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37th PARLIAMENT, 1st SESSION

Standing Committee on Public Accounts

EVIDENCE

CONTENTS

Tuesday, March 12, 2002

1535

Mr. Williams

Ms. Beth Phinney (Hamilton Mountain, Lib.)

The Chair

Mr. Mayfield

The Chair

Mr. Gilles-A. Perron (Rivière-des-Mille-Îles, BQ)

The Chair

Mr. Mac Harb (Ottawa Centre, Lib.)

1540

The Chair

Mr. Philip Mayfield

The Chair

Mr. Philip Mayfield

The Chair

Mr. Gilles-A. Perron

The Chair

1545

Mr. Mayfield

The Chair

Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada)

1550

The Chair

Mr. William Baker (Assistant Commissioner, Compliance Programs Branch, Canada Customs and Revenue Agency)

1555

The Chair

Mr. Philip Mayfield

Mr. Barry Elkin (Principal, Office of the Auditor General of Canada)

1600

Mr. Philip Mayfield

Mr. William Baker

Mr. Philip Mayfield

Mr. William Baker

The Chair

Mr. Philip Mayfield

Mr. William Baker

The Chair

Mr. Philip Mayfield

1605

The Chair

Mr. William Baker

The Chair

Mr. Gilles-A. Perron

Mr. Shahid Minto

The Chair

Mr. Barry Elkin

Mr. Gilles-A. Perron

Mr. William Baker

1610

Mr. Gilles-A. Perron

Mr. Barry Elkin

Mr. Gilles-A. Perron

Mr. William Baker

The Chair

Mr. Alex Shepherd (Durham, Lib.)

1615

Mr. William Baker

Mr. Alex Shepherd

Mr. William Baker

Mr. Alex Shepherd

Mr. William Baker

Ms. Jeanne Flemming (Director General, International Tax Directorate, Canada Customs and Revenue Agency)

Mr. Alex Shepherd

Ms. Jeanne Flemming

1620

Mr. Alex Shepherd

Ms. Jeanne Flemming

Mr. Alex Shepherd

Ms. Jeanne Flemming

Mr. Alex Shepherd

Ms. Jeanne Flemming

Mr. Alex Shepherd

Ms. Jeanne Flemming

Mr. Alex Shepherd

The Chair

Mr. Shahid Minto

The Chair

Mr. William Baker

1625

The Chair

Mr. Philip Mayfield

The Chair

Mr. Mayfield

Mr. William Baker

Mr. Philip Mayfield

Mr. William Baker

Mr. Philip Mayfield

Mr. William Baker

Ms. Jeanne Flemming

Mr. Philip Mayfield

Ms. Jeanne Flemming

Mr. Philip Mayfield

1630

Ms. Jeanne Flemming

The Vice-Chair (Ms. Beth Phinney (Hamilton Mountain, Lib.))

Mr. Gilles-A. Perron

Mr. William Baker

Mr. Gilles-A. Perron

Mr. William Baker

Mr. Gilles-A. Perron

Mr. Shahid Minto

The Vice-Chair (Ms. Beth Phinney)

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

1635

Mr. William Baker

Ms. Jeanne Flemming

The Chair

Mr. Shahid Minto

1640

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. William Baker

Mr. Shawn Murphy

Mr. William Baker

Ms. Jeanne Flemming

Mr. Shawn Murphy

1645

The Chair

Mr. William Baker

Mr. Baker

Ms. Beth Phinney

Mr. William Baker

Ms. Beth Phinney

Mr. Shahid Minto

The Chair

Mr. Shahid Minto

Ms. Beth Phinney

Mr. Bertrand

1650

Mr. William Baker

The Chair

Mr. Philip Mayfield

Mr. William Baker

Mr. Philip Mayfield

1655

Mr. William Baker

Mr. Philip Mayfield

Mr. William Baker

The Chair

Mr. Philip Mayfield

The Chair

Mr. John Bryden (Ancaster--Dundas--Flamborough--Aldershot, Lib.)

Mr. William Baker

Mr. John Bryden

Mr. William Baker

Mr. Baker

The Chair

Mr. Robert Bertrand

Mr. William Baker

Mr. Robert Bertrand

1700

Mr. William Baker

Mr. Robert Bertrand

Mr. Baker

Ms. Jeanne Flemming

Mr. Robert Bertrand

Mr. William Baker

The Chair

Ms. Beth Phinney

Mr. William Baker

Ms. Beth Phinney

Mr. William Baker

Ms. Beth Phinney

Ms. Jeanne Flemming

Ms. Beth Phinney

Ms. Jeanne Flemming

Ms. Beth Phinney

The Chair

Mr. Shahid Minto

1705

Ms. Beth Phinney

The Chair

Mr. Barry Elkin

Ms. Beth Phinney

The Chair

Ms. Beth Phinney

The Chair

Mr. William Baker

The Chair

1710

Mr. William Baker

The Chair

Ms. Beth Phinney

The Chair

CANADA

Standing Committee on Public Accounts

NUMBER 043

1st SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, March 12, 2002

[Recorded by Electronic Apparatus]

¹ (1535)

[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Good afternoon, ladies and gentlemen.

Today, for the Standing Committee on Public Accounts, the orders are the adoption of the fifth report of the subcommittee on agenda and procedure, and after that we'll move into our regular meeting. I'll announce the witnesses at that time.

First, we'll deal with the fifth report of the Standing Committee on Public Accounts. I presume everybody has a copy of it. I'm going to deal with items 2 and 3 first, and then we'll come back to item 1.

Item 2 is that the committee meetings have been scheduled--and they're outlined there--to consider the December 2001 Report of the Auditor General of Canada, chapters 1, 4, 5, 6, 8, and 13.

Following that, the main estimates for 2002-03, vote 20 under Finance, Office of the Auditor General of Canada, will be considered; and we also have a meeting on the report on plans and priorities relating to 2002-03, Office of the Auditor General of Canada.

But I'm going to deal with the two items first. Are we all agreed with these? Is there any debate on them?

Ms. Beth Phinney (Hamilton Mountain, Lib.): I'm not sure what you're doing.

The Chair: I'm asking that the committee adopt--

Ms. Beth Phinney: This report?

The Chair: No, this is the fifth report of the steering committee, which is a recommendation to the full committee that this be the future business of the committee.

I think items 2 and 3 are reasonably uncontentious, therefore I've moved....

Are we all agreed?

Some hon. members: Agreed.

The Chair: Now we'll deal with item 1, which I think may have a little bit of contention. It was voted at the subcommittee--I think the vote was three to two--that we recommend to the main committee that Jon Grant, the former chair of Canada Lands Company Limited, be invited to appear before the committee with respect to Chapter 13 - Other Audit Observations, Parc Downsview Park Inc., of the December 2001 Report of the Auditor General of Canada.

You may recall that at a previous meeting we had adopted that we would deal with the Parc Downsview Park Inc. issue of the Auditor General's report. The question is, should Jon Grant be invited to appear? It's not whether we're going to deal with Downsview Park; we have agreed to deal with it. The point is, will Jon Grant be invited as a witness? The recommendation is that he be. Do you want to debate it or do you want to vote on it?

Mr. Philip Mayfield (Cariboo--Chilcotin, Canadian Alliance): Mr. Chairman, I would like to see Mr. Grant come. He has obviously brought important information forward. He has pointed out irregularities in a department that would be totally appropriate for this committee to discuss. I think it would be an act of negligence of this committee not to talk to someone who has brought such important information forward, to examine the information that he has brought, to assess it, and to make a determination and, if necessary, write a report that the government can respond to.

I can't understand why people would not want to have this man here, to assess what he has to say and make a judgment on it, and let the Canadian people know that the business of the government is being done openly and that the full facts are being aired. If we are not prepared to bring in the witnesses who have the information, what are we doing as a committee?

I think we should have him. I strongly urge the committee to vote for that.

[Translation]

The Chair: Mr. Perron, please.

Mr. Gilles-A. Perron (Rivière-des-Mille-Îles, BQ): Mr. Chairman, I agree whole heartedly with my colleague Philip. We must absolutely hear Mr. Grant, and for the following reasons. Are we afraid of the truth? Are we hear to listen to the truth? I believe the answer is yes. Therefore, it is our duty to the taxpayers to listen to those who might shed some light on a particular file. A person with the credibility of Mr. Grant must appear before us to express his point of view. I am therefore in complete agreement with having Mr. Grant come before us to explain how he sees this.

Thank you, Mr. Chairman.

[English]

The Chair: Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): I feel it's not only inappropriate to be before this committee, it's not the place.... We have a House of Commons committee that deals with government operations and this whole department. I find it most inappropriate for us to be side-stepping that particular standing committee.

On the other hand, the role of this committee is not an investigative one. We have the police for that. We have the Auditor General for that. We have the proper agencies and individuals in government to do that.

