Front Burner - Canadian corporations dodged up to $11-billion in taxes

Episode Date: June 21, 2019

According to a new report from the Canada Revenue Agency, in just one year - 2014 - Canadian corporations did not pay up to $11-billion in taxes. That amount is part of the “tax gap”. It’s the difference between the taxes Canada knows it's owed and the taxes that are actually collected. Today on Front Burner, Toronto Star investigative reporter Marco Chown Oved explains how corporations get away with this, and why it’s such a persistent issue.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. As I talk about it, I can feel and smell everything that I did back then. And he looks down at me, I'm looking up at him, and he says, that's my little girl. It's a 30-year-old homicide where we don't have anybody charged and convicted.

Felt like a murderer had gotten away with something. Tell me now, did you have anything to do with the murder? Someone Knows Something with David Ridgen, Season 5. Now available. Go to cbc.ca slash sks. Hello, I'm Jamie Poisson. If you're a person like me who actually pays their taxes, what I'm about to tell you is likely going to make your blood boil. In just one year alone, 2014, Canadian corporations did not pay between $9 and $11 billion in taxes. That's according to a new report from the Canada Revenue Agency.

This $9 to $11 billion, it isn't money that's hidden offshore. It's something called a tax gap. It's actually the difference between what Canada knows it's owed and what it's actually collecting. So how do corporations get away with this? That's coming up on FrontBurner. Also, Prime Minister Justin Trudeau was in Washington meeting with Trump yesterday, and we've got some tape and updates on that, so stick around till the end. My old colleague, Marco Chown-Ovid, has been following this story for years. He's here with me now in Toronto.

He's an investigative reporter at the Toronto Star, and he's going to help explain why Canada is so bad at collecting corporate taxes. Marco, hello. Hey, Jamie, how's it going? Good, good. So tell me about this new Canada Revenue Agency report. What do we need to understand about its findings? The number one takeaway is just the sheer amount of tax that's supposed to be in government coffers and is just missing. $11 billion is no small chunk of change here. And it's actually only a small part of the problem, right? Because it's just what corporations aren't paying. When you add in the underground economy and the GST and all these other things,

it actually, the full tax gap is $26 billion every single year. $26 billion. You're talking about people who are just not claiming their income or are shirking GST. And then also these corporations, that all adds up to $26 billion. Exactly. It's like without changing a word in the tax code, if everyone just paid what they were legally supposed to pay, they would have to pay $26 billion more. And think about that's $26 billion extra dollars in the government's coffers to spend on stuff. This is a mind-blowing figure to me. Like, think about how many clean energy projects we could fund with $26 billion.

Or the entire pharmacare for everybody. A seven-person panel is recommending a universal national drug program. By 2027, the additional cost to the federal books could be as much as $15 billion. Universal pharmacare, done. Universal Daycare. Done. Okay. Okay, so a lot of money that the government knows it's owed and has not collected.

I want to dig into this. So I know you mentioned there's other categories here, like personal income that isn't being collected, GST shirking. But let's talk about this report, corporations, because these are the big guys, right? And when we're talking about corporations, what are we talking about here? The CRA splits corporations into small and medium-sized enterprises, right? And that's 99% of corporations in Canada are small and medium-sized enterprises, more than 2 million corporations, right? And they run the gamut from, you know, mom-and-pop shops or, you know, even doctors' corporations or farms, whatever.

And then, of course, there are a lot of what Bill Morneau and Justin Trudeau have talked about, which are shell companies. The systems that we're talking about are currently legal. We see that, though though the implications of these structures create an unequal playing field so we don't think that they're fair. These are companies that wealthy people just sort of set up to basically take advantage of the fact that corporations have all sorts of tax advantages over individuals. So a lot of, for example, wealthy folks put their

house in a corporation. They don't own their house. It's, for example, wealthy folks put their house in a corporation. They don't own their house. It's, you know, Marco doesn't own his house. It's Marco Inc. that owns the house. Okay. And then what does that allow you to do? Lots of things. For example, companies can borrow money and then write off the interest. If you set up a whole bunch of companies, you can end up borrowing money from yourself and then paying interest to yourself and then writing it off. Okay. And so when we're talking about this report, this corporation report that says that there's between nine and $11 billion in taxes the government is owed, is this the government saying, look, we've come back, we've looked at your situation and you can't do this. So you have

to pay us. So yeah, ultimately what they do do is they to calculate this, they did a random sampling of tax returns filed by corporations. And then they kind of said, well, look, they are actually missing all sorts of tax that they should be paying. And so you'd get a reassessment in the mail or whatever. Right. But, of course, they can't in reality actually reassess and audit every single company in Canada. There's 2 million of them. And so this number that they've arrived at, 11 billion, is if they audited every single company in Canada, they would get that extra 11 billion. Okay.

