:
Good morning, Mr. Chair. Thank you very much for the invitation to appear before this committee.
I've been with KPMG Canada for over 30 years and recently completed a term as KPMG international global head of tax. Before that, I was managing partner of KPMG Canada's tax practice and before that led our tax practices in Vancouver, Calgary, and in my home town Winnipeg.
We welcome this opportunity to help bring clarity and understanding to a number of issues that are important to us as Canadians and particularly the accounting profession, including our firm KPMG.
KPMG is an active member of CPA Canada, the body that sets and enforces the standards for more than 200,000 accountants in Canada. Every day, accountants across the country help their clients with all sorts of financial issues including helping them comply with the myriad of complex tax rules. Our firm has been serving Canadians for close to 150 years. Over those years, we have continually evolved our practices to meet the changing needs and expectations of our clients and society as a whole, a fact which is critical to this discussion.
Tax planning is an acceptable part of our tax system. As the Supreme Court of Canada explained in 2013:
Every taxpayer is entitled to order his or her affairs so that the tax payable is less than it otherwise would be. Taxpayers often engage in tax planning to achieve that result.
With that in mind, the Isle of Man tax plan, which has been subject of much discussion and media attention in recent months, was created in 1999 and hasn't been implemented for close to 10 years. To understand the facts around this particular plan, we need to try to put ourselves back in that environment 17 years ago. Simply put, we can't take a 2016 lens to look at a 1999 issue.
In the late 1990s, the approach to tax planning in our profession, and society as a whole, was different that it is today both in Canada and around the world. The fact is the late 1990s was a time when non-resident trusts were permitted under Canadian law as a matter of government policy.
In fact, they were encouraged by the federal government as a way for immigrants with financial means to come to Canada while keeping some of their funds abroad. It was in this environment in 1999 that this tax plan was created.
As is the case with all our tax plans, it fully complied with all applicable tax laws. We conducted extensive internal and external due diligence including going so far as to obtain independent legal opinions from leading tax experts both in Canada and in the Isle of Man. With this diligence in hand, we implemented this plan 16 times, of which 13 are known to the tax authorities. We haven't used one of these plans in almost a decade.
If we now roll the conversation forward to 2016, the world has changed for every business, including the accounting profession. We, too, have modified our business practices to meet the expectations of our people, our clients, and our communities.
For example, KPMG strongly supports and was proud to have been involved in the OECD-G20 base erosion and profit shifting initiative designed to allow jurisdictions to work together to lay the foundations of a modern international tax framework.
Further, we ceased offering the tax plan to clients many years ago because both our tax practice and the national and global context changed regarding acceptable tax planning.
We have done more.
By 2006, any significant tax plan required a review by independent partner committees regarding the general anti-avoidance rule, transactional tax matters, risk and reputation, and other areas deemed appropriate by our professional standards.
In 2009, we developed and deployed a global tax code of conduct, a document that sets forth the commitments we make every day to our people, our clients, the tax authorities, and our communities. It spells out our responsibilities as individuals and as leaders, and requires us to act as role models promoting ethical behaviour and ensuring that our actions serve to reflect our values.
Like every business, we've changed dramatically since 1999. One area where we have not changed, however, is the importance that we place on client confidentiality.
Client confidentiality is not just a KPMG issue, it is a cornerstone of the accounting profession. We have a legal and professional obligation to keep client information confidential.
As all of you can appreciate, if Canadians could not trust their accountants to keep their private business affairs private, there would be no accounting advice.
Client confidentiality is a key issue at stake in this debate. In 2013, the CRA applied to the Federal Court to require us to disclose the names of all of our clients who used this tax plan.
We opposed that order on principled legal grounds because of the precedent it sets around client confidentiality and the impact that precedent would have on our entire profession.
The existence of this ongoing litigation has resulted in us being limited in what we can and cannot discuss publicly, which in turn has led to an unfortunate imbalance in the depiction of our firm in the media. As inconvenient as it is for us, the principle is too important to the profession to forgo.
I'd like to conclude my remarks by talking about our team. KPMG Canada employs 6,400 employees in 40 offices from Victoria to St. John's. Globally, the KPMG network employs 175,000 people in 155 countries.
Our people in Canada and around the world come to work every day to help our clients with the business challenges they face. We help small business owners meet their payroll. We help Canadian businesses grow, expand and be successful internationally. We help protect Canadian investors through our audit services. We help Canadians meet their tax obligations and, finally, we help our communities prosper by volunteering our time and expertise.
