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Updated: Fri, 27 Sep 2013 16:15:00 GMT | By Deirdre McMurdy, MSN Money

Tax scandal opens a Canadian can of worms

A mobster’s unintended legacy may be renewed vigour in fighting corruption.

Deirdre McMurdy

What is it with mobsters and taxes?

In 1931, when the notorious Chicago gangster, Al Capone, finally went to jail, it wasn't for murder or bootlegging or racketeering. It was because the U.S. Treasury Department nailed him on charges of income tax evasion.

Now, more than 80 years later, a similar story is playing out in Canada: The Canada Revenue Agency is embroiled in an embarrassing scandal involving a $381,000 tax refund cheque issued to a Montreal man, the late Nicolo Rizzuto, who had been publicly identified as a leading figure in the city’s Sicilian Mafia.

Rizzuto was in prison for drug smuggling, extortion and bookmaking in 2007 when the cheque was issued. There was also a $1.55 million lien against his home by the CRA for unpaid taxes, which disqualified him from any sort of refund.

An investigation is now underway and politicians and bureaucrats are publicly scrambling to reinforce the notion that just a few corrupt tax officials were responsible for the fraud.

Federal Revenue Minister Kerry-Lynne Findlay reassured Canadians that, "Those responsible for misconduct must be held accountable. We are acting to hold people accountable.”

Given how long it has taken for any heed to be paid to those who flagged such “misconduct” years ago, the minister’s words aren’t terribly reassuring.

Sure, everyone understands that a couple of bad apples can cause a lot of rot, but these revelations of systemic corruption — and the apathetic response — have shocked a lot of Canadians.

The thing is, we’re not a nation that’s got a strong tradition of challenging authority or engaging in civil disobedience, and the cost of that complacency can be high.

Once a government’s credibility has been widely compromised, it’s very difficult to restore it. It also leads, inevitably, to inefficiencies and bottlenecks in any process. That’s because the natural response to revelations of wrongdoing is to go overboard with all sorts of rules and regulations that are intended to make it clear the problem has been addressed and won’t recur.

That sort of reactive response almost always ends up taking the form of overkill. The Sarbanes-Oxley Act in the U.S. — which was the government’s response to all the corporate scandals a dozen years ago — created all manner of expensive dislocation.

Then there’s the fact that corruption erodes the moral high ground upon which we like to stand when it comes to pronouncing on corrupt practices in other countries, especially emerging economies and their challenges.

For another thing, it underscores the fact that when it comes to government spending cuts, compliance and enforcement aren’t the place to focus. This is as true of the CRA (which has disbanded it’s anti-organized crime unit) as it is of environment and securities regulation among other areas.

After all, when it’s an inside job, those who are intent on bending the rules for personal profit know exactly where the vulnerabilities lie. And how to exploit them.

Finance Minister Jim Flaherty has spent a great deal of his personal political capital pushing Canada toward the creation of a single securities regulator — something that’s standard in most developed economies.

Whatever the provincial jurisdictional objections may be to a national system, uniform codes and enforcement of those codes diminishes the opportunity for fraud and other abuses.

The less quantifiable issue of national brand is especially sticky.

Canada takes great pride in its reputation as a place that’s attractive to foreign investors because of its stable government, democratic tradition and transparent, accountable governance.

Corrupt tax officials and ineffectual safeguards aren’t the image we’re going for. It’s a little too reminiscent of a World Bank report on the situation in Pakistan:

“More than half of firms in Pakistan beside Bangladesh and India are expected to pay bribes during tax inspections. The tax systems in these countries are complex and create not only high costs of compliance but also opportunities for corruption … .The firms [are] expected to give gifts to public officials, by different type of interactions.”

What’s important about a tax system is not that it be fair, but that it be perceived to be fair. Anyone who’s studied the American Revolution and the Boston Tea Party can attest to that. If it’s not seen as fair, all manner of hijinks may ensue.

In the end, the late Rizutto may not have been a conventional model citizen. But his unintended legacy is an ironic one: raising awareness of corruption and galvanizing the public and political will to crack down on it. Hard.

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