How the CRA has abdicated its duty to catch tax cheats
THE CANADIAN PRESS/Sean Kilpatrick
Written by: Aidan Jonah
This piece was originally published on Medium, on Aug. 30, 2019.
When the Panama Papers were released in 2016 by the International Consortium of Investigate Journalists (ICIJ), the outrage of Canadian society was palpable. Yet more than three years later, the CRA has failed to recover a single penny from offshore tax cheats. It was eventually revealed that Canadians had been robbed of $270 billion dollars, according to a 2017 study by Canadians for Tax Fairness, which would’ve been used to fund life-changing programs for Canadians of all backgrounds. In the Panama Papers, the identities of thousands of Canadian tax cheats were revealed. They exposed the horrifying extent that the richest Canadians have gone to, in their quest to cheat the Canadian government out of their tax dollars.
Through the assistance of law firms such as Mossack Fonseca wealthy individuals were able to buy anonymous offshore companies around the world. When the leaks were made public, the people of Canada were justifiably outraged by the actions of our richest citizens. In Bill Morneau’s first federal budget, the Canadian government was expected to respond to the findings of the Panama Papers. A pertinent response came quickly. They agreed to invest $444.4 million over five years into the CRA, to “crack down on tax evasion and combat tax avoidance”. That November, Justin Trudeau said, “Our investments have already yielded results. We are on track to recuperate $25 billion from our efforts against tax avoidance and tax evasion.”
The question is, how did they get around the laws our whole society believed would prevent the wealthiest citizens from hoarding their money? It’s a lot simpler than you’d think. To our most affluent Canadians, buying a shell firm is like buying a pack of gum, as it’s available for a minimum cost of $1000 USD. Mossack Fonseca offers both a sham director, which usually costs $150 USD per year, and the ability to conceal the identity of the true shareholder. Without a law firm to assist the wealthy, many of them would be forced to identify themselves as the director, exposing themselves to negative public attention. Since authorities are only able to access data coming from public registrars, these shell companies seemed airtight. That was until the Panama Papers were released.
After the much anticipated budget was released, optimism was in the air. But what was the CRA even going to do with the millions they were given? In their words, it would be used for “hiring additional auditors and specialists; developing robust business intelligence infrastructure; increasing verification activities; and improving the quality of investigative work that targets criminal tax evaders.” They seemingly stayed true to their promises. According to the “Human Resources” section of the CRA’s 2018-2019 “plans and priorities” report, the agency added 600 auditors in 2016, and an additional 1,200 in 2017. Yet, for all the positive progress made by the CRA, they were only able to recover just over half of the 3,100 CRA positions cut by the Harper government in its’ 2013 Budget. To make things even worse, this year’s the pace of hiring stagnated as the agency eliminated 45 positions, seemingly forgetting that “hiring additional auditors and specialists” was one of the major conditions that came with the additional $194 million a year which they now receive from the government.
Why were the CRA struggling to find and charge offshore tax cheats in the first place? It’s simple. The Harper government was aiding and abetting corporations by signing Tax Information Exchange Agreements (TIEAs). These agreements provided a further security blanket for corporations who wish to create subsidiaries, thereby depriving the government of their tax revenues. But some may ask, what is so wrong with companies creating subsidiaries in tax havens? Surely, companies would be double-taxed, assuring that both countries receive their mandated tax revenues? That’s where most people are wrong. Instead a subsidiary of a Canadian corporation in a tax haven can place all of its “profits” made in the tax haven in its “exempt surplus”. Thanks to the Harper government, the entire “exempt surplus” is not subject to further taxation in Canada, meaning that these companies can bring home all profits made, tax free. Yet, the current Trudeau government is just as culpable, due to their failure to repeal both the TIEA’s and the provision in the Canadian tax code, which allows corporations to bring these profits home tax free.
The real question was this: How were the ongoing failures to recover the hundreds of billions in lost tax revenue, affecting the lives of average Canadians? The effects were unsurprisingly devastating for most Canadians. According to the Frontier Centre for Public Policy, the average Canadian household income rose 55% while the average house price rose 158 per cent from 2000 to 2015. As a result of this, house ownership is becoming unrealistic for the next generation. There was a lack of additional subsidies or grants for first time house buyers, allowing the issue to fester even further. This further illustrates the importance of collecting all possible tax revenues. The failure to collect these revenues deprived key governmental initiatives in 2016, of the necessary financial resources to complete their goals.
