How the CRA crackdown on tax dodgers stacks up
Plan details how Ottawa will spend the previously announced $88.8M per year for the next five years in an effort to recuperate more than $2.6B in taxes.
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On Monday, Revenue Minister Diane Lebouthillier will announce specific ways the government will crack down on tax avoidance — schemes that arguably respect the letter of the law, but violate its spirit. The plan details how the government will spend the previously announced $88.8 million per year for the next five years in an effort to recuperate more than $2.6 billion in taxes that would have otherwise gone uncollected.
Many of the measures respond to long-standing critiques of Canada’s tax enforcement as lackadaisical, according to tax evasion experts interviewed by Torstar News Service over the last several months.
1. Jurisdiction-by-jurisdiction investigations
Tax analysts will start by looking at the Isle of Man, which was where $130 million was stashed by high-net worth individuals in a tax avoidance scheme designed by the accounting firm KPMG, according to a CBC investigation reported last year. From there, CRA investigators will turn to other “secrecy jurisdictions” that attract tax avoidance.
This is a good approach because each tax haven has a different specialty. However, the CRA will likely have to combine its investigations to catch the biggest tax avoiders, according to James Henry, an economist at Yale and Columbia Universities who specializes in tax havens.
“You can’t single out a specific territory, the most sophisticated schemes are all cross-border,” said Henry, who spoke to Torstar about approaches to combating tax havens in general and wasn’t privy to the specific CRA proposals.
2. Going after the enablers
The CRA will create a special branch dedicated to looking into the organizations that create and promote tax avoidance schemes. This initiative will probably attract accolades from tax evasion analysts as it goes after the professionals who convince their clients that there’s nothing wrong with exploiting legal grey areas to avoid paying tax.
“Much of this happens because lawyers and accountants and bankers collude with their clients,” said John Christensen, Executive Director of the Tax Justice Network of financial researchers.
“I would love to see a few big law firms, accountancy firms and banks in the headlights, forced to justify their actions, which are so clearly against public interest,” he said.
The CRA will soon embed tax lawyers in their investigative teams to expedite criminal cases against tax evaders — something Canada has been criticized for in the past.
While countries like France and Australia have aggressively pursued their citizens named in previous leaks of tax haven data, Canada has not. The CRA even offered amnesty to 26 people who paid at least $5 million each to participate in the KPMG tax avoidance scheme based in the Isle of Man.
In the 2014-2015 fiscal year, the CRA convicted 95 people for tax evasion or fraud, but only nine of those had any links to offshore tax havens, according to statistics provided by the agency.
“In Canada, your chance of getting caught are nil to none,” said Senator Percy Downe. “And if you do get caught, there’s no fine or penalty.”
4. Bolstering International Cooperation
Lebouthillier will announce that Canada will bolster its co-operation with other countries to fight tax evasion, and will likely cite the OECD’s “common reporting standards,” a system that would allow all countries to automatically share information on financial transactions and make it easier to catch tax cheats.
This is a big step forward from Canada’s international efforts over the last decade, which primarily consisted of a flurry of tax treaties — some of which were signed with known tax havens like Cyprus, the British Virgin Islands and Luxembourg.
“The only thing Canada has done is sign Tax Information Exchange Agreements (TIAs), which were designed by the OECD to end bank secrecy, but which have had the opposite effect,” said David Kerzner, a tax lawyer and author of several books on global tax governance. “TIAs help tax cheats hide their foreign accounts.”
5. Calculate the tax gap
As promised in their campaign platform, the Liberals will be moving forward to calculate the tax gap — the difference between the taxes Canada should collect on paper and the money that actually comes in.
Despite the fact that 19 OECD countries calculate their tax gap, under the Conservatives, the CRA refused to, saying there was no internationally accepted methodology and any estimate would be based on too many assumptions to be useful.
“We don’t even know the size of the problem,” said Downe. “The new government is very interested in science-based decision making. The tax gap is a very good example of that.”
KPMG has declined to comment on the allegations.