The Committee’s witnesses provided a variety of comments in relation to suspicious financial transactions and aggressive tax planning. In particular, they spoke about criminal activity, offshore bank accounts and offshore financial centres, and aggressive tax planning strategies used by corporations.

A. Criminal Activity

Some of the Committee’s witnesses believed that aggressive tax planning by individuals and corporations that is virtually indistinguishable from criminal activity has played a role in focusing attention on offshore income and tax compliance. The OECD mentioned the aggressive tax planning techniques of the banking sector, with foreign banks covertly recruiting clients in the United States, while an official from the Department of Finance highlighted the government’s draft reporting requirements for advisors of aggressive tax planning schemes; these requirements were supported by Arthur Cockfield.

A representative of the Royal Canadian Mounted Police (RCMP) stated that criminals and criminal organizations can use the same financial system as others, thereby making it difficult for investigators to distinguish between legitimate and illegitimate activities. For example, criminal organizations operate seemingly legitimate businesses so that the proceeds from their criminal activities can be co-mingled with “legitimate income.”

Accountability Research Corporation highlighted the ease with which income earned in Canada can be directly transferred by a Canadian-resident individual, corporation or trust to foreign locations or invested by an entity controlled by a Canadian-resident individual, corporation or trust in foreign financial instruments that are not reported in Canada; this ease can make it difficult for Canadian law enforcement and tax authorities to track the origin and destination of income. In addition, due to confidentiality requirements between lawyers and their clients regarding the use of trust accounts, lawyers’ trust accounts are often used to launder income earned from illegitimate activities.

Global Financial Integrity informed the Committee that secrecy jurisdictions, which prohibit the disclosure of the beneficial owner of an account or corporation, undermine the efforts by developed countries to provide foreign aid, as such jurisdictions facilitate the transfer of foreign aid funds from the developing country to offshore accounts. Walid Hejazi suggested that it is difficult to determine whether a foreign corporation is owned by a Canadian, as individuals in Canada can create a corporation or a private bank in an offshore financial centre and manage assets through that corporation or bank.

B. Offshore Bank Accounts and Offshore Financial Centres

Although having an offshore bank account is not illegal, a number of the Committee’s witnesses identified legitimate and illegitimate reasons for establishing such an account. Stephen Jarislowsky, an investment advisor with Jarislowsky Fraser Limited who appeared on his own behalf, said that low investment returns and a high rate of taxation on investment income earned by Canadians have enticed individuals to avoid or evade taxation of that income through the use of an offshore bank account. Arthur Cockfield countered this statement by remarking that Canadian tax compliance rates are among the highest in the world; that said, he agreed that tax evasion in relation to foreign income is rising, and argued that the globalization of financial services has contributed to international tax evasion, as it is relatively easy for Canadians to conceal certain domestic transactions from Canadian tax authorities through the use of offshore bank accounts and related foreign-issued credit cards. Accountability Research Corporation provided reasons for establishing an offshore bank account that are unrelated to tax evasion, including: funding activities in another jurisdiction, such as to support foreign dictators; concealing profits from illegal activities, such as securities fraud and Ponzi schemes; and hiding assets from other individuals or entities, such as creditors.

Some witnesses mentioned globalization as one explanation for the increased use of offshore jurisdictions by Canadians and for Canadian taxpayers generating income in tax havens. Walid Hejazi highlighted that Canadians have more invested abroad than non-Canadians have invested in Canada, and suggested that 20% of foreign direct investment by Canadians occurs through an offshore financial centre. Stephen Jarislowsky pointed out that a high relative value for the Canadian dollar has increased foreign investment by Canadian businesses in offshore financial centres.

Regarding the communication of financial information between and among bank branches, HSBC Bank Canada indicated that the non-Canadian divisions of HSBC operate independently from the Canadian division, and that HSBC does not share client information between and among divisions. Moreover, each HSBC division operates in accordance with the laws of its specific jurisdiction, and HSBC Bank Canada does not open bank accounts in foreign jurisdictions for Canadian customers; instead, customers are referred to the foreign division of HSBC in a particular jurisdiction.

C. Aggressive Tax Planning Strategies Used by Corporations

1. General Strategies

Some of the Committee’s witnesses highlighted the use of aggressive tax planning strategies by multinational corporations. For example, Walid Hejazi indicated that multinational corporations use bank accounts in offshore financial centres to transfer money to other parts of the world, and that they use tax avoidance techniques to remain competitive with corporations that use similar techniques. The OECD noted that multinational corporations use tax havens and offshore financial centres due to relatively lower regulatory standards. It provided the example of an insurance company created by a U.S. parent corporation in an offshore financial centre to provide insurance services solely to the parent corporation, as well as to its U.S. and foreign subsidiaries.

