May 10, 2013: Canadian money stashed in the top 12 global tax havens has topped $170 Billion, according to data on foreign direct investment released yesterday by Statistics Canada. This amounts to a quarter of all Canadian money going abroad.
This figure is also equivalent to ten percent of Canada’s $1.8 trillion GDP.
One of the main reasons wealthy Canadians and large corporations put their money in tax havens is to avoid paying their fair share of taxes. Canadian money sent off shore also means less being invested in Canada. This means the loss of billions of dollars in tax revenue for federal and provincial governments and fewer new jobs being created in Canada.
Canada is lagging behind other countries such as the UK, US and Australia in going after tax cheats using tax havens. CBC reported today that Britain and Australia have had a huge trove of secret offshore financial records for years, while the Canada Revenue Agency has only recently requested access. It is thought that this tax havens data is largely the same information as that obtained by the International Consortium of Investigative Journalists and revealed by the CBC last month.
The Australian government has already red-flagged 65 people, launched audits against 35 and criminal investigations against two, citing the possibility of millions in evaded taxes by wealthy citizens.
Revenue Minister Gail Shea announced the creation of a new Canada Revenue Agency unit dedicated to going after international tax evasion – something that was promised in the 2013 Federal Budget. But with only six to ten people in this team of CRA experts, it will take them a long time to go through the list of over 400 Canadians with offshore accounts if Canada does get its hands on the leaked tax havens data.
These are typically complicated cases which can take a year or two to resolve and CRA staff working on international tax evasion and aggressive tax avoidance cases usually work on no more than a dozen or so cases at a time. While it is good news that the government has established this special unit to focus on tax haven related tax evasion, it will have to increase its capacity significantly if it gets the list and is serious about investigating the 400 plus names that are on it.
This new CRA team does not mean they will be hiring new staff but merely reassigning existing staff. The CRA has actually suffered more staff service job cuts than any other department. Over 3000 jobs have been lost.
Given the size of the tax haven problem it is a false economy to be cutting back on CRA capacity as this will likely mean losing more from revenue not raised than savings resulting from job cuts.
All the media attention lately on the tax havens issue has had a positive effect as it is reported that the number of people coming forward to voluntarily report on their off shore accounts has increased greatly in the last few weeks.
Voluntary compliance is key to ensuring an efficient and well-functioning tax system. But high voluntary compliance rates depend on a perception that everyone is paying their fair share of taxes, that taxpayers get good value in terms of quality public services for the taxes they pay and that there is a credible threat you might get caught if you cheat.
Canada’s tax compliance rate is currently about average for OECD countries, but could erode further if the government does not do more to make taxes fairer, provide quality public services and go after tax cheats more aggressively.
Surprisingly the rate of tax does not seem to affect voluntary compliance rates as those countries with some of the highest tax rates, such as the Scandinavian countries, have some of the highest compliance rates, while those with low tax rates such as Greece, Italy and Mexico, have very low compliance rates.
While more could be done by Canada to tackle tax havens, solutions will require international cooperation. Canada needs to support proposals for automatic tax information exchange, country by country reporting and unitary taxation of multinational corporation profits that are being considered at the upcoming G8 and G20 Summits as well as at the OECD.