FINA Committee Report

In their appearance before the Committee, witnesses shared their views about federal and private-sector entities that play a role in monitoring, detecting and prosecuting aggressive tax planning and tax evasion in Canada, including the CRA, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the RCMP and Canada’s financial institutions.

A. Canada Revenue Agency

1. Monitoring, Detection, Prosecution and Tax Revenue

According to some of the Committee’s witnesses, the main method by which revenue associated with tax evasion is collected is through the audit procedures of the CRA. An official from the CRA said that the audit process is long, and requires an initial risk analysis to determine both the amount of tax that may be recovered and the level of difficulty in obtaining it. The Committee was told that, in the 2009–2010 fiscal year, the CRA conducted 1,251 audits, an increase from 278 in the 2005–2006 fiscal year; since 2006, nearly 8,000 audits have been completed involving aggressive tax planning, and more than $4.5 billion in unpaid tax has been identified. An international comparison was provided by the OECD, which said that Ireland obtained €1 billion in tax revenue from residents using accounts in the Channel Islands.

In speaking about criminal prosecutions, a CRA official indicated that the CRA launches criminal proceedings only after discussions with the Department of Justice and the Public Prosecution Service of Canada, as tax evasion must be proven beyond a reasonable doubt in order to be successful in court. The official also noted that investigations of criminal activities by taxpayers are undertaken by the CRA’s Enforcement and Disclosures Directorate, perhaps with the aid of tax authorities in other jurisdictions. In an effort to deter further abuse, the CRA publishes information about successful prosecution of tax evasion and aggressive tax planning schemes. Robert Kepes suggested that the Office of the Auditor General of Canada should, on an annual basis, measure the success of the CRA in prosecuting tax evaders.

Regarding international activities by individual taxpayers, the CRA told the Committee that — for the 2009–2010 fiscal year — $1 billion in tax revenue was recovered by the CRA, of which $4 million was obtained from the taxation of income associated with offshore bank accounts held by Canadian individuals. Arthur Cockfield suggested that a large proportion of this $1 billion was obtained from individuals and corporations engaged in aggressive international tax avoidance, rather than from tax evasion.

Finally, a CRA official identified two global programs used by Canada to discuss tax evasion schemes with other tax authorities: the Seven Country Working Group on Tax Havens and the Joint International Tax Shelter Information Centre. Another CRA official mentioned that Canada is a member of numerous regional tax administrations that develop and share best practices.

2. Tax Administration and Auditors

Witnesses appearing before the Committee differed in their opinions about whether the CRA has sufficient resources to prosecute tax evaders and aggressive tax planning properly. The Mouvement d’éducation et de défense des actionnaires indicated that the CRA’s resources are insufficient, and argued that the CRA does not publish enough information to combat tax evasion or to inform policy-makers properly. Canadians for Tax Fairness noted that the CRA does not have enough staff to examine the tax information received from other countries. On the other hand, Stephen Jarislowsky stated that the CRA is sufficiently staffed; however, in his view, its employees lack training in the prosecution of tax evaders. Arthur Cockfield suggested that more comprehensive audits of taxpayers should occur and that greater resources are needed for the CRA, as noted by a 2007 report by the Office of the Auditor General of Canada. In relation to the benefits of increased resources for tax authorities in other countries, the OECD indicated that the United Kingdom spent an additional £4 million on tax collection efforts in relation to undeclared offshore accounts in 2009, and expected to receive £7 billion in additional tax revenue.

In response to the need to increase federal funding allocated to the CRA, an official from the Department of Finance noted that the CRA received additional funding for the creation of a tax planning centre of expertise. A CRA official indicated that economists are used to review the audits of multinational corporations, which may use transfer pricing as a tax avoidance tool.

