03/05/22

CANADA: Battle over secret CRA tax deal divided staff, launched complaints, documents show.

As published on cbc.ca, Tuesday 3 May, 2022.

The Canada Revenue Agency violated its own policy and exposed its reputation to damage when it granted a secret tax deal to a major corporation, according to documents filed in court.

More than 2,000 pages of highly sensitive government records recently filed in Federal Court expose details of an internal CRA controversy over the tax deal. One CRA manager wrote in the documents that an executive tried to make them support the deal, which was "completely unethical and "wrong."

Despite some CRA employees disagreeing with the arrangement — warning it would lead to lower tax revenues — agency executives went ahead with it in 2019, CRA records show.

"There could be negative reputational effects as a result of the atypical process followed … ," reads the preliminary findings of an investigation by CRA's Internal Affairs and Fraud Control Division, tabled in Federal Court.

CRA defended the deal in a statement to CBC News, saying it was "favourable" to the agency and an investigation by the Internal Affairs and Fraud Control Division cleared those accused of wrongdoing. But the agency would not share a copy of that investigation report or name the company involved, citing the privacy rights of staff and taxpayers.

Internal documents show the deal set off a torrent of allegations and counter-claims between executives and staff that triggered a series of internal investigations and a settlement to drop retribution claims.

Two CRA employees have filed an application for judicial review in Federal Court arguing the integrity commissioner shouldn't have ceased investigations into other claims of wrongdoing at CRA including a toxic workplace environment. The allegations contained in the documents have not been tested in court.

The controversy centres on a division of CRA that approves payment agreements between multinational firms and the Canadian government to prevent tax avoidance.

The CRA is sensitive about this topic because of recent news stories about Canadians stashing offshore fortunes in tax havens. The agency also made headlines in the past for a high-level decision to offer amnesty to wealthy KPMG clients caught using offshore tax avoidance schemes in the Isle of Man.

Court documents confirm an investigation by the CRA's internal affairs and fraud control division in 2019 probed three anonymous complaints alleging preferential treatment was given to a "prominent global company that is alleged to use aggressive tax avoidance schemes to shift profits from Canada to an Irish Tax Haven."

"Please take immediate action to stop this … deal which further undermines the entire integrity of the CRA," reads one of the complaints.

The name of the company involved is blacked-out in the documents filed in Federal Court, which also don't say what the company does or where it's based. According to the court documents, the deal saw the CRA waive penalties and interest that the company otherwise would have owed and a controversial advanced pricing arrangement (APA).

Two CRA employees filed similar complaints to the integrity commissioner in 2020 and named three CRA executives at the time as the key players involved in approving the deal: assistant commissioner of the Compliance Programs Branch Ted Gallivan, director general of the International and Large Business Directorate Alexandra MacLean, and director of the Competent Authority Services Division Donna O'Connor.

Those complaints by CRA employees claimed some staff in the Competent Authority Services Division (CASD) were "pressured to rubber-stamp" the "multi-million dollar" agreement without being able to review it substantially themselves.

One of the complaints claims that in one instance, a manager with CASD who refused to support the deal was told by MacLean that they had "no choice" because "Ted wants this done" — a reference to Ted Gallivan.

That complainant, a manager, claimed they did not "play ball" because they felt the deal was wrong. In an email to a superior — also tabled in Federal Court — the complainant alleged they became the "subject of a campaign" by a director "to force me out of my job."

One of the complainants compared the case to the CRA giving special deals in the past to wealthy clients of the accounting firm KPMG during settlement agreements that also violated the CRA's own guidelines. As the head of compliance disputes, Gallivan spoke publicly on CRA's behalf about those claims in 2016.

What was tabled in Federal Court is only a summary of the investigation's preliminary findings that confirm the agreement got off to a "novel start."

The International Tax Division (ITD) reached a verbal agreement with the company that CASD would extend the scope of the multinational firm's APA to cover 2016-20, including two years that had already passed, according to the conclusions of the preliminary investigation.

APAs allow companies to avoid being subjected to annual tax audits and set out methodologies for pricing a company's international transactions.

When the file reached the unit that approves the agreements — CASD — the unit's director at the time said she "wouldn't honour it" without her team "doing its usual due diligence," according to the preliminary investigation.

CASD staff also did not agree with extending the APA to cover previous years and were unable to "conduct their usual inquiries" because the other division, ITD, felt it already did that work, the summary of the preliminary findings said.

MacLean then advised staff that the "agreement would be honoured." That move contravened CRA's policy that states unilateral APAs cannot be retroactive because other countries are not included in the negotiation process, the draft of the final report found.

A new director at CASD, Donna O'Connor, signed off on the deal in November, 2019, making it official.

CRA then had to notify the Netherlands and United States, where the company in question also operates. The preliminary findings of the investigation noted those countries "may wonder if, and why, Canada did not follow its published practice."

