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After a Decade of Fighting Tax Havens, Canada Has Only Managed to Prosecute 71 People

The Panama Papers have turned everyone's attention to fighting offshore bank accounts and shell companies — but it's not an easy problem to fix.

by Justin Ling
Apr 9 2016, 2:10pm

Photo via David Kawai/Daily VICE

The Panama Papers have turned the world's attention towards the legal grey zone of tax havens, offshore bank accounts, and shell companies.

These accounts aren't necessarily illegal — plenty of offshore bank accounts are designed to protect money or investments from unstable banks or corrupt governments, even as their owners are still paying all their taxes. But lots of accounts are used for nefarious deeds, and to skirt taxes.

And, for the past decade, the Canadian government has spared no expense to catch those tax cheats.

Yet, as the world demands action — from US presidential hopeful Bernie Sanders to tens of thousands of Icelandic protesters — there is a simple question at the heart of the problem: how much more can be done? Canada might be a great test case to answer that question.

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In 2006, the Canadian federal government announced that it would be going after those who hide money in tax havens like the Canary Islands, Belize, and, of course, Panama.

By 2008, it had implemented the "International Compliance Strategy," which beefed up enforcement and auditing of offshore accounts in order to catch tax evaders. From there, it launched the "Anti-Tax Haven Initiative."

Between those bureaucratic initiatives, the government said 85 new measures came into place. A tip line was set up to snitch on tax evaders. Dozens of staff were dedicated to finding tax fraudsters with offshore money and bringing them to justice.

The whole thing appeared to be a great success. The Canada Revenue Agency (CRA) bragged that it had discovered $1 billion in taxes in the 2009-2010 fiscal year alone by going after international tax avoidance.

The key word, there, is 'avoidance.'

Put simply: tax avoidance is when you bend the rules and laws out of shape to help minimize your taxes — and will probably result in the CRA auditing you, and forcing you to pay back taxes — while tax evasion is deliberately ignoring or avoiding the laws in such a way that is actually criminal, and could result in fines or jail time. One is regulatory, one is criminal.

Avoiding taxes, with the help of a skilled lawyer or accountant, isn't that hard. Evading taxes outright is far more tricky.

Every time someone moves $10,000 or more outside of the country, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is alerted. If, in monitoring those transactions, it suspects a crime is being committed, FINTRAC passes that information on to police. At a 2011 committee hearing, a FINTRAC official reported that they flagged 287 cases to police over a two-year period.

Before FINTRAC or the police catch you, there is the option of CRA's Voluntary Disclosures Program — which gives amnesty to anyone who comes forward about their tax evasion or avoidance, so long as they pay it back with interest. Every year, that Voluntary Disclosures Program, which operates on an annual budget of about $5 million identifies roughly $1 billion in unreported income — although it's unclear how much of that is international assets.

In other cases, CRA merely audited people who were being skimpy with their taxes, and forced them to pay back the outstanding amount.

But the CRA's policy is, once you're under investigation for tax evasion, you can't just hand back the money through the voluntary program and apologize — you're going to be facing charges.

While it may be doing a good job of convincing people to hand over their money and cracking down on tax avoidance, statistics on how often Canada prosecutes tax cheats — the ones aggressively trying to avoid detection — reveals that either the CRA's anti-tax evasion initiatives have been ineffective, or the problem simply isn't as big as has been estimated.

Of that billion dollars in missing tax dollars the CRA said it had discovered, they said just a small fraction — $4 million — was being sheltered by offshore bank accounts or shell companies.

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It's a trend that has continued since the agency started targeting tax evasion in 2006. Figures provided to VICE News shows that the CRA convicted over 1,600 people with tax evasion, both domestic and international, between 2006 and 2015, amounting to over $235 million in federal taxes that had been avoided.

Only 71 of those cases, amounting to just $25 million in taxes, involved bank accounts or shell companies hidden offshore, or the use of tax havens.

That didn't stop the government from doubling-down on the fight against tax havens.

In 2013, then-National Revenue Minister Gail Shea earmarked $30 million to try and crack down on overseas cash stashes — half to target the quasi-legal tax avoidance, half to go after evasion.

In 2015, the funding increased again. The Conservative government of the day committed $25 million to fighting tax evasion and tax avoidance, and another $58 million specifically to go after large businesses who have assets overseas.

In his first budget, Bill Morneau, the current finance minister, kicked in another $444 million to fight tax evasion and tax avoidance over the next five years.

That puts the total amount of new funding at over $550 million, spread over seven years.

'If anything, we think our estimate is low.'

This, despite the fact that nobody in Canada knows how big the tax gap — the difference in how much in taxes that should be collected, versus how much is actually collected — actually is.

Estimates are notoriously unreliable.

Canadians For Tax Fairness, an advocacy group that is often cited on tax havens, estimates that both levels of government lose $7.8 billion from tax havens each year. Yet, the organization's calculations, which are frequently cited in the media, is based on less-than-stellar math.

"It's triangulation of several different sources," said Dennis Howlett, executive director for the group.

He said that the figure comes from proportioning Canada's share of the estimated world offshore wealth — pegged in one report as $21 trillion — and then blends it with the total foreign direct investment by Canadians in tax haven countries (which, in the group's calculations, includes Ireland and Hong Kong.)

Howlett admits that there are some problems with his calculation, but said that "if anything, we think our estimate is low." He adds that the only ones who can get an exact number is the CRA.

According to the CRA, there is between $3 billion and $8 billion in assets that are subject to Canadian taxes sitting in bank accounts worldwide, according to those who have disclosed assets worth over $1 million to the federal agency. Most of those assets are in the United States or Europe.

In 2009, only 160 individuals reported holding assets worth over $1 million in the Caribbean.

For Howlett and his group — whatever the actual cost of the tax gap is — there needs to be a new commitment to empowering the CRA to go after all tax cheats.

"There's a huge lack of capacity in the CRA, so they end up going after the low-hanging fruit," Howlett said.

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He said that while identifying the exact number of staff who have been assigned to fighting offshore tax evasion is difficult — the number appears to be north of 70 in any given year — the department as a whole has been ravaged by job cuts from the previous government's austerity program. Canadians for Tax Fairness does list the Public Service Alliance of Canada, the union which represents CRA employees, as one of its sponsors.

But it's more than staff — Howlett argues that while the agency is happy to go after the "low-hanging fruit" of small-time tax avoiders or someone who accidentally broke the rules, they're letting the big fish go free. He singles out accounting giant KPMG, which cut a deal with the CRA to avoid serious penalties after it was caught offshoring SOME $130 Million to the Isle of Man.

One way or the other, despite the buzz over the Panama Papers — which are said to name 350 Canadians — nobody appears to be calling up the Voluntary Disclosures Program, which is essentially a get-out-of-jail-free card.

VICE News inquired to CRA to see if there had been a spike in individuals reporting income through the Voluntary Disclosures Program.

"There has been no noticeable increase in the number of submissions to the Voluntary Disclosures Program in the last 24 hours," a spokesperson said following the Panama Papers leaks.