3. Tax Information

A number of the Committee’s witnesses highlighted that the sharing of information between tax authorities in various countries is essential in detecting tax evasion. An official from the CRA noted that the CRA obtains information through double taxation treaties, TIEAs, international networks, audits and court orders, which can be obtained pursuant to section 231.2 of the ITA; this section contains “unnamed persons requirements.” The 2013 federal budget announced a change to the “unnamed persons requirements” that would streamline the CRA process, as well as changes to Form T1135 that would increase the level of detail that is required on the form.

4. Voluntary Disclosure Program

A number of the Committee’s witnesses highlighted both the problems with — and the effectiveness of — Canada’s Voluntary Disclosure Program (VDP), which is administered by the CRA. According to witnesses, the VDP allows taxpayers to disclose previously undeclared income; the CRA can allow these disclosures to occur without penalty or prosecution. A CRA official indicated that the CRA received 3,298 voluntary disclosures and recovered $138 million in tax revenue in the 2009–2010 fiscal year, while a colleague said that more than 15,000 voluntary disclosures in the 2011–2012 fiscal year resulted in $310 million in tax revenue. Another CRA official highlighted that the VDP is not a negotiated settlement regarding tax owing, as all previous taxes and penalties must be paid; a separate tax fairness program allows taxpayers to negotiate a settlement with the CRA.

Based on the experiences of the clients represented by Spiegel Sohmer, David Sohmer indicated that the average age of VDP applicants has increased in recent years; whereas applicants in 2003 had been members of the baby boom generation, their age is now consistent with the parents of those individuals. He also suggested that the recent increase in the number of VDP applications reflects two events: changes in Canadian securities law in 2009 that resulted in foreign investment advisors ceasing to serve those clients who owned less than $5 million in securities; and disclosure of the names of individuals holding accounts in a Liechtenstein bank. He argued that the VDP does not reduce the number of long-term tax evaders. Don Johnston shared his view that the VDP recovers more tax revenue than do audits resulting from TIEAs.

Scott Michel outlined the voluntary disclosure program that existed in the United States in 2009; according to him, that program was similar to Canada’s VDP but allowed U.S. taxpayers to negotiate lower settlements, which resulted in 15,000 settlements by taxpayers. He made suggestions regarding the requirements for an effective voluntary disclosure program, including amnesty from criminal prosecution, penalties proportional to the offence, no penalties for non-resident individuals who pay foreign income tax, timely resolution of cases, random checks of amended returns in order to ensure compliance, and aggressive enforcement of tax law. Arthur Cockfield supported a temporary reduction in interest penalties for VDP participants in Canada.

David Sohmer mentioned that the Ministère du revenu du Québec does not administer the VDP in the same manner as the CRA, and noted that the two entities use different formulae to estimate the amount of tax evaded. The result is that more income tax is paid by VDP participants in Quebec than elsewhere in Canada.

B. Financial Information and the Financial Transactions and Reports Analysis Centre of Canada

An official from FINTRAC informed the Committee that information on approximately 65,000 transactions per day are received by FINTRAC from reporting entities, mostly from financial institutions and casinos. Reporting entities submit several types of reports: suspicious transaction reports, which must be submitted if criminal behaviour is suspected; large cash transaction reports, which are submitted when a transaction has a value of $10,000 or more; reports of international electronic funds transfers, which are submitted when $10,000 or more is transferred into or out of Canada; and casino disbursement reports, which are submitted when a casino makes a payment of $10,000 or more to a patron. The 2013 federal budget announced a new requirement for financial institutions to report international electronic funds transfers of $10,000 or more to the CRA.

The Committee was told that FINTRAC analyzes the information received by it in an effort to discern patterns and thereby detect suspicious transactions. According to FINTRAC’s analysis, there are approximately 64,000 suspicious transactions per year. In some instances, there are sufficient grounds to build case disclosures related to a suspected money laundering or terrorist activity financing offence; these case disclosures are then sent to the appropriate police force, the CRA, the Canada Border Services Agency and/or the Communications Security Establishment.