Accountability Research Corporation indicated that the new International Financial Reporting Standards legitimize the under-reporting of income by publicly traded corporations for tax purposes. It highlighted the adoption of the these standards by the CRA without debate in Canada, as well as the drafting and approval of these standards by organizations interested in maximizing investment returns for their clients, which may lead to aggressive tax planning and decreased tax revenue in the future.

Brigitte Alepin, a chartered accountant with Agora Services de Fiscalité Inc. who appeared on her own behalf, argued for a balance between, on one hand, restricting certain transactions due to tax evasion committed in tax havens by individuals, corporations and trusts and, on the other hand, legitimate tax planning transactions in the same jurisdictions by multinational corporations.

A Department of Finance official noted that Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation, contains measures that would limit the use of foreign investment entities, non-resident trusts and foreign tax credit generators to avoid and reduce the taxation of income in Canada.

2. Profit Shifting and Transfer Pricing

Regarding the use of transfer pricing, the CRA informed the Committee that transfer pricing occurs in all sectors, and is used by both large and small corporations. Global Financial Integrity noted that transfer pricing is used by multinational corporations to under-report income in developing countries, thereby lowering the tax base of those countries. As an example of this approach, the Halifax Initiative mentioned international mining companies operating in Zambia that have allegedly unprofitable affiliates in that country. To reduce the shifting of profits, Global Financial Integrity and the Halifax Initiative advocated country-by-country reporting of sales, profits, tax paid, the number of employees and costs for all multinational corporations. Similarly, Brigitte Alepin and Arthur Cockfield proposed that country-specific information be submitted to the CRA in order to reduce tax avoidance by multinational corporations.

The OECD noted that multinational corporations transfer investments and intellectual property to various jurisdictions for tax purposes. For example, a company may have a physical presence and business activities in Canada, investments in an affiliate in Europe and intellectual property owned by another affiliate located in Barbados. Payments between affiliates for goods and services, such as intellectual property, can be used to shift profits to jurisdictions with low or no taxes.

Paul Collier told the Committee that certain multinational companies use transfer pricing to eliminate their tax payable in developed countries, such as Britain, which disadvantages domestic companies. He requested coordination among Group of Eight countries in order to prevent such practices.

3. Double Taxation Treaties

A number of the Committee’s witnesses indicated that bilateral tax treaties designed to reduce the double taxation of income — or double taxation treaties — actually promote tax avoidance and evasion by Canadian corporations. Alain Deneault, a researcher at the University of Quebec at Montreal who appeared on his own behalf, provided the example of the Canada–Barbados double taxation treaty, which he felt promotes the reporting of higher expenses by multinational corporations in Canada through inflated prices for intra-firm transactions, thereby lowering Canadian taxable income. The Quebec Association for the Taxation of Financial Transactions for the Aid of Citizens had similar views on the Canada–Barbados double taxation treaty, and said that the treaty enables profit shifting and reduces the amount of Canadian tax revenue.

The Mouvement d’éducation et de défense des actionnaires proposed repeal of the rules allowing corporations in countries that have signed tax agreements with Canada to return income to Canada on a tax-free basis. An official from the Department of Finance informed the Committee that Canada’s policy is to exempt business income earned by foreign affiliates of Canadian multinationals from Canadian taxation, regardless of the tax rate in the foreign jurisdiction; this approach ensures Canada’s competitiveness with other countries that have similar policies. Gilles Larin suggested that Canada should undertake a review of all double taxation treaties with countries that have low tax rates, revise treaties with obsolete information exchange provisions, and repudiate a treaty if the other jurisdiction does not agree to a provision providing for the exchange of information.

Brigitte Alepin felt that signing a double taxation treaty with a tax haven encourages tax evasion by legalizing tax avoidance activities. She also mentioned that domestic tax policy, in conjunction with double taxation treaties, can increase the level of tax evasion or the use of tax avoidance transactions. She gave the example of section 116 of the ITA, which was recently amended to allow Canadians to sell eligible property in a country with which Canada has a bilateral tax treaty to a resident of the relevant country so that the Canadian is exempted from paying the 25% withholding tax. The removal of this withholding requirement may result in tax not being paid if taxpayers feel that they do not need to determine if either or both the property and the purchaser are eligible for the exemption.