It has been a tradition of this committee to try to work through consensus-building in a non-partisan fashion. It is my hope, in the spirit of that non-partisan fashion, we won't try to turn this into you and me and a circus. Leave the issues we are interested in dealing with to the standing committee for which it is most appropriate.

If the idea is to try to address some of the comments Mr. Grant has made in the public domain--they are very much public--the Standing Committee on Foreign Affairs and International Trade is going to have an opportunity to meet with the minister who was responsible for the department at the time. Some of my colleagues might be interested in sitting in on that committee, to listen and perhaps ask any questions they have.

Our agenda is fairly charged up as it is. We have lots of reports to look at. We have a lot of issues to address in this committee. I would like the focus of this committee to remain as it was set in the past and as we have continuously done in the past. I hope we will not waste a lot of time on it. I hope we'll put it to a vote.

I want to propose that the question be put on this issue, Mr. Chair, and voted on. Let's move on to the agenda of the day.

¹ (1540)

The Chair: Okay.

Mr. Mayfield.

Mr. Philip Mayfield: I would like to respond to one or two of the comments Mr. Harb has made, if I may, Mr. Chairman.

The Chair: The clerk advises me that the rule that the question now be put is not appropriate at committee, only in the House.

Agreed?

Mr. Mayfield.

Mr. Philip Mayfield: Thank you, Mr. Chairman.

I would hope that in inviting this person here we're not trying to create an opportunity for a partisan clash between your side of the table and mine. This committee has a reputation for dealing with issues in a primary non-partisan way, for the good of government and taxpayers, and I hope that's the way it is.

I would like to see this issue discussed with Mr. Grant in a non-partisan way. I really have some difficulty understanding why the government would be threatened by this conversation, because I'm convinced it is the desire of the government to have the departments work efficiently, openly, and provide the best service possible to the citizens of Canada. I would like very much to work cooperatively with you in getting to the bottom of this issue, without the partisanship you've referred to, because that is not in my interest and not in my nature. We always accomplish more in a cooperative way than in a partisan way.

Having said that, we need to have the full facts aired. As the public accounts committee with the responsibility to hold departments accountable, if we're not prepared to accept that responsibility, look at all the evidence available, and judge it fairly, we're negligent in our duty. I appeal to you as a colleague to join with me in getting the air cleared and setting it aside, so everyone knows the facts. Then we can go on, having said we have done our job in bringing the best possible government to the citizens of Canada.

[Translation]

The Chair: Mr. Perron.

Mr. Gilles-A. Perron: I really don't think that a political party or a political stripe or any political aspect whatsoever would be involved in having Mr. Grant appear before us. I don't see it that way. I don't see it that way nor do I believe it. I see Mr. Grant as a means by which we might shed some light on this and obtain the best possible information on the issues that we are discussing at this time. It is therefore absolutely necessary that Mr. Grant appear before us to help us to make the right decision and to properly understand the file. That is my position, and I don't think I am being partisan in the least. It is a position that involves protecting the government treasury.

[English]

The Chair: We're going to have the question on the motion that Mr. Jon Grant, the former chair, be invited to appear before the committee.

(Motion negatived)

¹ (1545)

Mr. Philip Mayfield: Are you going to break the tie?

The Chair: There was no tie to break there, Mr. Mayfield. It was a recommendation by the committee. Anyway, Mr. Grant will not be coming.

I would invite the witnesses to come forward. We will start the regular part of the meeting.

Pursuant to Standing Order 108(3)(e), we are considering chapter 7, Canada Customs and Revenue Agency - International Tax Administration: Non-Residents Subject to Canadian Income Tax, of the December 2001 report of the Auditor General of Canada.

Our witnesses today are from the Office of the Auditor General, Mr. Shahid Minto, Assistant Auditor General; and Mr. Barry Elkin, a principal of the Office of the Auditor General. From the Canada Customs and Revenue Agency, we have Mr. William Baker, assistant commissioner, compliance programs branch; and Ms. Jeanne Flemming, director general, international tax directorate/compliance programs branch.

Welcome to you all. We'll start with the opening statement from Mr. Minto.

Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chair. I and my colleague Barry Elkin would like to thank you for this opportunity to discuss our report on how the Canada Customs and Revenue Agency administers the tax regime for non-residents of Canada.

The Canada Customs and Revenue Agency reports that in the years 2000 and 2001, over 1.7 million non-residents paid about $3 billion in tax on income earned from Canadian employment, contract services, investments, pensions, and other sources taxable in Canada. The agency's non-resident enforcement activities have identified another $350 million in tax.

Mr. Chair, the agency provides a range of services to help non-residents meet their income tax obligations. For example, it responds to inquiries, issues waivers, and establishes units that specialize in areas such as the film industry. It also runs a compliance program to verify the tax obligations of non-residents and those paying on income earned in Canada.

Our chapter made 10 recommendations aimed at strengthening the administration of the non-resident tax regime. Mr. Chairman, the agency has responded positively to our observations and recommendations.

Many parts of the agency are involved in ensuring that non-residents and Canadians who pay income to non-residents comply with Canadian tax requirements. Mr. Chair, we found that the agency had not assessed the overall tax amount related to non-residents that is at risk, nor has it finished identifying the complexities of the transactions and the non-compliance risk unique to this area. This is necessary to develop a compliance strategy that integrates the work of its various parts to achieve optimum results.

We also found gaps in the agency's verification of the Canadian tax obligations of non-residents. For example, Mr. Chairman, we found that the agency did not ask non-resident actors it had identified as likely to owe taxes to file tax returns for taxation years up to and including 2000.

Another example of the compliance verification gap touches on people who leave Canada. An immigrant's final tax return as a Canadian resident is subject to many verification checks when it is assessed. However, no checks are made to ensure compliance with the obligation to report capital gains.

Mr. Chairman, we found that the agency's data capture and data matching systems for non-resident taxes are not as sophisticated as the systems it uses to record and match domestic tax data. As a result, the agency has been unable to make effective use of some non-resident tax data to identify non-compliance and undertake initial enforcement activity. More efficient data matching could free auditors from many of the routine tasks and allow them to concentrate on taxpayers who are not yet complying.

Finally, Mr. Chairman, we are concerned that some taxpayers are using the Canada-Barbados Income Tax Agreement to take aggressive tax planning measures, and this is putting pressure on the agency's enforcement capability. Barbados does not tax capital gains, but the Canada-Barbados treaty allows a resident of Barbados to claim a Canadian tax exemption on a capital gain that would otherwise be subject to Canadian tax.

The agency has uncovered a number of schemes developed to exploit this advantage. The offshore spousal trust scheme is one of the schemes under review. The agency has identified 53 examples of this scheme that have moved over $800 million in capital gains to Barbados from Canada.

Mr. Chairman, the agency is examining this scheme to determine if it can be challenged successfully. Failing that, we encourage the agency to seek changes to the applicable legislation or to the treaty in a timely manner to protect Canada's tax base.

Mr. Chair, as I have mentioned, the agency has responded positively to our observations and recommendations. The committee may wish to discuss with the agency the specific steps it is taking to deal with the issues we have raised and obtain from it a plan that details how and when it will put these measures into action. The committee may also want to be kept informed about the status of their implementation.

Mr. Chair, that concludes my opening statement. We would be pleased to answer any questions.

¹ (1550)

The Chair: Thank you very much, Mr. Minto.

Now we're going to turn to Mr. Baker. Mr. Baker has given us an opening statement, which I believe has been circulated. However, it is a rather long one, and he's quite prepared to make a verbal opening statement. The written presentation, of course, will be filed with the clerk of the committee and is available should anybody desire a copy.

Mr. Baker.

Mr. William Baker (Assistant Commissioner, Compliance Programs Branch, Canada Customs and Revenue Agency): Thank you, Mr. Chair.

As has just been said, we tabled a document, and I won't take you through that. It sets out our approach to achieving compliance on an international level and some descriptive information about the agency and the program.

I would like to take a few moments, though, to make some broad observations and to set the context for this discussion today. First, in terms of observations, I'd like to make it clear, as pointed out by Mr. Minto, that we agree with the Auditor General's observations. I believe the report to be fair, accurate, and balanced.

Second, we accept the constructive proposals that have been set out in the chapter for improvement. Indeed, as indicated in the report, we are working on action plans and have already begun to address some of those areas.

Third, we appreciate the positive comments the Auditor General made about an area of taxation where it's difficult to achieve positive results because of the environment in which we operate.

It's useful that we talk about the context of this part of the Canada Customs and Revenue Agency's mandate. International tax, whether it involves non-residents doing business in Canada, which is the subject of this chapter, or Canadians doing business abroad, is one of the most challenging, complex, and dynamic areas of tax administration in Canada today. The challenges we're trying to address at the CCRA are shared by every other developed tax administration in the world that is interested in compliance, as we are. Compliance is certainly the raison d'être of the Canada Customs and Revenue Agency.