And the idea is that they're taking this one year, 2014, as sort of a marker or an example of what an average year would look like. Exactly. To add to this nuttiness, this seems insane to me, but to add to this, I understand that it was a real fight to even get this number in the first place. Well, what's really interesting is so that the things really came to a head when they started the Parliamentary Budget Office. So Kevin Page, yeah, the PBO, Kevin Page had this great power to actually start essentially auditing the government. And he asked the CRA for the information so that he could calculate the tax gap. Because it'd be a useful number.

And even today, the CRA admits, oh, this helps us decide who to audit because we know where the money's missing. And back in the day, this was under the previous Harper government, the CRA said, we see no point in calculating the tax gap. It's a theoretical exercise that has no bearing on reality. And because the numbers, we can't be 100% sure of the number, it's an estimate, then we're not even going to bother doing it. Okay. And then so what happened? How did we get to today? Because they've clearly calculated it.

Well, the PBO has powers, right? And so they essentially said, that's great. You guys don't want to calculate it. We'll calculate it for you. But we're going to need the info. We're going to need some tax info. But the CRA holds its tax info really close to its chest. And in this case, they actually said no. They wouldn't even share it with another part of the government. Cool. Nothing like two taxpayer-funded government agencies fighting with each other over taxpayer-funded information, hey? Exactly.

The CRA has been worried about sharing data from private tax files. in, hey? Exactly. The CRA has been worried about sharing data from private tax files. The agencies also questioned the value of spending so much time and money on chasing a tax gap number instead of spending the money on enforcement to catch tax cheats. They went back and forth and back and forth. Is there a way that you could give us this info by de-identifying it or take out people's SINs numbers? We just want to calculate the tax gap. And the CRA was like, no, no, no, no, no, impossible. And the PBO, in fact, threatened to sue them. So this would be the government suing the government to say, you've got to give me this data. Oh, that's giving me a headache. Well, I mean, the big thing that changed was the government changed. And when Justin Trudeau

got elected, he said, you know what, unlike the previous government, we're going to calculate the tax gap. And so it was a campaign promise. He sent a letter down to the CRA and said, calculate it. Okay. And then in the intervening years, there were four reports to get to the $26 billion number, and it culminated in this June 18th corporate report. Exactly. And so this is the CRA's number. So is there a sense that this is like the best number that we can get here? Well, considering that they're the only ones who have the data, they're the only ones who can calculate the number.

They still really won't be giving this data to anybody else. But the flip is that a lot of critics say, you know, should we allow the CRA to audit itself? Right. Because they have every incentive in the world to say, we're doing our job great. Look, we're only missing this much money. And, you know, if you think 26 billion sounds like a big number, I'm, you know, a lot of people question if we gave the data to an outside agency,

they might come up with a much bigger one. Has the CRA tried to ever go after any of this money? And are there any cases or recent examples of that? Absolutely. I mean, really since the Panama Papers and Paradise Papers, there's been this huge emphasis like we're going to, you know, in order for the tax system to be fair, we're going to go after the cheats. And so they've hired all these extra auditors, and they are like far more aggressive than they were a few years ago. New developments in the Panama Papers investigation. Agents from the Canada Revenue Agency today launched a major

raid looking for evidence of possible tax evasion. Warrants were executed in Calgary, West Vancouver, Looking for evidence of possible tax evasion. Warrants were executed in Calgary, West Vancouver, and the greater Toronto area. But they have kind of a questionable track record. They might be going aggressively after companies and tax cheats, but they're often not getting any money back. Okay, and why? Turns out that it's kind of hard, right? So the two big cases that I'm thinking of recently are the BMO case and the Cameco case.

And so both of these cases are big Canadian corporations. Huge. Huge Canadian corporations. And the CRA audited them and handed them billion dollar tax bills. Like tax bills that ran into the billions just said, you guys have been not paying what you owe. You owe me two billion dollars. Right. You could just buy half a pipeline with that.

