Broken Windows Theory & the CRA
The broken windows theory states that visible signs of disorder and misbehavior in an environment encourage further disorder and misbehavior, leading to more serious offences. The principle was developed to explain the decay of neighborhoods, but it is often applied to large work environments… like the Canada Revenue Agency.
The broken windows theory, defined in 1982 by social scientists James Wilson and George Kelling, drawing on earlier research by Stanford University psychologist Philip Zimbardo, argues that no matter how rich or poor a neighborhood, one broken window would soon lead to many more windows being broken: “One unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.” Disorder increases levels of fear among citizens, which leads them to withdraw from the community and decrease participation in informal social control. This analogy holds in the case of the CRA where there is no recourse should those Public Servants simply choose to ignore public input, and many citizens refuse to stand against CRA overreach for fear of retribution.
The degradation in the ethical application of power within the CRA sped up when government oversight was minimized. Since the implementation of Agency status, given to ensure that elected officials could not influence tax investigations, the CRA has had no master, therefore no accountability. It is good not to unduly influence investigations, but investigators need limits no less than any authority or they will rely on the fear they illicit in citizens for speedy resolutions. According to Geoff Perry, a retired CRA Auditor, this is already a broadly applied strategy:
"Their goal is to break the taxpayer," said Mr. Perry in an interview with W5. "(CRA auditors) have the feeling that if the person has no resources, how are they going to defend? People go and they'll pay their assessments even though they know they're not true assessments because they can't afford the process."
The CRA is openly rationalizing this self-righteous abuse based on their wide spread belief that we citizens are all cheating on our taxes, or would without their constant invasion of our privacy. That belief is wrong according to numerous OECD reports placing Canadians on the top level for being naturally tax compliant, and the truth is understood even among the CRA public relations people:
As CRA Spokesperson, Sylvie Branch, stated "We know that the vast majority of Canadians are honest & forthright, especially when it comes to their tax affairs."
And yet, though many of Canada’s brightest minds work in the financial planning industry (and pay a lot of taxes), the quote below clearly indicates how the CRA wishes to attack us on our tax planning and tax avoidance. No one is talking about evading due taxes here, we are talking about legally created tax structures that decrease the tax burden owed to the government via efficiently moved money and its release in a timely manner. That is not an illegal pursuit, but here is the CRA’s take, nonetheless:
The fear of one’s own government is anathema to democracy. Our career public servants are not supposed to be creating policy on how they would choose to interact with the public, they are supposed to be strictly process controlled by clearly defined Acts that have been passed in Parliament. That is the legally derived process. So the country, as a whole, should be shocked when the same internal CRA documentation reads: “Tax avoidance results when actions are taken to minimize tax, and while within the letter of the law these actions contravene the object and spirit of the law,” concluding that these “actions are not illegal but are unethical” as their justification for inducing fear.
There couldn’t be a clearer indication that our Public Servants have expanded their policing duties outside of their legal mandate and have taken on the robes of philosophers and Pharisees in determining who they can pursue and publicly deride. It is the rationalization of dictators and has no ethical basis in an operating democracy. The letter of the law is the only measure of ethics that the CRA should apply when dealing with the public.
The Ethics of Power and Authority
The Canada Revenue Agency possesses enormous power, which can be used against citizens to deprive them of their financial freedom, search their work spaces and dwellings, seize their property, and bring official police action against them. These powers are legally permitted under specific circumstances, and their agents and representatives need to know when these powers can be legally applied. As the role of taxation officer ranks among the most feared occupations in society, this compounds an ability to abuse their power as they frequently come in contact with relatively powerless and disenfranchised citizens who may be unable to resist illegitimate use of that power. These powers are legally prescribed under the Tax Act, and Canada Revenue Agents are well aware of them. It is important that Canada Revenue Agents not misuse their power for the following reasons.
• Because of the psychology of citizenship.
Citizens, for the most part, want to participate in the “social contract,” to be a part of mainstream society and carry out their citizenship responsibilities. They want to belong to society and will do what they think is required by authorities to accomplish this. As a result, they will often try very hard to respond to whatever directive Canada Revenue requires and many times are susceptible to unreasonable requests by CRA representatives.
• To maintain due process.
