The Panama Papers, a leak of millions of confidential documents from Panamanian law firm Mossack Fonseca, has caused an uproar in international media. The leak revealed that the firm had spent decades helping wealthy people from around the world set up offshore shell companies. Such companies often have a legitimate purpose, but they can also be used as vehicles for, among other things, evading or avoiding taxes that a person would otherwise have to pay.
David Piccolo, a tax lawyer and partner with TaxChambers LLP, was kind enough to sit down for an interview to provide his thoughts on this matter:
What are your thoughts on the leak?
Panama has notoriety in the tax world as being a place that protects privacy more than other jurisdictions. Once, it was thought that the Cayman Islands, Switzerland and other quote-unquote havens were thought of as jurisdictions that valued privacy. These jurisdictions have given up some of that privacy in recent years to get in line with the Organization for Economic Co-operation and Development crackdown on tax havens. Panama has tried to maintain its secrecy, so there is a little bit of notoriety attached to Panama, because unscrupulous people know that the Panamanians will protect their secrecy. This is why this information is often only available through a leak like this, and not through normal channels.
People are interested in the idea that wealthy people are holding funds offshore, and are not paying their fair share of tax. Tax policy has to deal with the fact that capital is so mobile now, that we have to balance not only the issue of funds being able to flow between different jurisdictions, but also with the idea that people have to pay their fair share of taxes. These are competing issues, because Canada has a wide network of tax treaties, so we have obligations to other jurisdictions. We also know that people will leave the country if they are forced to pay too much tax – there are famous cases of tax refugees, people like Eduardo Saverin, Gerard Depardieu, Sophia Loren, Tina Turner.
Practically speaking, it’s infuriating for the average employee who has very little opportunity to plan their taxes. They have their tax withheld at source, they get their T4, and they pay their tax. The average person could not funnel their money to Panama and see any benefit from it. However, for the person who has his or her own business, they may be able to take advantage of this to arrange his affairs to minimize his tax. It’s that fact that may be infuriating to the average person.
You mention minimizing tax. How would you explain the difference between tax evasion and tax avoidance?
Tax evasion is a willful evading of tax, and is a criminal matter under the Income Tax Act. Tax avoidance is a lawful reduction of your tax, seeking to avoid paying tax within the provisions of the Income Tax Act by structuring your affairs in a certain way. The law allows you to arrange your affairs in a legal manner to reduce your tax.
So the issue that this leak presents is not necessarily that anyone is engaging in anything illegal so much as it is exposing this world of legal tax avoidance that’s only accessible to people who have the means to access it?
Correct. What was interesting to me was reading about the art dealer from Montreal who was named in the Panama Papers, and the article said that she was advised to set up this structure by her tax adviser at Deloitte. Presumably, Deloitte would have reported this to CRA. This may mean that nothing in these leaks is news to CRA. It may make for good press, and it’s likely that CRA is going to find something that is non-compliant with someone, but I suspect that at the end of the day, the number of people who will be directly exposed as having done anything wrong is going to be disappointing to people. The people who would likely be caught having done something wrong would not be the wealthiest people, but rather the random guy who tries to set something up in Panama on his own and does a sloppy job.
Why do you say that?
Proper tax planning is not based on failing to report to Canada Revenue Agency. Any plan that is put into place includes proper reporting. No lawyer is going to advise their client to not comply with the Income Tax Act, and an accountant should not be filing returns that they know contains false information. So, people who are getting advice from accountants and lawyers are going to be advised to do everything by the book. So they’re reporting these things to CRA.
What’s interesting to me is not what might come out of this leak, but what this leak might lead to for other people who have used other firms in Panama. I could see people asking “is such-and-such firm next,” and deciding to get their affairs in order now before there is another leak. These people could use CRA’s voluntary disclosure process to come into compliance before another possible leak. We’ve seen this in the past when CRA got information from eBay years ago about their power sellers, or from Uber more recently about their drivers, there was a spike in voluntary disclosures by people who may not have been reporting their income before who wanted to avoid potential penalties. It will be interesting to see whether there is a similar spike in this case.
This interview has been edited for clarity and length.
Timothy Duggan is a condominium lawyer and civil litigator with Horlick Levitt Di Lella LLP. You can contact him on Twitter at @timmyd_ and tell him what you would like to read about in future columns. Reasonable Doubt appears on Mondays.
A word of caution: You should not act or rely on the information provided in this column. It is not legal advice. To ensure your interests are protected, retain or formally seek advice from a lawyer. The views expressed in this article do not necessarily reflect those of Horlick Levitt Di Lella LLP or the lawyers of Horlick Levitt Di Lella LLP.
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