Exactly. And of course, you know, like any major company, the major company said, ha ha ha ha, we'll see you in court. Okay. And then the court sided with the company. Cameco has been locked in a legal battle over whether uranium sold through a Swiss company should be taxed

in Canada. Now the court has ruled in favor of Cameco for three of those years in dispute. Now the court has ruled in favor of Cameco for three of those years in dispute. And so the CRA has lost two multi-billion dollar tax cases recently. And this shows that even when they find the money, even when they audit the companies and find these huge amounts of tax that are owing, it takes years and years and expensive court battles and they might not even get a penny in the end. You've mentioned the Panama Papers and the Paradise Papers a few times.

And these were, of course, a massive leak of documents that showed individuals and companies putting money into offshore tax havens. It's something that you reported on quite a lot. The largest ever document leak. It's coming from a law firm based in Panama. They are one of the largest providers of offshore shell companies. Can you explain to me how this is different than what we're talking about here today, this tax gap? If you remember back to the Panama Papers, one of the first reactions people had was, but it's legal. And Barack Obama, former U.S. president, himself said,

and that's the problem. It's not that they're breaking the laws. It's that the laws are so poorly designed that they allow people, if they've got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by. And that's how you put your finger on it. A lot of what was in the Panama Papers was legal. Okay. Companies basically reducing their tax bills to zero.

They might operate in five or six countries and not pay any tax in any of them. And that's legal. That's all legit. That's a much bigger problem, many people say, than companies or people evading tax. It's the avoiding of tax. Got it.

Paying fancy lawyers and fancy accountants to come up with creative ways to make sure that you don't pay money on your profits. So when we're talking about the tax gap, we're talking about the evasion of taxes. That's the illegal stuff. It's you got to pay it. If you don't change a word in the tax code, it is what you are owed. And then there's a second issue of tax avoidance, which is I'm just going to find fancy ways to hide my money in shell corporations in the Cayman Islands.

Exactly. And tax avoidance is not included in the tax cap because it's not legally due. It's technically legit. But one of the crazy things about it is if you get outside of the like weird tax world that I kind of exist in, regular people would take one look at this stuff and go, there is no way that is legit. There's no way that could be legal. And yet it is. So for example, the BMO case, they set up all these shell companies in the US, and they were moving money back and forth, like literally just to create a structure so that they wouldn't have to pay tax. And it's like this company lends money to this company and pays money to that company so that all the money isn't paid in the US or in Canada.

And the Cameco case is kind of the same thing, but for a mining company where the Cameco says, oh, oh, oh, we might mine the ore, but we don't sell it. So we sell the cheap ore to ourselves via a shell company in a low tax jurisdiction like Switzerland. And then when we sell the ore expensively on the market, all the money ends up in Switzerland, look, and we don't have to pay tax on it. That's what people do, or that's what big companies do, and it is legal. We'll be back in a whole new way, where stories are brought to life by powerful performances from renowned actors and narrators.

With the free Audible app, you can listen anytime, anywhere, whether you're at home, in the car, or out on a jog. The first 30 days of the Audible membership are free, including a free book. Go to www.audible.ca slash cbc to learn more. When you're talking to people about this, I know you're so steeped in this story. Do you feel like all of these examples fuel this frustration that people have that the system feels so rigged against them, right? Like, I feel like I can't even, you know, get like a $500 check from a bursary or something without, you know, getting 72 emails from the CRA about claiming it, right? Like, and yet, you hear these stories, where companies are not paying like a billion dollars that the CRA says that it's owed. I mean, you've nailed it, right?

All the numbers show that at the same time that inequality is getting bigger and bigger and bigger, it's the same time that the tax haven industry is getting bigger and bigger and bigger. And the two are linked. This idea that the tax code is written with so many leaks in it, that so much money can just escape taxation. And it leaves all us suckers who like don't have offshore accounts to make up the difference and the governments are broke. Like if you think back to the 70s where, you know, the average CEO made 20 times more than a regular worker and governments had like lots of cash. more than a regular worker and governments had like lots of cash.

What changed between then and now is that the economy became globalized and all of a sudden corporations were moving their money all over the world quickly, more and more quickly. But the tax system is just based on country by country. And so right now you have like an unfair fight. You have multinational corporations, and then you have individual tax agencies who are like, please pay me. And the corporation goes, I don't owe you anything. All my stuff's in Bermuda. Ireland.