Every CRA representative should acknowledge the importance of due process, and that they have a Duty of Care. Abuse of power runs directly contrary to the notion of due process, and agents who misuse their power are creating an environment in which due process cannot flourish. Ideally, all agents under the CRA umbrella need to maintain focus on due process and participate in accomplishing due process by being fact finders. Along with this, Canada Revenue Agents who might benefit from or are induced to embellish or create tax evasion charges must resist this power they are afforded when charges or other actions, such as search or seizure, are not truly warranted. Weighing true protection of the treasury against due process, in which they are faced with opportunities to misuse their power, must always be controlled by oversight. Agents must make decisions on when and in what situations they should use their power, but must automatically reflect on how the use of their power would look under close scrutiny that must be likely to take place. Oversight and accountability are paramount.
• To safeguard discretionary power and therefore efficiency.
As previously outlined, authorities can exercise power through discretion that is based on a personal or biased ethic. Psychologists argue that the way to eliminate this lack of due process is to place restrictions on discretion. Should agents of the CRA desire to maintain the discretion that they have, which is critical for efficiency, they must attain a track record showing they do not abuse their power. And that trust needs to be a precious asset, integrated into the ability to remain in a position of power.
Power and authority are tools that officials must use judiciously and ethically. Without a measurable and defined ethic, this power will be misused, creating a power imbalance that is bad for CRA representatives, the agency, and society. So, how prevalent are these ethical breaches within the CRA’s massive structure and how can we measure it? I suggest we can use their very own macro-view accounting numbers, their basis for demanding higher prosecutorial powers.
Annually, the CRA calculates the Tax Gap, their measure of the how much the total tax payment received falls below their statistically derived expectations. This is an ever increasing number despite the compliant nature of Canadian society and now, and in recent years, the CRA claims huge 11 figure numbers annually, but is never willing to have third-parties fully audit those results. This is a strange combination of claims and denials for any government body to be making simultaneously, so let’s unpack it:
1) The CRA derives power over citizens through their ability to state that individuals or businesses are non-compliant in tax payments. Ethical breaches by the CRA would generally present as false or inflated claims of an individual’s, or a corporation’s, tax avoidance or tax evasion. The Tax Gap is the CRA’s cumulative accounting of the total underreporting of due taxes which, of course, is a real problem. It is in a first differential analysis, where any unreasonable inflation of the Tax Gap would show up, that the public could gain insight on and magnitude of the Abuse of Power issues within the CRA.
2) Starting with just a smell test, the CRA’s claim that there is an annual under-reporting of due taxes by Canadians, up to 15%-18% range based on Canada’s total tax revenue, either indicates that the CRA is very inefficient at their job or that they are unreasonably inflating the Tax Gap. Either way, the CRA has no shame, because their constant ask in addressing this “shortfall” is for expansion of their staffing levels. Staff levels which already sit, on a per capita basis, at five times the staffing level of the IRS and nine times that of Germany’s tax department. Our CRA now sits at nearly 46,000 employees being carried on the public purse, which should at least buy us gold-plated service. Instead they offer us “fear” and feel entitled in doing so.
If the Tax Gap is a true indicator of rampant tax evasion throughout Canada, why would the CRA not want it fully confirmed by third-party government offices? And yet, for a decade Senate committees, the Auditor General and the Parliamentary Budget Officer (PBO) have been refused full access to the accounting and rationale behind the CRA’s Tax Gap totals. The CRA did provide the PBO with high-level, aggregated data on individuals, corporations and trusts, but the information on individuals was so high-level it was “unusable,” according to PBO Yves Giroux, who could only complete a partial study with the more usable corporate data.
The study will not, however, offer the full picture of the tax gap in Canada, Giroux said.
There are other troubling indicators that the CRA is hiding abuses. If the tax evasion issue was truly as rampant as claimed, why aren’t we implementing tried and true solutions from around the globe? Tax Reform to bring in a simplified or flat tax regime has been talked about in Canada for decades, but is never even initiated. This is the best tool to stop evasion since it can be so straight forward that there is no place left to hide large revenues. This approach cuts the paperwork, improves efficiencies and speeds up economies… why wouldn’t Canada want to use that huge CRA staff to gain those kinds of benefits? Simple clarity would also help with giving us a forecastable tax base.
