CPA Canada calls for enhanced focus on combatting tax evasion

With media attention focused on global tax evasion, CPA Canada welcomes the opportunity to once again call for a renewed focus on combatting tax evasion and greater clarity on what constitutes unacceptable tax planning.

Media around the world is focusing on the issue of tax evasion. As part of its professional commitment to serve the public interest, CPA Canada has consistently taken a strong stand against tax evasion. It is an illegal and unethical practice with an overwhelmingly negative impact on our economy and society. Our professional Code of Conduct specifically prohibits our members from engaging in any activities related to tax evasion.

CPA Canada welcomes this opportunity to once again call for an enhanced focus on combatting tax evasion and to clarify acceptable versus unacceptable tax planning practices.

The tax system in Canada is an important policy mechanism used to support sustainable economic prosperity for all Canadians. Canada’s overall standard of living is maintained by all Canadians paying their fair share as defined by our tax laws.

While the concept is simple, the tax system in Canada, as in many other countries, is complex and confusing to taxpayers. This is partly because our tax system is constantly evolving. Tax policy and legislation are shaped by a number of variables including political and economic interests, social values and priorities, and international competition. It is also directly affected by debate, dialogue, legal reviews and decisions – all of which serve to clarify areas where tax rules may be unclear.

Tax avoidance vs. tax evasion

One such area of confusion is the difference between “tax avoidance” and “tax evasion.”

These are two different things. Tax evasion is the act of avoiding tax by blatantly disregarding the law and failing to report taxable income.

Tax avoidance, on the other hand, relates to tax planning. In Canada, individuals and businesses are legally entitled to plan their affairs to reduce the amount they are required to pay, provided the steps taken comply with the law. We all do this when we contribute to an RRSP, pension plan or education savings plan for our children.

Recent public debate relates to the term “aggressive tax avoidance.” To combat aggressive tax avoidance, Canada has had a general anti-avoidance rule (GAAR) in place since 1988. The tax laws also contain a number of other specific anti-avoidance laws and specific disclosure requirements regarding tax shelters.

Tax planning slides into aggressive tax avoidance when there is an inappropriate interpretation of the existing rules or use of artificial transactions that is contrary to the legislation’s intent. The term aggressive tax avoidance should be restricted to those transactions that are contrary to the “object and spirit” of the law. All of this is a grey area and needs to be better clarified in the tax laws.

A collaborative approach is needed

The recent discussion around these issues is positive in the sense that it has provided an opportunity for a broader understanding of Canada’s Income Tax Act as well as public debate and dialogue about a number of related issues. This discussion and stakeholder engagement is consistent with the collaborative and transparent approach to tax administration that is endorsed by the OECD and followed by jurisdictions around the world.

In Canada, CPAs are part of a broader community of policy and professional organizations including the Canadian Bar Association, the Canadian Tax Foundation, the Canadian Chamber of Commerce and the C.D. Howe Institute. They provide analysis and expertise to governments and regulators to ensure Canada’s taxation system is effective, efficient and supports sustainable economic prosperity. On its own, CPA Canada works closely with a number of international bodies, including the OECD, to address issues such as global tax evasion, fraud, corruption and money laundering.

It’s time to reform Canada’s tax system

In that collaborative spirit, CPA Canada has for many years advocated the reform of Canada’s tax system. Reform of Canada’s tax system would provide multiple benefits, including making the system easier for taxpayers to understand and comply with, enhancing efficiencies for businesses, providing tax professionals with clarity and certainty for tax planning, and creating administrative savings for the government.

Changing the legislation to bring clarity and certainty to the rules that govern tax avoidance is one of the areas needed as part of a broad reform of the system. The case for wholesale reform is well established.

Canada’s Income Tax Act is almost a century old and has not been significantly reviewed since the 1960s. Granted, since that time there have been a number of iterative changes to the Act as well as reviews of specific areas. CPA Canada has been involved in these processes by providing commentary on technical amendments through the Joint Committee on Taxation (comprised of the Canadian Bar Association and CPA Canada, this collaboration of tax accountants and tax lawyers was created in 1944). The profession provides such expert input to the federal finance and national revenue departments (now known as Finance Canada and the Canada Revenue Agency), and through special projects, such as the Advisory Panel on Canada’s System of International Taxation.

A 2013 CPA Canada white paper on tax avoidance urged the federal government to make a number of changes that would benefit the Canadian economy and directly address the issue of tax avoidance. Among other measures, the paper recommended tightening the focus of specific anti-avoidance rules to further clarify the distinction between acceptable and unacceptable tax planning. It also recommended increased transparency around reporting transactions in the grey areas and raised the need for agreements with other countries to facilitate the exchange of information that would help governments detect and prevent tax evasion.

Canadians deserve a predictable, fair and transparent tax regime. It’s the responsibility of organizations such as CPA Canada, as well as others in the financial community, to collaborate with the federal government to bring about reforms needed to ensure a tax system that keeps Canada competitive and benefits all Canadians.