On 14 April 2016, the House of Commons Standing Committee on
Finance (the Committee) adopted the following motion:
That the Standing Committee on Finance call for
the Honourable Diane Lebouthillier, Minister of National Revenue, officials
from the Canada Revenue Agency (CRA) including Ms. Stephanie Henderson, manager
of offshore compliance, and officials from the Department of Justice to appear
before the committee to provide the steps being taken by the Agency to combat
tax evasion and tax avoidance and provide an explanation as to the current
status of the KPMG/Isle of Man file; and
That the committee also call for officials of KPMG
to appear before the committee to explain their role in this file.
From 3–19 May 2016, the Committee held three hearings in relation
to this motion. On 31 May 2016, the Committee adopted a related motion on this
topic, and additional witnesses were heard on 7 and 14 June 2016. In total,
nine groups or individuals made presentations to the Committee over the course
of the study.
During the June 2016 hearings, witnesses were asked not to comment
on an offshore corporate structure developed by KPMG and located on the Isle of
Man; this structure is the subject of hearings by the Tax Court of Canada and
the Federal Court. In asking the witnesses to limit their comments in this
regard, the Committee was mindful of the sub judice convention and,
solely in the context of the subject matter at hand, wished to avoid possible
prejudice to the participants in these court cases.
The House of Commons holds the power of the “Grand Inquest of the
Nation” (hereafter, the Power of Inquiry), which allows it to inquire into any
matter that it considers necessary, with the possible exceptions of matters
outside of its legislative competence or where it has expressly limited this
power by statute.
The Power of Inquiry is delegated to House of Commons standing committees
through the House of Commons’ Standing
Order 108(1), which provides that standing committees have the power to
“send for persons, papers and records.” According to
Standing Orders of the House of Commons, 2005, this power is qualified
in the following way: the power of committees to send for persons “does not
include Members of the House and Senators,” and “the power of committees to
send for papers and records is qualified in that the papers must be relevant to
their order of reference and should only be requested if, according to the
rules and practices, the House would itself order such papers.”
The sub judice convention is a self-imposed restraint that
the House of Commons and its committees may apply to their affairs, including
their use of the Power of Inquiry or the delegated power to send for persons, papers
and records; there is no legal requirement to adhere to, consider or debate
adherence to the convention. Under this convention, members of the House of
Commons avoid commenting on matters that
are before the courts. The convention is based on the principle that Parliament
and the courts should respect their respective functions and not interfere with
– or be seen to be interfering with – each other’s constitutional role.
In adhering to the sub judice convention, the House of Commons and its committees restrain themselves from
drawing any legal conclusions. In part, the convention seeks to prevent the remarks
of parliamentarians from prejudicing decisions before the courts. An example of
such prejudice occurred in the 1988 case of R. v. Vermette, where the Supreme Court of Canada ordered a new
trial for an accused person after Quebec’s premier provided his opinions
regarding the possible outcome of an ongoing matter before the Quebec Superior
Court during the National Assembly’s question period. The Supreme Court
commented on this breach of the sub judice convention, stating that: “It
is in the public interest that such accusations be scrutinized by the
judiciary. [The Supreme Court] cannot accept that the reckless remarks of
politicians can thus frustrate the whole judicial process.” For these reasons,
the sub judice convention encourages the House of Commons and its
committees to be cautious in their proceedings so as not to interfere
with – or be seen to be interfering with – judicial processes.
This report summarizes the testimony received by the Committee
during these hearings, and presents the Committee’s recommendations. Chapter
Two focuses on the Canada Revenue Agency’s (CRA’s) efforts to enhance tax
compliance by individuals and corporations, and to address situations of
non-compliance. Chapter Three discusses the development and use of offshore
corporate structures, including that developed by KPMG and located on the Isle
of Man; it also identifies the CRA’s actions in relation to that structure. The
Committee’s recommendations are contained in Chapter Four.
During the Committee’s study, witnesses discussed a variety of
issues, including tax avoidance and evasion, selected Canada Revenue Agency
(CRA) measures designed to enhance tax compliance and detect situations of
non-compliance, the CRA’s enforcement and prosecution processes, a number of
international initiatives to address tax avoidance and evasion, and codes,
directives and standards to which CRA employees and other tax professionals are
subject. The background information below provides a context for the witnesses’
The CRA defines “tax avoidance” as any
taxpayer activity that minimizes tax payable by contravening the object and
spirit – but not the letter – of the law. It
occurs when the taxpayer does not provide false information to the CRA,
but the provisions of the tax legislation are used in a manner that was not
intended by its drafters. The CRA’s determination of whether tax avoidance has
occurred is made on a balance of probabilities, and the taxpayer is deemed to
be innocent if it is unclear whether abusive tax avoidance has occurred.
“Aggressive tax planning” is the term used by the CRA to refer to
domestic and international strategies that “push the limits of acceptable tax
XVI of the Income Tax Act (ITA) and section 274 of the Excise Tax Act contain
provisions that are designed to address aggressive tax planning. These
provisions, which are known as the General Anti-Avoidance Rules (GAAR),
are available to the CRA when specific anti-avoidance provisions do not address
a transaction that would constitute aggressive tax planning. The GAAR provide
the CRA with broad powers to challenge perceived tax avoidance activities.
Essentially, where a transaction or a series of transactions is undertaken not
primarily for a genuine business purpose but rather to obtain a tax benefit,
the CRA may use these rules to invalidate the tax-free consequences of the
transaction or series of transactions, and taxes may be owed.
According to the CRA, “tax evasion” involves the deliberate
underreporting of tax payable by concealing income
or assets, or by making false statements. Tax evasion violates the object, spirit
and letter of the law. According to section 239 of the ITA, penalties for income tax evasion include fines of between 50% and
200% of the amount of tax evaded and/or imprisonment for up to five years. This
section applies to tax advisors and to
taxpayers, as section 239(1)(a) specifies that every person who has “made, or
participated in, assented to or acquiesced in the making of, false or
deceptive statements in a return, certificate, statement or answer filed or
made as required by or under this Act or a regulation, … is guilty of an
offence.” However, advisors are rarely charged under section 239; instead, they are more likely to face
administrative penalties under section 163.2.
While the CRA does not define the term “negotiated settlement
agreement” in the context of its pursuit of taxpayers for wrongdoing, the
Organisation for Economic Co‑operation and Development (OECD) defines
“settlement” in this context to be the formal resolution of a tax and/or legal
dispute – either before or during its litigation – where the taxpayer typically
admits wrongdoing, agrees to co-operate with the tax authority, waives certain
procedural rights and pays outstanding tax debts in exchange for a reduction in
the sanctions that could be – or have been – imposed on him/her.
Similarly, the CRA does not define the term
“amnesty” in the context of its pursuit of taxpayers for wrongdoing. However,
various organizations have definitions for the term. For example, the OECD defines “tax amnesty” as a tax
authority waiving the taxpayer’s responsibility to pay outstanding tax debts. Certain
U.S. states – such as Missouri – have offered “tax amnesty
programs” that allow a taxpayer to avoid penalties, interest and criminal
charges if he/she comes forward and remits outstanding tax debts prior to the
tax authority’s identification that a tax-related issue exists.
Canada operates a self-assessment tax regime whereby taxpayers
their own taxable income. Canadian residents must report, and pay taxes owing
both domestic and foreign income; this requirement applies to individuals,
and corporations. The CRA has a number of
programs designed to enhance compliance
with this regime, including the Voluntary
Disclosures Program (VDP), advance
tax rulings, the Liaison Officer
Initiative and a proposed registration
system for certain
The CRA’s VDP provides individual and corporate taxpayers with an opportunity to correct inaccurate or incomplete information in
relation to their tax form, or to disclose information not previously
reported on their tax form. Those who make a valid disclosure are required to
pay the taxes or charges and any associated interest, but they are not
subject to further penalties or prosecution.