Instead, our Tax Code has not been substantially updated in nearly 50 years and stands as one of the world’s most complex with over 3600 pages. Either the CRA is very inefficient in stream-lining procedures to a modern standard, or they prefer the power this mess gives them: the ability to interpret tax structures in any number of convoluted manners due to the lack of clarity. The CRA is far from consistent in how they apply the existing code on a case-by-case basis so, given their elevated staffing numbers and the lack of will to update, they must be motivated to maintain the complexity rather than simplifying. Experts have claimed that upwards of 70% could readily be stripped to modernize, clarify and close out loop-holes. But leaving it as-is allows the CRA to appeal court losses, rather than having to remove their associated tax-evasion claims from the Tax Gap total. That alone would reduce the Tax Gap by billions each year.
Here are some results of tax cases in our country:
Justice Robert Punnett found that Tony & Helen Samaroo were “victims of an egregious prosecution” and “reprehensible conduct.”
Justice Norman Douglas stated on the obvious innocence of John Marsden that “One would think that he would be the last person of interest to the ever vigilant gaze of Revenue Canada.”
Judge Douglas went on to state that the CRA had clearly breached their own code of conduct “jumping the gun based on tunnel vision” to bring a criminal prosecution.
Justice M.A. Humphries made two landmark rulings on the case of Irvin Leroux…
1) That the CRA owed a Duty-of-Care to Leroux to deal with him in a “non-negligent manner”
2) And that this Duty-of-Care was violated in applying crippling penalties for misreporting his income when there was no such reporting inaccuracy.
The CRA also attacks large corporations with many results like:
In CRA vs Cameco, Justice Owen stated “there is no evidence on which to base an adjustment for these services even if one were warranted” (which he had already stated it was not.)
Judge Owen further elaborated on transactions and series involving Cameco stating “the focus of the test is the commercial rationality or irrationality of the transaction or series.”
After the CRA appealed the Loblaws decision, Judge Judith Woods states: “the Crown submits that given Loblaw Financial’s position is accepted, the very target of the FAPI legislation, which is an investment portfolio held offshore, would be exempt. The concern is a valid one, but it does not enable a court to to give the legislation a broader interpretation than it can reasonably bear.”
Judge Woods went on to note that the Federal Government had already amended the law to change the definition of a foreign bank specifically to address this law, making a lie of the CRA’s defense statement that a Loblaw win would nullify the purpose of the Foreign Accrual Property Income rules. That rewrite also made clear that the CRA knew the initial version was inapplicable to Loblaws’ structure.
In every one of the above cases the CRA has appealed without hesitation… multiple times. The Samaroos had been charged with 28 counts of tax evasion but not one stuck in any judgement. However, their victory of a $1.7 million compensation payment from CRA was short lived. The CRA appeal overturned any financial penalty against the bureaucracy and the Samaroos received nothing for the loss of their life, family and business. The CRA had destroyed with impunity.
The CRA never tells that story truthfully. They just state that they were victorious on appeal, and then they let the assumption stand that the Samaroos were proven guilty of tax evasion. A dirty spin and a lie of omission.
Canadians need to stand up and defend against this expanding attack on our democracy. Fear is an autocratic tool and has no place being used against us by our own Public Servants. Much of the inflated Tax Gap is hidden by the automatic compliance that fear gains the CRA. As Geoff Perry stated, most of us just pay artificially inflated assessments to make the harassment go away. The average Canadian is far from becoming a tax expert and, out of that fear, pays these shortfall claims, solidifying them as valid portions of an inflated Tax Gap.
It costs Canada either way. Canadian citizens fearing and paying CRA inflated assessments undermines our democratic structure and expands the Tax Gap claims. Disagreeing with assessments clog our courts unnecessarily and slow our economy with ever increasing accountancy & legal bills; and even winning a judgement still will not remove the number from the Tax Gap until all appeal processes are ended. And that inflated Tax Gap supports the CRA’s constant request for expanded powers and staffing levels.
This is a system rewarding inefficiency and empowering abuse.
The CRA has already broken a lot of Canadian windows and we will be left in the cold if these “Public Servants” can continue this practice unchecked. They need to err on the side of caution when dealing with the public, not be rewarded when they find a harsher viewpoint on how the taxpayer addressed year-end accounting. Too many lives have been damaged, even to the point of suicide, by the CRA ignoring their Duty of Care in dealing with the public.
Taxes are necessary and we should all want to pay our fair share in supporting this great nation. But it is a team effort and we do not need our own service providers injuring our own people. That just undermines the very foundations of our nation.