When we're talking about trying to achieve compliance at an international level, we're faced with some peculiar challenges. First of all, we are dealing by definition with other countries. We're not dealing with just domestic entities where we exercise a degree of control. Of course, to the extent there are treaties or information exchange agreements, that helps. But you are dealing with jurisdictional issues in trying to achieve compliance.

We're dealing with more transactions. It's evidenced by the GDP. Today 45% of our GDP is destined for export, compared to only 25% ten years ago. So we're looking at an awful lot of international transactions taking place today. It's certainly the fastest growing area we're experiencing. These are very complex arrangements, and they're supported by a group of experts in the private sector who are very shrewd in developing plans and arrangements to allow individual taxpayers to minimize the amount of tax payable, if not evade taxes payable.

Today we're looking at electronic transactions at the international level as we never had before. Just trying to follow the movement of the money and identify the source of the good and service and characterize it is a challenge. Of course, when we're dealing with non-residents, we're also dealing with fundamental problems of language, knowledge of the Canadian tax system, and culture, and that poses particular challenges. At the end of the day we don't have, frankly, as much control when we're trying to achieve international tax compliance as we would with domestic issues.

But we have not been complacent in light of these challenges. In fact, 12 years ago we set up within the Canada Customs and Revenue Agency an international tax directorate as a centre of expertise in this area. Ms. Flemming is the director general of that area. We also created in Ottawa an international tax services office, which exists to deal exclusively with the processing of returns and the maintenance of accounts for non-residents. This has been the fastest growing part of the CCRA. During the four-year period from 1999-2000 through to the next four years, it will grow about 40% in size.

We've expanded virtually all areas of our international tax operations, including conducting research to understand compliance issues, improving our services to the public through the Internet or whatever mechanisms are required, and our outreach programs. We work very closely with our colleagues in the Department of Finance in looking at legislative solutions to improve reporting or enhance our compliance. We've also done an awful lot of work with regard to international and domestic partnerships. We have been extremely active in particular with the OECD.

I just want to say in closing that we're proud of the work we've done in this area. We still have a way to go.

I'd like to quote in so many words our commissioner, Rob Wright, who often says that there are two fundamental truths about the Canada Customs and Revenue Agency. The first truth is that we are one of the best tax administrations in the world, and I can attest to that. The second truth is that we have to do better, and I think that the work of the Office of the Auditor General and the deliberations of this committee will help us in that regard.

Thank you.

¹ (1555)

The Chair: Thank you very much, Mr. Baker.

Mr. Mayfield, please.

Mr. Philip Mayfield: Thank you, Mr. Chairman.

I'd like to begin, sir, by asking of the Auditor General, Mr. Minto or Mr. Elkin.... Greetings, gentlemen. Before I begin the questioning, I want to thank you for coming and I want to say how pleased I am to read the report, the positive nature of the report, and the nature of the recommendations to enhance the job you're doing.

I have some questions, but just to clarify, in paragraph 7.30 of the report, the Auditor General has written:

The current international tax compliance strategy does not recognize the interrelated nature of the non-resident tax compliance functions undertaken in the tax services offices and the ITSO.

Could you expand on this issue and explain to the committee why this is important?

Mr. Barry Elkin (Principal, Office of the Auditor General of Canada): Perhaps the easiest way to answer that question is with an example, and I'll use the example of when a non-resident is paid rents from Canada. Under that set of circumstances, the non-resident has a choice. He can either be subjected to a withholding tax on the gross rents--let's say that's 15%--and no further tax is due Canada. So the person paying the rents to the non-resident deducts 15% or whatever the withholding rate is, remits it to CCRA, and that's the end of it.

The non-resident can also elect to pay tax on his net rental income. If he chose to do that, he would file a tax return, his net rental income would be computed, and he would settle with Revenue Canada. If he elects to pay tax on his net rental income and his estimated tax is less than the withholding, he can approach CCRA and ask them to reduce his withholding rate so that his withholding would equal his estimated tax liability. At that point in time, he would request a waiver. When he requests the waiver, one would expect CCRA to make a determination of whether in fact that non-resident had received rental income in prior years and whether he had settled his obligation with Revenue in a satisfactory manner.

Unfortunately, this is not presently done and cannot be presently done. That poses a problem when you have different parts of the system, one providing a waiver and one where you file a tax return, and how you link them together.

Another example that comes to mind is that when you request a waiver and the tax service office that you requested the waiver from denies your request, you can still request a refund through the international tax services office. When you request that refund from the international tax services office, they may raise the issue that perhaps you're carrying on business in Canada through a permanent establishment and refer that issue back to the tax service office. So there's that interrelationship where it goes back and forth. That's the concern we raised.

º (1600)

Mr. Philip Mayfield: Could I bring that to you, Mr. Baker, and ask what your response is about dealing with this kind of concern?

Mr. William Baker: Sure. First of all, there are different parts of the CCRA, the Canada Customs and Revenue Agency, that deal with international tax matters. For instance, we have specialists who deal exclusively with international tax. To put that in perspective, we're talking about roughly 1,000 people in the agency--it's actually a little more than that now--who work exclusively in the area of international tax. We have other parts of the agency that come across international tax matters as part of their business. For instance, for an auditor auditing a small business, there may be an international or a non-residency issue there that has to be looked at.

So the responsibility is spread across different parts of the organization. Right now we do rely heavily on the manual exchange of information, but the point is made that there are opportunities to make sure all the parts are more tightly coordinated. In fact, we're doing development work on some systems improvements and so on, to assist in that area.

Mr. Philip Mayfield: Mr. Chairman, there is another question, not related to this issue as we're discussing it in the report, but it is an issue of some concern to me. And while we have the officials of CCRA I'd like to ask, inasmuch as we've learned that the agency is currently reviewing the disability tax credit claims issued between 1985 and 1996, I'd like to know what the difference is between the 1985-96 criteria for qualifying for the disability tax credit and the post-1996 criteria. Can you answer that for me while you're here, sir?

Mr. William Baker: I'm sorry, sir, I cannot. It's not an area in my direct responsibility that I was prepared to speak to today.

I would be pleased to arrange to have information provided to the committee.

The Chair: I think, Mr. Mayfield, that you have caught them flat-footed with no preparation for that question. So I think that if they take it under advisement and give you a written response--

Mr. Philip Mayfield: I'd be very happy to do that. And thank you for your response.

And again, Mr. Baker, according to the audit report you had plans to enhance certain facilitation services in the non-resident tax regime. But the progress has been extremely slow. Can you explain why this has been slow and what you're doing to correct this?

Mr. William Baker: It has been slow. This largely relates to improvements in the main systems we have to provide services to the public.

In our business we're dealing with domestic tax and international tax. And the biggest demands that have been placed on the agency, frankly, are at the domestic level, where instead of talking about 1.7 million non-residents, we're dealing with 20-odd million individual tax filers and 2 million corporations. And so our priority has been to develop systems to serve the bulk of our domestic clientele.

We're now taking advantage of the Internet, and compared to the old days we can now introduce services a lot more quickly and a lot more affordably to address non-residents as well as residents. And we'll be taking advantage of that technology over the next while to improve the level of service in that area. But we certainly acknowledge that it is lagging in terms of the domestic services we have.

The Chair: Mr. Mayfield, a brief question.

Mr. Philip Mayfield: Yes. Thank you, sir.

Mr. Minto, in his introduction, mentioned that there has been a sample of audits made with pretty good returns. He mentioned 350 million. And if that's a sample that seems to be a very productive sample. Why is the department not increasing that sample to perhaps the whole pie? It seems like there's a lot of money involved here.

º (1605)

The Chair: A brief response, Mr. Baker.

Mr. William Baker: There is. Certainly, like any public agency, we are limited by resource availability. Having said that, I can say to the honourable gentleman that we have made substantial increases in our international tax area over the last while. In fact, I'm just looking at some statistics now and between 1999-2000 and our budget plan rolling out to the end of the next fiscal year, 2002-03, we will increase the size of our international tax function by almost 40%. And the non-resident area will double in that period of time. And this is thanks to decisions made by government to make investments in some of our critical compliance areas. So we should be able to do more work in that area.

It isn't just the number of auditors, as well. It's our capacity to leverage our resources by working with foreign tax administrations and so on, improving our reporting requirements, and improving the legislative framework that helps in that area as well.

So we think we're making some good progress. There's certainly always more that could be done. And it's a question, mostly, of resource availability.

The Chair: Thank you, Mr. Baker.

[Translation]

Mr. Perron, you have eight minutes, please.

Mr. Gilles-A. Perron: I would like to thank you and your colleagues for coming.

