May 13, 2015

FACT Act: Bill S-226 Requires Transparency from Canada Revenue Agency

Charlottetown Senator Percy Downe has spoken in the Senate for Second Reading of his Bill S-226, the Fairness for All Canadian Taxpayers Act (measuring the tax gap to fight overseas tax evasion), marking the start of formal debate on the Bill. At its heart, said Downe, it is about "the right of Canadians to know that their tax system is fair ".

"The current state of affairs suggests an obvious failure on the part of the Canada Revenue Agency to come to terms with overseas tax evasion, a problem that is costing the Canadian Government billions in lost tax revenue," said Downe. "As a result, we risk an erosion of confidence in our taxation system at a time when every dollar counts."

?The Bill would require the Minister of National Revenue to produce an annual list of all Canadians convicted of overseas tax evasion. Additionally, the Canada Revenue Agency would have to provide an estimate of Canada's "tax gap" (the difference between what is owed in taxes and what is actually collected). Calculation of the tax gap is a function performed by a number of jurisdictions – the United States, the United Kingdom and the state of California, to name a few – and serves to both call attention to revenue that goes uncollected as well as to gauge the effectiveness of a nation's revenue agency and taxation policies.

"This Bill is about the right of Canadians to know that their tax system is fair, and fairly administrated. That fairness – and confidence in that fairness – must be the cornerstone of government policy, and its laws in particular. As in all things, justice in our taxation system must be seen to be done. This Bill seeks to bring some much needed transparency to that system," concluded Downe.

For further information:
Senator Percy Downe: 613-943-8107
Or toll free at 1-800-267-7362
www.sen.parl.gc.ca/pdowne

Senate Public Bill S-226: Second Reading Speech
Senator Percy E. Downe
May 12, 2015

The purpose of this Bill - Fairness for All Canadian Taxpayers: Measuring the Tax Gap to fight Overseas Tax Evasion - is to give the Government the tools to fight overseas tax evasion: if passed, this Bill will tell the Government how much revenue the Government of Canada is actually collecting as opposed to how much we should be collecting, the difference being the tax gap – the actual money lost to overseas tax evasion.

In these tight fiscal times, where every dollar counts, and programs are being cut or reduced and benefits to veterans facing fiscal review, the Government of Canada does not know how much revenue it should be collecting. Are we losing $3 billion to overseas tax evasion or $30 billion? I don't know, you don't know and more importantly, the Government doesn't know.

The Canada Revenue Agency's justification for this refusal to measure the tax gap may be partly found in their attitude toward the tax gap itself: they simply do not understand the value of it. This tax gap analysis would disclose the amount of dollars owed but not paid by overseas tax cheats to the federal government, an amount which would no doubt astound Canadians and could further expose the Agency's failing efforts to combat overseas tax evasion.

Canada's Revenue Agency does not have much company in its dismissive attitude toward calculating the tax gap. The United States, the United Kingdom, Denmark, France, Belgium, Slovenia, Mexico, Luxembourg, Israel, Estonia, Turkey: they all produce regular estimates of their tax gap, seeing it as, in the words of the United States Internal Revenue Service, a means of enabling government to "make better decisions about tax policy and the allocation of resources for tax administration". Such an attitude even extends to the state of California, which estimates its tax gap to be approximately US$10 billion.

This is not an endeavour these agencies take lightly. Her Majesty's Revenue and Customs (HMRC), the United Kingdom's (UK) equivalent of the CRA, produces yearly estimates of their tax gap, calling them a "foundation for HMRC's strategy", which enables the agency to measure the effectiveness of its programs. In fact, it even looks to other countries' estimates of their respective tax gaps for other policies that might be worth adopting by the UK. Similarly, the Swedish National Tax Agency uses their estimate as a means of risk management, helping to determine the best allocation of their Agency's resources.

And still Canada refuses to measure the tax gap.

In addition to identifying how much tax revenue we are losing, to measure the tax gap is to measure the performance of a revenue agency. This may be the reason we don't' have tax gap measurement in our country; because the Canada Revenue Agency does not want Canadians to know what a lousy job they are doing in failing to fight overseas tax evasion.

In the words of Oxford economist Paul Collier in his testimony before the House of Commons Finance Committee, attaching a number to the amount of tax revenue not collected "would certainly concentrate the mind, if you realized that you're losing a lot of money here".

The Government can only be sure it is dedicating sufficient resources to the fight against overseas tax evasion when it knows the actual size of the problem. This Bill will address that problem.

Honourable senators will know that the issue of the Canada Revenue Agency's pathetic efforts to fight overseas tax evasion has been a cause of growing concern for many Canadians for several years now, ever since information about what has become known as the Liechtenstein Affair came to light. Since then, Canadian taxpayers have been questioning what is going on and, why the CRA has not convicted a single person in this affair, particularly given the millions in dollars in taxes that were avoided. Canadians are also concerned about the difference in treatment between domestic and overseas tax evasion. CRA does a very good job catching and punishing Canadians who keep their money and earnings in Canada, and try to avoid paying taxes. Check the CRA website; there are all kinds of convictions for domestic tax evasion: a real estate agent in British Columbia, a house painter in New Brunswick, a doctor in Saskatchewan.

But none for overseas tax evasion are listed.

To recap, in 2006, a former employee of the LGT bank in Liechtenstein smuggled out documents showing how the bank assisted its clients in avoiding taxes in their home countries. Even more importantly, he also had a list of those clients from around the world, including over one hundred Canadian citizens.

