[Recorded by Electronic Apparatus]
Wednesday, May 8, 1996
.1612 
[Translation]
The Chairman: Good evening, everyone.
Pursuant to Standing Order 108(3)(d), the Standing Committee on Public Accounts will proceed to the consideration of the Auditor General's report, presented to the House of Commons yesterday, May 7.
Our witness is Denis Desautels, Auditor General of Canada.
Good evening, Mr. Desautels.
Mr. Denis Desautels (Auditor General of Canada): Good evening.
The Chairman: I'll just ask you to introduce the people who are with you today. I believe we agreed your presentation would last no more than 15 minutes. After that, there will be questions by committee members. In order to gain as much information as possible from your time with us, the committee examined your report in camera yesterday.
Mr. Desautels.
Mr. Desautels: Thank you, Mr. Chairman.
With me today are Raymond Dubois, Deputy Auditor General, and Michael McLaughlin, Assistant Auditor General.
Since this is the first public meeting on the May report, I would like to provide the committee with an overview of all the key topics covered, while paying particular attention to the priorities set forth in my letter to you dated May 7.
Chapter 1 contains two audit observations which bring significant issues to Parliament's attention.
The first observation deals with weak controls in the case of the Atlantic Canada Opportunities Agency's contribution to a local development association formed to assist communities affected by the closure of Canadian Forces Base Cornwallis. The agreement with the recipient was missing key conditions necessary for good control and accountability. The Association also used the funding for infrastructure purposes, which was not the intent of the agreement with the Agency. ACOA is now reviewing the use of its funding and the Military Police are investigating the alleged removal of assets. We will continue to monitor these actions and consider the need for any additional steps as the work is completed.
[English]
The second observation in chapter 1, which we consider a high-priority subject, outlines our concerns about the administration of the Income Tax Act as it applies to family trusts and the taxation of capital gains. Revenue Canada has given advance income tax rulings related to moving at least $2 billion worth of assets held in family trusts into the United States from Canada, tax free.
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We are concerned that these transactions may have circumvented the intent of the law regarding the taxation of capital gains and that this may have eroded the tax base by forfeiting a legitimate future claim to significant tax revenue, possibly many millions of dollars. This observation highlights significant ambiguities in the Income Tax Act relating to the concept of taxable Canadian property.
We are also concerned about the lack of documentation and analysis of key decisions in this matter. Furthermore, because the rulings were not made public until recently, other taxpayers may have been denied the benefit available to those who received the rulings.
I'm encouraged, however, by Revenue Canada's announcement that it now plans to release all advanced rulings. This observation reflects our continuing concern with maintaining fairness and the integrity of the tax base. For this reason, we've indicated this as a priority matter for your early consideration, but I note that the Minister of National Revenue has since announced that the finance committee will be asked to review the law relating to the issue of taxable Canadian property.
Chapter 2, on the implementation of federal environmental stewardship, reviews the greening of government operations process as it was applied from 1992 to 1995. This audit has identified lessons learned from the implementation of the stewardship initiative, which can be applied to the second phase.
There is a need for strong leadership, both government-wide and in departments and agencies. Although Environment Canada is a key player, the various players, including the Commissioner of the Environment and Sustainable Development, need to understand and carry out their role in accordance with the established framework. Responsibility for the implementation of the process also has to be clarified.
[Translation]
Chapter 3 on evaluation in the federal government reports on progress since our 1993 report on program evaluation and on the Treasury Board Secretariat's compliance with your Committee's sixth report on program evaluation. Your Committee has shown a strong interest by requesting that the government table an annual report on evaluation of government programs.
Although some progress has been made since 1993, program effectiveness information required for government decision-making and broader accountability is not consistently provided. Program evaluations in departments are still primarily focused on operational issues and smaller program components. The government needs to better identify government-wide evaluation priorities, identify gaps in review activities, ensure these gaps are filled, and to credibly report on progress. Also, the President of the Treasury Board's report on the performance of the evaluation function needs to provide a better picture of overall success in evaluating government programs.
Given continued fiscal restraint and the need to deliver programs in a manner that achieves optimal results, it is essential for the government to continue work towards ensuring that the effectiveness of programs is examined. Your Committee may wish to re-examine progress in this area.
[English]
Chapter 4, on internal audit in departments and agencies, reports on progress since our 1993 report. Internal audit is a fundamental management tool that can assist departments to reduce costs while they continue to provide needed services. Internal audit can provide deputy heads with assurance about the efficiency and effectiveness of key activities and management practices in their organizations and identify areas for improvement.
Except for some improvements at the unit level, the overall performance of internal audit has improved very little since 1993. Senior management support continues to be lacking and internal audit still suffers from a narrow range of expectations.
Chapter 5 reports on the federal government's efforts to simplify and streamline its complex and costly system of classification and job evaluation and to ensure it will meet the requirements of the Canadian Human Rights Act for pay equity. Classification and job evaluation are considered the cornerstone of human resource management in the public service. The current systems, developed in the 1960s, are complex, cumbersome, and costly.
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Since 1991 the Treasury Board Secretariat has been developing a new classification and job evaluation system known as the universal classification standard. The standard is intended to replace some seventy current classification standards. The standard is a definite improvement over the current systems. However, the audit concluded that significant corrective measures were needed for the system to be effective and less costly and for it to meet pay equity requirements.
Although the Treasury Board Secretariat is taking a number of important measures to address our concerns, the situation needs to be monitored to ensure the present level of effort is maintained and expected results are achieved. Your committee may wish to consider this chapter later, once design issues are resolved or if progress begins to slip.
[Translation]
Chapter 6 reports on the role and management practices of Foreign Affairs and International Trade Canada as they relate to Canada's participation in peacekeeping. The audit identified that:
- Parliament does not get comprehensive information on the financial cost - these costs have risen sharply in recent years - and other implications to Canada of its participation;
- Foreign Affairs does not have established evaluation or "lessons learned" procedures in the area of peacekeeping; and
The administration of reimbursements from the UN needs improvement.
We recommended that the government clarify responsibility for reporting annually to Parliament on all important aspects of peacekeeping. That requirement would define the process of accountability and the roles and responsibilities of the Department and of the other key players involved.
