Offshore Compliance Advisory Committee – Minutes – December 14, 2018

Friday, December 14, 2018

List of Participants

OCAC Members

Chairperson
Colin Campbell

Vice-Chair
Kimberley Brooks (by phone)

Committee Members

• Brigitte Alepin
• Catherine Brown (by phone)
• Larry Chapman
• Arthur Cockfield
• Daniel Thornton (absent)

CRA and Other Attendees

Assistant Commissioner, International, Large Business and Investigations Branch
Ted Gallivan

Executive Director, Offshore Compliance Liaison Office
Gina Jelmini

Coordinator, Offshore Compliance Liaison Office
Stephanie Weber (by phone)

Director General, Offshore and Aggressive Tax Planning Directorate
Sue Murray

Director General, International and Large Business Directorate
Alexandra Maclean

A/Director General, Criminal Investigations Directorate
Stéphane Bonin

Assistant Deputy Minister - Tax Law Services Portfolio Department of Justice
Lynn Lovett

Deputy Assistant Deputy Minister - Tax Law Services Portfolio Department of Justice
Daniel Bourgeois

1. Opening remarks and introduction of new members

Ted Gallivan opened the meeting and reflected on the Committee’s positive ability to influence change at the CRA. He also noted that favourable circumstances, such as funding and an innovation climate, are in place to support further changes.

He proceeded to describe the phased evolution of the offshore compliance programs beginning in 2012-2013. Phase one led to specialised field audit teams, mandatory reporting of electronic funds transfers and the Offshore Tax Informant Program – initiatives that are now reflecting positive results. A second phase included additional measures in 2016-2017 such as Country-by-Country Reporting and the Common Reporting Standard, which are underway but less mature. Finally, the latest phase looks beyond Canada to the favoured multi-lateral approaches and engagement with other tax administrations through various global forums in which Canada actively participates.

He concluded by warmly welcoming the two new members of the Committee, Brigitte Alepin and Arthur Cockfield.

2. Welcome and résumé of Committee’s work to-date; Committee’s views of the first two years

Colin Campbell (Chair) also welcomed the new members and outlined the work of the Committee to-date. He noted that in line with its terms of reference, the Committee responds to issues identified by the Agency. For example, it has offered recommendations with respect to the Voluntary Disclosures Program, the CRA’s use of big data, and the CRA’s treatment of the Panama and the Paradise Papers data leaks. (The Committee’s commentary on the latter is still in the queue to be formally issued.)

He noted that the terms of reference have been modified. Previously, legislative considerations were excluded from the committee’s scope; however, despite the change, there are boundaries to be respected that limit the Committee’s influence in the legislative arena and the types of recommendations the Committee may offer.

3. Retrospective on the CRA’s international, large business compliance and criminal investigation programs; evolution of the offshore and aggressive tax planning program

The Committee was provided with an overview of the branch’s programs with the opportunity for members to interject with questions and points of interest.

Criminal investigations

A program evaluation conducted in 2010 resulted in changes to enhance the CRA’s ability to address tax evasion through its Criminal Investigations Program. Key changes included centralizing the program in a few offices to develop the critical mass necessary to perform more complex investigations and to align locations with our key stakeholders, the RCMP and the Public Prosecution Service of Canada. Program priorities were refocused to investigating egregious cases involving those who promote tax evasion schemes and those who illegally hide their assets offshore. In addition, enhancements to workload selection on a national basis were implemented.

The Committee suggested that the CRA also target offshore tax evasion involving criminal money laundering and thought that including penalty and interest amounts in the tax evasion dollar results could reflect roughly as much as a 20% increase in identified revenue. The members discussed the linkages and referrals between the civil and criminal programs and the grey zone around tax planning – an area in which criminal organizations have become more sophisticated.

There was some discussion regarding the consequences of tax evasion, particularly jail time, criminal records, and publicity of CRA activities, noting that, previously, publicity of criminal convictions only occurred at the time of conviction, whereas it now also occurs when search warrants are executed and charges are laid. It was also noted that the number of convictions were down since the transformation, but that revenues were higher, leading to a discussion on the potential merits of having a second stream/track for tax evasion cases with lower consequences and a commensurate lower burden of proof.

