[Recorded by Electronic Apparatus]
Thursday, May 16, 1996
.0908 
[Translation]
The Chairman: Good morning, ladies and gentlemen. Pursuant to Standing Order 108(3)d), the Standing Committee on Public Accounts is meeting to consider Chapter 1 or the Report of the Auditor General, tabled on May 7, 1996, which is entitled ``Other Audit Observations - Revenue Canada - Family Trusts''.
I would ask our six witnesses to introduce themselves and identify the position they hold.
We shall begin with the Auditor General of Canada. Before hearing the initial presentation of the Auditor General, I would like to make an introductory remark and express the wishes of the committee.
Mr. Denis Desautels (Auditor General of Canada): Good morning, Mr. Chairman.
.0910
I'm accompanied today by Mr. Shahid Minto, Assistant Auditor General, and Mr. Barry Elkin, Principal Audit Operations, who work with me on this issue.
Mr. Denis Lefebvre (Assistant Deputy Minister, Policy and Legislation Branch, National Revenue): Denis Lefebvre, Assistant Deputy Minister, Policy and Legislation Branch, Revenue Canada.
Mr. Pierre Gravelle (Deputy Minister, Revenue Canada): Pierre Gravelle, Deputy Minister, Revenue Canada.
[English]
Mr. David Dodge (Deputy Minister of Finance): I'm David Dodge, the Deputy Minister of Finance.
Mr. Len Farber (Director, Tax Legislation Division, Tax Policy Branch, Department of Finance): I'm Len Farber, the director of tax legislation in Finance.
[Translation]
The Chairman: Before giving the floor to Mr. Desautels, I would ask you to limit your presentations to 10 or 12 minutes and not to enter into too many technical details, so as to make this meeting as productive as possible. The Standing Committee on Public Accounts has invited you to appear before it today because the members have interesting questions to ask you on this issue.
While we appreciate that you are experts in the area of taxation, the same may not be true of all the members here today. However we have been given briefing sessions from our researchers and therefore have some good ideas. So as to ensure that the presentations will be as effective as possible, we would ask you not to go into too many details. Without any further ado, I will give the floor toMr. Desautels.
Mr. Desautels: Thank you, Mr. Chairman. I am obviously pleased to be here this morning to discuss an audit observation contained in Chapter 1 of my May 1996 Report. This observation raises serious concerns about the administration of the Income Tax Act and specifically the taxation of certain capital gains.
I am encouraged that the Minister of National Revenue has announced initiatives to address our concerns. I can assure you, Mr. Chairman, that we will be watching the implementation of these initiatives with a great deal of interest.
In reporting this observation, we had to draw a fine line between maintaining taxpayer confidentiality and providing information that was essential to understanding fully the issues being raised.
As noted in my 1993 Report:
- The purpose of the advance rulings service is to promote voluntary compliance, uniformity and
self-assessment by providing certainty with respect to the income tax implications of proposed
transactions. By removing doubt as to the tax consequences of a particular transaction, advance
rulings provide certainty for taxpayers.
[English]
The audit observation raises three concerns: possible circumvention of the intent of the law relating to the taxation of capital gains, lack of documentation and analysis of key decisions and fair and equitable treatment of all taxpayers. Let me briefly address each of these.
In our view, with certain exceptions the intent of the Income Tax Act is that capital gains accrued after 1971 on property held by residents of Canada are subject to tax when the property is disposed of, when the resident dies or when the resident leaves Canada. For a trust that is resident in Canada, this general rule also applies.
In the case of a resident who leaves Canada, an exception is made for a class of property called taxable Canadian property. Without getting into the specifics, it's our view that it is not the intent of the law that the shares of the public company in the case discussed in the observation be treated as taxable Canadian property. While there is overwhelming evidence in the Income Tax Act to support this view, one paragraph relating to partnerships was used to sanction the transactions discussed in our observation.
You'll note that in Revenue Canada's response to our observation, they agree the issue is complex and involves ambiguous provisions in the law. I assume this issue will be dealt with in depth by the Standing Committee on Finance and I'm hopeful that any ambiguities will be cleared up so the intention of Parliament continues to be fully reflected in the law and in its administration.
.0915
[Translation]
Our second concern deals with the lack of documentation and analysis of key decisions made to support the decision to rule favourably in 1991. Exhibit 1.4 sets out the chronology of the key events leading up to the issuance of this ruling. What I find striking in this is that there is a clear trail of documentation and analysis during the period of time up to December 23, 1991 when Revenue Canada, including its senior officials, believed that it could not give a favourable ruling. A memorandum to this effect dated December 23, 1991 was prepared by senior officials. However, during a series of meetings on the same day, senior officials of Revenue Canada, after consultations with officials with the Department of Finance, authorized a favourable ruling.
Both Revenue Canada and the Department of Finance advised us that their files do not contain any minutes or documentation of these meetings. Furthermore, we were advised that the Department of Finances' files do not contain any documentation to support its opinion or the potential fiscal impact of the advice it provided. We were also advised that Revenue Canada's files do not contain any analysis of the potential impact on other sections of the Income Tax Act or the impact on the fiscal framework as a result of accepting the Department of Finances' advice.
[English]
We believe that without a documented, appropriate analysis, public accountability for these types of decisions is compromised. In the matter before us today, because of the contradiction between a 1985 ruling and opinion, because of the inconsistency between the 1991 ruling and a waiver that can only be enforced by arguing against that ruling, and because of the lack of documentation, we do not understand the basis on which the decisions were made. As well, we continue to be concerned about the lack of risk analysis in these transactions, which appear to have such a significant impact on the tax base.
I note that the Minister of National Revenue has directed her department to take steps to improve documentation of tax policy interpretations. I am hopeful that your committee will be able to obtain firm commitments from Revenue Canada and the Department of Finance to adequately analyse and document future significant decisions. This is important to ensure proper accountability, to ensure that potential fiscal impacts are fully thought out and to strengthen the credibility of the tax administration process.
Since my report was tabled, I have been asked several times whether I'm questioning the integrity of senior officials. I can advise you that we have done many audits over the last number of years at Revenue Canada, and while we have been critical at times and have frequently provided recommendations designed to strengthen the performance of the tax system, we have never had any reason to doubt the integrity of Revenue Canada's senior management.
Our third concern today deals with the fair and equitable treatment of all taxpayers. As we point out in the observation, the 1985 ruling was not in the public domain, whereas the 1985 opinion, which gave a different view, has been in the public domain for some time. While the 1991 ruling was finally published in March 1996, I am concerned that because the details of these tax arrangements are now in the public domain, there is an increased sense of urgency to rectify the matter.
[Translation]
In conclusion, I am encouraged that Revenue Canada has now announced that it plans to release all advance rulings in severed form of course. We recommended this in 1993 because we believe making such rulings available on a timely basis should result in a more consistent and uniformed application of the law. It should also improve the transparency and accountability of the tax system for all Canadians.
Thank you Mr. Chairman. My colleagues and I would be pleased to answer any questions you may have.
The Chairman: Thank you, Mr. Desautels. I now give the floor to Mr. Dodge.
Mr. Dodge: Thank you, Mr. Chairman.
.0920
[English]
Thank you for inviting us to appear before you today. The matters you have asked my Revenue Canada colleagues and me to talk about are extremely important ones, and I hope what I'm going to say will help you understand some of the policy issues related.
The department has prepared a short outline of the policy framework. I hope you all got this before our meeting today. It should be on your desk.
The report issued on May 7 by the Auditor General identified a number of concerns with advance tax rulings. Most of those concerns my colleague Mr. Gravelle is going to speak about, but I want to speak today to the first issue the Auditor General has just talked to, the policy basis for the ruling.
In order to understand these issues it's necessary to understand a bit about how the tax rules work. I think it's probably useful to take a bit of time to just work through this. That's the purpose of the little deck.
Since 1972 Canada has taxed capital gains. A capital gain, as you know, is simply the difference between what a taxpayer pays for a capital property and the value of it when he disposes of it. For tax purposes, the important number is the difference between those values, that is, three-quarters of the total gain, the taxable portion.
It's important to note that Canada taxes capital gains only when they're realized. I'm sure the reason for this is obvious. A taxpayer who has not actually disposed of a property probably would not have any money to pay the tax. As well, if the government were to insist on an accrual basis it would be constantly charging and then refunding the tax as property values fluctuated. Parliament determined in 1971 there were good, practical reasons for taxing gains only when realized.