[English]
Chapter 7 presents our findings on the Department of National Defence's ability to meet government commitments for peacekeeping without impairing its ability to meet other commitments. The audit indicated serious problems in the land force's ability to generate multi-purpose forces, including inability to complete training plans, use of emergency buys to provide minimum levels of equipment for troops deployed on peacekeeping, deficiencies in armoured vehicles, and insufficient medical support for the maximum deployment goals established in the white paper. Finally, we also found problems in the control of supplies and equipment deployed overseas to support peacekeeping missions.
Chapter 8 deals with the construction of the Canadian Security Intelligence Service headquarters building. Overall this project was well managed. The project met its budget, schedule, and stated user requirements. We have noted several success factors and lessons learned that are applicable to future such projects in the federal government. However, we noted that the current framework for managing crown projects does not encourage the under-spending of budgets where that is possible, such as in this case.
[Translation]
Chapter 9 identifies opportunities for improving Agriculture and Agri-Food Canada's planning, conducting and reporting of Animal and Plant Health Program activities. During our audit we identified no instances of significant health risks that have gone unattended. Nevertheless, the Department needs to utilize scientific risk assessment more effectively in determining program-wide priorities and allocating resources to areas of greatest risk.
This audit is complementary to our 1994 audit of the federal management of the Food Safety System. Together, these areas comprise most of the operations of the recently announced single Food Inspection Agency.
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Chapter 10, on the Rehabilitation Programs of Correctional Service Canada, reviews CSC's rehabilitation programs. We concluded that CSC's rehabilitation programs are not being well managed or targeted to meet the needs of offenders in a coherent manner.
CSC has an impressive series of intervention programs but there is a lack of consistency in the treatment of offenders and there are significant cost variations in programs from one region to the next. Correctional Services Canada still has problems with offender employability once they are released, and the CORCAN Program is not as cost-effective as it could be.
[English]
Chapter 11 examines Revenue Canada's efforts to combat tax avoidance. In keeping with our objective of monitoring the effectiveness of revenue programs and your committee's continued interest in revenue matters, we have suggested this chapter as a priority for your consideration.
The department has undertaken specific initiatives to combat and deter tax avoidance and it expects the program to produce about $365 million in reassessments in 1995-96. Although the cost of tax avoidance is not known, the results of Revenue Canada's program to combat it indicate that avoidance continues to pose a serious threat to the tax base.
Our report indicated that abusive tax shelters continue to put pressure on the tax system. The department could further streamline operations and strengthen accountability. In particular, improving the timeliness of legislative changes, ensuring that large corporations are adequately reviewed for tax avoidance issues, and internal communications are areas that could be improved.
Your committee may wish to review with Revenue Canada its current plans to address our overall concerns with compliance monitoring raised in this and previous audit reports.
Finally, chapter 12 reviews the health care program of Veterans Affairs Canada. The annual cost of this program is about $629 million and has been the fastest growing area of expenditure in the department. Veterans Affairs must improve its planning to meet the future health care needs of its clients. The department needs to improve controls over the cost of its health care program. The chapter also discusses a long-standing, unresolved issue between Veterans Affairs and some provinces over responsibility for certain health care benefits.
[Translation]
In summary, Mr. Chairman, we have suggested four items for your Committee's consideration in developing a plan for hearings: the observation on family trusts and the taxation of capital gains, Chapter 3 on evaluation of government programs, Chapter 5 on the reform of classification and job evaluation in the Public Service, and Chapter 11 on combatting income tax avoidance. These suggestions are offered as a place to start.
Thank you, that completes the overview of the Report. We would be pleased to answer questions and to discuss our suggestions for priority consideration by your Committee.
Thank you.
The Chairman: Thank you, Mr. Desautels. I have a short question for you.
In your previous comments, you recommended that consideration of family trusts be given priority by this committee. In your time as Auditor General, have you commented on family trusts before, or is this the first time you have examined them?
Mr. Desautels: This is the first time we are making recommendations specific to family trusts. In the past, we have made recommendations regarding other sections of the Income Tax Act, such as foreign subsidiaries of Canadian companies, but we have not touch on family trusts.
In fact, we are not focusing on family trusts as such. It's somewhat broader than that. We are talking about capital gains tax, specifically the concept of taxable Canadian property which does not only apply to family trusts.
The Chairman: But we are talking about two cases that represents 2 billion of assets. If I understand correctly, you felt these cases were serious enough to merit particular consideration in this report.
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Mr. Desautels: Yes, that's true. Each time we table a report, it is our practice to suggest issues for priority consideration by the committee - even though we would like to think that all the issues we raised are important.
The Chairman: Mr. Laurin.
Mr. Laurin (Joliette): In Chapter 1 of his recent report, the Auditor General mentioned two particularly important cases in which family trusts or people moved huge fortunes to the United States.
During Question Period in the House today, the Minister of Finance indicated he found it quite natural that we would raised these issues again. He agreed that the opposition should seek to obtain the facts and get answers to their questions in committee, since he was unable to answer all our questions in the House.
Since we have the Minister of Finances' consent and encouragement to ask these questions, I will be spending some time on these issues today. My question for the Auditor General is on two advance income tax rulings issued in 1991 and 1985, if I'm not mistaken.
Since this a very important issue - we are talking about $2 billion, which is a lot of money - and since for at least two and a half years we have been talking about this in the House, and drawing the medias' and the government's attention to family trusts and calling for action, I would ask the Auditor General today whether he can give the committee the names of the two entities who moved these $2 billion of assets to the United States.
Mr. Desautels: Pursuant to section 241 of the Income Tax Act, I believe I am unable to reveal the names of the trusts involved, or any information that would make it possible to identify them.
Mr. Laurin: In the chronology of events set forth in Exhibit 1.4 of the Auditor General's Report, on page 1-17 and 1-18, the Auditor General gives the position titles of some people involved at the time. Could he not provide us with the names of those people? We are talking about a Deputy Minister and an Assistant Deputy Minister who played a role in this chronology of events.
Mr. Desautels: I could provide you with that information, but I do not have it with me now. I can tell you that the Deputy Minister has not changed since then. As for the other names, I do not have them with me but I could provide you with them.
Mr. Laurin: So the Deputy Minister is the same one who was in the position then. There is also an Assistant-Deputy Minister involved. Is the current ADM the same person?
Mr. Desautels: I could perhaps ask Mr. Minto to answer that question. He was in charge of that departmental audit.
Mr. Laurin: Mr. Minto, the chronology of events in the Auditor General's Report includes the position titles of some persons involved, without mentioning their names. It seems that the Deputy Minister and Assistant-Deputy Minister of Revenue Canada played a role in making these decisions.
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Could you please give us the names of the DM and the ADM? We are told that they still hold those positions today.
[English]
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, yes, they are still there, and they are still the same people.
[Translation]
Mr. Laurin: Forgive me, I didn't hear. Could you please repeat that?
Mr. Minto: Yes, the DM and the ADM are still in the same positions today.
Mr. Laurin: Could you give us their names, please?
[English]
Mr. Minto: I believe the deputy minister of the department is Mr. Pierre Gravelle.
[Translation]
Mr. Laurin: The Deputy Minister is Pierre Gravelle?
Mr. Minto: Yes.
Mr. Laurin: And the Assistant-Deputy Minister?
[English]
Mr. Minto: The assistant deputy minister, I believe, was Mr. Denis Lefebvre.
[Translation]
Mr. Laurin: So Denis Lefebvre is Assistant-Deputy Minister of Revenue Canada, and held the same position at the time these events took place. Is that right?
[English]
Mr. Minto: That's correct, to the best of my information, sir.
[Translation]
Mr. Laurin: Mr. Desautels or Mr. Minto, could you tell us whether there have been other transfers since that time? Here, we are talking about two particular cases; what I would like to know is whether there have been other transfers since then.
Mr. Desautels: We cannot answer that question with any degree of accuracy. The transfers described in our report were identified on the basis of audit procedures already under way. We followed up on the two cases at issue here. At the time of our audit, they were the only two such cases we had come across. We have neither seen nor sought to find similar cases since the time of the audit.
Mr. Laurin: Mr. Desautels, could we find out whether there are other cases like this? Would that information be in the public domain? If so, who can we ask, where do we look for these cases?
Mr. Desautels: The reason we found out about the cases at issue today is that advanced rulings were involved in both. Without advanced rulings, it is very difficult to find out what's going on. The information is in each taxpayer's confidential file.
Mr. Laurin: We know that in the past advance rulings were not published, but that doesn't mean they did not exist. Where do you think these advance rulings are? They have to exist somewhere, so how could we obtain them and see what's in them?
Mr. Desautels: I do not believe that obtaining copies of advance rulings is a problem nowadays. Since the time we began this audit - and particularly since a report we prepared in 1993 - the Department has started publishing advanced rulings. Of course, it deletes any information that could identify taxpayers.
Mr. Laurin: Mr. Desautels, since you have identified two cases, could we at least try to assess the amount that all such cases might represent each year since 1991?
Mr. Desautels: Mr. Chairman, that would be...
Mr. Laurin: Does that information appear anywhere in the public accounts?
Mr. Desautels: Mr. Chairman, providing Mr. Laurin with the information he is requesting would be practically impossible. Advance rulings do not provide the details we would need to assess the amounts involved.
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As I said before, advance rulings must be published by the Department within a prescribed period. This gives us a chance to appreciate the frequency and extent of transactions like these.
Mr. Laurin: I have one more question, and a notice of motion.
Could the Minister of Finance authorize you to disclose the names of the two taxpayers who moved the amounts in question to the United States?
Mr. Desautels: I would need a legal opinion to answer Mr. Laurin's question, which touches on a very, very sensitive area. I could not give him an answer to that before consulting a legal advisor.
The Chairman: How long will you need to get back to the committee? We would like to start work on your report as soon as possible. Since family trusts are your priority, we would like some concrete information before we get down to work. We want our work to be constructive.
How long will you need to get your legal opinion and answer Mr. Laurin's question?
Mr. Laurin: If it could help Mr. Desautels, I would remind him there's a precedent. In the case of Mr. Dingwall, the government authorized disclosure.
The Chairman: Mr. Dingwall's case?
Mr. Laurin: Yes.
The Chairman: Minister Dingwall?
Mr. Laurin: Yes, yes.
The Chairman: How long will you need to obtain the legal opinion, Mr. Desautels?
Mr. Desautels: I will certainly have it within a few days or a few weeks. At present, the committee could study the issues raised without necessarily requiring disclosure of the taxpayers' identity. I could then work with the committee immediately.
Mr. Laurin: Can the minister authorize you to investigate the circumstances that led to the decision being reversed? The initial decision was to issue an unfavourable ruling. Some two or three weeks later, the Department changed its mind and issued a favourable ruling.
Could the minister authorize you to conduct a more in-depth investigation of the circumstances which led to that change? Do you already have the authority to conduct such an investigation?
Mr. Desautels: We do not require authorization to investigate. Our Act allows us to go as far as we consider necessary.
We may occasionally be asked to conduct specific examinations. In this case, we took the initiative and conducted an audit without requesting authorization. We have the authority to do it.
The reason we were unable to obtain answers to all our questions is that there is no other information available. If the department has anything to add, it could provide the information without requesting us to conduct an investigation.
Mr. Laurin: In the light of Mr. Desautels' answers, I would like to announce that I will be moving a motion at the end of this meeting.
The Chairman: Agreed.
[English]
Mr. Williams, you have twelve minutes.
Mr. Williams (St. Albert): Thank you, Mr. Chairman.
Mr. Desautels, I have a few questions also on the family trusts. If you want to have Mr. Minto answer, please feel free.
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There is the tax ruling that was issued, and one week later, a tax opinion, which is not quite as formal, in a contrariant position. First of all, is it the same department that issues rulings and opinions?
Mr. Desautels: Yes.
Mr. Williams: The same department issues rulings and opinions, and since rulings are much more official than opinions, are you aware of any other situation where an opinion has been granted that is contrary to a ruling that has just been issued?
Mr. Desautels: I'll ask Mr. Minto to answer that, please.