Figure 1 – Number of Voluntary Disclosures Processed and
Amount of Unreported Income in Relation to Voluntary Disclosures, 2003–2004 to
Note: The number of voluntary disclosures processed for 2014–2015
is not available.
Source: Figure prepared using
data obtained from: Canada Revenue Agency, Annual Reports to
Parliament, 2003–2004 to 2014–2015.
A taxpayer or a tax practitioner may also request guidance from the
CRA regarding the treatment, under Canadian income tax law, of a proposed
transaction or series of transactions. In such cases, the CRA reviews the
proposed transaction or series of transactions and issues an advance
income tax ruling that provides the CRA’s interpretation of the manner in
which the law’s provisions would be applied.
Figure 2 – Number of Advance Income Tax Rulings and
Percentage of Advance Income Tax Rulings Completed Within 90 Days of Receiving
All Essential Information from the Taxpayer, 2009–2010 to 2014–2015
Note: The percentage of advance income tax rulings
completed within 90 days of receiving all essential information from the
taxpayer is not available for the 2009–2010 to
The Canada Revenue Agency’s target for the
percentage of advance income tax rulings completed within 90 days of receiving
all essential information from the taxpayer is 85%.
Source: Figure prepared using
data obtained from: Canada Revenue Agency, CRA Annual Reports
to Parliament, 2009–2010 to 2014–2015.
As well, educational and preventative programs exist to improve tax
compliance by small businesses. For example, through the Liaison
Officer Initiative, selected small businesses are provided with
in-person support to help them prevent errors and comply with their tax
In January 2014, the CRA announced its intention to introduce a
mandatory registration system for certain tax advisors. The Registration of Tax Preparers Program will require tax advisors who are paid to
prepare an individual or corporate income tax return to register with the CRA.
This registration will allow the CRA to connect each tax return to a particular
tax advisor, identify tax advisors who prepare inaccurate returns, and link
these advisors to taxpayers suspected of tax avoidance or evasion. According to
the Canada Revenue Agency’s Report
on Plans and Priorities 2016–2017, the CRA will launch the program in
The CRA also has programs aimed at detecting tax avoidance and
These programs include the Offshore Tax Informant Program, a requirement that certain
international electronic funds transfers (EFTs) be reported, and the ability to
obtain information on certain taxpayers from third parties. Regarding offshore
tax compliance, the CRA’s Offshore Compliance Division – which was established
in 2013 – has implemented a number of initiatives, and employs specialized
teams that are responsible for conducting offshore compliance audits.
Established in 2014, the Offshore
Tax Informant Program provides financial rewards to individuals who provide
information regarding offshore tax non-compliance
that leads to the assessment and collection of additional federal tax in an
amount that exceeds $100,000.
Moreover, since January 2015,
banks, credit unions, caisses populaires, trust and loan companies, money
services businesses and casinos have been required to report international EFTs of $10,000 or more in a
single transaction to the CRA. These entities are already reporting information
on certain international EFTs to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Lastly, the CRA can seek court authorization to issue, to a third
party, a requirement to provide information in relation to unnamed persons.
These third parties, such as financial institutions, may have information that
can assist in verifying whether particular entities have complied with their
To ensure compliance with Canada’s tax regime, the CRA is also
focused on verifying tax returns for errors and/or omissions and on ensuring
that tax offences do not go unpunished.
When the CRA suspects that aggressive tax planning is occurring or
has occurred, it initiates an assessment, reassessment or additional assessment
of the relevant taxpayer. When it finds that the taxpayer has used an
aggressive tax planning measure, he/she is liable for the assessed taxes and
any interest owing. Furthermore, section
237.3 of the ITA provides for general penalties to be applied when the taxpayer fails to report taxable transactions,
such as income received, to the CRA.
When a taxpayer disagrees with an assessment or a determination by
the CRA, an objection may be filed. The case is then referred to the CRA’s Appeals
Division, which has the mandate to review such cases in a fair and impartial
manner. If the taxpayer disagrees with the Division’s decision, he/she may make
an appeal to the Tax Court of Canada.
The general procedure for prosecution under section 239 of the ITA begins when the CRA refers the taxpayer’s file to its Criminal
Investigations Program (CIP). Employees of the
CRA’s CIP have the mandate to investigate significant cases of tax evasion and,
where appropriate, to refer these cases to
the Public Prosecution Service of
Canada (PPSC) for criminal
prosecution. A primary focus of the CIP is the pursuit of “significant
cases of tax evasion with an international element.” The CIP works in
partnership with the Royal Canadian Mounted Police, and may share relevant
taxpayer information with law enforcement agencies when there are reasonable
grounds to believe that the information indicates the existence of a serious
criminal offence; these offences include tax evasion or fraud under section 380 of the Criminal Code.
As an alternative to
prosecuting taxpayers under section 239 of the ITA, the Crown may – in serious cases – lay charges for fraud under section 380 of the Criminal Code. Prosecution under section 380 can result in a prison term of up to 14 years.
A two-year minimum sentence is imposed if the taxpayer defrauded the government
by an amount that exceeds $1 million.
As well, tax advisors may face criminal sanctions for fraud.
According to section
21(1) of the Criminal Code, a person is a party to an offence if
he/she “does or omits to do anything for the purpose of aiding any person to
commit the offence; or abets any person in committing it.” Moreover, section 22(1) of the Code stipulates that counselling another person to be a party to an
offence makes the counsellor a party to that offence, provided that the person
who has been counselled goes on to commit the crime.
At any point up to and including 10 years prior to the current
taxation year, the Minister of National Revenue may give a taxpayer relief from penalty or interest costs
that the CRA has assessed. These costs may be waived in the following
situations: extraordinary circumstances, such as natural disasters or serious
illness; errors for which the CRA is at fault; financial hardship; and, at the
discretion of the Minister, any other circumstance.
The Minister may take such an action in an effort to entice
taxpayers who are suspected to be engaging in a tax avoidance or evasion scheme
to provide information on that scheme. The
CRA can then use this information to investigate other parties to the scheme and/or to adapt their investigative techniques to facilitate the
detection of similar schemes in the future.
Under the exchange of information provisions found in tax treaties, bilateral tax information exchange agreements (TIEAs) or the Convention on Mutual Administrative Assistance on Tax
Matters, the CRA exchanges selected tax information with tax authorities
in other jurisdictions.
Table 1 – Tax Information Exchange Agreements Entered Into by Canada
Tax Information Exchange Agreements In Force
Signed but not yet in force
Anguilla, Aruba, Bahamas, Bahrain, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Costa Rica, Dominica, Guernsey, Isle of Man, Jersey, Liechtenstein, Netherlands Antilles, Panama, San Marino, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Turks and Caicos Islands and Uruguay
and Barbuda, Belize, Gibraltar, Grenada, Liberia, Montserrat and Vanuatu
prepared using data obtained from: Department of Finance Canada, Tax
Information Exchange Agreements, accessed 14 June 2016.
As well, the OECD is overseeing a number of international efforts
to combat tax avoidance and evasion. In 2013, it launched the Base Erosion and
Profit Shifting (BEPS) project, which deals with tax avoidance by multinational
corporations, and released its final reports and a
set of non-binding recommendations in 2015. It has also developed a common
reporting standard, which sets out the minimum requirements for the automatic
exchange of financial account information collected by financial institutions.
Finally, various jurisdictions – including Canada – participate in
international fora focused on developing best practices regarding tax
administration. Such fora include the Forum on Tax
Administration and the Global
Forum on Transparency and Exchange of Information for Tax Purposes, both of
which are OECD bodies.
