The NDP crackdown on tax havens

By Ira Basen of CBC on April 27, 2011 4:53 PM

“If the old Ottawa was serious about going after tax havens, they would have invested in the Canada Revenue Agency because the best darn return on a tax dollar that you can get is when you start going after the billions of dollars that are socked away by the most affluent individuals offshore.     But we never saw the Liberal party willing to take that on. We never saw the Conservatives willing to be serious about it. They’re simply protecting those who are inappropriately socking their money away, hiding it from taxation, offshore.     Why is it that the billionaires get to park their money off in some sunny place and end-run our laws?”     Jack Layton – April 27 2011

It makes such a tempting target. All that shady money resting in sunny places.

Tens of billions of dollars sitting in offshore bank accounts, deposited there by wealthy Canadians and corporations looking to escape the onerous tax burden of our native land.

There is an estimated $80 billion in Canadian money in Bermuda, Barbados and the Cayman Islands alone.

If only we could get our hands on some of it; force those rich folk to cough up their fair share of the taxes they’ve been evading for so long. Think of the money that would yield.

The NDP has certainly thought about it. It fact, it plans to help fund its health-care and other campaign promises with a “tax haven crackdown” that will yield a billion dollars in extra tax revenue in 2011-12, rising to $3.2 billion by 2014-15.

The party is a bit vague on how this will be done. Though in a statement last November, it proposed a three-step plan that included identifying current tax losses, increasing the powers of the CRA and changing the law to force more disclosure from tax filers.

Will it Work?

Probably not. According to most experts in the field, the chances of the NDP plan yielding anything close to the amount of money the party is counting on is just about zero.

Audits always capture some money, but usually not enough to finance their promises, which is the object of the exercise.

All the Money Under the Sun

It’s not because the money isn’t out there. By many estimates, there are trillions of dollars, as much as 60 per cent of the world’s money, residing in the more than 70 international Offshore Financial Centres, which is how tax havens are referred to in polite society.

If all that money returned home to be taxed, the home countries would see hundreds of billions in additional tax revenue.

But in a globalized economy, capital is very liquid. Money flows inexorably to places where it will receive the highest return.

OFCs offer the holy trinity of security, secrecy and zero or minimal taxation. Nobody has yet devised a way of stopping that giant pool of money from moving around to its most advantageous location without harming international capital markets.

But if that money is not coming home, why can’t we tax it where it lies?

Evasion or Avoidance?

The first thing to understand is that most of this money is not doing anything wrong. The NDP likes to describe the people and corporations with money in OFCs as “tax cheats” and “tax evaders.”

But tax avoidance is different than tax evasion. Avoiding taxes, or at least deferring them, is legal, and we all do it when we take advantage of whatever opportunities the tax code allows us, such as putting money into RRSPs.

Tax evasion is not legal, though many of us do that, too, on a smaller scale when, for example, we pay cash to a plumber to avoid paying the GST.

According to Andrew Rogerson, most of the money Canadians have stashed offshore is about reducing taxes, or “asset protection,” as he prefers to call it, not tax evasion.

Rogerson is a Toronto tax lawyer who has spent 30 years helping wealthy Canadians move their money to OFCs.

“There is nothing legally or morally wrong with having an offshore trust, or any other income producing asset for that matter,” he wrote in an email from the Persian Gulf, where he was on a business trip.

As an example, he cites wealthy Canadian grandparents who want to set up a trust for their grandchildren.

They can do that in a Caribbean OFC like the Turks and Caicos islands, perhaps even putting the money in one of the Canadian banks operating there.

In doing so, they pay no income tax on that money, either here or there. But, Rogerson points out, once the trust distributes some of the money to the beneficiaries back in Canada, it will be taxed in Canada and the bank’s trustee fees could ultimately find their way back to Canada as well and be taxed here.

“What is the problem?” he asks.

Cracking Down All Over

Old stereotypes die hard, but the offshore world has changed enormously over the past few years.

A special report on OFCs in The Economist magazine in 2007 concluded that thanks to international campaigns against money-laundering and illegal tax evasion, “today’s successful tax havens thrive not because of crookery, but because they are well run and well regulated.”

There is now often more scrutiny applied to opening a new account in an OFC bank than in one onshore, and wire transfers of money to and from offshore accounts are closely monitored.

As a result, using OFCs to evade taxes is not nearly as common as it used to be.

That has led many experts to conclude that at this point, the administrative costs involved in pursuing offshore “tax cheats” isn’t justified by the amount of money actually collected.

Find Me the Money

This may be the central flaw with the proposed NDP crackdown. It tends to ignore the enormous costs, logistical difficulties and legal complexities involved in chasing delinquent taxpayers in far-flung locales.

How many tax inspectors can we afford to send to the Cayman Islands, for example, to see if a Canadian has paid his taxes?

In 2007, the Harper government launched its “Anti-Tax Haven Initiative,” designed to crack down on “aggressive international tax planning and tax evasion.”

The CRA boasted that it audited 1,251 cases and assessed $1.026 billion in federal tax in 2009-10.

Sounds impressive. But there’s a big difference between tax assessed and tax collected, and the CRA doesn’t tell us how much it actually collected from these audits.

Michelle Gallant, who teaches law at the University of Manitoba, doubts that the CRA collected very much.

She points out that most delinquent taxpayers wind up negotiating a settlement with the taxman for considerably less than the amount assessed, and that the negotiations and the appeal process can drag on for years.

So the NDP plan to collect a billion dollars next year, and $3.2 billion by year four looks like a bit of wishful accounting.