Mr. Minto: Mr. Chairman, we are not aware of that, but I also have to add that it hasn't been the focus of our audit to find things like that.
Mr. Williams: Would it be reasonable to assume that it would be a most unusual position to find an official ruling granted one week and a contrariant opinion granted the following week? That would be quite unusual, wouldn't it?
Mr. Minto: Mr. Chairman, I would have to agree to say it was unusual, because it was the same unit dealing with both issues.
Mr. Williams: Was the tax opinion that was granted, which denied the taxpayer intending to pursue a particular course of action, made public in any way, shape or form to accountants? Did it get out to the public domain in any way, shape or form?
Mr. Minto: The ruling was made public, but the opinion was not.
Mr. Williams: The opinion was...sorry, but I'm talking about 1985.
Mr. Minto: Oh, 1985. I apologize. No, sir, it wasn't.
Mr. Williams: Neither was made public.
Mr. Minto: No, sir. Let me go back and make sure I have the record correct here. When Revenue Canada ruled that public company shares could leave Canada on a tax-free basis, this was not made public.
Mr. Williams: That's correct. Now, was the opinion they issued on a contrary position one week later in any way, shape or form in the public domain?
Mr. Minto: Yes, sir, it was.
Mr. Williams: That was in the public domain.
Mr. Minto: Yes, sir.
Mr. Williams: So we had a situation where one taxpayer had a confidential tax ruling saying he could avoid taxes, and in the public domain was an opinion that had carried lesser weight, issued after the ruling, saying that is not allowable, therefore obviously discouraging any accountant, company or taxpayer from following that avenue of a tax loophole. They thought that was closed off. Is that a reasonable assumption, Mr. Minto?
Mr. Minto: Nobody would have access to the information that said you could do it.
Mr. Williams: Moving on to the 1991 tax ruling that was issued, I see that the requests were received by the department on November 7 and the decision was made and issued on December 23, about seven weeks less. In a complex issue like this, is it normal to have a ruling issued that fast?
Mr. Minto: That is difficult to answer, sir. It would depend on how many resources they put on the job.
Mr. Williams: It seems to me that there was a great deal of urgency in getting this ruling out. Was there an advantage to the taxpayer to have this ruling in his hands prior to December 31, 1991?
Mr. Minto: Mr. Chairman, I would really ask Mr. Williams to reconsider the question. He's asking me for questions that are of a confidential nature relating to the taxpayer, and I really don't think we should get into that.
Mr. Williams: Can we assume, Mr. Minto, December 31 being the end of the taxation year for the vast majority of people, that it seems, or that I have the impression, that there must be some advantage to this ruling being issued so quickly?
Mr. Minto: We understand the department wanted to provide a service to the taxpayer who wanted the ruling.
Mr. Williams: In a most efficient manner possible, obviously.
Mr. Minto: Perhaps, Mr. Chairman, I can quote from the income tax ruling that has been made public in a severed form by the department. They talk about the purpose of the ruling or the proposed transaction. It says:
- As the Child decided to take up permanent residence in another country, it was considered
desirable to minimize the Child's interest in foreign trusts...
Mr. Williams: On December 23, 1991, there was a flurry of activity, if I may say so. That happened to be a Monday and two days before Christmas, which aren't normally the days the Government of Canada and civil servants are working at their peak of efficiency. But there certainly was a great deal of effort that day, as you've outlined in exhibit 1.4.
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It seems to have culminated on December 23. The taxpayers' representatives are advised that the department will accept an undertaking and a waiver and rule favourably. I'm getting the impression they must have got a telephone call or something along that line saying yes, you're home free. Is that the normal way to communicate tax rulings?
Mr. Minto: The basic assumption you're making is that this was in a phone call or something. I really don't know the process. That is the honest answer. I know they were advised of that. We could find out how they were advised. I really couldn't answer the question.
Mr. Williams: The Revenue Canada bureaucracy below the highest level documented all their meetings with well-documented minutes, and each and every one said this was not the position of Revenue Canada; this particular situation is taxable. Then we find at meetings that at the most senior level no minutes were taken; decisions are totally reversed. Can we expect perhaps the Ministers of Finance or Revenue would have been involved in these meetings?
Mr. Minto: I have absolutely no knowledge that any ministers were involved in these meetings.
Mr. Williams: You have no knowledge that they were or were not involved?
Mr. Minto: The essential thing, sir, is that there were no minutes and there were no documents. So we do not understand the basis of the decision. Anything else would be speculation on our part, and we really don't want to get into that.
Mr. Williams: I can't remember just exactly where it is, Mr. Minto, but there was another opinion. I get back to the opinion issued in 1985, which is contrary to the ruling issued one week later, and I'm looking at 1.36 of your report:
- We attempted to review the analysis supporting the opinion. We were informed that the file
contains only the request for the opinion and the opinion itself. There is nothing in the file to
support the reasoning behind the opinion.
- That was contrary to the ruling, by the way.
- Revenue Canada advised us that it now considers the opinion to be technically incorrect. At the
completion of our audit
- - which presumably is not that long ago -
- the accounting firm had not been advised of
- - the reversal of Revenue Canada's position.
Mr. Minto: One of the concerns we raise in this report is that for significant issues and significant rulings and significant policy decisions there has to be a detailed and rigorous analysis to understand the effect on the tax base, to understand the effects on the other parts of the Income Tax Act, and to understand and forecast the future: where is this leading us to? We found it curious it wasn't there, and that's why we put it in the report.
Mr. Williams: Would you say because they failed to advise this particular accounting firm of the two contrary positions, one ruling in favour and one opinion against, some taxpayers - let's say two taxpayers - had an unfair advantage?
Mr. Minto: I would say, sir, some taxpayers had information others did not. Whether they used it to their advantage or not I don't know that. But some people had information, yes.
Mr. Williams: Mr. Desautels, I would imagine this situation is the exact point you're trying to point out: whether this undermines the credibility and the faith Canadians have in the Income Tax Act. Where we find some people have access to confidential opinions and decisions by Revenue Canada that allow them certain opportunities that are denied, even in writing, by Revenue Canada, this type of thing undermines the faith Canadians have in the Income Tax Act, and that is why you brought it to our attention.