CRA employees are subject to a number of obligations in relation to
their conduct, including under the Code of
integrity and professional conduct, the Values
and Ethics Code for the Public Sector and the Directive
on conflict of interest, gifts and hospitality, and post-employment. For
example, the Directive requires CRA employees to refuse any prohibited gifts,
such as cash and tickets to entertainment or sporting events, and to report
offers of such gifts and of any other gift, hospitality or benefit that is
regularly offered or that exceeds $50 in value. In addition, CRA employees must
comply with section
241 of the ITA, which – subject to a number of exceptions – prohibits them from
sharing or disclosing information on taxpayers or on files on which they have
Accounting professionals are subject to provincial/territorial
legislation, as well as codes of professional conduct developed by each provincial
and regional body that represents the accounting profession. For example, Rule
201.1 of the Rules of Professional Conduct of the Chartered Professional
Accountants of Ontario stipulates that “[a] Member, Student, Applicant, membership
candidate or firm shall act at all times in a manner which will maintain the
good reputation of the profession and its ability to serve the public
interest.” The standards adopted by provincial and regional bodies that
represent the accounting profession are aligned with the Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for
As well, accounting firms have internal codes of conduct. For
example, KPMG's standards of ethical conduct are set out in its Global
Code of Conduct, which it adopted in 2005 and updated in 2012. It applies
to KPMG employees and partners around the world.
Witnesses appearing before the Committee commented on the CRA’s
measures designed to enhance tax compliance, and to detect tax avoidance and
evasion. They also discussed the extent to which Canadians comply with their
tax obligations, and on factors that may affect tax non-compliance. As well,
they focused on the CRA’s enforcement and prosecution efforts in relation to
tax non-compliance, international efforts to address tax avoidance and evasion,
and the integrity of CRA employees and tax advisors.
In speaking to the Committee about measures that are effective in enhancing
compliance with tax obligations, KPMG highlighted that it is important for tax authorities to engage in discussions with
taxpayers and tax advisors on an ongoing basis in order to keep them informed
about the types of tax planning arrangements that are acceptable. It also identified
the requirements placed on taxpayers and tax advisors to notify the CRA when a
tax arrangement involves a contingency fee or a confidentiality agreement, or
is designed to obtain a tax benefit.
Regarding advance income tax rulings, Canadians
for Tax Fairness indicated that tax advisors generally do not request such
rulings from the CRA. It pointed out that U.S. tax advisors are required to register all tax products,
and suggested that the adoption of a similar requirement in Canada would help
to address tax avoidance. KPMG said that advance income tax rulings are rarely sought, although they are being
requested more frequently. According to it,
obtaining such rulings is a lengthy and costly process.
The CRA commented on the VDP, noting that a taxpayer who participates in this program
engages in a process that is entirely distinct from that involving a negotiated
settlement agreement. It mentioned that the number of voluntary disclosures has increased by 400% over
the last six years. André Lareau – who appeared as an individual – was of the view that, in cases of
voluntary disclosures involving funds held offshore, the Minister of National
Revenue should not use her discretion to cancel or reduce either interest or
penalties because the funds could be linked to fraudulent transactions. He also said that, compared to similar programs in other countries, the VDP is too
lenient; international programs provide taxpayers with a more limited time
frame within which to engage in disclosure without facing penalties.
Regarding compliance by small businesses with their tax obligations,
the CRA indicated that – instead of audits – it is increasingly trying to educate and
provide timely support to such businesses; particular mention was made of the
Liaison Officer Initiative, which was introduced in 2014.
The CRA highlighted a number of measures that have been implemented in recent years to
improve the detection of offshore tax evasion and aggressive tax planning in
Canada. In particular, it noted that it now has access to more and better information, and is targeting
offshore tax compliance more effectively. Arthur
Cockfield, who appeared as an individual, also held the view that measures
adopted by the federal government over the last three years, such as dedicating
more resources to auditing, have been helpful.
Cockfield also characterized implementation of the CRA’s Offshore Tax
Informant Program as a very positive change. He mentioned that whistleblower initiatives can be very effective for detecting
offshore non-compliance, and provided an example involving the United States,
where tax authorities recovered billions of dollars in a tax evasion case that
was first revealed by a whistleblower.
The CRA said that, in 2013, it created both a new Offshore Compliance Division and
specialized teams dedicated to offshore tax compliance, and that it has reorganized
its CIP to focus on severe cases of tax evasion. The CRA also indicated that, in April 2016, it created a new branch that is focused solely
on multinational and large corporations, aggressive tax planning and criminal
Furthermore, the CRA explained that the mandatory reporting of certain international EFTs, which has
been a requirement since January 2015, helps it to target jurisdictions and
financial institutions of concern. Similarly, the Minister
of National Revenue stated that this information will be used to target up
to four jurisdictions each year for further investigation; the Isle of Man will
be the first such jurisdiction. The CRA indicated that it is investigating up to 800 Isle of Man accounts.
The CRA noted that the streamlined process for obtaining information from third parties
on unnamed persons suspected of tax non-compliance allows it to receive such
information more quickly. As an example, the CRA mentioned that it sought court authorization to require the Royal Bank of
Canada (RBC) to provide information on clients linked to the Panamanian law
firm Mossack Fonseca; it added that RBC will not be opposing this request, which should result in
information being made available in a timely manner. As well, the CRA said that the Foreign Income Verification Statement was changed in 2013 to
introduce more detailed and rigorous reporting requirements for taxpayers with
assets in foreign jurisdictions.
As well, the CRA stated that – in relation to
corporations with annual revenue exceeding $250 million – it has implemented a
risk-assessment system based on an algorithm that takes 200 variables into
account. It explained that all corporations that
are identified as having a high risk of non-compliance are audited. According to it, the implementation of this system
has allowed the CRA to increase the amount of taxes collected through audits of
large corporations. The CRA further noted that the reputation of a tax practitioner and his/her current
behaviour influence its decision about whether to undertake an audit.
The CRA also noted that its efforts to address offshore tax compliance are supported by
increased resources; it said that it
currently has 20% more auditors than it did in 2006. It commented that the funds announced in the 2016 federal budget for the CRA would
be used, among other things, to hire more auditors and specialists in order to
increase the number and quality of examinations of high-risk individuals, multinational
corporations, and entities that create and promote tax avoidance schemes.
According to Réseau
pour la justice fiscale Québec, while it is encouraging that
the federal government is providing the CRA with additional funding, this
funding will barely compensate for the reductions that have occurred in recent
years, and will help to address tax avoidance and evasion only in a marginal
way. The Chartered
Professional Accountants of Canada supported this additional funding for
the CRA, and stated that the federal government should consult with taxpayers
and a range of stakeholders as it moves forward with its efforts to address tax
avoidance and evasion. Mr.
Cockfield suggested that, going forward, an ongoing commitment from the
CRA's senior management is required to address offshore tax evasion.
As well, Réseau pour la justice fiscale Québec mentioned that – in
its view – the federal government is not very committed to addressing the issue of tax havens, noting that world
leaders in a number of countries commented on the leak of the “Panama papers”
in a more forceful manner than did Canada’s Prime Minister. It also
suggested that, in addition to the CRA, the Office of the Prime Minister,
Global Affairs Canada and the Department of Finance should be involved in
Canada’s efforts to address the issues raised by the “Panama papers.”
According to Canadians
for Tax Fairness, the federal government should consider amending the ITA
to oblige tax advisors to report suspected situations of tax avoidance or
evasion to tax authorities; specific mention was made of the regime currently
in place in the United Kingdom.
In order to detect offshore tax evasion better, Mr.
Cockfield emphasized the need for better coordination between FINTRAC and
the CRA in relation to suspicious financial transactions reports received by
The CRA told the Committee that the voluntary tax compliance rate of Canadian
taxpayers, which exceeds 92%, is among the highest in the world, and KPMG agreed that Canadians generally comply with the country’s tax rules. In order
to improve its measurement of non-compliance, the CRA indicated that it is undertaking a comprehensive study of methodologies to
estimate Canada’s tax gap, or the amount of tax revenue that is not collected. KPMG mentioned that a number of jurisdictions currently analyze their tax gap, and
that the largest component of the gap often is the underground economy.
pour la justice fiscale Québec said that the tax gap should be assessed
from a sociological perspective. It explained that, from this perspective, the analysis of the tax gap should not
be limited to an estimation of the amount of tax revenue that is not collected;
it should also take other consequences of offshore tax avoidance and evasion
into account. In particular, it suggested that tax revenue losses due to offshore tax avoidance and evasion
have prompted governments to lower corporate tax rates in an effort to reduce
the flow of capital to offshore jurisdictions, further reducing tax revenue; as
a result, governments have had to borrow more, reduce spending and/or impose
fees on public services that were previously available to the population at no
According to Canadian
for Tax Fairness, Canada’s federal and provincial governments lose between $5.3
billion and $7.3 billion annually as a result of tax avoidance and evasion. It also spoke about the book The Hidden Wealth of Nations, whose author
concluded that about $300 billion, or 9% of total Canadian wealth, is held
offshore; this proportion exceeds that in the United States, at 4%. Mr.
Cockfield said that an estimated $10 trillion to $35 trillion worldwide is
hidden in offshore tax havens, while Réseau
pour la justice fiscale Québec indicated that about $21 trillion are
circulating in tax havens.
In commenting on tax haven-enabled tax avoidance and evasion, Réseau
pour la justice fiscale Québec identified two key components of the problem:
tax evasion by individuals who transfer funds into tax havens and rely on the
secrecy provided by these jurisdictions; and multinational corporations that
use tax havens when structuring their affairs with a view to avoiding the
payment of taxes in the countries in which they operate.
pour la justice fiscale Québec observed that, in many cases, tax havens allow
entities – such as "exempted companies" or special types of holdings
– to be created within their jurisdiction; such an entity is subject to few –
if any – controls in relation to the identity of the beneficial owners, and its
creators do not have to pay taxes on the assets held by the entity, so long as
it does not have any operations in the tax haven. It emphasized
that, by allowing the creation of such entities within their jurisdiction,
tax havens effectively legislate on the activities of corporations that are not
located within their jurisdiction, thereby neutralizing the legislation of the
countries in which these corporations operate.
As well, Réseau pour la justice fiscal Québec suggested that the federal government
should consider diplomatic means by which to address the use of tax havens. For
example, it said that
the government – either through its embassies or through the Minister of
Foreign Affairs – could signal to tax havens that, to the extent that their
legislation applies to the activities of corporations that are not located within their jurisdiction, they are exceeding their
In speaking to the Committee about factors that may affect tax compliance,
the CRA stated that changing societal norms are enhancing compliance because businesses
and individuals are increasingly concerned about the reputational impact of
being involved in a tax dispute. KPMG commented that cultural differences may explain varying levels of compliance
across countries, noting that some countries – such as Greece – have a large underground
Professional Accountants of Canada and Mr.
Lareau identified the income tax system’s complexity as a key issue in
relation to tax avoidance and evasion. According to Mr.
Lareau, Canada’s tax legislation has become more complex over time in order
to address increasingly complicated tax planning strategies created by tax
advisors. The Chartered
Professional Accountants of Canada called for a comprehensive review of
Canada’s income tax system with a view to reducing its complexity, and making
it more competitive, efficient, effective and fair. It noted that there has not been a full review of the income tax system since the
1966 Royal Commission on Taxation.
KPMG highlighted the importance of ensuring that taxpayers have trust in the tax
system, and mentioned studies suggesting that individuals are more likely to
with their tax obligations if they perceive that their neighbours are doing so. It also
noted that there is a perception among Canadians that the international tax rules
are unfair, due partly to their complexity and lack of transparency. According
national tax systems do not reflect the global nature of business, with the
result that many international tax rules are broken; it supported changes to those rules in order to instil trust in the tax system.
The CRA observed that, while Canadian taxpayers generally comply with their tax
obligations, offshore tax evasion and aggressive tax planning remain a
challenge. It indicated
that growth in the level of international trade and foreign investment flows
have led to increasingly complex multinational corporate structures, and more
frequent use of certain offshore jurisdictions and profit-shifting schemes.
In speaking to the Committee, the Minister
of National Revenue said that the CRA’s position regarding tax avoidance
and evasion schemes is that all participants in such schemes must be identified
and brought into compliance with their tax obligations. She added
that the CRA also takes action against tax advisors who create opportunities
for clients to participate in, or assist them in participating in, such
Cockfield expressed the view that, in order to create precedents for future
cases, the CRA should increase its efforts regarding the prosecution of tax
advisors who create aggressive tax planning schemes. He added that the ITA contains penalties that can be applied on tax advisors who
engage in reckless, negligent or willfully blind behaviour, and suggested that
the CRA should seek to impose these penalties more frequently. Similarly, Canadians
for Tax Fairness said that the federal government should be more aggressive
in pursuing individuals and corporations – including financial institutions,
wealth management firms, law firms and accounting firms – that facilitate the
use of tax havens by taxpayers. As well, it supported additional regulations for these types of organizations as an
effective way to address the use of tax havens.
According to Mr.
Lareau, given the complexity of Canadian tax laws, the only effective tool
in addressing offshore tax evasion is stronger penalties for tax advisors who
create sophisticated offshore tax evasion schemes; he said that, in such cases,
serious consideration should be given to jail terms. KPMG mentioned that, in a number of countries, tax advisors who develop tax evasion
schemes may face criminal liability. It supported
penalizing those who engage in these activities. Mr.
Lareau stated that, in addition to tax advisors who create such schemes,
those who are in charge of firms within which tax evasion is committed should
The CRA stated that tax avoidance and aggressive tax planning involve taxpayers receiving
a tax benefit that is contrary to the object or the spirit of the ITA, and said
that it may reassess taxpayers when these situations are found to exist. Mr.
Lareau observed that, in cases of tax avoidance, the burden of proof rests
with the CRA, which has to demonstrate that abusive tax planning has occurred;
he added that establishing that this situation has occurred can be difficult.
According to the Canadians
for Tax Fairness, the federal government should introduce legislation
similar to Bill C-621, An Act to amend the Income Tax Act (economic substance),
which was introduced in the 2nd session of the 41st Parliament
and died on the Order Paper when the October 2015 general federal
election was called. Bill C-621 would have required the Minister of National
Revenue or the court to consider the economic substance of a transaction in determining
whether it is a tax avoidance measure.
In her appearance before the Committee, the Minister of National Revenue stated that
the CRA conducts more than 120,000 audits each year, resulting in more than $11 billion
being collected in taxes, penalties and interest. She pointed out that at least
two thirds of this amount involves cases of aggressive tax planning by large
and multinational corporations, and by high net worth individuals.
According to the CRA,
tax evasion is a criminal offence that involves a taxpayer making false or
deceptive statements; such cases are taken to the PPSC, which then decides
whether to proceed with prosecution. It noted that, to be successful, the Crown must prove beyond a reasonable doubt
that the taxpayer committed tax evasion. In commenting on the
investigation of tax evasion cases, Mr.
Cockfield said that the Royal Canadian Mounted Police has virtually no
resources to investigate white-collar crime; as a result, it cannot assist the
CRA with these cases.
The CRA indicated that approximately 200 cases are referred to the PPSC annually.