Mr. Minto, my first question is for you. I share your concern with respect to electronic commerce and a new way of doing business. Could you tell me a little more about the issues that you are raising with respect to electronic commerce? I am anxious to hear more.

[English]

Mr. Shahid Minto: Mr. Chairman, I'm going to ask my colleague Mr. Elkin to respond to this question.

The Chair: Mr. Elkin.

Mr. Barry Elkin: Yes, Mr. Chair.

I think, first of all, I should mention that our audit only observed that the tax risks of e-commerce is an ongoing concern of the CCRA in relation to international tax. We made no comments on the sufficiency of the current initiatives, nor did we make any recommendations.

However, we believe--and certainly our colleagues from CCRA can correct me if I'm wrong--that what the agency is presently doing is identifying taxpayers engaged in e-commerce in order to review their activities and get a better idea of the compliance risks associated with these types of transactions. It's a continually evolving area.

[Translation]

Mr. Gilles-A. Perron: Mr. Baker, on the same subject, during your presentation you inferred that you had some problems with electronic commerce because things were moving so quickly. Do any solutions come to mind? What type of planning can you do and how effective are the plans when you must also contend with electronic commerce?

Mr. William Baker: First of all, let me say that there are two aspects to electronic commerce: it obviously allows us to provide a better service to the public, as is the case with NetFile and that type of service, but it also presents challenges for us.

We must work at both the national and international levels. We are working primarily with the OACD, with task forces that are studying this issue, in order to develop standards for policies, practices, and guidelines that will give us a system that actually works.

Here in Canada there are advisory groups made up of representatives from the private sector and from [Editor's note: Inaudible] who express their ideas for the domestic, or national administration of the system.

I think that what is important is to establish a series of policies that work and that would be the same throughout the world. All countries that become involved in electronic commerce must play by the same rules. And we must also call upon the experts. We are quite fortunate on that score here in Canada. At the agency, in the field of electronic commerce, we have a division with a director and experts who create monitoring programs. So I am quite confident that we are up to the challenge.

I might add that last year we held an international electronic commerce conference in Montreal. Some 100 countries were represented with 3,300 delegates who spent their time discussing nothing but the challenges and advantages of electronic commerce throughout the world.

º (1610)

Mr. Gilles-A. Perron: In the light of the response given by Mr. Baker, I will now turn to you, Mr. Elkin. Are you optimistic as Mr. Baker when it comes to the introduction of electronic commerce, or do you think the agency could do even more?

[English]

Mr. Barry Elkin: I think it's an international problem, as Mr. Baker pointed out. You have to get a whole bunch of players on side and you have to have standardized rules.The problem is, if you don't have standardized rules, you end up where a particular taxpayer could end up paying tax to two jurisdictions. Then what that means is you need a whole bureaucracy to resolve that difficulty and decide who should get what. It's a very cumbersome process to resolve a taxpayer's problem. So the approach that Canada is taking is to sit down in an international arena and sort out these difficulties, so that we can have common rules.

On the other side of the coin, assuming the agency follows through on what I understand is its current initiative and actually takes a look at enterprises in Canada that are presently carrying on in an e-business environment and understands the compliance risks associated with that, ultimately you develop risk profiles, you develop tools to screen files that have complex and risky e-commerce transactions in them, and you sort out what you have to do from a compliance point of view. If there are legislative problems that have to be solved, your compliance activities should highlight them, and you ultimately deal with them.

Am I happy? I don't know what other route CCRA can take. They're not in this game by themselves.

[Translation]

Mr. Gilles-A. Perron: Mr. Baker, you sound very optimistic about the outcome of the Montreal conference. Do any other countries share your vision about international trade, or are you pioneers in this field and will you have to coax other countries into going along with you? I would like to know what Canada and the rest of the world think about this.

Mr. William Baker: Canada's position is essentially the same as that of all of the other develop countries that are part of the OECD. We all face the same challenges and we all have the same opportunity to improve our service to the public.

I believe this is right to say that Canada has played a leadership role in this area because we have had a process in place for some years now. We have already published a report explaining how to ensure compliance with our tax laws where electronic commerce is involved. If you would like a copy of the report, sir, I would be happy to make one available to you.

[English]

The Chair: Merci beaucoup, Mr. Perron.

Now Mr. Shepherd, eight minutes, please.

Mr. Alex Shepherd (Durham, Lib.): Mr. Baker, you have identified $800 million in capital gains that basically is designated to the Barbados. Despite your earlier comments, capital gains are domiciled in Canada, so it's not something that is elusive behind a border of another country. It would appear to me that this tax scheme is to create overnight non-residents who in fact had been residents of Canada.

But it talks in here about successfully challenging this, and yet if I recall, an issue around this was a tax ruling by you, the finance department, saying that this is perfectly acceptable. What's the status of that, then?

º (1615)

Mr. William Baker: What the chapter is referring to, of course, is the fact that in Barbados capital gains are not taxed. Through the establishment of non-resident trusts and so on, Canadians could participate in that scheme to effectively realize capital gains without being subject to Canadian taxation. Even though they don't tax them through the treaty, there's a recognition that they're exempt from tax because of the treaty.

Notwithstanding the fact that there is a treaty like that, we do have avoidance provisions in the Income Tax Act that we can use to challenge arrangements like this. We have done so successfully, notwithstanding the fact that the treaty is there. We're certainly pursuing this in every way possible. I'm not sure of what you mean in terms of previous arrangements. Perhaps you can provide more detail.

Mr. Alex Shepherd: There was a big issue about an offshore trust some years ago that basically received a favourable tax ruling from Revenue Canada by using the same scheme. That you're the author of your own misfortunes to some extent is what I'm suggesting.

Mr. William Baker: First of all, the law was changed in the interim, as you're aware, in the last number of years. I think, sir, wherever, regardless of the law, regardless of the treaty, there will be arrangements that people will pursue. There is quite an industry to try to find ways to minimize or avoid the payment of tax, and in this particular case we're confident that we're on top of those arrangements and are doing what's necessary.

Mr. Alex Shepherd: You're talking about using the anti-avoidance provisions of the Income Tax Act.

Mr. William Baker: Yes.

Mr. Alex Shepherd: Have you in fact reassessed? You have a number here: $800 million in capital gains. Have you reassessed a good portion of that?

Mr. William Baker: We've reassessed some, and with your permission I'd ask my colleague Jeanne Flemming to give you some additional precision on that.

Ms. Jeanne Flemming (Director General, International Tax Directorate, Canada Customs and Revenue Agency): We have a number of issues ongoing with Barbados because of the attractiveness of the arrangements that people have been able to utilize. We have a specific Barbados project that encompasses a number of arrangements. The $800 million that you mentioned, we're still challenging it and we're not yet at the assessment stage. But I know that we have assessed many others.

I have one here, for example. It was a misuse of a Health and Welfare trust provision. A million dollars has been reassessed. We had a successful prosecution of an offshore promoter out of Montreal, where the promoter agreed to a fine of $600,000, and we've issued reassessments of approximately $1.5 million. I have several others. There's one in Calgary, Laval, Windsor, Sherbrooke, Vancouver, and Kitchener. So we're very active in terms of challenging and we're at various stages in the various files that we're--

Mr. Alex Shepherd: You talked about challenging. If I recall, you normally have three years to launch an objection here, to reject an assessment in the filing of an income tax return or some kind or other. The time must be clicking by as to when you can in fact recover this $800 million--that's not dollars of tax, I know, it's capital gains. But the reality is, you just said, that you have not done anything to formally challenge this.

Ms. Jeanne Flemming: I said that we're challenging it, but we're not yet through the audit process. Once we've begun that audit process, we can keep it going and keep it open for many years until we complete the file. It's up to the taxpayer after we have reassessed; they have a 90-day window to do a notice of objection if they don't agree with us. But keeping a file open for an audit can go on for more than three years. In fact, we have many files that are open.

So when I say we're challenging, I mean that we're under the audit process at this point but that we've not yet reached a point in time where we're satisfied about what we have and can therefore issue a reassessment.

º (1620)

Mr. Alex Shepherd: How about the collection side of this? I'm assuming they disposed of the capital assets or whatever and that they're now in Barbados, that they're claiming residency status in Barbados. How are you going to collect?

Ms. Jeanne Flemming: Well, the collections issue on the non-resident side is a very difficult one. One of the things we're doing under our tax haven working group...we have a formal tax haven working group that works across all program lines within CCRA to address the multi-faceted problems. We do have a study group now looking at the collections and at how we can more creatively look at these accounts for collection purposes, but it is difficult, I agree.

Mr. Alex Shepherd: If I were in your position, if I were now getting people who were forming trusts, filing them, or whatever the case may be, and if I investigated them initially and found that the word “Barbados” was in there, I might jump on top of those today rather than waiting two or three years down the road for this other process.