Other discussion points included strict liability -- it was suggested that the Committee could benefit from information about other tax administrations’ experience with this type of legislative tool; accountant privilege and other expansions of assertions of privilege; and cryptocurrency links to tax evasion. Publicity and deterrence opportunities were discussed.

International and large business

This program serves a well-defined population. Coverage is strong, supported by good risk assessment and excellent field auditors, and it has been acknowledged in the business community that the CRA audit experience is intense for taxpayers.

There was some discussion of the current business model which decentralizes audit decisions to the field.

The validity of the tax earned by audit measure and its effect on audit decision making was also considered. The challenge of how improved data translates to demonstrable results was suggested by the Committee as a topic that warrants further discussion.

There was discussion on deterrence and performance measurement considerations insofar as these are affected by both taxpayer indifference to audit and strategies to resist and prolong the audit.

It was highlighted that voluntary compliance is already up significantly over last year. However repeat non-compliant behaviour continues to be challenge. This led to some discussion about penalty regimes.

Offshore and aggressive tax planning

The program has evolved considerably since 2013. New data sources and the capacity to derive business intelligence support good risk assessment and file selection. Challenges arise at the audit and reassessment stage relating to low levels of cooperation from taxpayers / advisors who draw out the audit process and proceed to litigation.

The program remains focused on preserving fairness in the tax system and is now seeing a gelling and greater clarity of the target population allowing better concentration of resources and initiatives. Program activities generally revolve around destabilizing and disrupting tax planning schemes and the identification of unreported offshore income among high net worth individuals. The Committee expressed an interest in knowing more about the target population as there is not much data in the public arena.

The Committee discussed the role of charitable foundations in tax planning strategies in Canada.

There was some discussion of potential additional risk criteria in the target population and recognition of the fluidity of a risk assessment determination, which could change based on subsequently obtained information. As well, challenges to obtaining necessary documentation and information and recourse processes were considered as were the means to address them, including the use of the inquiry mechanism, which can also be used for civil matters.

The OTIP was discussed as it contributes to the sources of data used for risk assessment and audit file selection. There was some discussion on the informant eligibility rules and the protection of informants.

4. Deeper dive into programs, operations and projects

CRA officials provided additional detail on program metrics (e.g., 190 criminal investigations are underway with a number of these indicating an offshore component, new initiatives such as the J5 and international working groups involving two or more jurisdictions). A new business model for criminal investigations allows for multiple investigators working different aspects of a file; whereas in the past it was a one to one relationship, i.e., one file, one investigator. Further, the program has recently had success with a section 231.4 enquiry leading to the identification of $10 million in evaded taxes. Good results flowing from these program enhancements are expected.

IT enhancements such a GAAR database that will enable taxpayers / advisors to search the CRA’s position on a particular scheme or tax plan; a single platform for elections; and tools that detect and visualize the relationships among legal entities are expected to support improved service, certainty and risk assessment.

Offshore and aggressive tax planning approaches using many sources of data and various algorithms are permitting a better look into non-compliance trends that have been typically difficult to quantify. The related party initiative is proving useful as a basis to scope and define the targeted population.

5. Department of Justice presentation

DOJ officials gave a presentation about their tax law services portfolio, which provides legal advice to and conducts litigation for the CRA. The focus was around the strong partnership between the CRA and Justice, as well as continuing program and service delivery improvements to ensure that the needs of client departments continue to be met into the future. The ensuing discussion was specific to CRA needs.

Some of the more significant changes involve the initiatives underway to allow for more legal input at the audit stage where there is often labour-intensive document review required or where high impact issues have been identified, with a view to providing strategic advice to improve the sustainability of the assessment. It was also noted that Justice is working to improve the clarity in its risk-based analyses on the likelihood of success in litigation when providing advisory services.

