Snitching and Taxes

Taxation is a hot topic these days. Globally and in Canada, the media and public are calling on governments to curb international tax evasion, and governments are formulating various strategies in response.

Taxation is a hot topic these days. Globally and in Canada, the media and public are calling on governments to curb international tax evasion, and governments are formulating various strategies in response. It’s generally agreed that illegal tax evasion is a scourge that should be prevented through vigorous enforcement of domestic tax laws. It’s also accepted that many large corporations avoid taxes through perfectly legal means, and that government should take steps to change their laws if they wish to prevent such avoidance.

But many commentators are using the terms tax avoidance and tax evasion interchangeably, the line between tax avoidance and illegal tax evasion is significant. This lack of clarity can lead governments to adopt responses that are overly broad or of questionable value in the fight against illegal tax evasion. Here at home, an example of such a response could be the Canada Revenue Agency’s new whistleblower program — which offers cash rewards for information that leads to the identification of incidents of non-compliance with the tax law.

Below, Nick Pantaleo, FCPA, FCA, discusses the dividing line between tax evasion and avoidance. He also presents his views on why CRA should consider abandoning this program. Do you think it’s appropriate to reward individuals for providing CRA with information identifying international tax evasion and avoidance? Share your views by posting a comment or sending an email as noted below.

Nick Pantaleo is Senior Vice President – Tax at Rogers Communications, former Leader, Canadian National Tax Services at PwC and a member of CPA Canada’s Tax Policy Subcommittee. This blog is condensed; for the complete version, visit PwC’s Tax Exchange Blog.

In the March federal budget, the government introduced the Stop International Tax Evasion Program. Already referred to by many as a whistleblowing or snitch program, it’s intended to be similar to programs in some other countries, like in the United States.

The program will reward individuals for providing information of major international tax non-compliance if it leads to the collection of $100,000 or more of outstanding taxes. The reward will be up to 15% of federal taxes payable (excluding penalties, interest and provincial taxes), once the tax has been collected.

A program we need?

Personally, I am not in favour of this sort of program. I do not believe a government should or needs to reward its citizens for doing the right thing. Far more Canadians do far more important things for their fellow citizens, including giving up their life, for little or no benefit or reward.

Canada Revenue Agency’s (CRA) website explains why informants should come forward under the current Informant Leads Program (ILP), which does not reward informants. CRA says informants “are helping to ensure that all taxpayers are paying their fair share of taxes and this benefits all Canadians.” Exactly, although I suspect that of the 24,000 referrals CRA apparently receives annually under the ILP, many are from jilted spouses, vindictive business associates and disgruntled former employees.

I also have a problem with the scope of the program.

Whereas the current ILP is clearly directed at suspected tax evasion, the budget papers describe the new program as a way for “…CRA [to] target high-income taxpayers who attempt to evade or avoid tax using complex international legal arrangements.” CRA’s website states the initiative will “encourage individuals to provide information identifying international tax evasion and avoidance.” [emphasis added] In other words, the new program is not just directed at tax evasion.

What’s wrong with that? Well, two things. First, the program risks further blurring the distinction between tax evasion and avoidance. Second, for many, all avoidance is a bad thing and little attention is given to acceptable versus abusive tax avoidance.

Evasion versus avoidance

Already in Canada and globally, many in the media and in government and non-government organizations use these words loosely, often describing or treating both as if they are the same thing.

But they are not the same.

It is wrong to treat tax avoidance as if it is like evasion but it is worse to marginalize tax evasion by confusing it with avoidance. There is no defence for tax evasion.

On the other hand, there is a general principle that all taxpayers have the right to manage their affairs in a manner that results in them paying the least amount of tax. So, unlike evasion, tax avoidance is defensible.

Acceptable versus abusive tax avoidance

Many are troubled that there is such a thing as acceptable tax avoidance. Daily media reports feed a growing perception that it’s costing many governments significant revenue at a time of when they are enduring high deficits and debt levels. When people suggest that this loss of revenue results, for example, in fewer schools and hospitals being built, it even makes my mother question what I do for a living.

Tax avoidance is acceptable if it is not abusive; i.e., if it does not rely on an interpretation that is inconsistent with or abuses the tax rules. But the interpretation can’t be a simplistic or frivolous, or we are talking evasion, not avoidance.

The really hard part is drawing the line between acceptable and abusive avoidance. Tax rules are complex, especially when domestic rules intersect with those of other countries. Experienced taxpayers, tax advisors and CRA struggle all the time as to where to draw the line. Ultimately, the courts decide the matter if the taxpayer and the CRA are at an impasse. And if the government does not like the courts’ interpretation, they can change the law.

A government-sponsored whistleblowing program should be a last resort in a civil society. It is an admission of failure to enforce the country’s laws. Canada is not there yet.

The CRA has the tools and legislative and investigative powers to pursue and prosecute tax evaders. For example, Special Investigations must have better forensic tools and more perspective to deal with tax evasion than ordinary citizens blowing whistles that will invariably divert CRA attention from areas that can better use their limited resources.

Frankly, the Stop International Tax Evasion Program is something Canada can do without.

Join in the conversation

Do you think it’s appropriate to reward individuals for providing CRA with information identifying international tax evasion and avoidance? The better we understand the issues you face, the better we can represent them to government and other stakeholders.

Post a comment below, or email Gabe Hayos.

Conversations about Tax is designed to create an exchange of ideas on tax policy and practice developments and issues and their impact on Canadian accountants who practice tax. Comments received can provide helpful input to the public interest advocacy positions developed by the Chartered Professional Accountants of Canada.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada