Standing Committee on Finance (FINA) - June 22, 2021
Opening remarks
Speaking notes for the Honourable Diane Lebouthillier, Minister of National Revenue
Standing Committee on Finance (FINA)
Tax Evasion
Ottawa, Ontario
June 22, 2021
Check against delivery.
Hello.
Thank you for this invitation to provide details on the Canada Revenue Agency's (CRA) strategies to combat tax evasion and aggressive tax avoidance.
Let me begin by saying that the Government of Canada and the CRA are firmly committed to combating tax evasion and aggressive tax avoidance on all fronts. And we are all committed to making things much more difficult for those who choose not to meet their tax obligations.
In fact, since 2016 the Government of Canada has made investments that have helped provide the CRA with better data, better methodology and, ultimately, better results.
In particular, these investments have enabled the Agency to develop a strategy that promotes global data sharing. Let's face it, tax evasion and aggressive tax avoidance are complex global problems.
The CRA is working with international partners through various multilateral organizations, including the Organization for Economic Co-operation and Development and its Forum on Tax Administration (FTA). I was pleased to see Mr. Bob Hamilton, Commissioner of the CRA, was appointed Chair of the FTA in August 2020.
As a result of its modern and collaborative strategy, Canada is member to 93 tax treaties and 24 international tax information exchange agreements. In fact, Canada is one of more than 70 countries that exchange information through the Country-by-Country Reporting System.
In addition, Canada participates in the Electronic Funds Transfer Reporting Program, which is related to international electronic funds transfers over $10,000. And with the implementation of the Common Reporting Standard in 2016, Canada, alongside nearly 100 other jurisdictions, benefits from financial institution data that identifies financial accounts held by non-resident clients for tax purposes.
With these improved resources and tools, the CRA is now able to focus on large multinationals, high net-worth networks, the underground economy, cryptocurrency and real estate transactions.
The CRA is now seeing these signs of success because of the investments made by the Government of Canada.
In recent years, the CRA has assessed the equivalent of more than $12 billion each year through audits, more than 60% of which were related to tax avoidance by large multinationals and aggressive tax planning by high net-worth individuals.
And I must note that these investments have generated approximately $5 billion in additional federal tax revenue, as of March 2021.
Additionally, the CRA’s Criminal Investigations Program has enhanced its ability to investigate the most serious tax crimes. It is important to note that the Agency investigates complex cases in collaboration with its partners in the Department of Finance and the Department of Justice to close what may be perceived as legal loopholes. And I must remind you that the CRA has shifted its focus to more hard-hitting investigations, which result in more jail time and higher fines.
However, we must never forget that tax evasion often involves very complex domestic and international money transfer structures, which require the CRA to complete lengthy and time-consuming intelligence gathering processes. I also want to note that we are increasingly seeing high net-worth taxpayers using the court system when they are audited in order to avoid providing documents and information to the Agency.
And I want to emphasize that the volume of complex litigation is up significantly from previous years, with approximately 3,000 active cases considered "high level" in complexity.
As a result, first announced in the 2020 Fall Economic Statement and confirmed in Budget 2021, the Government of Canada has committed to invest $606 million over 5 years, beginning in 2021-22, to continue this complex work.
These investments will:
- Close the compliance gap for high net-worth individuals;
- strengthen technical support for high-risk audits;
- improve the CRA’s ability to identify tax evasion involving trusts;
- improve the CRA’s ability to stop fraudulent or unjustified GST/HST refunds; and finally
- improve the Criminal Investigations Program.
In addition to the financial investments from Budget 2021 legislative changes will also be put in place to strengthen the rules on transfer pricing, oral testimony, base erosion and profit shifting, and mandatory disclosure rules.
Before I conclude, I would like to wish the Chair of this Committee, Mr. Wayne Easter, a very happy retirement. I want to thank you personally for your outstanding work on behalf of Canadians. We will miss you.
Mr. Chair, I am proud to say that the Government of Canada and the CRA have shown determination and innovation in creating effective and proactive approaches to identifying those who avoid paying their fair share of taxes or who are taking steps to do so.
Thank you.
Minister's placemat
Tax evasion and avoidance (general overview)
Redirect: Ted Gallivan
Response
The Government of Canada is firmly committed to combatting tax evasion. Through the important work of the Canada Revenue Agency, we are determined to make it much more difficult for all those who intentionally choose not to meet their tax obligations.
Additional information
- International tax evasion and aggressive offshore tax avoidance are very complex global issues. Since 2016, the Government has invested money into the CRA to better equip themselves with tools and resources allowing collaboration and exchange of data globally.
- Because of the investments made by this Government, the CRA has benefitted from better data, better partnerships, and ultimately, better results in its fight against tax evasion.
- In recent years, the CRA has made over $12 billion per year in gross audit assessments. Over 60% of which is related to tax avoidance by large multinational corporations and aggressive tax planning by wealthy individuals.
- As a result of historic budget investments of over $1 billion between 2016 and 2019, the CRA increased its ability to identify and target aggressive tax planning, especially more egregious cases. These incremental investments have already delivered an estimated $5 billion in additional federal tax revenues as of March 2021.
Panama & Paradise papers (CRA work & results)
Redirect: Ted Gallivan
Response
The CRA’s investigations related to the Panama Papers led to close to 200 completed taxpayer audits resulting in $21 million in tax and penalties. Another 160 are audits currently ongoing and forecasted taxes and penalties are estimated to be in excess of $60 million at this time.
Additional information
- Since 2016, the Agency has identified approximately 900 Canadian individuals, corporations and trusts for evaluation and review to identify those that may have potential Canadian tax non-compliance.
- Wealthy taxpayers often have complex tax arrangements resulting in lengthy and time consuming information gathering processes during the course of the audits completed by the Agency. A significant number of Canadian taxpayers audited are also using the court system to avoid providing documents and information to the CRA.
- As of March 31, 2021, there have been 5 criminal investigation cases related to the Panama Papers with 3 cases being discontinued at the investigation stage and 2 cases that are currently underway. To date, no criminal charges have been laid. No search warrants have been executed in the last 12 months.
Domestic vs international compliance trends
Redirect: Ted Gallivan
Response
Convictions relating to tax evasion are often very difficult to attribute exclusively to offshore activity, since tax evasion is complex and often involves moving funds through both domestic and offshore structures. Many cases may include a combination of both domestic and offshore related transactions.
Additional information
- The Canadian Government and the CRA have shown determination and innovation in creating effective and proactive approaches to identify people who avoid tax whether internationally and/or domestically.
- As a result of historic budget investments of over $1 billion between 2016 and 2019, the CRA increased its ability to identify and target aggressive tax planning, especially more egregious cases. These incremental investments have already delivered an estimated $5 billion in additional federal tax revenues as of March 2021, of which we estimate approximately 70% is generated from domestic sources with the remaining 30% from international sources.
- Not only are we pursuing complex cases, we are working diligently with our partners in the Department of Finance and the Department of Justice to close what might be perceived as loopholes in any legislation that tax scheme promoters exploit to enable taxpayers to skirt their responsibilities and avoid paying their fair share of tax.
- While the number of audits have fluctuated over the last several years, the CRA’s fiscal impact has increased as compliance programs transitioned from a coverage based approach to a more risk based approach to address compliance issues. In addition, proven results demonstrate that we are taking the right tax cases to the Tax Court of Canada, the Federal Court of Appeals and the Supreme Court. This shows that the CRA is placing more scrutiny on large multinationals, high-net-worth individuals, the underground economy, cryptocurrency, and real estate transactions.
CRA Tools to combat international tax evasion
Redirect: Ted Gallivan
Response
The Government of Canada’s continual investment in fighting tax evasion and aggressive tax avoidance promotes an international exchange of information that is both modern and collaborative, and ultimately ensures that all Canadians pay their fair share.
Additional information
- Thanks to budget investments of the last several years, the CRA has acquired increased data and improved tools and approaches to obtain and use various sources of intelligence. These tools help the CRA collect and improve the analysis of valuable information and allows the CRA to work smarter in targeting non-compliance.
- Canada is part of one of the most extensive tax treaty networks in the world; we participate in 93 tax treaties and 24 international tax information exchange agreements.
- The CRA collaborates extensively with international partners through various multilateral organizations, including the Organization for Economic Co-operation and Development and its Forum on Tax Administration, which appointed the CRA’s Commissioner as its Chair in August 2020. Collaboration with our international partners is critical in order to effectively combat tax evasion and aggressive tax avoidance.
CRA Efforts (international comparison & work)
Redirect: Ted Gallivan
Response
The CRA is committed to protecting the integrity of the Canadian tax system by combating international tax evasion and aggressive tax avoidance on all levels. Over the past few years, the CRA has stepped up its efforts to use all business intelligence at its disposal to identify risk and address aggressive tax avoidance and tax evasion by high-risk taxpayers, domestically and internationally.
Additional information
- As a result of historic budget investments of over $1 billion between 2016 and 2019, the CRA increased its ability to identify and target aggressive tax planning, especially more egregious cases. These incremental investments have already delivered an estimated $5 billion in additional federal tax revenues as of March 2021, of which we estimate approximately 70% is generated from domestic sources with the remaining 30% from international sources.
- Not only are we pursuing complex cases, we are working diligently with our partners in the Department of Finance and the Department of Justice to close what might be perceived as loopholes in any legislation that tax scheme promoters exploit to enable taxpayers to skirt their responsibilities and avoid paying their fair share of tax.
CRA Efforts (revenu québec comparison)
Redirect: Ted Gallivan
Response
The CRA and Revenue Quebec continue to closely collaborate, through a number of committees and working groups in order to ensure transparency and to facilitate information sharing.
Revenue Québec (RQ) and the CRA both take aggressive tax avoidance and tax evasion seriously, however, when appropriate the CRA tries to take an educational first approach with certain populations or sectors.
Additional information
- The CRA and Revenue Québec (RQ) are bound by different legislation.
‘Web giants’ & e-commerce compliance
Redirect: Ted Gallivan
Response
The government will continue to work with the international community, provinces and stakeholders to ensure that the sales tax system is fair and provides a level playing field for Canadian and foreign-based businesses.
Additional information
- In its Fall Economic Statement in November 2020, the Government of Canada proposed a number of changes to the GST/HST system to ensure that the GST/HST applies in a fair and effective manner to the growing digital economy. The proposed changes were announced again in Budget 2021 with some amendments following stakeholder consultations.
- Effective July 1, 2021, the government proposed GST/HST measures that relate to:
- cross-border digital products and cross-border services;
- platform-based short-term accommodation; and,
- goods supplied through fulfillment warehouses in Canada.
- Budget 2021 proposes to implement a Digital Services Tax at a rate of 3 percent on revenue from digital services that rely on data and content contributions from Canadian users. The tax would apply to large businesses with gross revenue of 750 million euros or more. It would apply as of January 1, 2022, until an acceptable multilateral approach comes into effect. This would help ensure that Canada’s tax rules capture new ways in which businesses carry out value-creating activities.
Tax gap (+work with PBO)
Redirect: Ted Gallivan
Response
Canada is among the leaders in tax gap estimation along with the United Kingdom, United States, and Australia. This year, Canada will publish its first overall tax gap report and begin building up longitudinal data on Canada’s tax gap. Only a select number of countries both estimate and publish their tax gap estimates.
Additional information
- Canada has helped revitalize the international tax gap community and contributed several novel methodologies (e.g., international tax gap).
If pressed about PBO
- The PBO is seeking access to individual and corporate taxpayer information in order to attempt to calculate Canada’s tax gap.
- The CRA is prohibited by law (Section 241 of the Income Tax Act and Section 295 of the Excise Tax Act) from providing access to the information of specific taxpayers except for purposes clearly defined in the Acts.
- Thee CRA has been working with the PBO to identify the data and information that could be legally shared.
- The PBO has the authority to obtain financial or economic data from government departments. This authority does not supersede the confidentiality protection provided for in Section 241 of the Income Tax Act and Section 295 of the Excise Tax Act.
CEWS & tax compliance
Redirect: Marc Lemieux/Ted Gallivan
Response
Since the onset of the pandemic, the CRA has been committed to maintaining a balance between making emergency funds accessible to businesses who urgently need this support, while preserving the fairness and integrity of our tax system.
To date, the CRA has approved over 3.5 million applications and provided more than $81 billion in support to the Canadian economy.
The CRA also has robust safeguards in place to identify fraudulent applications.
Additional information
- The CRA designed the Canada Emergency Wage Subsidy (CEWS) to include up-front verification to help ensure the subsidy was provided to eligible applicants.
- The CRA’s approach to CEWS compliance starts with providing early outreach and engagement with businesses and stakeholder groups.
- The CRA uses a combination of risk-assessment tools, analytics, leads, and third-party data to detect and address non-compliance.
- Penalties may apply in cases of fraudulent claims, including fines or even imprisonment.