That is the main basis on which we tax capital gains. There are, however, cases where the law does call for taxing accrued gains, whether or not they've been realized. The most important of these cases are when a taxpayer leaves the Canadian tax system either by death or emigration.
Again, the reason for taxing gains on an accrual basis in these limited cases is that Canada's losing the ability to tax the gain accrued up to that time. This suggests that if Canada does still have the ability to tax a gain on a particular property, the deemed disposition is not necessary and the basic principle of taxation on realization would apply. Where a taxpayer leaves Canada, Canada does have the ability in respect of taxing certain kinds of property. Once a taxpayer has become non-resident, Canada will still - subject to treaty, of course - tax gains on what is known as ``taxable Canadian property''. Item 2 provides a list of what taxable Canadian property is.
These are the kinds of property Canada taxes gains on, even when the property is held by a non-resident. The principle is that non-residents should pay Canadian tax on their gains from Canada, except where treaties provide otherwise.
Because Canada will continue to tax a former resident's gains on taxable Canadian property, again subject to treaty, the system does not tax those gains on an accrual basis. Instead, it treats them like any other resident's gains on taxable Canadian property and taxes them when they are realized. This is extremely important.
Let me give a simple example to show how this works. Suppose a resident of Vancouver were to buy an apartment unit for $100,000 in 1985, and in 1990 the person leaves Vancouver. The property is worth $200,000. Five years later he sells the property, which is then worth $300,000. At that point there's $200,000 of gain - both the $100,000 that accrued before the person emigrated and $100,000 after. Canada retains the right to tax three-quarters of the whole of the $200,000 gain.
This is how the system works. In fact, this is how it has worked since 1972. The basic principles of the system are clear.
.0925
There is also a special rule for trusts that operates in the same way. You'll find that on page 2, point 4. If a Canadian trust distributes the property to a non-resident beneficiary, tax is payable on all gains except gains on TCP. Again, those gains on TCP will still be taxable in the non-resident beneficiary's hands when they are realized. So there is no need to tax them prematurely.
There's one more rule, the roll-over rule. This rule prevents what would otherwise be an easy form of tax avoidance. It's described at point 5 on page 2 of the handout.
If non-residents were taxed only on the gains on TCP, it's easy to imagine how a non-resident might avoid Canadian tax. They'd take advantage of the roll-over provisions of the act to exchange those shares that are TCP for shares of a public company that aren't. Then the gains that would have accrued would have escaped tax. To prevent that, the act includes rules that deem the replacement property to be TCP as well. This a standard form of anti-avoidance rule. The deeming rule is relevant to the Revenue Canada rulings identified by the Auditor General, and that Mr. Gravelle may explain in more detail.
The final thing I'd like to touch on by way of background concerns tax treaties. Canada taxes residents on all their gains, and non-residents on their gains on TCP. This does create the potential for double taxation. The purpose of tax treaties is to avoid that double taxation. A tax treaty between Canada and the other country will establish which country can tax which gains.
Canada's treaties follow the OECD model in this respect. The country where the taxpayer lives gets to tax the gains. There are two exceptions. The first is real estate. The second goes back to the discussion we just had on taxable Canadian property.
You will recall that the individual who emigrates from Canada is not subject to any immediate tax. Treaty rules I've described would suggest that if an emigrant moves to a treaty country, Canada will lose any right to tax gains on TCP other than real estate. Canada would forego its ability to tax at the time of emigration, and then be barred from taxing by the treaty.
So there's an exception that preserves our right to tax for a given period of time, 10 years in the case of the U.S. treaty. The gain that's taxable in Canada is the whole gain, not just the part that accrues before the taxpayer leaves Canada. The U.S. can also tax the gain, and if it does, what happens on the Canadian side is that we give credit for the amount of U.S. tax paid.
To summarize, Mr. Chairman, Canada taxes gains when they're realized. The exception is that most accrued gains are taxed when the taxpayer leaves the Canadian system, as for example when a taxpayer emigrates. But because we retain the right to tax, subject to treaty, taxable Canadian property is not subject to this deemed disposition when an individual leaves Canada. Instead, it will be taxed when the individual disposes of it.
