October 24, 2012

Senator asks Parliamentary Budget Officer to Investigate
Canada Revenue Agency's Failure to Apply Resources in Addressing Overseas Tax Evasion

Charlottetown Senator Percy Downe has written the Parliamentary Budget Officer to request that he investigate the Canada Revenue Agency’s (CRA) failure to apply sufficient resources to fight overseas tax evasion. Downe is concerned specifically with the Government’s plan to cut hundreds of positions at the CRA and its refusal to provide additional funding to counter aggressive international tax planning, which the Government itself has acknowledged is costing Canadians billions of dollars in lost revenue.

“The issue of overseas tax evasion has not been given the attention it deserves by this Government,” said Downe. He cites an internal audit by CRA which expresses concern that serious cases of large scale tax evasion may be abandoned due to limited resources, and that as a result, officials are focusing on smaller cases that are easier to pursue.

The importance of adequate resources is demonstrated by documents acquired by Downe under the Access to Information Act, which credits the Government’s February 2005 investment of $30 million to combat Aggressive International Tax Planning with a fiscal impact of $2.5 billion over four years.

“If it’s simply a matter of CRA not having the resources it requires to get the job done, then the Government should be providing those resources. Instead, it is cutting jobs at the Agency, treating it like an expense rather than an investment which has paid dividends in the past,” said Downe.

Since 2006, more than 1800 Canadian-held accounts have been discovered at two different banks in Liechtenstein and Switzerland – both well-known tax havens. The total amount of money hidden away in just the Canadian-held accounts in Liechtenstein was over $100 million dollars. Canadian officials learned about the existence of these accounts at the same time as tax officials in the United States, Australia, and the United Kingdom were informed about citizens in their countries who had accounts at the same two banks.

“The response of foreign governments to the problem of overseas tax evasion has been extensive in comparison to Canada,” said Downe. “Over $650 million dollars have been recovered in Australia with 26 people convicted, and several Britons have been convicted of tax evasion in the UK. In Canada, not one penny has been assessed in fines and not one charge has been laid. In the five and a half years since CRA first received information about these secret accounts, they have only managed to collect a little over $5 million dollars. Less than a third of what they have assessed.”

The Parliamentary Budget Office’s mandate includes the authority to “…when requested to do so by a member of either House or by a committee of the Senate or of the House of Commons, or a committee of both Houses, estimate the financial cost of any proposal that relates to a matter over which Parliament has jurisdiction“.

Downe is hopeful that the Parliamentary Budget Officer can shed further light on the problem and that his work will convince this Government they should be doing more to collect the millions of dollars that have been stashed in secret banks accounts abroad.

Enclosed: Letter to Kevin Page, Parliamentary Budgets Officer, October 18, 2012

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

October 18, 2012

Mr. Kevin Page
Parliamentary Budget Officer
Parliament Buildings
50 O’Connor Street, Room: 908
Ottawa ON  K1A 0A9

Dear Mr. Page:

I am writing to ask for your assistance in addressing what many Canadians regard as a serious problem that does not receive the attention it deserves: the issue of wealthy Canadians hiding their money in overseas tax havens in order to avoid paying their fair share of taxes. Specifically, I am requesting that the Parliamentary Budget Office conduct a study into the cost to Canada of the abuse of overseas tax havens by Canadians.

The nature of overseas tax evasion is such that it is difficult to gain a clear picture of the problem, but the recent case of Liechtenstein serves as an informative case study. As you may know, in 2007, the Government of Canada was provided a list of 106 Canadians with secret accounts totaling over $100 million in a bank in Liechtenstein. It was part of a larger list of clients taken from the bank by a former employee and later acquired by the Government of Germany. When Germany shared the information with the relevant countries, there was a flurry of activity as governments worked to recover the money rightfully owed them and to prosecute those who sought to avoid paying their fair share. From Europe to the United States to Australia, there were investigations, charges and convictions, with hundreds of millions of dollars recovered in taxes, interest and fines.

Regrettably, Canada’s performance has not been as impressive. As of April of this year, the Canada Revenue Agency (CRA) claimed to have assessed just $16.5 million dollars owing in back taxes, interest and penalties on the money hidden by Canadians in Liechtenstein. Given that the total amount of money hidden away was over $100 million – with $12 million in one account alone - this is a very small amount. Smaller still is the amount they have actually collected: a little over $5 million, or less than one-third of what was assessed.

