Education. Infrastructure. Health. It takes money to run a province. And most provinces are desperate to find more of it. That’ll be one thing on which provincial premiers agree when they meet in Charlottetown later this week.
A cost they don’t often talk about is offshore tax havens and how they undermine provincial revenues. Avoiding that issue costs provinces and the federal government at least $7.8 billion dollars each year. Some provincial and territorial leaders have recently dealt with large deficits by cuts to essential programs. But so-called austerity measures are not the only solution. And voters seem to know it. In her recent budget, Ontario Premier Kathleen Wynne committed to reduce corporate tax avoidance and close loopholes after making fairer taxation a key part of her campaign. In a country with the lowest corporate tax rate in the G7, making sure everyone pays their fair share of taxes should be the first line of defense. It could help reduce deficits, avoid cuts to services and provide additional revenue that could target poverty and environmental challenges we face.
Most provincial and territorial governments rely on the Canada Revenue Agency to raise their revenue. Provincial services and programs need a revenue stream provided by an efficient and fair system. But under the CRA’s watch, Canadian money in tax havens has ballooned to an all-time high - an estimated $185 billion in 2013. Almost $63 billion of that is in the popular tax haven of Barbados - an island paradise that is one-tenth the size of PEI, where the premiers are enjoying their late summer gathering. They need to declare that the holiday is over. It is time bring our Canadian tax dollars home so they can be put to use doing useful things like funding health care and education.
Everyone from tax lawyers to tax fairness advocates agree that the 1100- page Income Tax Act is a complex mess. It needs a major re-haul. But in the meantime there are things provincial premiers can do. Provincial governments are responsible for nominating members of the CRA Board of Management. Those members could be directed to strongly encourage the agency to give higher priority to tax haven related compliance efforts. It is a strategy that could have important results.
The provincial representatives on the CRA Board of Management also need to ask:
- Why the CRA is wasting so much of their scarce capacity harassing development and environmental charities that have been critical of the Harper government?
- Why does the CRA refuse to work with the Parliamentary Budget Officer and calculate the Tax Gap to measure missing revenue as is done in many other countries? This could help them set priorities and do a better job of going after the most important tax cheats.
- Is going after the self-employed, small business and other “low hanging fruit” the best use of staff?
- Have cuts to the CRA’s budget undermined its ability to go after really big tax cheats who play the system?
- Has more revenue been lost than money saved from staff cuts?
- Is there sufficient technical expertise to follow up on leads from CRA’s tipster hotline?
- Does the Justice Department have the capacity to properly prosecute major tax cheats in the courts?
Australia and the United States are just two countries that have realized the importance of a well-organized, well-run revenue service. Ottawa has announced several measures in the past two federal budgets to address the problem of revenue lost to tax haven related tax evasion. They have launched an Offshore Tax Informant Program that offers a reward for information on major tax cheats using tax havens. They have also established a special unit in the Canada Revenue Agency focused on international tax evasion and aggressive tax avoidance. But tax avoidance is big business. So although the response is welcome, it has been completely inadequate given the scale of the problem.
Recent Canadian experience shows that when governments stepped up efforts to combat tax evasion the results were impressive. The 2005 Federal Budget increased the capacity of the CRA to combat aggressive international tax planning by $30 million. The return on that investment was $4 billion by 2011. That is math that is easy to understand. It is also math that should prompt questions about the logic behind Canada Revenue Agency’s most recent $60 million budget cuts. As a result the CRA has experiences more layoffs than any other government department, and the CRA international tax audit program has been seriously undermined. This sloppy fiscal management should be of concern to premiers and their finance ministers. It is estimated that global tax avoidance schemes are hiding about $32 trillion worldwide in tax havens. The problem occurs everywhere from the European Union to Africa to the United States. And it isn’t just Amazon, Google and Apple who are the problem. From pharmaceutical companies, to mining operations to financial companies - Canadian provinces are not immune.
It is time for provincial and territorial leaders to push for a Canadian tax system that can stand up to an expensive problem that is playing itself from St. John’s to Charlottetown to Victoria.
(This piece originally appeared on IPolitics on August 27, 2014)