CRA told CBC News that, in the end, its investigation concluded that the claims about the APA deal being granted "with no analysis" were unfounded, and that no staff members were forced from their jobs for complaining about it.

"We can unequivocally state that the CRA has thoroughly investigated these allegations of wrongdoing with the participation of an expert third-party consultant and has determined them to be unfounded, with all those employees alleged to have committed wrongdoing having been cleared," wrote CRA spokesperson Etienne Biram in a statement to CBC News.

"Administrative policies do not have force of law...the mention of these allegations has serious impacts on the reputations, careers, and mental health of longstanding, dedicated public servants."

Vern Krishna, a tax lawyer and University of Ottawa law professor, said that while what CRA did is not a criminal offence, it's a "huge deal in international taxation."

"CRA has frankly misapplied its discretion," said Krishna. "Extremely unusual that it would happen and a remarkable accommodation to this particular company."

Krishna was awarded an Order of Canada for his contributions to tax law over the past 50 years and has written several books on international tax law. He said it's a big deal for a company to get an APA because it involves tens of millions of dollars internationally.

The purpose of APAs, he said, is to assure multinational corporations they won't be exposed to the threat of audits, assessments and years of litigation. But if other countries dealing with Canada through international tax treaties lose confidence in CRA's willingness to follow its own processes and policies, "it does a great deal" of damage, he said.

"When you begin to do backroom deals and retroactive deals that don't comply with your policies, you have reputational damage," said Krishna. "Reputational damage is not in the best interest of the country."

But Dale Hill, who worked at CRA on APAs during the infancy of the program in the 1990s, said that what the agency did isn't a big deal. He's now in private practice as a partner at Gowlings WLG and negotiates APAs on behalf of companies. He specializes in audit defence and was not directly involved in this particular case, he said.

"It doesn't look like a sweetheart deal," said Hill, after reviewing the CRA preliminary investigation's findings. "There is no financial benefit to the company.

"The benefit to the company was an efficient resolution to their case. That's the only benefit. The benefit to the CRA was it was able to reallocate resources because the company did not have to go through the whole process of amending tax returns."

Hill said that while he would never question CRA's integrity, he did think it was unusual for a deal to be struck verbally without consulting with the unit that approves them.

Lawyer Scott Wilkie, who is named in the documents as the tax representative for the multinational firm, did not respond to CBC's request for comment.

Gallivan, who became executive vice-president of the Canadian Border Services Agency last fall, also didn't reply to CBC's request for an interview. Someone who picked up Gallivan's phone last week hung up after CBC asked for his email. MacLean also has not responded to CBC's request submitted last Thursday.

The controversial case has grown into a series of wider grievances and harassment complaints.

Two employees filed internal complaints against the executives involved — including claims some abused their power, retaliated, created a toxic workplace and harassed them.

A briefing note to the agency's director general of HR in 2020 warned of "repeated and persistent allegations being filed within this division" that showed "a certain level of dysfunction exists" that required action.

The CRA's Internal Affairs and Fraud Division launched a series of investigations and found O'Connor made hiring decisions that contravened the rules and failed to foster a healthy and respectful workplace. The investigation determined O'Connor used derogatory terms to refer to two employees who filed complaints against her at an after-hours celebration.

The CRA suspended O'Connor in July 2020 for 20 days and suspended her staffing authority. She has not responded to CBC's request for comment via LinkedIn and through the CRA.

O'Connor also filed her own allegations against one of the complainants, court documents show. The CRA took disciplinary action against the employee for sending personal emails at work, failing to disclose other financial compensation from a hockey billet, staying away from the office too long during lunch breaks and being tardy.

As first reported by the Globe and Mail last week, the CRA later hired a team of psychologists in 2021 to independently assess its workplace environment at CASD. That report found that 50 per cent of surveyed staff felt they were a victim of bullying, harassment or discrimination. Only 31 per cent of respondents believed that management would take action in response to the survey results, the report said.

CRA said a plan to address its workplace culture is in place and it "is proud of the reputation" of "over fifty thousand CRA employees for acting with integrity, and fulfilling their responsibilities in an ethical, professional, and principled way."

The case went to Federal Court after federal Integrity Commissioner Joe Friday decided he would not launch his own investigations.

Friday decided in July 2020 not to investigate the allegations about the APA because it didn't concern gross mismanagement or a serious breach of the code of conduct. Friday also said he couldn't act on information protected by client-solicitor privilege.

The CRA employees who complained have now submitted an application for a judicial review in Federal Court, arguing Friday should have investigated two other complaints about alleged wrongdoing in the workplace. The current legal battle does not involve the APA.

Documents released as part of the case were only lightly redacted and have since been removed from the public record. A new version redacted by the parties involved removes the names of complainants, those accused and other information not pertinent to the case.

The privacy commissioner's office confirms it's investigating the release of the lightly redacted documents.