidentiality agreement with the adviser or the promoter, or there is a fee associated with it that is based on the tax plan working or not or being successful or not, or if there is any sort of insurance or coverage in case the thing fails, those criteria, together with having a tax avoidance transaction in the first place, will impose a positive reporting obligation on the taxpayer, and in some cases on their adviser or promoter, in order to declare the transaction to CRA and again for CRA to now have the leg up, if you will, to investigate further.
:
I'd like to pursue the future strategies, because I think it's really important that we come out of this meeting with a little bit of dialogue.
Penalties for evasion of income tax in the form of fines range from between 50% and 200% interest. That's pretty awesome. I spent a lot of years as a chartered accountant doing tax returns. I must admit, I have had involvement in some cases where people have said, “I ran into some difficulty. I couldn't pay my taxes. By the time I recovered, I had so much accumulated that I couldn't possibly afford to pay it back. So I had no way out, and I was just playing roulette trying to figure out whether I could continue to go on without getting that phone call. Once you get the phone call, the next thing you do is probably to go and get a rope and hang yourself.” There really are some very clear stories about how it happens. I know that Finance and CRA know very well how people get into trouble.
A voluntary disclosure program is an amnesty of sorts, isn't it? You can come out and you can negotiate a deal, and you don't have to pay 200% interest. You can say, “Let's do the best I can; I want to pay as much as I can, but I also have to survive and live.” It effectively is an amnesty program.
But let's not call it an amnesty. We have a program already that allows people who, in good faith, want to come out and make it right as well as they possibly can over the long term. I'd rather have 80% of something than 100% of nothing. That has to be part of our strategy, I hope.
So if we are now embarking on new initiatives for international treaties and information sharing, and really digging our heels in on those who are using offshore instruments, isn't it time we told Canadians how we feel about this and started to have a public education program that comes out with it, rather than just having the big stick?
:
No. As I said, the voluntary disclosure program is effectively an amnesty, because you're not going to be paying...you can negotiate down. We have to figure out...and do just what Mr. Mulroney did. He said, “Here's what I have”, and it was just a fraction of what he otherwise would have owed if he had declared it in the first place. You have a tool there already, and it's not being subject to the penalties and interest and all this other stuff. It's just saying, “Let's make a settlement.”
It seems to me that it would cost a lot less if you didn't have to go into court cases and do all the months and months of research for data, when people would be prepared to come forward if we only told them about it. I think the Canadian taxpayers out there are just afraid. They're afraid to come forward under the voluntary program, and we haven't told them that they don't have to be afraid, because, quite frankly, it's a win-win if we can get them on the tax rolls fairly and they're paying their taxes.
What's the thinking here? Are we just going to use a big stick? Are we going to say, “Everybody, come on, take a chance here, we have a program; you can come out, and we want you to get back on the rolls, because the stress is going to kill you a lot sooner than your other natural health problems will”?
:
If you can get that to me, I'd appreciate that.
I did want to return to the issue of banks in other jurisdictions with you, Mr. Ernewein, and I've got about two and a half minutes left.
Take the example of BMO, which owns Harris Bank in the United States. They obviously pay taxes in the U.S., but they're not avoiding tax in Canada. A Canadian bank owns a bank that operates in the U.S. and therefore complies with U.S. laws with respect to tax and other matters. In my view, that is a good thing for Canada and a good thing for Canadians, in the sense that our companies owning companies in other jurisdictions is a good thing. We obviously want to have as much investment in Canada as possible, but we want our companies to be global champions as well.
But I think some people may think that's somehow avoiding tax when it's not. So I wanted to give you an opportunity, in a couple of minutes here, to clarify the activities of our banks and insurance companies and others in other jurisdictions and the issue of tax avoidance, because I think that does really need to be clarified.
:
Thank you, Mr. Chairman.
I appreciate the opportunity to return to this. Yes, I think the example you give of a Canadian bank owning a U.S. financial institution is an excellent one. U.S. tax rates are at or are increasingly above Canadian tax rates, and that may mean that the amount of tax paid in the United States on the U.S. bank income is greater than the Canadian tax bill. We provide a foreign tax credit; that is, we allow a deduction for foreign taxes against Canadian taxes paid.
So in those circumstances, the profits of the U.S. financial institution owned by the Canadian parent bank would produce no additional Canadian tax, and that seems reasonable because you need to provide the foreign tax credit to eliminate double taxation. That's one case.
Another case is where a financial institution owned by a Canadian bank, a subsidiary, is located in a jurisdiction that has a lower tax rate than Canada's. In those circumstances we don't impose current tax on that foreign subsidiary's business profits, just as almost every other country does not tax to that income.
That leads me to my third point, which is the suggestion that we can look at these foreign financial institutions owned by Canadian banks or other financial institutions and simply apply a Canadian tax rate to it. I think this is misleading at best, because it suggests that if we imposed a 25% tax on these profits, the Canadian bank would still get the business. Every other bank in the world having operations in that same location is subject to the same non-taxation rules, and that's why for competitive reasons we don't tax. So applying a fictional tax rate or applying a tax rate to this fictional income would, I think, be a misleading way to measure Canadian revenue losses.