There’s a crisis of public confidence in Canada’s tax system — but don’t expect any help from the nation’s accounting profession in rectifying the situation.

That’s the message I’m taking from a hearing of the House of Commons Finance Committee this week, called to hear expert testimony about offshore tax avoidance — specifically, KPMG’s former Isle of Man tax product, designed to allow wealthy Canadians to shelter millions of dollars in assets from taxation by stashing the money offshore.

The hearing itself was a bizarre affair. MPs on the committee opted to muzzle themselves and their witnesses by suddenly declaring that nobody could talk about what the hearing was called to discuss in the first place — the Isle of Man product.

The committee decided back in March to look into KPMG and the product it designed to allow wealthy Canadians to donate millions of dollars to specially-designated corporations based on the Isle of Man, only to get the cash back later (also as a gift), thereby avoiding paying Canadian taxes.

When the Canada Revenue Agency discovered what was going on, it called the scheme “a sham” intended to deceive. But the CRA later signed secret agreements with some of the taxpayers involved, allowing them to pay back the taxes owing with no interest or penalties. Disclosure of the affair by the crack investigative team at CBC touched off a political firestorm.

Last month, the Finance Committee opened its hearings on the issue by hearing from Gregory Wiebe, KPMG tax partner in Canada. Wiebe said it was all old news because KPMG no longer offers the Isle of Man “product”. He told the committee that “we have no tax shelters that we sell … The tax shelter regime in Canada is something we’re not part of.”

But when it came time this week for KPMG’s critics to take the stand, the Finance Committee suddenly had a change of heart about the whole business. It effectively decided to gag itself — and any witnesses who would appear before it.

The decision came after the committee received a letter from a KPMG attorney who complained that it would be “unfair and improper” to discuss the issue while elements of the case were still before the courts. Committee chair Wayne Easter agreed that it would be preferable for the MPs to avoid saying anything that could be seen as affecting court proceedings.

So the witnesses were told they could only talk about tax havens in general — even though KPMG already had been given an opportunity to present its side of the story last month. (A KPMG spokesperson emailed me to state that Wiebe was careful during his committee appearance to avoid directly discussing matters currently before the courts.)

Lareau said the only way to stop this leakage is to make tax avoidance facilitators who break the rules pay with prison sentences. Lareau said the only way to stop this leakage is to make tax avoidance facilitators who break the rules pay with prison sentences.

Witnesses were gobsmacked by the gag order. Andre Lareau, a Laval University tax expert, was clearly irritated when he was told to talk in generalities about tax havens. “I was invited here to talk about KPMG,” he protested.

But Lareau and other witnesses still managed to make it clear where much of the problem lies. The tax system is increasingly leaky, with wealthy Canadians hiring high-paid accountants and lawyers to think up aggressive ways of reducing their tax footprint.

Scott Chamberlain, lawyer for the Association of Canadian Financial Officers, said that “facilitators conceive of, develop, get legal advice, sell, market and promote tax products that have not been vetted by the CRA.”

Lareau said that the Income Tax Act has become increasingly complex, in large part because accounting firms are concocting increasingly convoluted avoidance strategies — some of which he said operate at “the limit between the spirit and the letter of the law.”

“There are penalties in the law for tax evasion but given the complexity of the law, the only tool to deal with tax evasion is to increase penalties for the people who create these tools,” said Lareau, pointing out that it’s the tax adviser — not the client — who usually creates the tax avoidance strategy.

“I’m not talking about concealing money in an account in the Bahamas. I’m talking about complex tax strategies where screens are set up, where there are nominee directors … where there are people behind smokescreens.”

Lareau said the only way to stop this leakage is to make tax avoidance facilitators who break the rules pay with prison sentences. “The only way that the creators of those tax devices will understand that they went beyond what is permitted is to deprive them of their freedom. Imprisonment should be seriously considered.”

Art Cockfield, who teaches tax law at Queen’s University, made a similar point, noting that the U.S. is much more serious about cracking down on these schemes that Canada has been. And the boundary between legal tax avoidance and tax evasion is often pretty thin. “At some point, the tax planning becomes so egregious and so aggressive that measures need to be taken to curtail it and to sanction the advisers as well as the taxpayers.”

But the head of the organization representing Canada’s 200,000 CPAs, Joy Thomas, argues the profession is blameless. The problem, she said, is not aggressive tax planning or the marketing of schemes that skirt the law. Whose fault is it? The government’s, of course.

“The root cause of all this is that we are dealing with a system that continues to grow and grow in complexity,” said Thomas — as if that complexity had nothing to do with experts actively seeking out loopholes to exploit. Tax evasion is illegal, tax avoidance isn’t. “Tax avoidance is tax planning,” she said, arguing that contributing to an RRSP is a form of tax avoidance. (I always understood that RRSP contributions didn’t avoid tax. They simply deferred it until after age 71.)

Asked what was being done by the profession to police its members who actively promote tax schemes that are deemed beyond the pale, Thomas was quick to say that the profession is regulated at the provincial level and there are penalties for unprofessional behavior.

But Chamberlain said he had spent hours poring over 30 years of cases involving professional misconduct allegations against Canadian accountants and hadn’t found one case involving an offshore operation like the Isle of Man product.

After all, it’s simply tax planning, right?

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