And amid the talk of interest and penalties, another fact stands out: not one penny has been assessed in fines. That is because not one charge has been laid. In the five and a half years since CRA received this information not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada has stood before a judge, in Canada or overseas.

What makes this lack of prosecutions particularly noteworthy is that a visit to the website of the CRA (http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html) reveals page after page of convictions for domestic tax evasion and fraud. It certainly suggests that a double standard exists, or at the very least, that the Agency is not pursuing overseas tax evasion with the same diligence it applies to its domestic equivalent. 

Whatever the reason for this lackadaisical approach, it appears that part of the problem might be a lack of resources. An October 2010 internal audit by the Canada Revenue Agency expressed concern that:

“Cases that could potentially represent significant criminal non-compliance can be rejected by a specific TSO enforcement group because of limited resources or other workload pressures. . . (O)ffices are choosing smaller cases of a lower dollar value that do not necessarily represent the greatest risk. This supports the observations by some program staff that offices are choosing smaller cases that represent ‘quick hits’.” (Enforcement and Disclosures Programs Evaluation, Corporate Audit and Evaluation Branch, Canada Revenue Agency, October 2010)

The fact that the CRA may be abandoning serious cases simply because they are too difficult to pursue speaks to either a lack of leadership or a lack of resources at the Agency. If it is simply a matter of resources, past experience indicates that the problem can be easily solved. Internal CRA documents obtained through an Access to Information request reveal that an infusion of $30 million from the February 2005 budget to counter Aggressive International Tax Planning (AITP), yielded a total fiscal impact in excess of $2.5 billion in just four years.

Sadly, rather than invest in tax fairness, this government has chosen to include CRA in its wide ranging program of cutbacks, treating the Agency as a liability rather than a means of recovering untold millions in hidden assets.

If, however, the cause is something more than inefficient use of resources, then it points to a deeper problem in the leadership of the Canada Revenue Agency.

I mentioned the Australian response to the Liechtenstein revelations earlier. In fact, Australia serves as a very good example of what a government can accomplish when it takes the problem of overseas tax evasion seriously. In 2006, around the time the Liechtenstein information was starting to percolate through the tax enforcement world, the Australian Government instituted Project Wickenby, in order to, as they put it, “protect the integrity of Australia's financial and regulatory systems” by cracking down of Australians’ illegal use of tax havens.

A task force comprising eight government agencies, Wickenby was expected to recover around $AUS500 million in wrongfully evaded tax revenue by the summer of this year. Not only was this goal met, but as of June 30th, 2012, the Australian Government was able to recover just over $AUS660 million. That’s almost $675 million in Canadian currency. On top of that, 67 people were charged, with 26 convictions. And the process is by no means complete.

Contrast that with CRA taking five and a half years to recover less than one-third of the money they think they are owed from the Liechtenstein affair, and not a single charge laid, and this government’s repeated claims of aggressive efforts to combat overseas tax evasion ring hollow.

And although the case of Liechtenstein is illustrative, it is by no means unique. Two years later, a similar situation involving a disgruntled former employee and a list of clients resulted in CRA being given information on 1785 Canadians with accounts in a bank in Switzerland. That’s only two banks, in Europe, with over 1800 Canadian account holders. How many more accounts are out there? How many millions of dollars are hidden overseas, denying Canada revenue that – in this time of tightened budgets – are urgently needed both to fund the services that Canadians count on and value, and to pay down the national debt?

As you are well aware, your mandate includes the authority to “…when requested to do so by a member of either House or by a committee of the Senate or of the House of Commons, or a committee of both Houses, estimate the financial cost of any proposal that relates to a matter over which Parliament has jurisdiction“.

In accordance with that mandate, I am therefore requesting you to:

1. Estimate the financial cost of the proposal by the Government of Canada to cut hundreds of positions at CRA.
   
   
2. Estimate the financial cost of the proposal of the Government to refuse to provide additional funding to counter Aggressive International Tax Planning
   
   
3. Estimate the financial cost to the Government of Canada in loss of tax revenues by failing to reduce overseas tax evasion.

The facts I have cited in this letter are based on publicly available information, including the answers to Written Questions I have filed in the Senate, and the documentation I have received from various government departments with regard to Access to Information requests I have submitted over the years. These documents are on file in my office, and I would be pleased to share any information you would like to receive.

Sincerely,
Original signed by
Percy E. Downe
Senator