Ms. Jeanne Flemming: [Editor's Note: Inaudible] ...the migration rules have changed. They were put in place, receiving royal assent, in June 2001, and they were retroactive to October 1996. What these migration rules do is to kind of put a stoppage, if you will, into the transfer of these funds abroad.

We are able to go to the person, company, trust, or whatever that is trying to move these offshore, and they have two options, because the assets are deemed to be disposed of at that time. They can either pay up on the capital gains at this point in time if they so choose or provide security to us that they will make payment as they dispose of the assets in the future.

We are putting a processing system in place to keep track of these. It will be in place in 2003 to look at our 2002 tax year. Meanwhile, we're doing this manually. Following the suggestions by the Auditor General, we are doing this manually to try go keep track of this. We'll be keeping track not only of the amount they've paid for the asset itself but will be tracking the security and looking for the disposition at some future date.

Mr. Alex Shepherd: I presume the other problem here is that you could get challenged. You'll obviously get challenged in court, and they may well say that under the legislation the way it's set up is perfectly legal.

Ms. Jeanne Flemming: That's always a possibility.

Mr. Alex Shepherd: So if they ask for changes to legislation?

Ms. Jeanne Flemming: As I've said, the legislation was just changed, effective 2001--

Mr. Alex Shepherd: What about the treaties?

The Chair: We're going to have a final word by Mr. Minto.

Mr. Shahid Minto: Thank you, Mr. Chair.

I'm sorry. I didn't mean to interrupt, but Mr. Shepherd has raised some extremely important issues.

Mr. Chair, tax treaties are signed in order to avoid double taxation. But here we have a situation where there's a treaty that gives exemption from capital gains tax to Barbados, where there is no capital gains tax. So this is not taking it to avoid double taxation; people are taking advantage to avoid pay tax, period, on capital gains.

Now, Mr. Shepherd has also brought out the fact of how long it takes to work this thing out and of the difficulties in collection, and Mr. Baker earlier talked about the fact that we don't have as much control with respect to people who are offshore. It all leads to the complexity of the thing, and while it is important that my colleagues from CCRA keep up the pressure and take a look at trying to reassess as much as they can, remember, Mr. Baker was talking earlier about scarcity of resources. This does take important resources away from other things. Would it not be cleaner if something could be done with the treaty, perhaps?

Subsequent to the chapter, it is my understanding that perhaps the treaty is now under renegotiation. I think this may be an opportunity for the committee to have some input into that.

Thank you.

The Chair: Is the treaty under renegotiation, Mr. Baker?

Mr. William Baker: Yes. We have 75 signed treaties right now. There are about 23, I believe, that are under renegotiation or under negotiation. Barbados is one of those.

I should point out, as Mr. Minto is aware, that process takes a long time and by its very definition requires the signature of the two countries to arrive at the outcome. This is something that's usually measured in years, not months.

I think what the member has pointed out is a critical commentary on international tax, and that is that it's difficult to catch the horses after they leave the stable. There's no doubt about that. A lot of our challenge is making sure we have the right legislative framework in place and, for instance, the right level of withholding up front, and creating a mechanism whereby the onus is on the taxpayers as opposed to having the tax administration try to play catch-up, because it is hard to assess. It's even harder to collect from non-residents.

º (1625)

The Chair: Thank you very much.

Mr. Mayfield, we're now in round two, so it's four minutes.

Mr. Philip Mayfield: Thank you very much.

It occurs to me, Mr. Shepherd, that perhaps a way of dealing with this problem is for Canada to eliminate its capital gains taxes, and then it would become a moot point.

Some hon. members: Oh, oh!

Mr. Philip Mayfield: I would support that. Would you?

The Chair: We will not ask that question.

Mr. Philip Mayfield: Regarding the issue of non-compliance of high-income non-residents, your response to the recommendation in chapter 7, paragraph 7.79, is that you're in the process of reviewing policy and procedural changes, systems, and legislative changes in order to enhance compliance and enforcement of non-residents. I'd like to ask you, what is the current status of this review?

Mr. William Baker: First of all, it is certainly all-encompassing. This is an area where there is no single solution that's available to us. We certainly have been looking at legislative solutions where they're appropriate, and you're well aware--it's pointed out in the chapter--that the government passed legislation to change the withholding rate, for instance, for non-resident actors, so that the amount withheld initially more closely resembled what would be the final tax obligation, and it eliminated the requirement to file a tax return. That's certainly one example of that.

We've also made some significant changes in the way we administer waivers for non-residents, for instance, in the behind-the-scenes personnel involved in the film industry, which was a very cumbersome and non-functional area. We completely revamped that and have achieved a regime that works right now as far as the behind-the-scenes personnel go. In particular areas such as--and this is often used as an example--the acting industy, the film industry, we've established film services units to provide direct service to those people, not only to provide a better level of service but to allow us to focus our compliance efforts a little bit more.

The other thing I'd add is that these film services units deal not only with the international issues, which are relevant in film, as you can imagine, given the amount of Hollywood production that takes place in Canada. We've also charged that group with responsibility for the administration of the film tax credit and the video and production services tax credit. So we have it all under one bundle right now.

So administratively, procedurally, and legislatively those are the kinds of things we're doing.

Mr. Philip Mayfield: When I think of a review, I think of a process of reviewing a subject. Is there going to be an end to this review? Are there going to be results? And if so, when will that review come to a conclusion, and when will the results be available, perhaps to this committee?

Mr. William Baker: I believe the review that this refers to is work that began some time ago. The government asked us to take a good, hard look at this area, and we started that process over three years ago, involving industry representatives, and we have generated much of the product already.

Having said that, it's something we're going to have to continue to be diligent on, and if there are additional improvements required, we will pursue them.

Mr. Philip Mayfield: So it's not as though I can ask for results of your review and have you present them to the committee?

Mr. William Baker: Not in a single package, sir, but we certainly have produced a number of additional policy and information products from the agency that we'd be pleased to make available, as they affect that group.

Ms. Jeanne Flemming: Unless you're referring to...I'm having trouble trying to figure out the review you're referring to. If you're talking about the regulation 105 requirement--

Mr. Philip Mayfield: I'm thinking of the recommendation 7.79.

Ms. Jeanne Flemming: The actors came to the fore because of a review of the regulation 105 requirements. These are the waiver requirements, the withholding at source. We did a review several years ago. Some 61 recommendations were put in place at that time, and we can certainly provide that review.

Out of the 61 recommendations, we have adopted some 51. The others have not been adopted because they were overtaken by other events, or whatever. That review is certainly available, as well as the action plan and an updated idea of what happened in that. The actors kind of emerged from that review.

Is that what you're referring to?

Mr. Philip Mayfield: When our researchers put together a report of our meeting, they like to have the evidence of what is being done before them, and include much of that in the report. I'm looking for the results of your review that can be reviewed themselves.

º (1630)

Ms. Jeanne Flemming: That's fine. We'll be able to provide that to you.

The Vice-Chair (Ms. Beth Phinney (Hamilton Mountain, Lib.)): Send it to the clerk and the clerk will provide it.

Thank you, Mr. Mayfield.

Mr. Perron.

[Translation]

Mr. Gilles-A. Perron: I have a question with respect to the section numbered 769 to 774 which deal with the inconsistency in the tax services offices across Canada. Can you explain why the same regulations or methods do not seen to be applied equally? What can be done to correct that? What have you done to correct the situation once and for all?

Mr. William Baker: We are in the process of correcting the problems, but there will always be some here and there. We are talking about an entire network of tax services offices. There are some forty such offices across the country and it is quite a challenge to ensure that they are all uniform when it comes to the decisions that are made there, whether they be national or international in nature.

We have corrected some problems but, what is more important, to my mind, is a study that we are undertaking at this time on the methods that are applied in each of the tax services offices so that we might have more uniform decisions. That will ?? lead to a change in our policies, guidelines, training, and the way in which we assess performance throughout the year. We are doing our outmost to find the best possible solution to this problem.

Mr. Gilles-A. Perron: I have a supplementary question. It seem to me that we need not wait for the Editor General to discover a problem before trying to fix it. It seem to me that if we want to be fair to all of the citizens, the same policies should apply in each office. That is how they operate in the private sector. When you sell cars for example, each dealership operates more less in the same way as every other one. Why would another dealership have more cars or different cars, etc.? I don't understand.

Mr. William Baker: That is without a doubt the cornerstone of our system. However, when we look at the examples of disparity that are in the report, we see that they involve mainly procedure and not necessarily the implementation of the act itself. We hope that, generally speaking, the same results are achieve. However, each office has its own approach.

As I said earlier, we are working on it.

Mr. Gilles-A. Perron: Mr. Minto, will you confirm what has just been said, that is, that the differences relate more to procedure than to the results?

If I understand you correctly, that may not be the case...