That's the basic system. I apologize for going through it in detail, but it is very important to understand what the basic scheme of the act is against which this particular case fell. Indeed, what is quite clear is that against the basic scheme of the act, this particular case was fully in accordance in the ruling given, and absolutely fully in accordance with the scheme of the act.
It is important - and I'm sorry for taking the committee's time - to understand the details here. As we've seen, the principle that an individual's taxable Canadian property is not immediately taxable on emigration has formed part of the system since 1972. While that is a policy that your colleagues on the finance committee may wish to review, it was not the issue of the ruling. The ruling was about the status of a particular property and ultimately whether that property could be taxable Canadian property to a resident of Canada.
.0930
The question for us was who, as a matter of policy, ought to be considered to hold property as TCP. If a resident could have TCP, then the property that this resident of Canada wanted to move outside the country was TCP. That in turn meant the taxpayer would not be treated as having realized any accrued gain on the property.
Our answer, contained in the letter to Revenue Canada, was that the policy behind the act is clear and does contemplate that residents of Canada can hold TCP. Since this obviously is a matter of confusion on the part of the Auditor General, let me explain why the conclusion is clear.
If you look back at page 1 of the handout, you'll see that an interest in a partnership is TCP if most of the partnership's property is TCP. In other words, you look through the partnership to the underlying property. However, the Income Tax Act includes a very important exception to the look-through rule. The exception, paragraph 97(2)(c), is if a taxpayer who's a resident of Canada transfers TCP to a partnership on a tax-deferred basis, then the partnership interest is itself TCP, regardless of the make-up of the partnership's property.
This is a very important provision. Without it, a Canadian resident who leaves the country could easily avoid tax on all capital gains. All the emigrant would have to do is put his property into a partnership before leaving the country. Since all the property would be TCP, there would be no tax. Then he'd convert it afterwards and so avoid Canadian tax altogether.
This deeming rule, paragraph 97(2)(c), prevents this by keeping the partnership interest TCP regardless of what the taxpayer subsequently does. But notice the deeming rule works if the property that goes into it is TCP. That is, it works only if residents of Canada can hold TCP. If they cannot, then the simple avoidance technique I've just described would allow any emigrant to avoid all tax on Canadian property.
The policy question that our colleagues at Revenue Canada asked us was whether the act intended that residents could hold TCP. This was in the context of the long-standing, fundamental principle that an individual is not treated as having disposed of TCP on leaving the country. We looked at the rule and concluded that since the rule only made sense if Canadians could hold TCP, that was the appropriate answer in policy terms and was consistent with the scheme of the act. We told Revenue Canada that in our response.
This was a very simple call. With the attention given to this by the AG, we've looked again at the conclusion. We see absolutely nothing that would lead us to a different answer. The appropriate view, given the scheme of the act and given the policy at hand, is that residents of Canada can hold TCP.
I'm going to come back to the appropriateness of this general scheme of the act in just a moment, Mr. Chairman, but let me deal very quickly with one process point the AG has raised.
The observation has been made that the Department of Finance has no written records of certain meetings with Revenue Canada. Some have spoken of mysterious empty files. The facts, unfortunately, are very much more prosaic. The meetings were informal discussions on a narrow policy point. Meetings and conversations like this take place literally all the time, either face to face or over the phone.
The context of the policy question we had been asked was extraordinarily complex. The transaction was complex, but the particular question here, on which the ruling eventually turned, was very straightforward. Since it involved no conflict between the scheme of the act and what was written down in the act, it was a very simple decision to come to. Consequently, the only documentation on that is the one-page letter to which the AG has referred.
.0935
I should point out that in some cases we have great difficulties on a difficult point of policy or a difficult interpretation in squaring exactly the detailed rules with the scheme of the act. In those cases there can be reams of material. So the amount of material we generally keep relates to the ease or difficulty of coming to a decision. I think that's an appropriate and cost-efficient way to run an organization. When it's difficult, there's lots of material; when it's easy, there is very little.
Let me conclude, Mr. Chairman, with the policy issues. The final set of questions the AG has raised asks in effect whether the rules in the act relating to TCP and taxpayer migration are still as appropriate in the 1996 context as they were in the 1971 context.