Mr. Desautels: We state very clearly that our concern is about treating different taxpayers differently. This is in effect an equity issue, and this is among the reasons why we have raised this issue.
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Mr. Williams: I understand the constraints within which you have to operate and the professionalism you bring to the reports you have tabled, but I see this as an extremely serious issue. I think Canadians must be concerned about interference in the Income Tax Act, interference by those who have the ability to pay for expert legal advice and lobbying efforts to obtain an opinion that is contrary to what everybody else has to pay, and saves...well, $2 billion moving out of the country tax free has to be a massive tax loss to Canadians.
I look at chapter 11, where you talk about the tax avoidance that you have also audited. You say that taxpayers have developed avoidance schemes that are not contemplated by the legislators or not allowed under the general anti-avoidance legislation. If they're contrary to the object and the spirit of the law and frustrate its purpose, then also under the general anti-avoidance rules and so on, these are disallowed.
These general anti-avoidance rules were in place in 1991. This, in your opinion, is contradictory to the spirit of the Income Tax Act. Did you get any rational explanation out of Finance or Revenue as to why this is the case?
Mr. Desautels: I don't think we can logically make a link between the anti-avoidance rule and the issuance of an advance ruling. It would be illogical for Revenue Canada to issue a favourable advance ruling on something and then attack it through the anti-avoidance rule.
Mr. Williams: But they had opinions to the contrary. If they had an opinion that said it doesn't apply, but rulings that said it does apply, did Revenue Canada or Finance give you any justification for the decision-making process that allows them to arrive at contrary positions?
Mr. Desautels: That is the crux of the matter, Mr. Chairman. Because of the poor documentation, we fail to understand the rationale for the final decision that was made and the reversal from the previous position.
Mr. Williams: One final question, Mr. Chairman -
The Chairman: Your time is up. We'll come back, Mr. Williams.
Mrs. Barnes (London West): Last week when I read this report I noted that during the... I am the parliamentary secretary to the Minister of Revenue, and last week or earlier we met over this. I just want to go over the fact with the Auditor General that because there were no recommendations in this report, there was a meeting with the minister. I was present and other members involved in this audit were present, and we discussed this chapter line by line. There were no recommendations and we wanted to be very clear what the concerns of the Auditor General were. I forget the date.
Mr. Desautels: As a practice, I offer ministers on whose departments I have a chapter or a report a few days before tabling it to review with me the issues I will be tabling. Mrs. Barnes is correct - we did have such a meeting with the Minister of National Revenue the week just before tabling.
[Translation]
The Chairman: Does that give you all the independence you need? What if a department disagrees with something in your report? And do you still have the independence you need to perform your duties? I find my jaw dropping when I hear this, Mr. Desautels.
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Mr. Desautels: Mr. Chairman, when we meet with these officials, the report is already printed and ready for distribution.
[English]
Mrs. Barnes: The Auditor General was very concerned about certain aspects of the Income Tax Act in that meeting. Is that correct?
Mr. Desautels: That is correct.
Mrs. Barnes: During the meeting there was a concern, and it was important to understand what your concerns were in this report. Did you have any concern about the integrity of the department?
Mr. Desautels: Mr. Chairman, since the report was tabled I have had occasion to answer questions along those lines, and I did state that in my view the issue here is not an issue of integrity. In the dealings we have had with Revenue Canada - and since I've been Auditor General we've had a lot of dealings with Revenue Canada - I have never had the occasion or the need ever to question the integrity of the senior officials at Revenue Canada.
Mrs. Barnes: I understand that you were concerned about a proper audit trail. Is that correct? Is that one of the concerns?
Mr. Desautels: Mr. Chairman, this is only one of the concerns and I would say it's not the major concern. The major concern is the ultimate effect the ruling might have, which in our view is contrary to some of the basic principles of the Income Tax Act - that capital gains should eventually all be taxed.
Mrs. Barnes: You are aware, of course, that the Income Tax Act protects the identities of taxpayers. There are provisions to protect the identities of taxpayers, both corporate and individual.
Mr. Desautels: I'm well aware of that, as I indicated earlier in answering a question fromMr. Laurin.
Mrs. Barnes: Also, severed reports are now made public on these advance rulings.
Mr. Desautels: Yes, I'm also well aware of that and we have acknowledged that.
Mrs. Barnes: The concern of the department has to be with fairness for Canadian taxpayers. As you know, the minister has now recommended that this issue you have raised in your report... Since there were no recommendations, we wanted to clarify the complete issue, that it was not a matter of integrity but a matter of the tax problems, specifically with respect to taxable Canadian property, that was at issue for you. Is that correct?
Mr. Desautels: Mr. Chairman, I think the main issue is really the ambiguity in the Income Tax Act that can cause a result that I believe is not consistent with the intent of legislators.
I do welcome the minister's announcement to refer this to committee for study. I just hope it happens rather quickly so that if there is a remedy, it is brought fairly rapidly.
Mrs. Barnes: That's all I'm going to say. It was very much a concern that this report struck at a tax issue, not an integrity issue. You had clarified that, and I wanted to know if you were still saying that today as you had said it earlier. And you are still saying today that you are not concerned about the integrity. I think Canadians would be extremely concerned, and certainly the minister and the government would be extremely concerned, if you were in any way saying that.
Mr. Desautels: Mr. Chairman, I repeat that we don't understand the decision that was made on that day, but never have we had any reason to doubt the integrity of the senior officials at Revenue Canada in all the work I've done so far with that department.
Mrs. Barnes: I'm going to leave it at that. Thank you.
The Chairman: There are five minutes remaining.
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Mr. Hubbard.
Mr. Hubbard (Miramichi): Just to continue along the same line, it appears that one or two senior people in the department made this decision without any written statement giving their reasons for it. Is that correct?
Did one or two people make this decision without recommendation from people in their department? Was it made by the deputy minister and his assistant without a written explanation or documentation on why that decision was made?
Mr. Desautels: I'll ask Mr. Minto to respond to that question, Mr. Chairman.
