Simplifying the tax system among recommendations to help CRA tackle tax evasion and avoidance
Last week, the House of Commons Standing Committee on Finance issued its Report titled The Canada Revenue Agency, Tax Avoidance and Tax Evasion: Recommended Actions. The Report was the result of hearings conducted in May and June in which Minister of National Revenue Diane Lebouthillier, officials from the Canada Revenue Agency and from the Department of Justice, among other witnesses, were asked to appear before it “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.”
While the Committee initially also called for officials of KPMG to appear before it to explain their role in that file, during the June 2016 hearings, witnesses were asked to refrain from commenting specifically on the offshore Island of Man structure developed by KPMG since the structure is the subject of hearings by the Tax Court of Canada and the Federal Court and the Committee “wished to avoid possible prejudice to the participants in these court cases.”
Among the Committee’s fourteen recommendations, a few themes stand out.
Offshore tax compliance
A number of the recommendations were targeted directly at offshore tax compliance and enforcement. For example, the Committee recommended that the CRA strengthen protections for individuals under the Informant Leads Program and the Offshore Tax Informant Program. The government should also ensure that these programs are “properly incentivized” and that credible information that is obtained through them is appropriately investigated.
The Committee also asked about the progress of audits in relation to the “Panama papers” and asked that a full report be made before June 1, 2017.
From a human resources perspective, the Committee felt that the CRA should enhance its technical capabilities and knowledge surrounding both domestic and international aggressive tax planning. It also felt that the government should take steps to improve coordination between the CRA, which investigates situations of possible tax evasion, and the Department of Justice, which prosecutes cases of tax evasion.
The Committee also recommended that the government review Canada’s 92 tax treaties and 22 tax information exchange agreements 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.” It also suggested that the CRA address offshore non-compliance with tax laws through greater collaboration with other jurisdictions, including through enhanced joint audits with tax treaty partners.
Registration of tax products
In the U.S., registered tax products offered by tax advisers is already required. The Committee recommended that Canada adopt a similar rule requiring that all tax advisers operating in Canada register all of their tax products. This would presumably allow the CRA to better identify them (and consequently, decide to audit them) to determine if they were legitimate tax planning vehicles. A similar system currently exists for tax shelters, all of which must be registered with the CRA and have a tax shelter identification number issued to them. Penalties for selling a shelter without a registration number are severe.
Simplification of the tax system
Finally, the Committee called on the government to “accelerate its review of the Income Tax Act and expeditiously implement initiatives aimed at simplifying the income tax system” since complexity and inequities can distort behaviour and can lead to tax avoidance or tax evasion. The Committee was told that this review should be completed by June 30, 2017.
This was welcomed by Joy Thomas, president and CEO of CPA Canada, who participated in the hearings. “CPA Canada has long called for the simplification of the tax code to assist taxpayers with compliance,” she said.