[English]

Mr. Shahid Minto: The reason for the process is to have consistent results. If the process has flaws, the results can't be consistent. I think it's talking about the same thing from a different point of view. The process is not something by itself. It is there for a reason, and the reason is consistent application of the rules, which is what Canadians expect.

I have to say we have seen the department making efforts, and they've responded quite positively to our findings in this area. So we'll go back, do a follow-up and see what happens.

Mr. Gilles-A. Perron: Merci, madame.

The Vice-Chair (Ms. Beth Phinney): Madame Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Madam Chair.

I want to thank you both. Your presentations were very informative. Now I have a couple of questions.

Also, I'm pleased to hear Mr. Minto comment that CCRA responded very positively. We hope this trend will continue.

I have a question regarding foreign asset reporting, maybe as related to a non-resident party. About two years ago the finance department and CCRA decided on new regulations as to foreign asset reporting for all immigrants. I think it caused a great deal of criticism or debate in Parliament, and also a great deal of a decline in offshore investment, especially to B.C., which is where I'm from. Even today, I still get questions, over and over. There's a great deal of concern.

My question is, what's the status now? I understand we agreed that after two years the government would have a review to see how effective that had been, what the purpose is, and are we heading in the right direction. I'd like to know what the status is now. I think Mr. Minto knows quite well, and Mr. Baker and Ms. Flemming.

º (1635)

Mr. William Baker: If I might, Ms. Leung, we have indeed carried out that review and are just in the final throes of that. Perhaps I'd ask Ms. Flemming, who is in charge of that review, to respond, if you don't mind.

Ms. Jeanne Flemming: Thank you.

As you may recall, this was part of a larger piece of the foreign reporting requirement that was put in place in 1996 in order to thwart tax haven usage. A number of new forms were required to be filled out, some by individuals, some by corporations, and so on.

The undertaking at that point in time was that the minister would review two things: He would review the penalty provision, which was a part of the foreign reporting requirement, and he would look at the whole processing. At that time the minister also made an undertaking for increased outreach to make sure we were servicing the clientele.

In terms of the form you were talking about, which was one piece of this, the foreign asset reporting, indeed we have carried out the two-year review. We look at data, in general and in terms of compliance, in two ways. One is kind of a macro approach to it, where we're looking for trends and aggregate information so that we understand where tax gaps, compliance gaps, are. The other way we look at it is from a bottom-up, micro point of view in terms of looking for specific file selection, which individuals or groups of individuals should be audited or selected for compliance work.

In terms of the T-1135, which is the foreign asset reporting, we have looked at that. The penalty has never been administered. So the review of that is that it's there and nobody has administered that to this point in time.

We have reviewed the people who have put this, the foreign asset reporting, the number who have checked it in. It is a very simple form. You may recall that there was some expression of issues about privacy and issues of compliance burden at that time, so we asked the Auditor General to assist us in evaluating whether or not it was indeed burdensome and indeed whether there was a privacy issue here. The Auditor General gave us his assurance that we were doing the right thing.

Nevertheless, in order to ensure that we were doing the right thing, we streamlined the form down to a “check the box”. So the individual simply has to check two or three boxes at a minimum. They do not have to provide any documentation or any support. It's merely a “check the box”. So we believe we did reduce the compliance burden.

In terms of the overall foreign reporting requirement, they have been extremely useful to us. As our internal report, which is working its way through the system, indicates, in terms of data it really takes us much longer than a two-year period to evaluate its effectiveness. Two years in a tax life is really a very small period of time.

We are going to be reviewing the forms, for sure, and looking to streamline some forms that have been problematic.

In terms of outreach, particularly under foreign asset reporting, we have established quite a sophisticated and an increasing outreach program to make sure that the people who would be affected by this will be able to do it. I'll just give you one example here.

The Chair: I think perhaps you'll find it's time.

I know we're dealing with a very complex subject. Everyone understands that taxes are complex, but we need to try to keep our answers somewhat brief.

Ms. Sophia Leung: I have a short question.

The Chair: Your time is up, Ms. Leung. Everyone else would like to have a little time to question, too.

Mr. Minto, did you have something you wanted to say on this issue?

Mr. Shahid Minto: No.

º (1640)

The Chair: Okay.

Mr. Murphy, you're next.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you, Mr. Chairman.

First of all, I want to thank all the witnesses for appearing. As the chairman just indicated, this is an extremely complicated area of the law and accounting. We're obviously working under very difficult circumstances. The report is reasonably clean. I want to congratulate your particular directorate for the job it's doing.

I have a question that may not be targeted right to the report, dealing with these offshore accounts. I've no proof of this, but you hear all kinds of anecdotal evidence that a lot of Canadian residents have accounts in the Barbados, Bermuda, the Turks and Caicos, and the Cayman Islands. I realize they're Canadian residents and they're supposed to report their worldwide income. This is not tax avoidance; it's really tax evasion.

What mechanism is available to your agency to detect this type of behaviour?

Mr. William Baker: We largely rely on information sources.

First of all, there could be domestic information, if you're talking about a Canadian investing in a tax haven and not reporting the return on that investment. For instance, if they're going through a financial institution or some other vehicle to make this investment, we might be able to obtain information domestically identifying this and then we match. Also, if they're doing business with a country where we either have a tax treaty or some information exchange provisions, we might be able to get information back.

It is a challenge, though. Of course here we're talking about the flip side of this chapter. We're not talking about non-residents; we're talking about Canadians investing in foreign jurisdictions.

Mr. Shawn Murphy: I realize it's outside of the report.

Mr. William Baker: That's fine. You're talking to the same people. We have this responsibility as well. But it is a critical area.

One of the things we've been doing--in fact Canada is leading--is working with a number of other countries on tax haven projects to look at how we can better cooperate with other countries to get information, because at the end of the day, the transactions don't necessarily begin and end in that tax haven jurisdiction. There could be other countries involved, other information being shared. We're working with them through our existing treaty provisions to share information, conduct research, and identify which practices work and which don't.

In fact--and again I'll ask Jeanne to make a brief comment in this regard--Ms. Flemming is the leader of the seven-country tax haven project, which involves a number of developed countries.

Ms. Jeanne Flemming: Thank you.

We established the seven-country tax haven working group as a priority of PATA. That's the Pacific Association of Tax Administrators. It includes Canada, the U.S., Japan, and Australia. Then we added the G-4, with the U.S. being the common country, so we added Germany, France, and England to this project.

We're looking at very practical measures to go after tax havens, helping each other out on a project basis. We are targeting promoters and creating databases now.

If I have two seconds, I'll just explain what is probably one of the most creative things we're doing. We divided up the OECD tax haven list amongst the seven countries. We're creating a database of all the public information available about each of those tax havens and collecting the various schemes worked by promoters using those particular tax havens.

I'm going off to a meeting next Wednesday in Australia,Gilles-A. Perron where the seven countries will be getting together. Canada has created...we don't have a database format yet, but the seven countries have all done their homework. We now have this very wonderful base of information that we can put out to our auditors in the field. So when they come across a scheme in Anguilla, they can actually look it up on a database to see how it works there. Then they are able to challenge better.

The Chair: You may ask a very brief question, Mr. Murphy.

Mr. Shawn Murphy: I have another question for Mr. Baker. Again it is a public policy question.

I know it takes a tremendous amount of resources to investigate and prosecute an offender. I'm sure you're talking millions of dollars in some cases. But isn't the problem in the sentences?

Ms. Flemming has indicated a case--an evasion case, I assume--involving $1.5 million of taxes. The case was successfully prosecuted. I assume it was a very intense investigation. The fine was $600,000. Isn't this a fundamental public policy problem? If a criminal goes down and steals $200 from a service station, the fine is not 40% of what is stolen; it's probably going to be six months in jail. Don't we have to change the whole public attitude, through public education on sentencing, that this person really should have been in jail for five years?

º (1645)

The Chair: A brief comment, Mr. Baker.

Mr. William Baker: We have an active criminal investigation program in the agency. About 800 people work in that area . Every year we obtain about 300 or 400 prosecutions. Are they sufficient? We could debate from a public policy point of view whether they are. Courts have generally looked at white collar crime a little differently than blue collar crime or the front-line rough edge of crime. Perhaps that's a product of Canadian values.

The Chair: Thank you.

Ms. Phinney, please.

Ms. Beth Phinney: Thank you, Mr. Chair.

Thank you all for coming today.

I was lucky enough to be parliamentary secretary when you switched from Revenue Canada to Canada Customs and Revenue Agency. I like the other name better. I would like to know if you've seen any major difference in how you can carry out your job now that you're an agency compared with what it was like before.

Mr. William Baker: I will try to be brief. As you know, we recently celebrated our second anniversary as the Canada Customs and Revenue Agency.