Mr. Minto: Mr. Chairman, that's extremely difficult to answer, because that is really the question we've been raising: who was involved in the decision? Without the minutes and without the documentation it is very difficult to see who was at the meetings, who said what, who provided what advice, and how the decision was arrived at.
Mr. Hubbard: Mr. Minto, you are saying a decision was made that could have affected the Canadian revenue system by several hundreds of millions of dollars -
Mr. Minto: Absolutely, sir.
Mr. Hubbard: - without documentation, without minutes, without any reason. It was simply a decision of one or two senior officials in the department.
Mr. Minto: If I could just go back to the last one...I don't think we said without any reason, sir. We just said we could not see the reason because the documentation wasn't there. There is a difference.
Mr. Hubbard: Also with the department, I read here where we have write-offs of interest.
Mr. Minto: Yes, sir.
Mr. Hubbard: With the write-offs of interest, is the audit group satisfied that this is done on an organized, definite, policy system whereby people at different levels within a department are authorized to write off a certain amount of money? Does it have to be approved by someone at the next highest level?
Mr. Minto: The question of the interest write-offs was raised by us in a chapter that we did a couple of years ago on collections. At that time, we found that the department was systematically writing off interest but never recording the amount it was writing off. In the Public Accounts of Canada, where you have to list all the debts forgiven by the Crown, the matter was never reported, and not just not reported in public accounts, but internally. The department was not aware of how much it was giving up in total.
Mr. Hubbard: But I'm asking if there is a definite policy in terms of levels within the bureaucracy by which different civil servants are authorized to recommend to a higher authority in terms of writing off interest or other debts to Revenue Canada.
Mr. Minto: Mr. Chairman, there is a policy that covers that within Revenue Canada, but who is authorized to write off the interest.
Mr. Hubbard: So it's not defined in terms of recommendations and approval by somebody at a higher level?
Mr. Minto: Depending on the amounts involved, sir, it could go to a committee. Depending on the amounts involved it could go higher. The concern we raised, sir, if I could just clarify the issue here, was a little different.
There are two kinds of interest write-offs that we talk about here. One is if the interest has been recorded in the accounts of the department and they write it off. A record is kept of that.
Second, there is interest accruing during the process, and upfront when they're doing negotiations with the taxpayer they will say they will waive that interest. This amount of interest has not been recorded, and, under the present system, does not get recorded, so they do not know how much is forgiven through this route. The issue here was that this is public money and if you're forgiving it, if you're writing it off, there has to be an accounting for it. That is the issue we raise here. This is really part two of the issue we raised when we were doing the chapter on collections.
Mr. Hubbard: In the area of tax avoidance, more importantly in tax shelters, there seem to be reflections that there are people out there who are recommending various methods to taxpayers that are not within the laws of this country or that are on the verge of the law.
You seem to indicate that in the United States, since 1982, there has been a definite law, with penalties, for people who are involved in that type of activity. Are you recommending a similar type of system in our country to our minister and to our government in order to deal with these people who are avoiding taxation for taxpayers and who are getting people into difficulty in terms of readjustments of their tax reports?
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Mr. Minto: Mr. Chairman, the member is referring to paragraph 11.67, which states that in the U.S. there are laws and there are penalties for people who do these kinds of things. In Canada there are no laws under the Income Tax Act where you can go after people who promote this kind of abuse of tax shelters. It's only in the very rare cases where there is outright fraud that the department has been able to do something. I think there have been four or five.
I'll just draw your attention to paragraph 11.70, where we make the recommendation that Revenue Canada should consider recommending to Finance an additional penalty for promoting abuse of tax shelters. I'm sure there will be further consideration and things talked about. Right now we see that people who for some reason get sucked into these things lose their money - they get reassessed - but the person who promoted it has nothing to lose.
[Translation]
The Chairman: Mr. Tremblay, you have five minutes.
Mr. Tremblay (Rosemont): I will go along with the Auditor General's recommendation, and move on to the issue of capital gains in family trusts and tax avoidance. When did you start auditing capital gains in family trust?
[English]
Mr. Minto: Two years ago we were doing an audit of the advanced rulings process, and as part of that audit we took a sample of the advanced rulings that the department had given for further review. It was at that time that these cases came to our attention.
The chapter was completed, because these are much larger issues. We did not deal with them at that time. We thought we would finish the chapter and come back to this.
[Translation]
Mr. Tremblay: So in fact, it's by auditing the advanced rulings process that you come to investigate capital gains. You came in by the back door, as it were. The focus has been on family trust, and I can understand that. Given the cases you put before us, it's justified. You're well aware that rarely cases are so well presented when we are dealing with tax issues.
It is quite true that much of the information is confidential, and that you will be maintaining that confidentiality, but you are at least giving us a good idea of the decision making process and its scope. We are talking about capital gains on property that is not necessarily part of a family trust. Is all the property concerned necessarily part of family trusts, or can taxable Canadian property be outside a family trust?
Mr. Desautels: Mr. Chairman, it is not only family trusts that can hold taxable Canadian property. Individuals may also have taxable Canadian property.
Mr. Tremblay: This issue - and I'm not talking about transfer of funds - involves billions of dollars in Canada. We are not only talking about family trusts here. We are talking about capital gains on taxable Canadian property. That, I believe, is the issue you are raising.
Mr. Desautels: Exactly, Mr. Chairman.
Mr. Tremblay: We may be seeing the Chairman's jaw drop yet again. Billions and billions of dollars are involved in these rulings. Here we may be talking about moving funds to another country, but there are other issues involved. Capital is increasingly mobile, subsidiaries are proliferating, more and more Canadians have more than one citizenship; the issue is growing in scope. We will have a chance to come back to what you're planning to do.
I believe a great deal of work could be done on this. My question is in the same vein as Mr. Laurin's. We want to move further and faster, but we are restricted by the confidentiality aspect. However, I do feel we could do some investigating to assess the scope of the problem while maintaining confidentiality. Do you have any suggestions?
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Mr. Desautels: Confidentiality does not prevent us from studying the issues that we raised. On all the factors involved, we could provide more details than you will find in the report. This would give you a chance to consider whether the system is in your view logical, and whether the planning is what you, as parliamentarians, would like to see. You could study the issue in enormous detail without being restricted by confidentiality.