As tax policy questions, these fall squarely within the responsibility of my minister. To ensure that these issues are fully aired and looked at again after many years, the minister has referred them to the Standing Committee on Finance. In light of the referral, I don't propose to offer specific policy discussions here today except to say that it is a very important issue. It's very important that it be looked at again 25 years after the basic act was written down, and we thank the AG for bringing this to general attention.
One question is whether any tax deferral on emigration is appropriate. Should all accrued gains be subject to tax when an individual leaves Canada? To actually collect the tax may be harsh since the departing taxpayer hasn't realized any gain. On the other hand, it may be in today's world that the difficulties of collecting from non-residents and the limitations imposed with tax treaties ought to change the basic scheme that was put in place in 1971. These are important issues for Parliament to consider.
Another question concerns which of a non-resident's capital gains Canada ought to tax. Under our current rules we tax non-residents' gains on TCP only. Thus, some may argue that the definition of TCP ought to be broadened. On the other hand, the property that Canada retains the right to tax is in certain cases allowed under the current rules to leave the country without any immediate tax. In that circumstance, one would say that maybe it ought to be narrowed. This is an important issue for the finance committee to look at.
There are other issues the minister has referred to, such as the relationship between our domestic rules and our tax treaties, the treatment of taxpayers who become non-residents of Canada, including offshore trusts, and the administration of rules as they apply to non-residents. These are important questions and we thank the AG for raising them. They've been referred to the other committee.
As I conclude, there are two factual points I'd like to highlight because they have been the subject of some confusion, Mr. Chairman. The first has to do with the rulings process, whichMr. Gravelle will deal with in more detail. An advance tax ruling is not a permission to avoid taxes; it is simply a determination based on the existing law of the tax effect of a planned transaction.Mr. Gravelle is going to describe that in more detail.
Second, the actual fiscal impact of the rulings shouldn't be exaggerated. The AG has written of figures like $2 billion, but the $2 billion figure is not the amount of tax involved or even the amount of the accrued gain. According to the AG, it's the total value of the property.
How much tax has the government forgone by way of these transactions? The answer is none. Under the taxpayer's plan the property was not to be disposed of before the end of this year at the earliest. How much tax would have been paid had the ruling not been given? Again, the answer is probably none, because the transaction would not have taken place. So the fiscal implication to date is zero, and it's important to understand that.
.0940
Let me conclude by laying out what I think are the important areas for your attention and that of your parliamentary colleagues.
On the substantive technical issue of the rulings, Revenue Canada reached what we believe to be absolutely a sound conclusion in policy terms, a conclusion that ensures that an important anti-avoidance rule works.
He has identified some important concerns relating to whether we should change the whole broad scheme of the act, and these have been referred to your colleagues at the finance committee.
Finally, he has identified some really important process concerns. We, from the point of view of the Department of Finance, will always endeavour to keep good records where the situation is difficult so that the thought process can be followed. We will endeavour always to at least keep records of the people who were at informal discussions.
Thank you very much, Mr. Chairman. I'm sorry I've gone over the time.
The Chairman: Mr. Gravelle.
Mr. Gravelle: Monsieur le président and members of the committee, I do not wish to tax your patience. I got the short end of the stick as the third presenter this morning. I will try to be as brief as possible, but there are some very important considerations that I think I should bring to the attention of the committee.
[Translation]
Public confidence in the fairness and integrity of Canada's revenue administration is crucial to the successful administration of the tax system. As all members of the committee know, our revenue system relies heavily on self-assessment and voluntary compliance for its efficient operation. Anything that erodes public confidence in Canada's revenue administration undermines the system as a whole.
Canadians have a revenue administration that they can and should be proud of. After working in the Department for several years, I believe that Revenue Canada is a world class organization. As the Department responsible for tax, trade and customs administration, as well as the delivery of social and economic benefits, we directly touch the lives of every Canadians.
We should simply remember that every single day of the year, Revenue Canada serves over21 million individual income tax filers, over 1 million corporations, 2.3 GST registrants, 1.2 million employers, 150,000 importers and exporters, and over 106 million travellers a year at the border.