The main difference we have seen is that as an agency we now have the authority to develop our own internal systems in order to be more effective in the way we deliver our programs and services to the public. For instance, we negotiate directly with unions to come up with the compensation regimes and other benefits for our expert staff. That has given us some flexibility. For example, over the last number of years we have been paying the professional dues of our auditors if they're members of the CICA, the CMA, or the CGA. This is something we could not do historically.

We've been able to target compensation to particular markets, such as Toronto centre, where we've historically had a hard time attracting and keeping people. We've been able to build in some terminable allowances to try to increase the compensation package.

So it has been largely in the human resource area, and that is critical. This is a human business the Canada Customs and Revenue Agency is in. With regard to our ability to get good people in the door and keep them, I couldn't think of a better example than international tax, where the competition we face from the outside is enormous. We often groom people who then leave and occupy very senior positions in the private sector. To the extent that we can be a little more competitive with them and as well make the critical investments in development and give people exposure to interesting experiences, that will hopefully offset some of that. That's the main area where we've seen a difference.

As you know, I could spend a long time speaking about the CCRA, but I won't.

Ms. Beth Phinney: Mr. Minto, would you like to comment on that? Could you also comment on whether you think using the agency system might work in other departments in our government?

Mr. Shahid Minto: I really would like to comment on the competitive part of what Mr. Baker said. From the point of view of a person who has lost eight people to CCRA in the last year or two, they're more than competitive. They're much more competitive, and there are some outstanding IOUs.

Some hon. members: Oh, oh!

The Chair: Mr. Minto, you're the training ground for CCRA, which then becomes the training ground for business.

Mr. Shahid Minto: It's all for the public good, Mr. Chairman. We'll let it go at that.

With regard to whether other departments can do it, let me just say that one of the major reasons for the transformation was to better deal with the HR initiatives. We have planned that a year and a half from now we will go back to CCRA and do a major review of the new HR regime to see what was there before, what has changed, and how effective it is. Until we do that I really can't give you a knowledgeable answer. I can see changes all the time, but to say that the HR thing has been fixed and is working, I don't know that yet. But ask me two years from now and we'll give you an answer.

Ms. Beth Phinney: Thank you.

Mr. Bertrand has a short question.

The Chair: Are you finished, Ms. Phinney?

Ms. Beth Phinney: Yes.

The Chair: Mr. Bertrand. I should go to Philip, but it's okay for you to ask a short question.

[Translation]

Mr. Robert Bertrand (Pontiac--Gatineau--Labelle, Lib.): You mentioned that revenue from non-residents represented about $42 billion. You might have already told us, but I would like to know how much tax was raised from this revenue?

º (1650)

Mr. William Baker: We recover a little over three billion dollars on non-resident revenue. This money comes in automatically. However, thanks to our monitoring efforts and to our auditing, we manage to recover another $350 million annually.

[English]

The Chair: Mr. Mayfield, please.

Mr. Philip Mayfield: It seems to me that as we go from one region of Canada to another there are differences, subtle or not, in the way the administration of the Income Tax Act is applied. If you live in Alberta and then move to British Columbia, the first year you notice it.

It seems to me, though, that if I want to get into an argument with the Department of Revenue people, I would much rather be a rich hockey player who spends 60% of my time or more in the United States or some other country.

I'm wondering why it seems that some people have an advantage with the agency in paying their taxes. In some of the language of this report and in the conversation we're having it's noticeable; we provide services to these people to pay their taxes. Other people get demands, and we all know that the tax collectors have long teeth. They can go in and they can really tell a Canadian taxpayer how he's going to do it.

I'm wondering why, when we do a sample and we get fairly good written results from it, that aggressive nature is toned down in some areas. As an MP I've dealt with some horrible experiences that people have had in finding out what taxes they owed and they didn't even know it.

Can you talk about this seeming unevenness of application of the act and why that is so? More importantly, what is necessary to make the act evenly applied to all people who owe taxes to the Canadian government? That's what I'm concerned about. How do we get to the even application?

Mr. William Baker: It's certainly our quest to have an even application of the act everywhere, and I think, by and large, we do.

There are situations, as you alluded to earlier, in different offices with different people working in different areas. At the end of the day, individuals are making decisions on the interpretation and application of the act and there could be subtle or otherwise differences. Because we do have a very active performance measurement and monitoring program, where we see those differences, we certainly try to correct those and ensure that we're all operating from the same ground.

You made a reference to certain groups. It is a reality that certain well-organized groups have a voice and they are able to bring their considerations in a more articulate way to the Canada Customs and Revenue Agency. We're willing to work with any group to try to come up with the right solution for a compliance problem.

It doesn't necessarily have to be rich athletes or rich actors. For instance, I had a meeting Monday with a representative of car dealers. We've had representatives of the construction industry. Where we have issues to address, and because they have organizations that can speak for them, we can sit down and look at the right solution to achieve the right outcome.

At the end of the day, we're always seeking consistent application of the act. To the extent that there's a perception that this may not always be case, we're interested in that perception and we're always trying to make the system work the way it should.

Mr. Philip Mayfield: I'll go to the second step on that now. For example, I'm not suggesting anything about hockey players, but there are American hockey players who come to Canada and Canadian hockey players who go to the United States. Are our tax policies enforced as vigorously as, say, the American tax policies are to their taxpayers in this situation?

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Mr. William Baker: Yes.

Mr. Philip Mayfield: More vigorously?

Mr. William Baker: They would be enforced with about the same vigour. In fact, that's not by accident. We would have regular discussions with our colleagues at the Internal Revenue Service to have a regime and ensure that there's symmetry. At the end of the day, we want to avoid double taxation, yet at the same time we certainly don't want to have no taxation. So we try to put in place comparable regimes.

The Chair: The point he's making, Mr. Mayfield, is that they can skate around the ice, but they can't skate around the income tax.

Mr. Philip Mayfield: Well, I'm not sure of that, Mr. Chairman.

The Chair: Anyway, your time is up. I'll come back to you.

Mr. Bryden, please.

Mr. John Bryden (Ancaster--Dundas--Flamborough--Aldershot, Lib.): Has September 11 forced you to re-examine any of your practices, both existing practices and planned practices?

Mr. William Baker: Certainly on the customs program there have been profound implications on how we manage the board, and we're certainly aware of that.

From a tax point of view, where we have felt it most is that we contribute to the government's agenda of fighting terrorism as well as related activities such as money laundering or what have you through the work of our criminal investigations area. As you're probably aware, we have cooperative arrangements with certain police agencies and other groups to bring the strength of the CCRA--under certain circumstanc, while respecting the whole issue of confidentiality--to our capacity to identify people engaged in those types of activities. We have very good databases, as you know, and provided that there are certain conditions met, we can use that information to help the police go after, for instance, terrorists groups and organized criminal activity.

So we've seen some ramping up in that area, Mr. Bryden, but it's not profound yet. I think this type of work also does not happen quickly and those types of investigations take a long time.

Mr. John Bryden: To follow a little bit on that and to make it a little bit more precise--and I'm aware that new regimes have come in that you're answering to now with Bill C-36, the money laundering bill, and that kind of thing--but in a general sense, did it force you to take stock? When we talk about tax havens and we talk about tax evasion, it strikes me, as a novice, as all part and parcel of this whole problem of people attempting to profit. And of course we want to put restrictions on this.

It's just a general question.

Mr. William Baker: Well, we've seen it. It certainly added some octane to the international discussions around tax havens. We alluded earlier to the major work underway under the OECD in Paris. We're heavily involved in the identification of tax havens, encouraging them to come on side, and looking at defensive measures to motivate them to do so.

Certainly a lot of people have arrived at the same conclusion you have, that there could well be a connection or that it creates opportunities for illegal and terrorist-type activities. Certainly that has got the attention of members more. And it's not just the OECD; the United Nations and many other groups are heavily involved in that right now, and we support it in many ways.

Mr. John Bryden: Thank you, Mr. Chairman.

The Chair: Thank you very much, Mr. Bryden.

Back to M. Bertrand, s'il vous plaît. Quatre minutes.

[Translation]

Mr. Robert Bertrand: Thank you Mr. Chairman. I have a number of short questions. I will begin with Mr. Baker.

Mr. Baker, do the United States have the same problems that we have with Barbados? Are the problems exactly the same?

[English]

Mr. William Baker: Yes, they do, and we participate with them.

[Translation]

Yes, they have exactly the same problem, and we are working together to find a solution.

Mr. Robert Bertrand: I did a quick calculation after my earlier question. I know it isn't very scientific, but according to what you told me earlier, out of $42 billion in income, you collected about $3 billion from the $1.7 million non-residents who have paid, which gave me a total of about $1,765 per non-resident. I don't think this is a very large sum, but, as I explained, it is not scientific.

I have some questions about the agency. The agency, which was created a few years ago, collects the federal tax and, if I understand correctly, it also collects the federal tax for nine of the ten provinces. Is that correct?