According to it,
three to five years may elapse between the referral of a case to its CIP and the
case being brought before a judge. The CRA also noted that, over the 2012–2015 period, 30 cases of tax evasion resulted in
Cockfield expressed concern about a lack of coordination between the CRA,
which investigates potential tax evasion cases, and the Department of Justice,
which is responsible for prosecuting those cases. He provided the example of a 2007 leak involving a Liechtenstein bank that
revealed that more than 100 Canadian taxpayers had undisclosed offshore
accounts in that country, and explained that – following a CRA audit of these
taxpayers – only two were referred to the Department of Justice for
prosecution; in the end, no one was prosecuted. Mr.
Cockfield added that embedding tax lawyers within the CRA would help to
address the lack of coordination between the CRA and the Department of Justice.
In discussing the importance of treating all taxpayers fairly, the CRA highlighted
the recourse available to taxpayers who disagree with a decision it makes. It stated that
a taxpayer who disagrees with an assessment may file an appeal and have his/her
case reviewed at no cost; according to it,
more than 90,000 appeals are resolved per year. The CRA also said that about 5,000 cases per year are litigated, with about 2,200 cases
being heard in court and 3,000 involving negotiated settlement agreements.
The CRA outlined that, in deciding between negotiated settlement agreements and
litigation, it reviews the facts of each case and consults the Department of
Justice; together, they examine the risks, issues and legal precedents in order
to develop a draft position about whether to pursue litigation or settlement. It indicated that this position is then taken to the Director of the CRA’s
Offshore Compliance Section; in turn, the CRA’s Assistant Commissioner decides
whether the matter will be pursued in court or a negotiated settlement
agreement will be proposed.
The CRA said that it considers both the public interest and the Crown’s interests in
deciding between negotiated settlement agreements and litigation. It highlighted that litigating a tax matter is a lengthy
process, with significant legal costs and an uncertain outcome; when pursuing
litigation, the CRA cannot assume that the Crown will win.
pour la justice fiscale Québec stated the CRA sends an inappropriate signal
when it negotiates reduced penalties for tax evaders, particularly when it
justifies this practice by saying that doing so is less costly than pursuing
litigation. It added that negotiated settlement agreements prevent legal precedents from being
established and give rise to a legal regime wherein the application of the law
can be bargained. According to it,
the federal government should not undertake a cost/benefit analysis in
determining whether the law should be applied.
Cockfield told the Committee that the use of negotiated settlement
agreements is a common practice in criminal tax matters, and believed that such
agreements are used consistently in Canadian criminal matters. He suggested that the leniency offered in these agreements should be examined
separately from the use of settlement agreements as a tool.
According to KPMG,
tax disputes are rarely litigated in Canada; rather, taxpayers often prefer a negotiated
settlement agreement because of the uncertainty and legal costs involved with
litigation. It also mentioned that, given that the court system is limited in the number of
cases that can be heard, the CRA and taxpayers are encouraged to negotiate a
settlement to avoid long delays.
In addition, the CRA indicated that – under specific circumstances – taxpayer relief is provided to
approximately 400,000 individuals each year; the relief may involve the waiving
of interest and/or penalties. Mr.
Lareau spoke about streamlined procedures in the United States; in
particular, in situations where a taxpayer's failure to report foreign
financial assets is due to an honest mistake and the sums involved are small,
penalties are limited to 5% of unreported assets for U.S. residents and 0% for
for Tax Fairness advocated for an independent study of tax avoidance or
evasion investigations initiated by the CRA; the study would identify the
number of investigations that led to convictions or settlements, as well as the
associated penalties and interest rates.
The CRA told the Committee that it has 92 tax treaties and 22 TIEAs in place that allow
the sharing of information among tax authorities, and that help it to identify
and address tax non-compliance. The Minister
of National Revenue mentioned that the CRA ratified the Convention on
Mutual Administrative Assistance in Tax Matters in 2013, which has expanded
the information-sharing network.
pour la justice fiscale Québec stated that, in order to address offshore
tax avoidance, the federal government should reconsider the treaties that
Canada has entered into with a number of tax havens, such as Barbados. It said that the Canada–Barbados Income Tax Agreement, and some other tax
treaties, facilitate tax avoidance by essentially making it legal to engage in
such behaviour. Moreover, it emphasized that Barbados is second to the United States as a destination for
Canadian foreign investment, and suggested that these investments occur
primarily in order to avoid taxation. KPMG mentioned that federal policy allows these corporations – under certain
conditions – to use such jurisdictions as Barbados to finance their
pour la justice fiscale Québec indicated that the federal government should
re-examine subsection 5907(11) of the Income Tax Regulations; according
to it, this subsection allows Canadian corporations to transfer assets to a tax
haven and repatriate these assets tax-free if that jurisdiction has a TIEA with
international efforts to combat tax avoidance and evasion, the CRA stated that it is involved with the OECD's BEPS project. The Minister
of National Revenue said that Canada, along with 30 tax treaty partners, have signed a Multilateral Competent
Authority Agreement in order to implement country-by-country reporting for
large multinational corporations, which is a BEPS recommendation. She explained that these new requirements are
designed to ensure that these corporations pay taxes in the countries in which
they operate, and that corporations will be required to provide
more information to tax authorities regarding their operations. In addition, KPMG stated that the CRA will begin sharing advance income tax rulings with other
jurisdictions, where appropriate, in accordance with a BEPS recommendation. It also mentioned its strong support for the BEPS project.
pour la justice fiscale Québec characterized the BEPS measures as
encouraging but unsatisfactory because they do not address key tax avoidance
mechanisms, such as patent boxes, or other important issues, such as electronic
commerce. It explained that patent boxes allow multinational corporations to transfer
ownership of intellectual property, such as patents, to affiliates located in
tax havens; these affiliates then charge an overvalued amount to the
corporation’s other entities for the use of that intellectual property in order
to maximize the transfer of the corporation’s assets to the affiliate located
in the tax haven. It added that patent boxes are the most common transfer pricing mechanism that is
used to avoid paying taxes.
As well, the CRA indicated that it is working on implementation of the OECD's common reporting
standard, which will allow financial account information to be exchanged
automatically among jurisdictions; the target date for implementation is 2018. Mr.
Cockfield characterized the implementation of this standard as the most
important international tax evasion-related initiative in which Canada is
pour la justice fiscale Québec said that, by addressing the secrecy
associated with certain tax havens, the automatic exchange of information among
countries would allow a number of individual tax evaders to be identified;
however, it would not help to address tax avoidance by multinational
corporations because it is much more difficult to demonstrate that their
affairs are organized in an illegal manner. In addition,
it noted that such information exchanges may not help in identifying tax evaders
in jurisdictions that do not require securities registers to be maintained, such
as Hong Kong and the British Virgin Islands.
In speaking to the Committee about its involvement in various
international tax-related fora, the CRA mentioned its participation in the OECD’s Forum on Tax Administration,
including the OECD’s Joint International Taskforce on Shared Intelligence and
Collaboration (JITSIC); the JITSIC brings together tax administrators from
various jurisdictions to develop measures designed to address tax avoidance and
aggressive tax planning. It explained that, at a recent JITSIC meeting, it worked with participants to
coordinate efforts in relation to the release of the “Panama papers.”
In addition, the CRA said that it is a member of the Global Forum on Transparency and Exchange of
Information for Tax Purposes, which works toward the implementation
of internationally agreed standards on tax transparency. It added that – to date – 101 countries have committed to the Forum’s
standards, and that participating countries engage in a peer review process in
relation to their taxpayer information protection measures; under this process,
the CRA collaborates with the Department of Finance and information technology
experts to assess potential risks when the CRA shares information about
Canadian taxpayers with tax authorities in another country.