Criminal investigations & convictions trends
Redirect: Ted Gallivan
Response
The government is committed to protecting the tax base by ensuring that suspected cases of tax evasion are investigated and, where appropriate, referred to the Public Prosecution Service of Canada (PPSC) for criminal prosecution.
Additional information
- There has been a decrease in the total number of referrals from the CRA to the PPSC from year to year. The CRA’s Criminal Investigations Program has strengthened its ability to target and investigate the most serious cases of tax crimes. This decrease can be explained by the fact the CRA has shifted its focus to more impactful investigations, with more jail time and higher fines.
- From 2015 to 2021, the courts convicted 204 taxpayers for tax evasion of more than $116 million in federal tax. These convictions resulted in sentences totaling almost $24 million in court fines and 199 years in jail.
- When comparing the last five years to the previous five years, there has been an increase in the average amount of federal tax evaded per conviction. For example, the average tax determined upon conviction is nearly three times what it was previously ($236k between 2012-2016 compared to $654k between 2017-2021).
- When comparing the last five years to the previous five years, there has been an increase in the average amount of fines and jail time per conviction. In the last five years (2017-2021):
- 50% of convicted taxpayers received jail time, versus only 26% between 2012-2016.
- jail terms are on average two months longer compared to the 2012-2016 period.
- the average fine has doubled from $78k to $155k compared to the 2012-2016 period.
CRA Auditor hiring number trends
Redirect: Ted Gallivan
Response
The government has made significant investments since 2015 to strengthen the CRA’s ability to crack down on complex tax schemes, increase collaboration with international partners, and ultimately bring offenders to justice. These investments have yielded positive results.
Additional information
- As part of the Fall Economic Statement 2020, the government committed to investing $606 million over 5 years, starting in 2021, to:
- Close the high-net worth compliance gap
- Bolster technical support for high risk audits
- Enhance the Criminal Investigations Program
- The funding will be used toward staffing and training new employees, and will be allocated to existing teams to increase technical capacity.
- The CRA will hire additional auditors focused on individuals who avoid taxes by hiding income and assets offshore, enhance the audit function targeting higher-risk tax filings, including those of high-net worth individuals, and strengthen its ability to fight tax crimes such as money laundering and terrorist financing by upgrading tools and increasing international cooperation.
- Budget 2021 proposes an additional $304.1 million over 5 years to allow the CRA to fund new initiatives and extend existing programs, including:
- GST/HST agile risk assessment
- Increased audit coverage of the GST/HST Large Business Audit Program
- Mitigating the risk from rapid growth in trusts
- It is estimated that these measures to combat tax evasion and aggressive tax avoidance will recover $810 million in revenues over 5 years.
CRA Results (amounts recovered)
Redirect: Ted Gallivan
Response
In recent years, the CRA has made over $12 billion in gross audit assessments every year, over 60% of which is related to tax avoidance by large multinational corporations and aggressive tax planning by wealthy individuals. As a result of historic budget investments of over $1 billion between 2016 and 2019, the CRA increased its ability to identify and target aggressive tax planning, especially more egregious cases. These incremental investments have already delivered an estimated $5 billion in additional federal tax revenues as of March 2021, of which we estimate approximately 70% is generated from domestic sources with the remaining 30% from international sources.
Additional information
Voluntary Disclosures Program (VDP):
- The CRA made changes to the VDP to ensure that those who use the program to correct their tax affairs do not have an unfair economic advantage over the majority of Canadians who file and pay their taxes in full and on time.
- The CRA narrowed the eligibility criteria to access the program and imposed additional conditions on applicants, making it more difficult for those who intentionally avoid their tax obligations to benefit from the VDP.
Offshore Tax Informant Program (OTIP):
- The CRA has completed audits of over 230 taxpayers uncovering over $95 million in additional federal taxes and penalties.
- Over 260 taxpayer audits are currently ongoing with forecasted return of over $110 million.
- As of March 31, 2020, the CRA had collected $37.8 million in federal taxes and penalties from audit assessments that originated from OTIP submissions.
Promoters:
- Over 1k promoters and close to 350 schemes identified to date.
- Since 2010, approximately 80 third-party penalties have been assessed for a total of over $269 million.
- In the last 3 years, promoter audits have generated over $33 million in federal taxes and penalties.
- Currently, the CRA is risk assessing approximately 40 projects involving over 100 promoters of concern.
KPMG:
- In total, work on the Isle of Man enabled the CRA to identify $48 million in additional tax, and 2 KPMG files are still open.