A FINTRAC official indicated that, for 2009 and 2010, FINTRAC sent 287 case disclosures regarding criminal investigation into tax matters to the CRA where, through its Special Enforcement Program, the CRA conducts audits and civil enforcement actions may be taken against persons suspected of deriving taxable income from criminal activities. The Committee was also told that, over the 2007–2012 period, FINTRAC referred 2,470 cases to the CRA. Until 2011, FINTRAC could provide case disclosures to the CRA when a dual threshold was met: a reasonable suspicion existed that the information being disclosed was relevant to investigating or prosecuting a money laundering offence, and a determination was made by FINTRAC that the information was relevant to an offence of evading or attempting to evade the payment of taxes. Furthermore, the law did not permit FINTRAC to use tax evasion as the prerequisite criminal activity with which to build a case disclosure. Thus, disclosures made to the CRA were usually related to proceeds obtained from drug trafficking or through fraud, and they were made after the determination of evasion of income taxes.

The first act to implement the provisions of the 2010 federal budget amended the list of predicate offences, known as “designated offences,” in the Criminal Code to include indictable offences listed in the ITA, such as tax evasion. Furthermore, on 14 February 2011, provisions in the ITA came into force that changed the threshold for case disclosures to the CRA; in particular, a change was made from a requirement that FINTRAC determine “that the information is relevant” to tax evasion to a lower requirement that FINTRAC have “reasonable grounds to suspect” that the information being disclosed is relevant to tax evasion. FINTRAC is now able to build a case and disclose the identity of the potential infringer to the CRA when there are reasonable grounds to suspect that the analyzed information is related to tax evasion and is relevant to investigating or prosecuting a money laundering offence.

The Committee was also told that, in the 2010 federal budget, FINTRAC received additional funding to help detect tax evasion. All FINTRAC analysts received in-depth training on the impact of the legislative changes and, from CRA specialists, on tax evasion. According to a FINTRAC official, FINTRAC expected the number of case disclosures referred to the CRA to increase as a consequence of the legislative changes, and believed that the training from the CRA will allow FINTRAC analysts to identify money laundering cases related to tax evasion.

As well, a FINTRAC official noted that FINTRAC has developed indicators of money laundering that are used to identify this type of behaviour. Usual indicators of money laundering include no payments being made to suppliers and ownership of a cash-intensive operation. FINTRAC has also developed, with the CRA’s assistance, indicators of tax evasion, and the official said that FINTRAC believed that targeting tax evasion will reduce criminals’ ability to profit from their illegal activities.

According to Denis Meunier, FINTRAC — like the CRA — shares information with foreign jurisdictions. He informed the Committee that FINTRAC receives more than 200 queries annually from 73 foreign jurisdictions. While FINTRAC is not permitted to make case disclosures to Revenue Quebec, it often refers case disclosures to the Sûreté du Québec.

C. Royal Canadian Mounted Police

In its appearance before the Committee, the OECD argued that a coordinated effort between tax authorities and law enforcement is necessary, as tax evasion is linked to money laundering, bribery, corruption and terrorist financing; this view was supported by a FINTRAC official and a representative of the RCMP. The RCMP representative stated that the RCMP, through its Proceeds of Crime Program, regularly refers information to the CRA regarding tax-related matters. For example, between March 1999 and March 2009, the Proceeds of Crime Program opened 542 files related to the ITA and referred information to the CRA that resulted in federal tax assessments totalling approximately $145 million.

According to the representative of the RCMP, however, the RCMP is not a primary recipient of information related to tax evasion and, within the RCMP’s Financial Crime Program, there were no investigative resources dedicated solely to tax evasion at the time of the representative’s appearance. The Committee was informed that the RCMP generally does not investigate tax evasion related to legitimate funds earning income offshore; instead, most of the information that it provides to the CRA is related to other criminal investigations. The representative also indicated that the RCMP shares information with the CRA only when it is permitted to do so by law and when the sharing will not jeopardize an ongoing criminal investigation. Information is provided to the RCMP by the CRA only when a judicial order under subsection 462.48(1.1) of the Criminal Code has been made by the RCMP or after charges have been laid in relation to a criminal investigation. Another RCMP representative suggested that a change should be made to the Criminal Code so that the RCMP could request tax information from the CRA through an affidavit for all indictable offences under the Code.