Regarding Canada’s involvement with the OECD, Réseau
pour la justice fiscale Québec commented that Canada is not particularly
combative and does not have a good reputation regarding its efforts to combat
tax avoidance and evasion. It explained that, while Canada participates in various OECD initiatives designed
to address tax avoidance and evasion, it also represents 12 tax havens –
including the Bahamas, Saint Vincent
and the Grenadines, Saint Kitts and Nevis – at the World Bank and the
International Monetary Fund. Furthermore, Réseau
pour la justice fiscale Québec stated that some countries – such as France
and the United States – are more advanced than is Canada in their efforts to
combat offshore tax avoidance and evasion, noting that some U.S. multinational
corporations have transferred their head office from that country to Canada
solely for tax reasons. It added that, in order to control and monitor their activities better, France has
implemented measures to require its banks to disclose information on their
assets and affiliates in other countries; these countries include tax havens.
According to it,
Canada should be more involved in international efforts to address offshore tax
avoidance and evasion.
In explaining its post-employment policy to the Committee, the CRA said that a departing employee cannot accept a position at, represent or be appointed
to the board of directors of a particular company if he/she has dealt with that
company in the one-year period prior to his/her departure. It indicated that the departing employee’s position, and the files on which he/she
worked in the preceding year, are considered before a decision is made about
whether he/she will be allowed to accept employment with the company in
question. The CRA stated that section 241 of the ITA can be used to impose criminal sanctions on
current or former CRA employees who divulge information pertaining to a
taxpayer, or to a file on which they had worked during their employment with
Regarding the means by which the CRA monitors former employees who
are employed elsewhere, the CRA explained that its post-employment policy requires a departing employee to sign
– and transmit to his/her new employer – a letter that details the obligations
imposed on former CRA employees. According to the CRA,
if a former employee breaches these obligations, legal proceedings can be
initiated. KPMG stated that it asks all new employees to disclose any legal obligations that
they have in relation to their former employer, and communicates the firm’s
expectation that they will comply with these obligations. It also said that, each year, employees are required to certify that they have
complied with their obligations.
The CRA noted that most of its departing employees retire, and that only a very small
number become employed by the four largest international accounting firms. KPMG commented
that about seven or eight of its 1,400 tax professionals were previously
employed by the CRA or the Department of Justice. It added that a similar number have left KPMG for employment with the CRA or the
Department of Justice.
In mentioning relations with stakeholders, the Minister
of National Revenue told
the Committee that the CRA has a responsibility to listen to those affected by
its policies and programs, which includes individual and corporate taxpayers,
as well as tax advisors. The CRA indicated that more than 70% of its interactions with Canadians, whether
individuals or corporations, occur through a tax intermediary. It noted, in all of their dealings with stakeholders, CRA employees are bound by
their obligations under section 241 of the ITA. According to KPMG,
open and transparent dialogue among taxpayers, tax advisors and tax authorities
contributes to the proper functioning of Canada’s tax system.
As well, the Minister
of National Revenue stated that CRA officials meet with stakeholders in an
effort to help them understand – and comply with – Canada’s tax system, rather
than to discuss specific files, while the CRA said that meetings with stakeholders – including those that occur at conferences
– allow issues related to tax administration and unacceptable tax planning
practices to be discussed. KPMG agreed that conferences provide tax advisors with a good opportunity to learn
about practices that may be of concern to the CRA. According to it,
CRA employees should be allowed to continue attending such conferences.
Moreover, the Minister
of National Revenue said that CRA employees avoid situations that could
lead to a real or perceived conflict of interest or preferential treatment. KPMG commented that CRA employees must respect very stringent rules in relation to
gifts and hospitality. It explained that firms often sponsor portions of conferences, such as coffee
breaks, and that these are the sole sponsored event that CRA employees are
permitted to attend. Canadians
for Tax Fairness supported an investigation, by the Conflict of Interest
and Ethics Commissioner, of what it described as the highly unusual hospitality
practices of the CRA’s senior executives.
The CRA indicated that its executives are accessible to Canadians, including to
advocacy organizations, boards of trade, and accounting and bookkeeping firms;
accessibility is not limited to large firms.
In its appearance before the Committee, Canadians
for Tax Fairness spoke about one of its studies that was based on
interviews with about 20 current and former CRA auditors; according to it, some
of them felt that, because of political interference, the CRA had failed to
follow through on a number of tax avoidance or evasion investigations involving
“well-connected” companies or individuals. It said that CRA employees should be encouraged to share their concerns with the Public
Service Integrity Commissioner. As well, Canadians
for Tax Fairness supported a review of the Public Servants Disclosure
Protection Act with a view to providing greater protection to
whistleblowers. According to it, the Act should be expanded to apply to the
private sector. Réseau
pour la justice fiscale Québec indicated that political interference with
public agencies is possible.
In discussing regulation of the accounting profession, which occurs
through provincial legislation, the Chartered
Professional Accountants of Canada stated that provincial regulators have codes
of professional conduct for the accounting profession that are harmonized, and that
meet or exceed the standards developed by the International Ethics Standards
Board for Accountants. It said that these codes contain a disciplinary process to be used in cases of
illegal practices, and that provincial regulators may impose sanctions and monetary
fines or expel – from the profession – accountants who violate relevant codes. Canadians
for Tax Fairness indicated that it reviewed all the disciplinary cases for
the accounting profession that have involved unlawful conduct or behavior that
could have affected the reputation of the profession since 1987; it pointed out
that there were no cases involving offshore tax evasion.
KPMG commented on its Global Code of Conduct, which outlines the standards of
ethical conduct applicable to its employees. It said that, among other things, the Code requires KPMG employees to act lawfully
and with integrity, and to develop a relationship with tax authorities that is
based on mutual trust and respect. In addition, it stated that its employees are required to attend a training course on ethics
and integrity every two years.
In addition to speaking to the Committee about tax avoidance and
evasion, CRA measures to enhance tax compliance and address non-compliance,
enforcement and prosecution of tax offences, international tax compliance
efforts and a variety of measures to which CRA employees and tax professionals
are subject, witnesses also focused on offshore corporate tax structures. Their
comments were both general and specific to the offshore corporate structure
developed by KPMG and located on the Isle of Man. The background
information on tax planning structures and on certain actions specific to the
CRA and KPMG’s offshore corporate structure on the Isle of Man provide context
for the comments made by the Committee’s witnesses.
Canada’s tax law contains a number of provisions that allow
taxpayers to minimize their taxes owing. One example of a tax planning
structure that can help taxpayers do so is a trust. With a trust, an individual
– known as the “settlor” – transfers legal ownership of his/her assets to a
trustee, who holds those assets for the benefit of the person(s) named by the
settlor. Because the settlor is no longer the legal owner of the assets, he/she
has no tax obligations in relation to them. That said, under Canadian law, a
trust that is located in Canada must report – and pay taxes owing on – both
domestic and foreign income.
Non-resident trusts operated as a tax planning structure to
minimize personal taxes owing until the ITA was amended in June 2013; the
changes applied retroactively to 2007. Non-resident trusts operated in a manner
that allowed a taxpayer to transfer funds into a trust located outside of
Canada and give up his/her legal ownership of the funds; the trust was subject
to taxation in the jurisdiction in which it was located, and both the taxpayer
and the trust avoided Canadian taxation. Under Canadian law, the distribution
of capital from a non-resident trust to its beneficiaries also occurred
Individual Canadian residents must report and pay tax on all
income, whether domestic or foreign, while multinational corporations are
required to report and pay tax only on profits that are attributable to their
domestic business activities. While this difference between the collection of
individual and corporate taxes allows Canada to remain competitive in
attracting and promoting international business, it is also the foundation for
offshore corporate structures – or plans that involve the use of corporations
in foreign jurisdictions – to minimize or evade taxes owing.