That's the incongruency that we're at right now, is we have national tax regimes and multinational companies that are gaming them. This is something I've heard Christine Lagarde, Managing Director of the International Monetary Fund, talk about a lot, right? There is a basic public perception and public opinion that large multinational companies pay little tax. And that has contributed to, at least in part, the breakdown in trust that we see throughout the global economy. That's absolutely it. Believe it or not, the International Monetary Fund is saying right now, advocating for, we need to rewrite the international tax rules. And we ought to do this in a coordinated manner so that all the countries kind of change the way they tax multinationals so that they stop getting gamed by them.

The ease with which multinationals seem able to, if not avoid completely, at least minimize their tax burden through some tax optimization schemes that lawyers are very familiar with. And the three decade long decline in corporate tax rates clearly undermines faith in the fairness of the overall tax system. And what is the CRA saying about this? The CRA is officially on board. And this is the problem kind of like every time we have gone to Morneau or... Finance Minister Bill Morneau. Exactly. Anytime we've gone and asked him like, what are we doing about this? They always kind of throw up their hands and they said, there's nothing we can do on our own. Because if Canada

went out and changed our tax code to like tighten up all these rules all by itself, all the companies would just go to other countries that haven't tightened their rules. So what's going on now is places like the IMF, the OECD. These are big groups of countries that are trying to get everyone around the table to change their tax codes together. So is there a sense that they're making headway here? Very, very slowly. Yeah. It was about two years ago in 2017 that they signed the first big international deal on this. And it's all, I mean, the fancy code word they call is profit shifting. You take your profit and you move it into a place where there's no tax. And so the idea is that if we all work together, we'll stop companies from doing this. And so there are new rules slowly,

but surely moving in to prevent companies from being able to move all their profits into tax havens. Do you feel optimistic about it? No, because there's this thing called tax competition, right? Every time, for example, every time anyone says, oh, we should raise taxes in Canada, there are like so many voices out there that say, if you do that, everyone's going to leave. All the corporations are going to leave. Every single time, they're always like, oh my God, if we raise the taxes by like one penny, all the banks will leave tomorrow.

That threat is omnipresent, right? And this idea that if we change the tax rules, there's always going to be some other country that doesn't in order to track business. Marco, I feel like a little depressed after this conversation, but I actually have like a much better sense of what's going on here. So I really appreciate this conversation. Thank you so much for coming on to the podcast. Thanks, Jamie.

So before you go today, I promised an update on Trudeau's trip to Washington. Trudeau's trip to Washington. But it's an honor to have the Prime Minister of Canada, Justin Trudeau. Two things of note came out of it. The first is the new NAFTA, or USMCA. Canada, Mexico, and the U.S. have signed it, but it's not officially valid yet. Trump still needs Congress to make the agreement official. So Trudeau, he was really talking it out. We've worked hard to build a great trade deal that's good for Canadian workers,

good for American workers. The prime minister also promised to raise the issue with Democratic House Speaker Nancy Pelosi. And the other big thing that's worth noting here, Trump said he'd do something Trudeau has wanted for a while. Call for the release of two Canadians who are being detained in China. Anything I can do to help Canada, I will be doing. Are you planning to bring it up with President Xi when you meet with him? I would. At Justin's request, I will absolutely bring it up. At Justin's request. That's all for today. I'm Jamie Poisson.

FrontBurner comes to you from CBC News and CBC Podcasts. The show is produced by Chris Berube, Imogen Burchard, Elaine Chao, Shannon Higgins, Marion Warnicka, Levi Garber, and Matt Alma. Derek Vanderwyk does our sound design. Our music is by Joseph Chabison of Boombox Sound. The executive producer of FrontBurner is Nick McKay-Blocos. And I'm your host, Jamie Poisson. Thanks so much for listening this week. See you guys on Monday.

For more CBC Podcasts, go to cbc.ca slash podcasts. It's 2011 and the Arab Spring is raging. A lesbian activist in Syria starts a blog. She names it Gay Girl in Damascus. Am I crazy? Maybe. As her profile grows, so does the danger. The object of the email was, please read this while sitting down. It's like a genie came out of the bottle and you can't put it back.

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