The Power of Perspectives

The Canadian Bar Association

Doug Beazley

Smackdown: Our tax-avoidance heritage meets political pressure

September 2 2016 2 September 2016

“Taxes,” said the great American jurist Oliver Wendell Holmes Jr., “are what we pay for civilized society.” Paying what you owe is a basic act of citizenship — but in every national culture with ties to Westminster, there has long been tension between a government’s right to collect tax and a citizen’s right to pay as little as (legally) possible.

In Commonwealth countries like Canada, the legal status of tax avoidance took root in the 1936 Duke of Westminster ruling: “Every man is entitled, if he can, to order his affairs so that the tax … is less than it otherwise would be.” Minimizing taxation is part of Canada’s legal tradition. But politics is starting to confront tradition.

The public image of the international financial services sector is in a slump. Starting with the 2007-08 financial crisis and intensifying with the release of the Panama Papers this past spring, a hostile political climate driven by stories of wealthy individuals and corporations paying very little tax has been pushing many governments to act. So when the multinational accounting firm KPMG made news last year with a tax-avoidance program based in the Isle of Man — one that, according to the CBC, the Canada Revenue Agency itself described as a “sham” meant to deceive government auditors — Canadian politicians were already feeling the pressure to make high-profile gestures against those seen to be flouting the spirit of the law.

“I think you’re already seeing the government go that way (towards a more aggressive approach),” said Liberal MP Wayne Easter. He chairs the Commons Finance committee that held hearings on KPMG’s Isle of Man operation in late spring. The committee is expected to table a final report by late September.

“And to be fair to the previous government, we’ve seen Canada get more aggressive on this front in recent years. And I think you’re going to see more (prosecutions) as a result.”

But how aggressive is aggressive enough? Tax evasion isn’t legal, but tax avoidance is. And governments don’t always have the information they need to tell the difference.

The lobby group Canadians for Tax Fairness estimates that tax evasion costs Canada roughly $80 billion a year. Canada and the other countries in the Organization for Economic Co-operation and Development have been working for years to close information gaps between tax jurisdictions that allow corporations and individuals to conceal funds.

Canada has signed more than 20 OECD-designed Tax Information Exchange Agreements with tax havens. The TIEAs are supposed to encourage tax havens to hand over information on Canadian assets abroad — but since the previous Conservative government changed the rules to allow Canadian corporations to set up in low-tax jurisdictions and bring their profits back to Canada tax-free, many critics argue the TIEA regime has made the problem worse, not better.

“We’re basically subsidizing multinationals through the tax system,” said David Duff, associate dean at the University of British Columbia Faculty of Law and an international taxation expert.

And the TIEAs themselves don’t do what it says on the label, said David Kerzner, PhD, an expert in U.S. and Canadian tax law based in Toronto. He and David Chodikoff, Miller Thomson’s lead partner on national tax litigation, wrote a book — International Tax Evasion in the Global Information Age — arguing Canada suffers from a lax attitude towards tax evasion.

“TIEAs were supposed to end secrecy, but they’ve had the opposite effect,” said Kerzner. “The requirements of TIEAs are such that, in order to use them to obtain information, the CRA has to know in advance about hidden assets.”

Some jurisdictions exchange information on non-resident accounts routinely and annually, under the OECD’s global standard for Automatic Exchange of Information (AEOI). Kerzner says such agreements are mostly a waste of paper. “We’re dealing with jurisdictions that may not gather this information in the first place because — like, say, Barbados — they don’t collect income tax anyway.”

Duff, Kerzner and Chodikoff all agree Canada’s response to large-scale overseas tax evasion is lacking in three key areas: legal tools, resources, and nerve. The dearth of resources has been addressed to a degree: Ottawa has earmarked almost $450 million to allow the CRA to hire more auditors, while the agency itself has struck a committee to recommend ways to go after overseas tax cheats.

“It simply isn’t enough,” said Chodikoff, who spent nearly 16 years as a federal tax counsel and Crown prosecutor before moving to the private sector. “I’ve been on what government lawyers call ‘the dark side’ for 11 years now, and I know from observation that it’s too easy to evade taxation in this country.”

As for legal tools, Kerzner suggests the federal government consider sharing the proceeds of tax evasion probes with foreign jurisdictions — cash for cooperation, in other words. He also thinks the CRA should mimic the U.S. Internal Revenue Service’s use of the ‘John Doe summons’ — which allows the IRS to demand information on an entire group, or class, of taxpayers. “Ottawa expects CRA to get the job done with bows and arrows, while the IRS is using drones.”

Easter has his doubts about John Doe. “We’re not the United States. We want everyone to pay their fair share, but we don’t want to be raising new concerns about invasions of privacy.”

Many critics think the CRA needs to screw up its courage and start taking high-profile cases to court — even if it ends up confronting corporations and individuals with deep pockets. The agency came under fire when the CBC reported that it had offered amnesty from prosecution to KPMG’s wealthy clients in the Isle of Man operation, provided they paid what they owed.

“What we’ve seen is an awful lot of CRA pressure being put on small taxpayers barely able to put food on the table, and not nearly enough pressure on those who can afford to use all the vehicles of tax avoidance,” said Easter.

“Part of that is a simple cost-benefit calculation on CRA’s part,” said Duff. “But if you’re thinking of the long game, at some point you’re going to want to send a criminal message.”

Duff believes it’s the tax advisory industry itself — not its wealthy clients — that needs to receive that message.

“It’s the culture of the industry that needs to change,” he said. “Some of these advisors have a kind of cowboy mentality.”

Doug Beazley is a journalist based in Ottawa.

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