It may be costly to pursue high profile tax evaders, but not doing so deprives Canadians of billions in taxes. We weigh the evidence here.
Irum Khan
A CBC News investigation in March this year revealed that the Canadian Revenue Agency (CRA) offered “high net worth” clients of accounting firm KPMG amnesty for using offshore tax schemes. CBC quoted a CRA official saying these kinds of settlements — as opposed to “lengthy litigation” — are in the public interest.
This when Justin Trudeau’s deficit Budget is aiming to infuse money into the market – in other words, Canada can have enough revenue over the years if the money going to offshore tax havens is scrutinized and if need be, arrested – the country’s conventional tax policy is in desperate need of a revamp.
With the World Bank, the International Monetary Fund, The United Nations and 149 Central Banks of different countries estimating the money travelling to offshore tax havens to a staggering $21 – 32 trillion, clamping down on tax evasion and tax havens, and especially on the wealthiest of tax payers, should be much higher on the priority for Canadians. The scathing Panama leaks were a wake up call. It revealed the names of 625 Canadians dealing in offshore accounts.
Attention to offshore tax havens would have a far-reaching impact in reforming taxation. Statistics Canada shows corporate Canada’s cash stored in the world’s top 10 tax havens totals $199 billion. By conservative estimates, Canada loses $8 billion to $10 billion each year from offshore tax avoidance. This money, if prevented from going offshore, could be put towards infrastructure, job creation, and funding social policies.
The OECD, G7 and G20 countries (Canada included) have adhered to bilateral regulations in curtailing this revenue drainage. But the issue needs a multilateral approach. According to Dennis Howlett of Canada for Tax Fairness, such an approach would allow for better co-operation between states, enforced stricter rules on confidentiality and proper use, and would permit the automatic exchange of information between Canada and the tax haven country.
Defining the problem
In order to understand the issue of tax havens, we need to better define what the problem is. Canadian Senator Percy Downe has consistently been campaigning for the release of official estimates of the tax gap to understand where the actual problem of evasion lies. The CRA has refused the idea citing limited resources.
Further, to deal with each country based on their inherent tax laws, Canada needs separate units within the Canada Revenue Agency (CRA) specializing in dealing with different havens. Barbados, for example, is ranked in the world top 20 for bank secrecy by the Tax Justice Network. Its trade? treaty with Canada makes it easy to legally minimize taxes. Barbados has low tax regime for offshore corporations.
Another tax haven, the Cayman Islands has laws protecting client identity and is reported to have more money on deposit than all the banks in New York combined. Cook Island is another haven that does not recognize court orders from a foreign land. It is a criminal offence there to breach a company’s confidentiality.
Tax havens: of increasing concern
While data from the CRA is lacking, more than half of OECD countries, including the United States, the United Kingdom, Denmark, France, Belgium, Slovenia, Mexico, Luxembourg, Israel, Estonia and Turkey, produce regular estimates of their tax gaps to make better decisions about tax policy and the allocation of resources for tax administration.
Also, officials in the U.S., UK, Australia and Germany are persistently setting precedents with their innovative approach to the issue. In 2015, for example, Australia tightened its focus on offshore tax evasion. The Australia Tax Office (ATO) compiled a list of 100 advisors and promoters operating globally directly connected to people who may have evaded taxes. The ATO also reportedly visited seven advisor firms linked to offshore arrangements and contacted more than 100 parents who had school fees paid from overseas bank accounts.
The U.S. too is ramping up its response to the issue. Its treatment of the UBS tax scam was considered to be a landmark approach to tax evasion. The country is known for recruiting and training reputable tax enforcement officers, and has stringent laws on the prosecution of the guilty. Of late, the U.S. has also tightened its scrutiny of people buying anonymous property.
In India, the Supreme Court has directed the government to make public a list of citizens holding Swiss bank accounts, in an effort to retrieve money siphoned out of the country. Greece and Germany too have stepped up their cooperation on tax evasion, with information supplied by Germany already being used to probe thousands of Greeks suspected of stashing money in Swiss banks. Greek inspectors will also be trained in Germany.
A new approach needed for Canada
According to the Auditor General of Canada, the CRA needs to prepare for the increased volume of information that it will receive as legislative changes in tax policy come into force.
Over the past several years, the CRA has undergone a major budget cut; a poorly-executed restructuring effort, including the loss of trained officers dealing with offshore taxes; and a misplaced focus on tax errors rather than on tax ‘cheats.’ As the CBC report detailed, it prefers to go after “lower-hanging fruit.”
According to a recent Canada For Tax Fairness report, the CRA’s budget was slashed by more than $250 million for the period between 2013 and 2017. These cuts may contribute to why the CRA is reluctant to chase after expensive, high-end clients evading tax law. Budgetary cuts, combined with the lack of appropriate training and resources, have made tracking down evaders an onerous task. Yet studies show every dollar invested in hiring a skilled investigator Canada gets between $7 and $10 in return.
Canada’s conviction rate is also poor. The 2008 Liechtenstein tax affair – a multi-country investigation into cases of tax evasion via banks in Liechtenstein – had relatively few conviction. Between 2006 and 2013, there were 44 convictions in Canada, most of which did not target big corporates.
This year’s Budget
Justin Trudeau has ramped up focus on nabbing evaders and upgrading the resources of the CRA.
It could begin by providing training to CRA staff and reviewing prosecution laws. An investigation into CRA lobbying may also be needed. Advocates for stricter offshore tax laws are also calling for the revision of stock deduction options that allows half the capital gained from encashing stocks to go tax-free. A re-instated special unit within force in the CRA specializinged in offshore tax evasion would be the next big leap in clawing back evasion.
Canada’s statutory tax rate for corporates is around 26 percent. Very few actually pay anything close to that. In fact, only four of the top 60 publicly-traded corporates paid 25 percent or more. More than 30 percent of these paid 10 percent or less. At the same time, Bermuda and Barbados have become leading nations for Canada’s capital outflow.
Clearly, it’s time to challenge outmoded tax laws.