According to public court records, on 12 June 2012, the CRA issued
notice of assessments to members of a family residing in Victoria, British
Columbia regarding unreported financial assets held within a corporation
located on the Isle of Man. The CRA contends that this family transferred more
than $25 million to this corporation without these assets being properly
reported to the CRA; as a result, approximately $4 million was generated on a
Documents filed with the Tax Court of Canada by the CRA argue that the
transfer of these funds was meant to deceive the CRA, and that the Isle of Man
offshore corporate structure – which had been developed by KPMG – existed as a
“sham” created for this purpose.
The offshore corporate structure developed by KPMG and located on
the Isle of Man allows KPMG clients to gift sums of money to an offshore
corporation that would hold or invest that money for an indeterminate period of
time. According to KPMG, the structure was designed for the purposes of estate
planning, asset protection or philanthropic use; KPMG indicated that a tax
benefit would also be present. KPMG believed that the structure operated as
follows: KPMG clients would not own shares in the offshore corporation, and would
not have legal ownership of the money gifted to the corporation; therefore, these
clients would not be taxed on any interest or income resulting from the
offshore corporation’s investment activities. KPMG felt that this interest or
income would fall under the Isle of Man’s taxation system, which has a
corporate tax rate of 0%. The offshore corporation could then gift the money to
the KPMG clients and their families. Because gifts are generally not subject to
taxation under Canadian tax law, KPMG believed that these clients and their
families would receive the gifted money on a tax-free basis.
On 12 February 2013, the Minister of National Revenue applied for a
court order requiring KPMG to provide the CRA with the names of its clients who
took part in the Isle of Man offshore corporate structure. The court order,
which was awarded on 18 February 2013, was immediately challenged by KPMG and
The Canadian Broadcasting Corporation released a story on 8 March 2016 alleging that the CRA had confidentially offered what it
characterized as an amnesty agreement to KPMG clients involved in the Isle of
Man offshore corporate structure. The story contained an unverified copy of
this agreement, which – if accepted – would relieve these KPMG clients from
penalties or fines if they paid outstanding taxes and interest owing.
In a 9 March 2016 statement, the CRA
acknowledged that it had discovered a “KPMG offshore tax avoidance scheme,” and
that 15 KPMG clients whose identities were being sought through the court order
had identified themselves. It also explained that – on a case-by-case basis –
the CRA will use negotiated settlement agreements with confidentiality clauses.
During the Committee’s study, witnesses discussed the operation of non-resident
trusts and offshore corporate structures, the development and implementation of
tax planning products and services viewed through three lenses, confidentiality
and the accounting profession, the use of negotiated settlement agreements by
the CRA, and the CRA’s specific interactions with KPMG in relation to the Isle
of Man offshore corporate structure.
In his appearance before the Committee, Mr.
Lareau characterized any tax structure that facilitates the transfer of
funds to offshore corporations, only to have the funds transferred back to
Canada, as a structure that facilitates tax evasion because the true objective
of such transfers is to circumvent Canadian tax law. He argued that, under Canadian tax law, gifts must be made by an individual with
no expectation of receiving compensation in return; the transfer of funds to
offshore corporate structures do not constitute a gift because there is an
expectation of future repayment. Mr.
Lareau also highlighted that there is a range of ways in which to conceal
funds in Canadian corporate structures, and said that the CRA ought to be
concerned about them.
KPMG noted that it developed the offshore corporate structure on the Isle of Man and
implemented it 16 times for a total of 27 individuals. Furthermore, it said that – except for a single implementation in 2007 – it did not implement
this offshore corporate structure after 2003. KPMG mentioned that the average fee charged for each implementation of its Isle of
Man offshore corporate structure was a fixed sum of approximately $100,000,
resulting in total revenue of approximately $1.6 million.
KPMG explained to the Committee that its current practices require any tax planning
product or service that it develops to be scrutinized through three different
lenses: legality; possible interactions with GAAR; and impacts on the firm’s
reputation. It commented
that the way in which it considers these lenses has evolved over time,
suggesting that any review of its past actions must be mindful of the period
during which those actions were taken. KPMG stated that it currently does not provide Canadian individuals or businesses
with tax-sheltering advice. It also noted that it conducts background checks on clients to assess their
reputation and financial means, among other things; it does not serve clients
who engage in tax evasion.
Regarding the lens of legality, KPMG said that – prior to the introduction of the GAAR in 1988 – the primary consideration
in the development of any tax planning product or service was whether it was “legally
effective.” According to it, this first lens examines whether a proposed tax
planning product or service will accomplish its objectives while being
consistent with the strict wording of the law.
KPMG stated that, when the Isle of Man offshore corporate structure was developed,
the structure complied fully with applicable tax law. It outlined that the structure underwent a detailed technical review by two KPMG
partners, a KPMG general anti-avoidance committee, and an independent legal
firm in both Canada and the Isle of Man; the structure was then approved by the
managing partner of KPMG’s national tax practice prior to implementation.
Moreover, KPMG explained that its Isle of Man offshore corporate structure was developed and
first implemented in 1999, when tax planning was significantly different than
it is today. It indicated that, during this period, non-resident trusts were permitted under
Canadian law; the legislation that effectively eliminated them as tax planning
vehicles was not passed for another 14 years, which was applied retroactively
to January 2007. KPMG suggested that, at one point, the federal government encouraged non-resident
trusts as a method to attract affluent non-residents to
immigrate to Canada by allowing them to keep some of their funds in
jurisdictions with lower levels of taxation.
According to KPMG,
when the GAAR was introduced in 1988, the behaviour of accounting firms changed
dramatically. It commented
that, thereafter, accounting firms needed to examine their tax
planning products and services through a second lens to ascertain their
consistency with the spirit of the ITA, or produced a tax benefit other than
what was intended by Parliament.
Regarding the tax planning products and services that it develops, KPMG stated that a third lens – the impact of a product or service on the firm’s
reputation – has been developing over the last 12 to 13 years. In particular, KPMG now questions whether it would support one of its tax planning products or
services if the product or service were to be placed under public scrutiny;
when viewed through this lens, a tax product or service that is both legal and
compliant with the GAAR may still not be implemented by KPMG. It emphasized
that, by 2006, independent partner committees reviewed any significant tax
planning product or service developed by KPMG in order to assess the risks to
the firm’s reputation, and to ensure that the tax planning product or service
was consistent with the accounting sector’s professional standards.
In assessing its Isle of Man offshore corporate structure through
the reputational lens, KPMG stated that the existence and legality of non-resident trusts at the time of
the structure’s implementation – as well as general accounting practices of the
day – supported the structure’s use. Moreover, it explained that an assessment through the reputational lens was an important
factor in deciding to stop implementing the structure.
The CRA told the Committee that it is seeking the list of clients involved in KPMG’s
Isle of Man offshore corporate structure because it wants to ensure that each
participant meets his/her tax obligations and/or faces the legal consequences
for failure to do so.
KPMG explained that it had challenged the Federal Court’s order to disclose the
names of its clients involved in the Isle of Man offshore corporate structure
because client confidentiality is a KPMG practice and a cornerstone of the
accounting profession. It stated that it has both a legal and a professional obligation to keep client
information confidential, and that the accounting profession depends on
confidentiality. KPMG stressed that it opposed the court order on principle for two reasons: the
precedent it would set for future client confidentiality issues; and the impact
that the precedent would have on the accounting profession as a whole.
Professional Accountants of Canada remarked that, in order to maintain an effective
self-assessment tax system, it is important to balance the CRA's need for
objective information with the taxpayer's desire for confidential advice. It suggested
that confidential tax advice is beneficial to the Canadian tax system; such an
approach facilitates frank and transparent dialogue between tax advisors and
their clients, which enables clients to disclose their complete tax history and
thereby be appropriately counselled.
In mentioning the ITA, Mr.
Lareau indicated that – unlike the relationship that exists between lawyers
and notaries and their clients –, discussions between accountants and their
clients are not privileged. Mr.
