The recent release by the International Consortium of Investigative Journalists of a report on tax havens should not come as too great a surprise to anyone. That wealthy folk have some, perhaps most, of their money stashed outside of their own countries merely shows how the rich are just like the rest of us, pressed by that urge to escape the reach of the tax man.
It can begin with the simple suggestion of a discount, should we choose to pay for goods or services with cash. While there may be a host of reasons why someone might offer a discount for cash payments, a pervasive one is that a cash transaction will not attract a tax. Of course, cash transactions are taxable. The discount is the plan, implicitly shared between buyer and seller, that the payments will not appear on accounting records. The buyer will not pay any consumption, goods and services, or other kinds of value-added tax: the seller will not declare the cash as income. They succeed in creating a little haven, a little tax savings.
Some of the money in tax havens is of this kind, money upon which tax was owed but which was intentionally, knowingly, moved before the reach of the state. Tax evasion is a crime, the intentional, knowing evasion of an obligation imposed under tax law. Most of us know that cash discounts are about evading a tax. We do not find it particularly criminal. Putting a couple of million dollars in an account in the Cayman Islands and not the declaring the lofty thousands in interest on that account to the Canada Revenue Agency or the Inland Revenue Service (IRS) is a crime.
Not all amounts put in safe havens abroad constitute a crime. It is not a crime to set up a trust, to place assets in that trust and to have those assets accumulate income and not declare that income. A non-resident trust, like a Caymanian citizen, may pay tax in the Caymans but not necessarily to any other jurisdiction. As long as the money does not flow into the pockets of a resident Canadian, whether a sentient Canadian or a trust resident in Canada, there is no tax issue. That is classic tax avoidance.
Tax avoidance is a common practice of most Canadians. Putting money into a Registered Retirement Savings Plan is tax avoidance and is perfectly legal. Today's tax is avoided in order to save for tomorrow. Placing money offshore in a trust, or some other legal device, is usually perfectly lawful. After all, even the wealthy have to save for tomorrow.
Nor is keeping finances secret a crime. It is no more criminal to put resources into a bank account protected by Switzerland's robust bank secrecy rules than is it to put the same into your local credit union. Bankers, whether in London, England, or Welland, Ont., owe their clients a duty to keep their financial affairs confidential. The size of my bank account is a private matter, beyond the prying eyes of my neighbour.
The trouble happens when the secrecy rules are used to hide taxable assets from the prying eyes of the revenue bodies. The crime lies in hiding income from the tax authorities. It differs in scale from a cash payment to evade a goods and services tax. And the billionaires can usually do it much better than the little cash buyer.
The problem is not so much the existence of tax havens. The problem is the little haven tendency in all of us.
Michelle Gallant teaches taxation law at the University of Manitoba's Robson Hall.