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Mr. William Baker: Yes. With respect to personal income tax, it is done for all of the provinces, with the exception of Quebec.

Mr. Robert Bertrand: Would non-resident income be subject to provincial income tax as well?

Mr. William Baker: No. This system does not apply to the provinces, only to the federal government.

[English]

Ms. Jeanne Flemming: There is a surcharge that goes on non-residents, but that is an agreement between the provinces. The Department of Finance could explain this better. There is a surcharge, and then the provinces can charge non-residents. For example, Quebec charges a 9% surcharge on the film industry for non-residents. So there's a variety of arrangements.

[Translation]

Mr. Robert Bertrand: To come back to what Mr. Mayfield was discussing earlier, last week, if I understand correctly, Alberta stated that they might consider taxing non-resident hockey players. Would your organization be collecting the tax, or would it be the province?

Mr. William Baker: That depends. Each province is entitled to have its own taxation scheme. If a province wants the agency to collect the taxes on its behalf, that can be discussed, but no decision has been made so far.

The Chair: Thank you very much, Mr. Bertrand.

Ms. Phinney again, please.

[English]

Ms. Beth Phinney: We all know how difficult your job is, collecting this money that people don't want to pay. The way you're talking, it sounds like everyone would comply if you could get the systems in place with these different countries. But that would only be about 20 countries, and there are probably still some people who don't want to comply.

What do you do with people who just don't want to pay these taxes or are living someplace where you have no agreement or you can't even get into the government? Do you have any recourse, such as going to Immigration and saying these people can't come into the country because they haven't paid their taxes?

I'm trying to think of what other department it might be. I guess Immigration would be the first. If they're not in the country, the first thing would be Immigration. Can you ask that they be stopped and not allowed into Canada, that they be checked to make sure they don't try to come in as refugees or don't come in and visit relatives and then do their financial dealings here? Do you have any contact or cooperation like that?

Mr. William Baker: The short answer would be no, unless of course the individual was subject to a criminal prosecution. That may have repercussions on the individual's ability to enter the country or do business or whatever.

Ms. Beth Phinney: If you knew they owed you $10,000 or $1 million and you told Immigration, they would have no right to stop them coming into the country?

Mr. William Baker: No. From a public policy perspective, in Canada we've largely kept tax affairs separate from other applications of government policy. There are advantages and disadvantages associated with that, but at this point in time, that would not have any impact on immigration.

Ms. Beth Phinney: I would think if somebody owed the Canadian government $10,000 or $100,000 or $1 million, that would be a concern to everybody, not just a concern to that one person.

Ms. Jeanne Flemming: The debt remains on the books. If the person comes back into the country owing $10,000 and suddenly they have assets of $10,000, we're still able to go after it. If they come back into the country with a debt owing and they have something to seize or go after, we will collect it.

Ms. Beth Phinney: So all they have to do is come in and just be visitors and not earn any money, and then you still can't do anything about it.

Ms. Jeanne Flemming: Well, it just depends. They'd obviously have to have assets in the country.

Ms. Beth Phinney: What if they apply for citizenship, apply to stay in Canada? There's no connection at all.

The Chair: Mr. Minto wants to say something on this, Ms. Phinney.

Mr. Shahid Minto: Thank you, Mr. Chairman.

Mr. Chairman, I want to go back to our experience when we looked at foreign asset reporting. Really, the reporting of foreign assets doesn't apply just to immigrants; it applies to all Canadians. It was not targeted to any group or any particular thing. That was one of the instruments that, it was thought, would help CCRA locate assets for which people were not declaring income. There was a fairly comprehensive study done at that time.

On the issue of immigrants coming in, let me give you the other side for an example. If someone comes in as an investor, from Europe or wherever, with millions of dollars, CCRA has no knowledge until that person files a tax return. If that person comes in and doesn't file a tax return, then CCRA has to use other means--there may be some matching, maybe some interest income, or some other stuff. So there's no link between Immigration and CCRA in the sense you mentioned. You could come in as an investor and it would seem to us you have to then go and register for your car and health insurance, and all kinds of things, but you don't have to do anything with CCRA unless you were setting up a business and need a number; or if you're going to be here as an individual, then we wait until you file a tax return. It's an issue we've raised before. We brought it to the attention of the committee when we did the review of foreign assets.

Mr. Chairman, with your permission, just for one second I'd like to go back to the issue raised previously on the reporting of foreign assets. I personally went to your constituents to present the report and I know how hostile they were. But really and truly, when we looked at the facts, and when we talked to the accountants and the lawyers in Hong Kong and Taiwan and China and Singapore, everybody advised us, even as late as this year, that it really had no effect on either immigration or investment. The investment climate in the rest of the world had changed, and that was not the reason. If somebody's got some solid evidence going the other way, I really would like to see it.

Thank you.

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Ms. Beth Phinney: I guess I'm finished. I got the answer I asked for. I'm not exactly happy with the answer, but--

The Chair: That is the way things work, Ms. Phinney. You don't always get the answer you want.

Ms. Beth Phinney: Yes, I realize that.

The Chair: Okay, Mr. Elkin has something to say.

Mr. Barry Elkin: May I just point out that the underpinning to the non-resident provisions in the act is the concept of withholding tax. Without the concept of having withholding tax, when money flowed to non-residents clearly there would be enormous problems, and that's basically the underpinning. You place the obligation on the person who makes the payment. If interest is paid to a non-resident, a Canadian is required to withhold tax. If rents are paid, the Canadian who's paying the rents is required to withhold. If you're buying property and a non-resident owns it, unless you get a clearance certificate from the Canada Customs and Revenue Agency, you as a Canadian are obligated to withhold. So the underpinning to the whole system is the withholding tax regime.

Ms. Beth Phinney: The person who should be doing the withholding has gone out of the country. This is what I mean. I guess criminals are criminals; they'll find ways of doing it. I just thought we might have some restriction on people coming into the country who already are in trouble in the country because they owe tax money. If they had come as a visitor and developed this problem with the country, I thought if they tried to come back in there'd be some restriction, but I guess there isn't.

The Chair: Perhaps it would be a good idea to let them in, and then we could charge them, Ms. Phinney. We can maybe put them in jail if they don't pay the money. Perhaps that is our responsibility rather than CCRA's, because we're the ones who write the Income Tax Act. I'm sure we all understand it fully.

Ms. Beth Phinney: I wasn't trying to suggest the agency should be doing something. I was just wondering if within the system of the government we had any kind of restrictions.

The Chair: I don't have very many questions this afternoon, but one of the things is that the Auditor General's report has got ten recommendations in it. How do you feel about these recommendations? Are you satisfied they can be implemented and will be beneficial if you adopt them?

Mr. William Baker: Mr. Chair, we agree with all the recommendations from the Auditor General. We are now already addressing some of them, and others we're still examining in terms of a concrete action plan. In fact I know Ms. Flemming has in front of her our draft action plan, which we're certainly not ready to table today, but we've already begun work in that area.

Just apropos of some of the comments around the table, I think we have to recognize that in some areas we don't pull all the levers to achieve necessarily all of the outcome we would like. It does require in many cases the right cooperation at an international level, the right mechanisms and procedures in place from treaties and legislation, and so on. Certainly, we are going to continue to pursue those with our international and domestic partners to try to achieve our aim.

The Chair: Okay. I see in paragraph 7.72 of the Auditor General's report they talk about the inconsistencies in the application of the Income Tax Act, where one office reassessed an employer but failed to withhold tax on income paid to a non-resident employee for services provided outside Canada because the employee had not obtained a waiver from the agency. Yet in a similar situation, another office took no action against the employer.

I appreciate your point that you aim for consistency across the country. I appreciate that with thousands of different people making complex decisions each and every day, to get total consistency is very difficult indeed. But I would also like your assurance that you want to try to stress for even application of the act. One of the last things one would ever want is a lack of credibility in the application of the Income Tax Act.

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Mr. William Baker: Absolutely, sir. It's an ongoing pursuit.

The Chair: I really don't have too much in the way of questions. I'm going to let you off fairly easy. Sometimes I get carried away with my questions at the end.

Ms. Phinney, do you have a question?

Ms. Beth Phinney: I don't have a question, but I have a comment. Mr. Bertrand just said that next year in the Auditor General's report he's going to say you can't steal from our department anymore. That's one of your recommendations.

Some hon. members: Oh, oh!

The Chair: Very good.

We're going to bring this meeting to a close. The clerk would like me to ask that the fifth report, which is the report from the steering committee we dealt with this afternoon, be adopted as amended. The amendment, of course, is to not bring in Mr. Grant.

(Motion agreed to--See Minutes of Proceedings)

The Chair: The report is adopted as amended.

The meeting is adjourned until Thursday, March 14, 2002.