Cockfield added that the issue of privilege becomes complicated in
accounting firms that have affiliated law firms; an accountant’s opinions may
be based on the advice provided by one of the firm’s lawyer, and the privilege
granted to the lawyer may carry over to the accountant when he/she transmits
that advice to clients.
Some of the Committee’s witnesses identified their inability to
discuss specific matters regarding KPMG’s Isle of Man offshore corporate
structure, any negotiated settlement agreement, information or documents posted
in media outlets, or matters concerning KPMG and the CRA that are currently
before the courts.
KPMG stated that settlement privilege – the
confidentiality granted in law to all matters that are part of the terms of
settling a case before the courts – prevents it from publicly discussing any
negotiated settlement agreement between it and the CRA regarding the Isle of
Man offshore corporate structure, any restitution that it may or may not have
paid as a result of any settlement with the CRA, and the names of any CRA
employees with whom it dealt during the CRA’s investigation of the Isle of Man
offshore corporate structure.
Regarding the unconfirmed negotiated settlement agreements with
participants in KPMG’s Isle of Man offshore corporate structure posted by the
media, the Department
of Justice noted that section 241 of the
ITA prohibits CRA employees from disclosing taxpayer information, and that the
details of any negotiated settlement agreements entered into with the CRA would
qualify as taxpayer information.
In speaking about negotiated settlement agreements generally, the CRA explained that these agreements tend to require the payment of all outstanding
taxes within 60 days, and therefore guarantee that these amounts are recovered.
The CRA emphasized that it has an obligation to maximize value for taxpayers, which
involves weighing the strength of its legal position and evidence against the
uncertain and costly nature of litigation. The CRA stressed that it will sometimes pursue litigation on principle, and risk the
possibility of not recovering any taxes owing.
While the CRA could not confirm to the Committee that the negotiated settlement agreement
posted by the media in relation to KPMG’s Isle of Man offshore corporate
structure is authentic, it commented on the agreement’s characteristics and the
CRA’s usual practices. The CRA noted that the agreement posted by the media would allow for the collection of
outstanding taxes dating back 15 to 16 years, which is exceptional. It stated that a traditional compliance review of businesses and
high net worth individuals generally examines between two and four previous tax
years and that, in cases of aggressive tax planning, the CRA usually undertakes
a six-year review. The CRA explained that it can justify the examination of 16 tax years in exceptional
cases only, and that penalties – such as the “gross negligence penalty” –
are pursued in less than 1% of all cases.
The CRA mentioned that, when compared to a traditional six-year audit of cases
involving aggressive tax planning, the recovery of taxes owing that date back
15 to 16 years would likely double the amount that the CRA would receive.
Furthermore, it underlined
that the alleged negotiated settlement agreement
between KPMG clients and the CRA that was posted by the media indicates that no immunity from criminal prosecution would be granted
to any party that consented to the agreement’s terms. As well, the CRA highlighted that a taxpayer signing such an agreement would have waived his/her
right to appeal or to object to the CRA’s assessment of their outstanding taxes.
Concerning the number of alleged negotiated settlement agreements
concluded with those using KPMG’s Isle of Man offshore corporate structure, the CRA explained that it could not confirm that any agreements had been concluded, but
noted that the CRA had been seeking the names of 21 KPMG clients in its action
before the court, and is now seeking the names of only six clients.
In relation to cases involving Isle of Man offshore corporate tax
planning structures, Mr.
Lareau called on the Minister of National Revenue to refuse negotiated
settlement agreements, and said that these cases should instead be pursued in
The CRA provided the Committee with an independent review of its management of the
discovery and handling of KPMG’s Isle of Man offshore corporate structure.
According to it,
this review – which was conducted by a former dean of Dalhousie University’s
Schulich School of Law – found that the CRA had acted appropriately.
Regarding its Isle of Man offshore corporate structure, KPMG stated that no CRA employees were involved in the development of the structure,
and that it did not seek an advance income tax ruling to ascertain the
structure’s level of compliance with applicable tax legislation.
of National Revenue commented that the CRA does not – and will
not – offer amnesty to any taxpayer; the negotiated settlement agreements it
offers carry an appropriately punitive element in the repayment of taxes owing.
The CRA believed that negotiated settlement agreements are an appropriate tool to be
used in meeting its obligations to the Crown and to Canadian citizens. It added that, where appropriate, the CRA remains willing to settle any
tax-related cases that are currently before the courts.
Finally, according to the Minister
of National Revenue, the CRA is actively targeting taxpayers who hide
income or assets offshore, or evade the taxes that they owe.
The Committee recommends that:
The Minister of National Revenue conduct a comprehensive review of
the advance tax ruling process. As part of that review, the Minister should
identify ways in which efficiency and timeliness could be improved, costs could
be reduced and effectiveness could be increased. This review should be
completed by 31 March 2017.
The Minister of National Revenue require tax advisors operating in
Canada to register all of their tax products with the Canada Revenue Agency.
The Canada Revenue Agency conduct a comprehensive review of its
Voluntary Disclosures Program. As well, it should review the guidelines that
are used to determine whether to pursue litigation or to seek a settlement with
individuals or organizations that have engaged in tax avoidance or tax evasion.
These reviews should be completed by 31 March 2017.
The Minister of National Revenue strengthen protections for
individuals under the Informant Leads Program and the Offshore Tax Informant
Program. As well, the Minister should ensure that these programs are properly
incentivized and that all credible information that is obtained through them is
The Minister of National Revenue report to the House of Commons
Standing Committee on Finance regarding the progress of audits in relation to
the “Panama papers.” The report should be made before
1 June 2017.
The Canada Revenue Agency enhance its technical, human resource and
other capabilities in respect of – and knowledge about – domestic and
international aggressive tax planning.
The Minister of National Revenue ensure that the Canada Revenue
Agency calculate Canada’s federal tax gap on an ongoing basis.
As well, the Agency should make information about the size of that gap, and the
methodology used to calculate it, publicly available.
The federal government, in an effort to reduce complexity and any
inequities that distort behaviour and can lead to tax avoidance or tax evasion,
accelerate its review of the Income Tax Act and expeditiously implement
initiatives aimed at simplifying the income tax system. This review should be
completed by 30 June 2017. The House of Commons Standing Committee on Finance
should study those initiatives and any resulting proposed legislative
amendments as part of its planned review of the Act.
The federal government take steps to improve coordination between
the Canada Revenue Agency, which investigates situations of possible tax
evasion, and the Department of Justice, which prosecutes cases of tax evasion.
The Minister of National Revenue, by 31 August 2017, establish a
regular reporting program for the Canada Revenue Agency that would facilitate
the public availability of statistical information about enforcement efforts in
relation to tax evasion and tax avoidance schemes. The reporting program should
identify the number of investigations leading to convictions or settlements,
and associated penalties and interest rates, as well as enforcement efforts in
relation to high-risk individuals and corporations.
The federal government review the 92 tax treaties and 22 tax
information exchange agreements to which Canada is a party in order to ensure
that they do not facilitate non-compliance with tax laws, particularly with
respect to the secrecy associated with certain jurisdictions and their banking
practices. This review should be completed by 31 August 2017.
The Minister of National Revenue address offshore non-compliance
with tax laws through greater collaboration with other jurisdictions, including
through enhanced joint audits with tax treaty partners.
The Canada Revenue Agency take a lead role in ensuring global
implementation of the recommendations by the Organisation for Economic Co-operation
and Development and the Group of Twenty in relation to their Base Erosion and
Profit Shifting Project.
The Minister of National Revenue conduct a broad-based review of
the Canada Revenue Agency’s code of conduct for current employees and employees
who are leaving the Agency. This review should be completed by 31 March 2017.