All this information was given in 2007 to tax authorities the world over, including our own CRA. No lengthy investigation by Canadian officials was conducted to acquire this information. It is because of a lucky break that CRA had the list of clients handed to them on a silver platter. What the Agency did having been presented with this information is rather underwhelming. In contrast to the response in other countries – hearings on Capitol Hill, police raids in Munich, people charged all over the world – the response in Canada has been, very passive; to the point where questions are being asked about the competence of CRA management.

The CRA has admitted that the information they were handed showed the amounts in Canadian-held Liechtenstein bank accounts totalled over $100 million ranging from a minimum of $500,000 to one account with over $12 million.

When this story first broke, the Federal Government was full of promises and tough talk. Then Revenue Minister Jean-Pierre Blackburn said "People realized that it's a question of time before we get them," (…) "I tell them '[W]e'll get you, we'll find you,'" and had called tax evasion "a huge problem for this country," vowing "[I]f somebody owes us something, we have to get it."

As time went on, however, the results fell short of the tough talk. In 2013, the Canada Revenue Agency claimed to have recovered only $8 million in back taxes on the money hidden by Canadians in Liechtenstein. The Agency described the project as "basically finished". One would have thought that "finishing" the project would have required actually collecting all the money Canada was owed…

Speaking of the money owed, not one penny has been assessed in fines. That is because not one charge has been laid. In the years since this information has come to light, not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada faced criminal penalties, in Canada or overseas. And again, CRA considers the matter "basically finished".

Recently, we were reminded of the leak of documents related to the activities of the The Hong Kong and Shanghai Banking Corporation – or HSBC - in Switzerland, including over 1785 accounts held by Canadians. As always, simply maintaining bank accounts overseas is not against the law, but if that account is used to hide assets in order to avoid taxation, then that is a different matter. As long as you pay your fair share, you can keep your money wherever you want. But hiding money to avoid paying taxes is a serious problem, and one that will not go away on its own.

A good example of what a government can accomplish if it takes tax evasion seriously is the experience of Australia. That country was able to hit the ground running in response to developments like the Liechtenstein revelations because in 2006 the Australian government combined elements of eight agencies under Project Wickenby, to "protect the integrity of Australia's financial and regulatory systems" by cracking down on use of illegal tax havens. Given the objective of recovering $Aus500 million in its first six years, it actually collected $Aus660 million (about $675 million Canadian), and by January of this year, it had collected $Aus928million (or $891 million Canadian), again exceeding the target set for that date. In addition, the Australian Tax Office reports credit Wickenby with "improving taxpayers' willingness to comply with their taxation obligations"; surely the goal of any such agency.

Tax revenue is the underlying foundation of every aspect and activity of government, from search and rescue to trade promotion to keeping the lights on in this very Chamber. Put simply: if government cannot fund, government cannot function. As a result, whenever a government advances a new policy or program, the first questions asked are inevitably "what will this cost?" and "where will the money come from?"

But how the Government raises that money is every bit as important as how it spends it. And although there is a long list of revenue sources for the government, the overwhelming majority of funds pass through the Canada Revenue Agency. So it follows that the CRA plays a uniquely important role in the functioning of the Government of Canada, and as such, must be subject to a high level of scrutiny to ensure that it is managed in a competent manner.

It used to be that the Canada Revenue Agency didn't attract a great deal of attention, either from the public or from the government. As the only branch of government to turn a profit, there has always been a temptation to simply let it go about its business – "if it's not broken, don't fix it."

The tax system, like all of government in a democracy, relies on the consent of the public in order to function. In turn, that consent is based on Canadians' confidence that everyone is paying their fair share and are being treated equally. No one enjoys paying taxes, but most recognize that they are – to use a phrase attributed to Oliver Wendell Holmes – "the price we pay for a civilized society", and are willing to pay their fair share if they are certain that it is their fair share, and that others are doing the same.

The need for that certainty, honourable senators, is what drives this Bill.

This Bill would require the Canada Revenue Agency to provide a report of all convictions for tax evasion, specifying which are for overseas tax evasion. The convictions themselves are part of the public record, so compiling the report should be a simple exercise. Compiling them all in a single report would show Canadians the consequences faced by those who would seek to avoid paying their taxes, and show Canadians the seriousness with which their government takes tax evasion and the lengths it will go to combat it.

The other main feature of this Bill relates to the mandate of the Parliamentary Budget Officer, and the responsibility of government to it. In this case, such responsibility is embodied in the legal obligation of the CRA to cooperate with the Parliamentary Budget Officer in fulfilling his mandate to "provide independent analysis to Parliament on the state of the nation's finances (…) and upon request from a committee or parliamentarian, to estimate the financial cost of any proposal for matters over which Parliament has jurisdiction."

The current state of affairs suggests an obvious failure on the part of the CRA to come to terms with a problem that is costing Canadians billions of dollars in lost tax revenue. As a result, we risk an erosion of confidence in our taxation system at a time when every dollar counts.

Therefore, and in the face of an Agency clearly unwilling to respect the mandate of an officer of Parliament, this bill seeks to cut through the stalling and delaying tactics of the CRA by instructing the Agency to provide the Parliamentary Budget Officer with the data he requires to fulfill his mandate.

This Bill is about the right of Canadians to know that their tax system is fair, and fairly administrated. That fairness – and confidence in that fairness – must be the cornerstone of government policy, and its laws in particular. As in all things, justice in our taxation system must be seen to be done. This bill seeks to bring some much needed transparency to that system, so that Canadians might see for themselves whether the results match the rhetoric.

Colleagues, there is something seriously wrong at the Canada Revenue Agency and we have a responsibility to ensure that those Canadians who work hard, pay their taxes and play by the rules, are treated the same as all other Canadians. A double standard cannot be allowed to continue to exist allowing some Canadians who hide their money overseas to pay no taxes, while the rest of us make up the shortfall.