And we administer over 185 acts, regulations, tax incentives, credits, surtaxes and international agreements and treaties.
[English]
This is a huge mandate. Revenue administrations around the world come to Canada for advice on tax, trade, and customs administration. In short, members, I believe that Revenue Canada enjoys an enviable international record of success, and we have worked very diligently to establish this record.
The department employs more than 40,000 employees, who must deal with Canadians every day of the week. These individuals are professionals. They are dedicated public servants and they all require the confidence and respect of Canadians to do their job. Fairness, equity and integrity are the founding principles on which we build this confidence and respect. They are in essence Revenue Canada's heart and soul. The credibility of the department depends on the adherence to the principles in everything we do and in every decision we make.
It is for these reasons that I do not take lightly any suggestion or presentation of information that has the potential to be misinterpreted in a way that puts the fairness and integrity of Revenue Canada into question. Unfortunately, the May 7 report of the Auditor General does just that, particularly with regard to family trusts.
.0945
The advance tax ruling provides Canadian taxpayers with a valuable and needed service. Let's face it, Canadian law is complex, yet we expect Canadians to voluntarily meet their tax obligations.
To manage the complexity of the law and to foster self-assessment, Revenue Canada administers a broad range of programs to provide Canadians with the information and assistance they need. These include: inquiry services; seminars; counter services; electronic services; simplified pamphlets and guides; client access to public databases; bulletins; rulings; and technical interpretations.
The subject at hand deals with the advance tax ruling service, which began in 1970 following a recommendation from the 1967 royal commission on taxation. The royal commission at that time stated that such a service would foster voluntary compliance, give more consistency in the application of the law, and give certainty before transactions are entered into by taxpayers.
I believe the commission's observations are as valid today as they were in 1967. I would argue that in our increasingly complex world they are needed more than ever. Indeed, as David Perry, senior research associate of the Canadian Tax Foundation, recently stated, ``Advance tax rulings are essential for the running of a fairly complex tax system where we don't always have clarity of the rules''. This service is now well established. It is well known and well respected for its quality, from coast to coast.
I should remind members that the Auditor General thoroughly reviewed the advance tax ruling service in 1993. That audit was comprehensive in scope and very supportive in its findings. It did assess the appropriateness of our procedures and it included a review of advance rulings and supporting documentation. He did make a very important recommendation in his 1993 report, that we should make more advance income tax rulings publicly available.
I wish to report that acting on this recommendation, the department consulted with tax practitioners and developed procedures to govern the release of all rulings. From January 1, 1996, onward, all advance tax rulings will be electronically published and distributed to various income tax publishing houses across Canada, made available to the public through Revenue Canada's tax services offices within 90 days of their issuance. This is a tough target, but it is an important target for the credibility of the service.
[Translation]
This obviously leads me to the advance tax rulings process, which is a key part of the concerns expressed by the Auditor General in Chapter 1.
This is a vigorous and dynamic process.
[English]
The process unfolds as follows when we are seized with an advance tax ruling request. The request is assigned to a rulings officer. The rulings officer undertakes a review of the following: relevant documents provided by the taxpayer; applicable provisions of the legislation; legal precedents, court decisions and previous rulings and interpretations; technical or explanatory notes prepared by Finance that accompanied the introduction of the legislative provisions in Parliament; policy statements from Finance; and legal opinions.
It is normal practice for the rulings officer to engage in consultations to ascertain the accuracy of all the elements relevant to the request and the application of the law. These consultations involve: policy experts from the Department of Finance; legal experts from Justice; senior officials from both Revenue Canada and Finance; and discussions, of course, with the taxpayer or his or her representative. The proposed departmental position is then reviewed by the director of rulings, who may seek further advice. Because of the complexity, this cannot be left to one individual's perception alone.
In addition, particular advice may be sought from a review committee, which is normally composed of the four rulings directors and the director general. This committee's role is to review potential interpretations and establish consensus positions.
.0950
Furthermore, complex or unresolved issues are brought to the attention of senior officials in Revenue Canada, the Department of Finance and the Department of Justice, as required, and it is only after this process has been completed that a final position on a ruling is adopted.