One year later, with billions of dollars in tax revenues still uncollected, what did the Liberal government do to further combat offshore tax cheats? In the 2017 budget, they agreed to invest an additional $105 million a year into the CRA to continue their efforts against them (to capture the elusive tax dollars). That was it. They were oblivious to the prime culprit, TIEAs, which act as a tool for corporations, in which they can deposit all their profits and transfer them to Canada, tax free. No amendments were made to these bills and no mentions of TIEAs were even made in the 2017 budget. This served to showcase the Liberal government’s unwillingness to truly combat offshore tax cheats. So despite the CRA’s failure to recoup any outsanding unpaid taxes from these tax cheats, the government decided to spend an additional $500 million a year in this budget, in the assumption that this outlay would be matched by recovered tax revenues.
The middle class has been severely harmed by the loss of valuable tax revenues, yet for the most vulnerable Canadians, this failure has had life threatening effects as they struggle without the desperately needed support systems. Homelessness has been a crisis for many decades, and it has remained a critical issue ever since. By 2017, according to the Canadian Alliance to End Homelessness, up to 35 000 Canadians are homeless every night while a minimum of 235,000 Canadians experience homelessness at some point each year. This is by far the most crippling effect of the CRA’s failure to attain all tax revenues, as the most vulnerable people of our population are hit hardest by the lack of available resources. In the 2017 budget, progress was made on homelessness in Canada. Over the next 11 years, $291 million per year would be sent to provinces and territories to fund key affordable housing priorities. In addition, a $5 billion National Housing Fund was created. Unfortunately, this necessary funding plunged this country further into debt. A country with efficient tax collectors would’ve ensured that almost all funding would be covered by tax revenues collected. However, this is Canada.
For many years, not a single dollar had been recovered from offshore tax cheats by the CRA. Yet, the only Liberal party member asking questions was Senator Percy Downes. He had been pressuring the CRA to release its’ estimate of the international tax gap since 2013. Due to his requests for this data from the Parliamentary Budgetary Office (PBO), it began to request data on the tax gap from the CRA. This is when they began to show their true face, stonewalling the PBO, to the point that they took the CRA to court, eventually forcing it to reveal the data. He was the only Liberal MP or senator who asked the difficult questions and the only one who got results. Without his efforts the international tax gap may never have been revealed.
In 2018, Liberal government sent a clear signal with the Federal budget that they were finally taking the task of catching offshore tax cheats seriously. In this document, they committed to “effectively addressing treaty abuse, such as treaty shopping”, meaning that they were promising to take a closer look at TIEAs. In addition, they began to address the backload in the courts, dedicating a total of $ 17.9 million per year to the Courts Administration Service, with the majority of the finding going towards the Tax Court of Canada. Yet, the measure which returned $128.4 million for Spain alone, voluntary disclosures, in which taxpayers are able to come forward themselves to admit tax cheating without punishment, has been totally ignored as a viable option for recouping unrecovered tax revenues. In Canada, anyone identified in the Panama Papers can’t make a voluntary disclosure, except under what it called "exceptional circumstances." This is meant to prevent relief from criminal prosecution and penalties normally guaranteed under the program. However, this policy has ensured that no offshore tax cheats have been able to participate in the VDP, creating an additional burden on CRA Auditors. This has created massive delays in gaining unpaid tax revenues.
We have now reached the present day, three years after the Panama Papers were released. With zero dollars in unpaid taxes received by offshore tax cheats, the Canadian people are no further ahead financially. Should we still entertain any hope of success? According to the CRA we should, as “These efforts, [to more effectively limit tax evasion and avoidance by offshore accounts in the past two years], are showing concrete results for Canadians”. However, a 2017 CBC investigation revealed that the agency conflated its record on obtaining criminal convictions for offshore tax cheats. According to the CRA, it will take a minimum of two and a half years to gain a concrete idea, before it will even have an idea of how much tax revenue it might recoup.
Over a billion dollars per year in additional funding later, what has truly been done in the war against offshore tax cheats? The CRA has been unable to recoup the number of investigators from Harper CRA purge of 2013, and has placed a further burden on a limited number of investigators by not allowing for voluntary disclosure. The government is paying millions a year in an attempt to prosecute offshore tax cheats, yet has not received a single dollar of previously uncollected tax revenues. The hardworking, tax-paying citizens of this country put their faith in the government and the CRA to do them justice, yet they claim that they still need two and a half years to even have a concrete idea of how much unpaid tax revenue it may recoup.
In the end, it seems as if, in the collective efforts of this Liberal government to understand what the problem is, they have simply been chasing their own tail, the whole entire time.