The Committee asked if settlement constraints pose a problem. CRA officials noted that while settlement constraints do not generally pose a problem as there are many elements to consider, the bigger concern is litigation resources/capacity. Committee members discussed a new tax litigation climate in Canada that draws on immense legal resources under strategic oversight and were interested in DOJ plans to address this through resource reallocation where needed and the development and maintenance of specialised expertise. Other options were explored in the discussion such as interchange programs similar to those that exist in the U.S. and tapping into the academic community. Notwithstanding its 90% success rate of all cases, DOJ officials nonetheless indicated they are very open to exploring resource models that would enhance the CRA’s ability to deliver on its priorities.

6. Program-specific needs and future challenges; how to get ahead of determined and well-resourced non-compliers

Seeking the OCAC’s input into strategic program development - medium and long term views

Mapping the way forward – (policy, consequences, deterrence, technology, etc.)

The Committee was solicited by CRA officials for top-of-mind input on future priorities for the international tax compliance programs in light of the day’s presentations and discussions. The following emerged:

1. Capacity – more training and technical knowledge for auditors, e.g., Master of Taxation program
2. Hiring specialists and lawyers part-time; alternate arrangements for legal expertise
3. Communications – section 241 – confidentiality; pre-empting negative public reaction, media frenzy and preserving public perceptions of fairness, .e.g., how to talk about high profile cases now and when there is a court decision, highlighting the lessons learned; communications in general, current communications strategies and products, more use of social media, CRA’s ability to correct the record
4. Strategies to tap into the moral outrage within cohorts or communities to reduce social acceptability of cheating; get the full picture of who is hiding wealth
5. Criminal investigations - exploring other tax administrations’ experience with strict liability provision, trade based fraud, corporate offences
6. Engage on current research and thinking regarding tax fraud uptick and stronger corporate liability
7. Evaluate the VDP changes among the HNWI population – are people opting to leave the country?
8. Case studies of anonymized data and fact situations of offshore disclosures through the OTIP
9. Treaties - will the Mutual Agreement Procedures (MAP) change positions, what Canada is seeing, assessing positions vis à vis audits; OCAC’s observations, Base Erosion Profit Shifting (BEPS) context; role of preamble in helping with GAAR?
10. Peace officer status for investigators (non armed); international liaison officers embedded in foreign jurisdictions
11. CRA definition of ‘criminal tax evasion’; second track for criminal tax evasion with lower consequences and lower burden of proof
12. Privilege – court decisions, academic views
13. Cryptocurrency exchangers – demo of other tax administrations’ tools to detect
14. Performance measurement challenges – demonstrating value of increased data and BI
15. Incentives to encourage taxpayer cooperation

7. Research partnerships, other collaborative arrangements

The Committee discussed the viability of various ways in which the CRA could partner with external agents for research projects to supplement its in-house strategic research program with a more operational level, program oriented research agenda. Several ideas were put forth including access to CRA’s aggregated data as a valuable draw for candidates, along with the associated publication opportunities.

There was mention of a one-day conference (as was done in the U.K.) held to invite papers with guaranteed publication that showcase a result or a proposed event. There was also the suggestion that perhaps a research project could be undertaken with key professional associations. It was also envisioned that that the OCAC could, via the CRA, issue a call for proposals to the members’ academic institutions for specific research projects as part of an overarching strategic research program it could oversee. In this scenario, members would recuse themselves from discussions accordingly where they plan to apply for the project(s).

It was also noted that research collaboration could dovetail with Masters programs supporting thesis opportunities.

8. Next steps / forward agenda

A telephone discussion will be organized for January to review and refine the list of priorities identified during today’s meeting. This will provide the foundation for the Committee to develop a strategic agenda to guide its future work and enable it to focus its expertise on the topics where the CRA would most benefit from its advice and recommendations with a view to future program improvements

The Committee will also seek to refine an approach for research collaboration.

The next in-person meeting will be held in April or May. The Committee reiterated the need for early planning.

9. Minutes of June 8, 2018 meeting

The minutes of the June 8, 2018 meeting were approved by the Committee.

10. Closing remarks

The Chair thanked everyone for their participation and the meeting was adjourned. The members then held their usual short in camera discussion.