Our people do all of this while living by the values of our organization. One value stands out above the rest. Above all, we act with integrity, including most importantly, acting within the law.
What is being portrayed in the media is not who we are. It is not what we stand for. We are incredibly proud of our team and the difference each of them make to each other, our clients, and their communities every day.
Each member of our team is committed to and supportive of the continued evolution of our world to a place where there's more trust in the role of government, the role of the accounting profession, and confidence by society in the fairness of the tax system both in Canada and globally.
We appreciate this opportunity to provide context and contribute to the ongoing discussion.
Thank you.
:
As I mentioned earlier, there are times when we will seek advance tax rulings on behalf of our clients. That's pretty rare.
To your second question, in the way the tax law in Canada has changed, and the way the world on tax law has changed, there are two elements. There is business taxation for multinationals, and there's taxation for individuals.
In Canada, multinational corporations are expected to pay the tax that is owed in Canada on the profits that they make in Canada. To this day, there still is a lot of use of non-resident jurisdictions outside of the Canadian tax system, and that is fine by government policy as long as the income earned in Canada by the multinational corporation is taxed in Canada.
For individuals, with the way the world has evolved today, including some of the legislative changes around non-resident trusts that took place in 2013 and a final change in 2014, individual citizens of Canada are expected to pay tax in Canada on their worldwide income regardless of where it's earned.
That's the way the rules have evolved. That's the way the system has evolved. As you know from filing your tax return—hopefully within the last few days—on the second page you have to actually tick off whether or not you have more than $100,000 worth of property located outside of Canada. It's on that basis that our plans are effective today.
:
Good morning, everyone. Thank you, Mr. Wiebe, for coming before us.
I did serve on the CICA user advisory council for a number of years. I don't know if that makes it better or worse, but I did. I can honestly say that, if you are a good tax lawyer or tax planner, you are obviously going to be sought after in today's world that we live in.
Nonetheless, the issue I have, and I think the issue a lot of Canadians have, is that we want to make sure that our tax system gives the confidence to all Canadians that it is transparent, that everybody is paying their fair share, and that honest Canadians are not subsidizing those who have the means or the wherewithal to implement tax measures or tax planning that raises red flags. From my conjecture, reading about this Isle of Man FSC structure obviously raised a number of red flags. I think the estimates worldwide are literally in the tens of trillions of dollars that individuals have put into tax havens—if I can use that term—in tax avoidance structures, and potentially, hypothetically, even tax evasion structures.
In Canada, I think in a prior report done by a prior committee, the potential tax gap is literally in the billions of dollars, which could be going to fund programs that Canadians need and that would make our economy stronger. It is obviously with some disappointment that we are sitting here today. Nonetheless, we are a committee, and we need to ask some questions.
You alluded, in your comments, to the negotiated settlement agreements. I take it that, over your long career, you have probably partaken in a few with your clients. I would like to stick to this for a little bit. Is it a more common practice to enter into an NSA rather than go to the courts, due to the length of time involved in the court system?
:
Thank you for being here and sharing your perspective on things.
I'm going to move in a couple of directions, but first, thank you for your comments about the initiatives our government took to combat some of the tax-evasion, tax-avoidance issues. It was recently reported that our 2013 measures brought in $1.57 billion in the 2014 fiscal year alone. Thank you for being complimentary about the initiatives we took to close some loopholes.
I want to talk primarily about your views, and it's a little anecdotal on this. A little bit is from experience in the mid-1990s in the building industry when I was president of Ontario Home Builders'. We tried to study the black market, the underground economy, to quantify it for the Ontario government of the day, and through the study we came up with an estimate that the government was losing somewhere around $6 billion, which was a fairly shocking number. It made the front page of the Globe above the fold.
I'm fast-forwarding to 2016. I speak with people in the accounting industry who are some of the top professionals about what the issues are right now regarding what people are doing in light of higher levels of taxation they're facing. These, in many cases, are people like your client base who would be high net-worth people looking for every opportunity to pay their fair share but not to pay more than their fair share. The anecdotal comments that I get back are, why concentrate on that? Why not go after the underground economy because it is rampant? This is some of the comment I'm hearing back.