Mr. Tremblay: A few moments ago, a member of the party in power asked a question about integrity. You said that you did not understand the decision which had been reached, but that you were in no way questioning the integrity of the people involved. Your role was not to investigate the integrity of those involved in the given process, but to investigate the process itself, and to see whether the decision is consistent with the Act. Questioning the integrity of those involved in the process is not within your purview, but within the purview of someone else.
I am trying to understand exactly what your mandate is. There are a lot of nuances in the answers we have received. I want everything to be perfectly clear. Essentially, it seems we are trying to make you say that integrity was not involved here. But you state simply that you do not understand the ruling. You have not investigated it.
Mr. Desautels: From a technical standpoint, we do not understand the rulings and we do not feel there is adequate material to support them. We have seen no evidence of interference or lack of integrity by anyone. However, we have not investigated interference or integrity. Our investigation focused on the technical interpretation that resulted in the advanced rulings.
Mr. Tremblay: Thank you.
[English]
The Chairman: Mr. Williams for five minutes.
Mr. Williams: Thank you, Mr. Chairman.
On the backdrop of chapter 1, I'm going to move to chapter 11. If I read your chapter properly, the department has its auditors divided into different groups, and there seems to be a large business audit group and a tax avoidance group. There are two separate groups. Am I correct in that?
Mr. Minto: That's correct.
Mr. Williams: Looking at 11.7, I see you have 150 auditors in the tax avoidance group, but that's different from the large business audit group.
Mr. Minto: Yes, sir.
Mr. Williams: And then of course you point out that 5,000 entities are controlled by over200 of the largest corporations, and large corporations represent a high-risk area. But in 11.25 you say only one referral was made by the large business tax auditors to the tax avoidance group - only one. We have 150 auditors in the tax avoidance group, and a Toronto office that likely handles a huge number of these large company returns referred only one?
Mr. Minto: To clarify, if you look at 11.25, you'll see the fact is 27 cases of tax avoidance were referred in 1994-95. The one referral was in Toronto, and Toronto doesn't have the 130. The 130 are spread over 30 offices all over the country.
Mr. Williams: I appreciate that, Mr. Minto, but I'm trying to say Toronto will handle a very large number of the large business tax returns.
Mr. Minto: Absolutely.
Mr. Williams: Therefore, out of all these high-risk taxpayers, only one was referred. Yet when we take a look at 11.26, Calgary has a different situation. It says:
- We note that in Calgary, where tax avoidance auditors routinely review large corporations' files
for tax avoidance issues in conjunction with large business tax auditors...
So the tax avoidance auditors and the large business auditors are working hand in hand, but Toronto doesn't seem to be that way. Is that correct?
Mr. Minto: That is our point, sir. Yes, in Calgary it seems to be working much better.
Mr. Williams: In Calgary it seems to be working much better; it seems to be that we have a policy to squeeze more taxes out of the west than we do out of the east.
Mr. Minto: Mr. Chairman, if I could just answer that question, I'd refer Mr. Williams to paragraph 11.62. At the end of 11.62 they show that 60% of the tax avoidance auditors in Toronto are involved in auditing tax shelters. The fact of the matter is that these tax shelters are diverting so much time and attention from the tax avoidance to this thing in Toronto that there's very little time for the thing. That is one of the concerns we had with the whole tax shelter problem.
Mr. Williams: Let's get back to what we were talking about in chapter 1, Mr. Minto, where we find that these people who can afford the high-priced help seem to be able to get the high-priced decisions that benefit themselves. We're finding that Toronto can't seem to get their act together because they're not working in harmony. The two departments aren't working in conjunction with each other, as they do in Calgary, where they're obviously efficient and productive.
In Calgary they assess these tax returns from two points of view, one to see that they're legitimate and two to make sure there's no tax avoidance. Yet in Toronto it seems to be a one-step, two-step. It's two steps that hardly ever come into being, and have actually done so only in one case.
Let me ask you one question. Does the Department of National Revenue have consistent policies that are supposed to be applied across the country?
Mr. Minto: Our concern is in paragraph 11.27. We've said that our concern is that a review of tax avoidance issues involving large business is not dealt with consistently and may not be given adequate attention in all the district offices.
Mr. Williams: But do they have different policies for different parts of the country?
Mr. Minto: I believe the policies are the same, sir.
Mr. Williams: The policies are consistent across the country, but they're being applied differently in different parts of the country?
Mr. Minto: Yes, sir. For various reasons they have been applied differently across the country.
Mr. Williams: They're being applied more efficiently in the west than in central Canada to generate tax revenues.
Mr. Minto: I just want to bring you back to paragraph 11.29. We've made the recommendation and the departmental response... This was a snapshot of when we were there and when we looked at it. In the response the department has produced, they say they are going to change this approach now, that they're going to do something different.
Mr. Williams: But you're an auditor, Mr. Minto, and you're a senior official in the Auditor General's department. From a business point of view, wouldn't you think that if you have a situation where each auditor is producing about $2.6 million of tax collection...? Now, I don't know what we're paying these people. I would imagine it's a reasonable salary, but I don't think we're paying them $2.6 million. Therefore there's a real net benefit to the taxpayer to have these auditors in there ensuring that the Income Tax Act is applied fairly.
Where is the Minister or the Deputy Minister of National Revenue trying to justify the fact that he can't afford to invest money in the salary of a tax collector whom he has a reasonable assurance is going to generate $2.6 million? Is the management of Revenue Canada up to par to be able to do the job?
Mr. Minto: The fact of the matter is that Parliament has provided the Department of National Revenue with about 39,300 employees, and at some stages that goes up to almost 42,000. We also have $2.1 billion in operating costs. If I can draw your attention to paragraph 11.21, we've been asking the department where the compliance strategy they should have is.
Mr. Williams: But let's get back to what we pointed out in chapter 1, Mr. Minto, which is that we have one rule for some that reduces their taxes considerably and we have a different rule for the rest of Canadians, which means they have to pay the taxes according to the Income Tax Act, and let's call that their fair share.