A RCMP representative told the Committee that the RCMP is involved in several international fora relating to tax evasion. For example, Canada has mutual legal assistance treaties with several tax havens and offshore financial centres, such as the Cayman Islands. Furthermore, the sharing of technology and methodology has increased in recent years, and Canada has been involved in several working groups relating to
this sharing, especially with the United States, the United Kingdom, Australia and New Zealand. As with FINTRAC, the RCMP has no direct relationship with Revenue Quebec but does have a close working relationship with the Sûreté du Québec.

D. Canadian Financial Institutions

The Committee’s witnesses expressed various views regarding the roles that Canadian financial institutions should play in monitoring and detecting tax evasion, as well as in conducting business in tax havens and offshore financial centres. In relation to monitoring and detecting tax evasion, Brigitte Alepin said that Canadian financial institutions should have stricter policies in place when clients wish to open an offshore bank account, rather than simply referring them to a foreign branch of the institution. Like Gilles Larin, she suggested that there should be automatic sharing of information with Canadian tax authorities when a Canadian resident opens a bank account at a foreign branch of a Canadian financial institution. On the other hand, the Canadian Bankers Association argued that Canadian banks have policies and procedures in place to ensure that the products they offer are not used for the purpose of evading taxes, and highlighted that the banks follow a “know‑your‑client” protocol. It also pointed out that if there is a suspicion that tax evasion or money laundering is occurring, banks are required to submit a report to FINTRAC.

A number of Canadian banks indicated that they have internal policies to verify the identities of customers, to detect and investigate suspicious activities, and to disclose suspicious activities to FINTRAC. For example, RBC Royal Bank told the Committee that it investigates the identities of clients to determine if they are politically exposed foreign persons, and the Canadian Imperial Bank of Commerce mentioned that it monitors clients who make suspicious investments. A number of banks indicated that they have internal investigative units that examine suspicious activities. For example, TD Bank Financial Group informed the Committee that its employees can contact the bank’s financial intelligence unit, and Scotiabank indicated that it has financial investigation units in each jurisdiction where it operates. The Canadian Imperial Bank of Commerce and RBC Royal Bank also said that corporate-wide policies are adjusted for application in each jurisdiction where there are operations; as well, privacy laws in certain jurisdictions may prohibit the transfer of information between branches. Regarding submissions to FINTRAC, HSBC Bank Canada noted that — for 2012 — it submitted 725 suspicious transaction reports, more than 96,000 large cash transaction reports and 600,000 electronic fund transfer reports.

Brigitte Alepin and the Mouvement d’éducation et de défense des actionnaires suggested that Canadian banks should not be permitted to have branches in tax havens and offshore financial centres. Some witnesses said that these banks are potentially aiding Canadian‑resident individuals, corporations and trusts in their attempts to avoid taxation in Canada, and are avoiding taxation themselves. In its brief to the Committee, the Mouvement d’éducation et de défense des actionnaires argued that, if no consensus can be reached on the issue of prohibiting banking activities in tax havens and offshore financial centres by Canadian financial institutions, the government should force financial institutions with such activities to provide detailed reports on staff and taxes paid to local tax authorities in those jurisdictions before obtaining federal contracts in Canada.

Other witnesses supported banking activities in tax havens and offshore financial centres by Canadian financial institutions. The Canadian Bankers Association stated that Canadian banks pay all tax owing on their business income earned in Canada and in other countries in which they do business. Regarding the benefits for Canada of allowing Canadian financial institutions to operate in tax havens and offshore financial centres, Walid Hejazi stated that — by competing globally and earning foreign income — banks generate economic benefits in Canada, such as more highly skilled, high-paying head office jobs, and higher profits from which dividends are paid to Canadian shareholders.