I don't have empirical evidence to give you today for 2016. That is some from a study we did in the mid-1990s. That said, it's also around your comment that really hits the nail on the head—no pun intended for the building industry—which is the fact that if your neighbour does it, all of a sudden it validates that you should do it. When they have the roof replaced and the guy says “Here's the price for cash, $4,000. If you want to pay me and get an invoice, it's $5,500.” This happens every day, on every street in Canada.
In your estimation, having the tax knowledge, where is money best spent in terms of making sure we get our fair share from that kind of underground economy that is, anecdotally, right now growing? I would put it that way. I would say the evidence is it's not being subdued, it's actually growing. Can you lend a perspective on that, please?
:
As soon as an employee joins us, they have to take the one fundamental course, in my humble opinion, and that's on acting with integrity. Everyone gets trained on integrity courses and I've been doing it now.... Every two years you have to redo it, and I've done it quite a few times because I've been with the firm for an awful long time. Integrity and our ethics are core to who we are and what we believe in.
If I can talk a little bit about the other aspect, which is the relationship with CRA, the tax system only works in Canada if there can be a relationship between tax authorities, taxpayers, and tax advisers.
CRA has very stringent rules about what they can and cannot do. They cannot come out for dinner, they cannot join us, etc. There was—and I hope there still is—one limited case, when we get together for tax conferences like the Canadian Tax Foundation's. I was speaking at that one you're referring to in 2010 on global tax trends, or whatever. The fact is that you get a huge amount of tax professionals who attend, because we want to understand policy, we want to understand where planning is going, we want to understand global trends, etc., and CRA is there as well.
That's critical, because they need to understand what we're thinking about planning, or what we're thinking about might be some opportunities where there might be some tax areas to save some taxes, etc., because if they see something and they say, we don't like it, then they're in the know.
Probably even more importantly, the most important parts of those conferences for me as a tax professional were to understand what CRA likes and doesn't like. What are they working on? What are they concerned about? What aspect of tax planning or tax policy is on their radar screen? That's when I can properly advise my clients.
During those meetings, two- or three-day meetings like the one in Vancouver, we have a breakfast that's sponsored by an accounting firm. We sponsor for $5,000 a coffee break. One law firm sponsors at night an opportunity for everyone, all members who attend the conference, to get together to have a coffee, a beer, piece of cheese, or whatever else it is.
I hope that opportunity for CRA doesn't go away, because they should be treated like absolutely everyone else who attends those conferences. They shouldn't be made to feel any different from anyone else. I've been in this business for over 30 years and I've met a lot of people from CRA and I can't imagine that a beer and a piece of cheese would impact their integrity in one way or whatsoever. I just don't think that's frankly even fair.
:
Let's take Barbados as an example, because I've been to that office on a number of occasions.
You would have seen in the press over the last couple of days, I think, talk about tax havens and that Barbados was the number one on the list as far as foreign investment going into Barbados. That's not individuals in Barbados, that's multinational corporations, Canadian based, going into Barbados. The reason they do that is because Canada has a tax treaty with Barbados. Barbados enjoys a tax treaty with Canada, just as Luxembourg does.
A multinational in Canada can take some of its business operations, not that does business in Canada but does business around the world, and they can put it in Barbados. The profits earned in that particular jurisdiction are taxed at a rate of 2.5% instead of the 25% they would have to pay if it were profit earned in Canada.
The Canadian government has, by policy, allowed its multinationals, when they expand globally, to use jurisdictions like Barbados to finance their international expansion, as long as they meet the tests around substance, etc. And for those of you who have been to Barbados, you'll have seen a lot of signs of Canadian businesses that are actually operating there.
Why does Barbados allow that? Well, Barbados doesn't have a lot of natural resources. They're not close to anybody. The only way they're going to get jobs or create a finance industry or whatever is to create an advantage. That advantage is a very low tax rate that Canadian businesses take advantage of. Ireland does the same thing.
:
All right. I think we can debate it based on some of the advice coming forward from some of the people on the legal end of things at the clerk's office.
If you were to turn to the information that was provided to us by the Library of Parliament, they indicated that:
For the purpose of ensuring compliance with the [Income Tax Act] on 12 February 2013, the Minister of National Revenue applied for a court order against KPMG LLP...requesting that KPMG provide the CRA with certain client information. The court order, which was awarded on 18 February 2013, was immediately challenged by KPMG. [That] challenge is currently unresolved.