Here we have some taxpayers in one part of the country having to pay their taxes according to the Income Tax Act, which is to pay their fair share, and we're now finding that because of lack of resources - even though if you pay somebody $75,000 a year we can expect them to bring in$2.5 million - the Income Tax Act is not being applied with the same degree of fairness in one part of the country as it is in another.
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Am I correct in making that assumption?
Mr. Minto: The conclusion is what we stated in our chapter, that we don't think it is being applied consistently.
Mr. Williams: It's not being applied consistently, so definitely in some parts of the country people are paying their fair share, because the act has been applied in the way it reads, but in some other parts of the country auditors are finding out where some people are claiming an avoidance and deductions that have nothing to do with legal entitlement.
Mr. Minto: If I can just conclude - since you're pointing that out to me, sir - remember that this is only one small program. You're talking about the tax avoidance program. Fairness is a very large issue, and this would probably contribute -
Mr. Williams: I realize that, too.
Mr. Minto: But I don't think you can draw an overall conclusion about fairness just because of this one program.
[Translation]
The Chairman: Mr. Paradis, you have five minutes.
Mr. Paradis (Brome-Missisquoi): It is interesting to see that we are focusing exclusively on the chapter before us today. These are difficult economic times in Quebec. I wouldn't want to find that billions of dollars are going out of the country and making things worse. We might do well to examine the amounts being transferred outside Canada today, and the amounts which were transferred out in 1991. I would like to point out that the ruling at issue today was rendered in 1991, under the previous government.
My questions are very simple. In the chronology of events on pages 1-17 and 1-18 of Chapter I, we see that several meetings took place on December 23, in 1991. Where did these meetings take place?
[English]
Mr. Minto: To the best of my knowledge, in Ottawa, in Revenue Canada's offices. But I could get back to you with a very definite answer.
[Translation]
Mr. Paradis: If possible, I would like to know exactly where each of these meetings was held. Where did all the meetings held on December 23rd take place?
[English]
Mr. Minto: Mr. Chairman, could we undertake to get back to you with a very precise answer on that?
[Translation]
Mr. Paradis: On page 1-18, your report states:
- We note that the senior Revenue Canada official responsible for rulings did not attend the
meeting.
- Who is he?
Mr. Minto: I believe it's the assistant deputy minister of the rulings branch.
[Translation]
Mr. Paradis: What is his name?
[English]
Mr. Minto: It's the name I provided earlier, Mr. Denis Lefebvre.
[Translation]
The Chairman: We just have a few minutes left before the vote, Monsieur Desautels, and quite a few committee members still have questions for you. You know that family trusts are a very topical issue. This is reflected in Mr. Paradis' last few questions. I am convinced that senior Revenue Canada officials will be available to come before us and answer some of those questions. I would therefore suggest that we adjourn for today. Mr, Desautels, could you come back before the committee next week?
Mr. Desautels: I will not be available on Monday, Tuesday or Wednesday, but I will be available on Thursday and Friday.
The Chairman: Thursday, then. Would the committee members be amenable to invitingMr. Gravelle, Deputy Minister of Revenue Canada, Mr. Lefebvre and the Auditor General next Thursday at 9 a.m. We could meet from 9 to 12, or until question period, if necessary.
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Mr. Laurin: Since this is a very urgent matter, could the Auditor General not be represented by someone who can answer our questions on this particular case? I know that you delegate different audits to different officials.
By next Thursday, we'll be just one day away from the week's adjournment, and we have to deal with it before we leave. I would much rather have a meeting on Tuesday. We could meet again on Thursday, with Mr. Desautels, if necessary.
The Chairman: Yes, but we'll check to find out whether Mr. Gravelle is available. We'd like to have him today but we don't know whether is available.
[English]
Mr. Williams: While I agree that this is a very important issue that we want to investigate fully and completely, I would rather be deliberate than be rushed in addressing this issue.
I would certainly want to see the deputy minister of the Department of Finance here, Mr. David Dodge, as well as the deputy minister of National Revenue, Mr. Pierre Gravelle, and the assistant deputy minister on rulings, Mr. Lefebvre. These are three people I would want to talk to. Of course we would want representation from the Auditor General's office as well, preferably the Auditor General.
I would rather that we refer this matter to the steering committee and have them report back, that this committee delegate to the steering committee the witnesses to be called. I really don't want to rush this, but I do want to think through who I want to talk to and who I want to appear before the committee. I would want to have it done quite quickly, but I do not want to rush into a decision,Mr. Chairman. I would therefore ask that if we are going to discuss this next Thursday, we refer to the steering committee the authority to call the appropriate witnesses.
[Translation]
Mr. Paradis: Yes, it would be a good idea to refer it to the Steering Committee which could have an in camera preparatory meeting with the researchers, before we continue.
The Chairman: Agreed.
Mr. Laurin: Mr. Chairman, I'd like to know what's happened to my motion.
The Chairman: It will have to be read and put to a vote.
Mr. Laurin: I move that the Standing Committee on Public Accounts begins, as soon as possible, an examination of the matter of family trusts dealt with in the report of the Auditor General of Canada of May 7, 1996.
My proposal goes along with the recommendations made by Mr. Desautels. I wanted to move a motion because I consider that it is urgent to deal with the matter as quickly as possible. After all, we're talking about $2 billion. We can't wait two or three months, we must begin immediately.
[English]
Mr. Telegdi (Waterloo): Mr. Chairman, I move that we refer it to the steering committee, and then we have to adjourn because we are being summoned to the House.
[Translation]
The Chairman: Yes, but we already have a motion before us. We must vote on the first motion and if it is defeated then vote on your motion. Is the mover willing to have all this postponed?
Mr. Laurin: The Steering Committee cannot vote on my motion. It's only the committee as a whole that can make a decision. So I'd like the committee to vote on my proposal and the Steering Committee can take it into account when reaching a decision.
The Chairman: I think that the members of the Steering Committee are certainly aware of the urgency of the situation.
[English]
Mr. Williams: I'll support the motion, Mr. Chairman, and it will be up to the steering committee to decide when we can make that the earliest possible opportunity.
The Chairman: There's no date on this.
[Translation]
The motion is unanimously carried
The Chairman: The meeting is adjourned.