Now, if you turn to the sub judice convention, which I originally thought we would be in violation of—and we still could be—it says in the House of Commons Procedure and Practice that:
It is accepted practice that, in the interests of justice and fair play, certain restrictions should be placed on the freedom of Members of Parliament to make reference in the course of debate to matters awaiting judicial decisions, and that such matters should not be the subject of motions or questions in the House.
Your motion is getting pretty close to that line in terms of the court case.
The people at the, we'll call them legal, basically said it's inadvisable for the chair to rule the motion out of order on the basis of sub judice. The imposition of the convention should be done with discretion, and when there is any doubt in the mind of the chair, a presumption should exist in favour of allowing debate and against the application of the convention.
What I would suggest, Mr. Caron, in terms of the motion, is that it can be debated. We can debate that motion, but we should keep in mind what it says in the rule and procedures. I really think we're really pretty close to the line.
Go ahead, Mr. MacKinnon.
:
I realize just how sensitive the matter is, and I think we need to be careful. I also realize that the minister and department have taken legal action, but the fact remains that our committee made the decision to study the KPMG and Isle of Man issue. The committee did that so it could get to the bottom of the situation insofar as that was possible.
If the department's request is ultimately granted by the courts, it doesn't mean that the committee will have access to the information, making it difficult to continue the discussion and study that we, ourselves, decided to undertake.
Another legal consideration we have to take into account concerns the five individuals whose case is still pending. We are prepared to accept that getting the names of those individuals would be difficult, so an amendment to exclude those five names from the list requested by the committee would probably be called for. But if the committee is serious about getting to the bottom of the KPMG and Isle of Man issue, we should vote in favour of the motion and see what KPMG decides to do in response to the committee's motion and request.
Let's not forget that Mr. Wiebe told the committee that any illegal tax manoeuvres by employees had to be reported, and I think the scheme that has come to light could clearly be qualified as such. That's why I don't think KPMG will necessarily refuse to hand over the list of employees involved.
As for the witness list, it's essential for the committee to do its work.
I would suggest we examine the motion in its current form, while being open to possibly removing the names of the five individuals whose case is before the court, if the committee members were in agreement. It is our duty to vote in favour of this motion so the committee can continue its examination of the issue.
:
Could we just set this aside for the moment? You think about it, whether you want to change that word. There might be unanimous consent to change it. While you're thinking about that, we will deal with some of these other issues.
We have two budget proposals before the committee. One is the study into the Canada Revenue Agency's efforts to combat tax avoidance and evasion. The amount requested is for $3,500.
Moved by Mr. MacKinnon.
(Motion agreed to [See Minutes of Proceedings])
The Chair: The second one is the budget matter request for the 2016-17 main estimates, votes 1 and 5 under the Canada Revenue Agency. The amount requested is $500.
Moved by Mr. MacKinnon.
(Motion agreed to [See Minutes of Proceedings])
The Chair: We do have some other motions to deal with, but before we get to that we need to deal with scheduling to assist the clerk.
We're dealing with the CRA in committee business on May 5. We're also dealing with CRA, the study into tax avoidance and evasion from 11 to 1. During the first hour, we're dealing with the commissioner and the chief executive officer of CRA and then following that, the officials are staying to deal with Bill
:
When I proposed holding a meeting the week of May 9, I thought second reading of the bill would have already begun and even been completed by now, given that it was mid-April when we talked about it.
To be perfectly honest, I'm a bit reluctant to set a precedent where the committee studies bills before second reading has even begun. Most likely, it will have begun by the time we meet next week. But for me, the bottom line is I'm not comfortable with this practice. We did it before with the physician-assisted dying bill.
Technically speaking, bills are subject to second reading for a reason. All of the debate that goes on in the House informs the committee's subsequent discussion of the issue. If we start to hear from witnesses while the debate in the House is still under way, frankly, what purpose does the debate at second reading serve? That is why I'm reluctant to begin this study immediately.
There is another point I'd like to make. When we made the suggestion, we had no idea what the budget bill would entail, and now we know we are dealing with a 170-page document containing extremely complex elements. I think we would do well to push the scheduled discussion to later in the week.
I suggest that the subcommittee meet not just to study the implications of discussing the bill prior to the completion of second reading, but also to see how much time the committee wants to spend on the bill in order to do a thorough review.