In short, the advanced tax ruling process is dynamic, in that positions change and evolve over the course of a ruling; comprehensive, based on a complete review of the legal, policy and interpretative issues at play; and consultative, with checks and balances. It is truly a challenge function throughout before we arrive at a departmental position.
Our fundamental objective is to ensure that both the letter and the intent of the law are respected and that the ruling request is dealt with in accordance with the principles of fairness, consistency and equity. I think the process works.
In 1995 the rulings directorate received 478 requests. We received 1,479 requests for tax opinions, and over 16,000 inquiries related to rulings and opinions. I'm pleased to report that close to two-thirds of the rulings requests were received and dealt with at the end of the year, and last year some 25% of rulings were issued within 30 days or less. The standards of service in this area are high for the very simple reason that we are dealing with taxpayers' interests as well as public policy interests, ensuring that our laws are upheld and respected.
[Translation]
I must comment on the advance tax rulings mentioned by the Auditor General in Chapter 1 of his Report.
We shall deal first with the 1985 decision. Revenue Canada provided an advance income tax ruling that public company shares held in a Canadian family trust were characterized as a class of assets described in the Income Tax Act as taxable Canadian property.
At that time Revenue Canada had to examine the provisions of the Act to determine if the shares in question qualified as taxable Canadian property. The essence of the 1995 Revenue Canada advance ruling was that: a resident can own taxable Canadian property, and the public company shares owned by the family trust did qualify as taxable Canadian property because they had been acquired in exchange for private company shares, which in turn, qualified as Canadian taxable property. This is completely consistent with the statement made by my colleague David Dodge a few minutes ago.
[English]
The Auditor General's May report refers to a technical opinion issued by Revenue Canada shortly after the 1985 advance income tax ruling. The opinion concerned a case involving similar circumstances to the advance tax ruling of 1985, and a different decision was made.
On review, I have to admit that this opinion was incorrect. I hasten to note that opinions such as this one are not as specific as an advance tax ruling and are not binding on the department. They are not given on as extensive an exposé-of-fact situation as is required for an advance tax ruling. Nonetheless, we take great pains to ensure that our positions, whether expressed in a ruling or in an opinion, are consistent.
To ensure that inconsistencies such as this no longer occur, the department instituted in 1993 a complete database of all rulings and opinions issued. It is now a standard procedure in the rulings directorate that all draft rulings and opinions be checked against this database before they are finalized.
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It is also departmental practice, I wish to assure you, to ensure that a process of analysis and consultation is in place to support new technical opinions on topics that are not included in the database.
[Translation]
This leads me to the 1991 ruling. Revenue Canada was asked to provide a ruling involving the transfer of shares from a resident family trust to a non-resident protective trust.
The ruling sought confirmation that assets in the trust could be characterized as taxable Canadian property within the scope of the Income Tax Act.
If the assets qualified as taxable Canadian property, then they could be transferred to the non-resident protective trust without there being deemed to be disposed of and, thus, without capital gains tax becoming payable at the time of the transfer.
[English]
Please remember the very rigorous process I have laid before you in terms of how we handle advance tax ruling requests. In considering the two issues in this 1991 tax ruling request, the rulings officer conducted initial research, including: reviewing the documentation provided by the taxpayer; requesting, of course, additional information from the taxpayer; corresponding with the Department of Finance; and reviewing precedents.
In mid-November - remember this request was received in early November - the case was discussed with Justice counsel, who advised then that the better view of the law was that a Canadian could hold taxable Canadian property. Counsel did allow, however, that an argument might be available to the effect that only a non-resident could hold taxable Canadian property.
Throughout November and December, meetings and discussions were held between Revenue Canada and the Departments of Finance and Justice. On December 3 Revenue Canada wrote to the Department of Finance formally noting the circumstances of the request and indicating that the department was not in a position at that time to grant a favourable ruling.
On December 12 the case was brought to the attention of a review committee. The committee, upon reviewing the situation, formed the view that the department might not be in a position to rule. On December 13 Revenue Canada sought a further legal opinion. Counsel remained of the view that a better interpretation of the law was that a Canadian could own taxable Canadian property. However, he did acknowledge that an argument could be made to the effect that only non-residents could own taxable Canadian property.
On December 23 Revenue Canada and Department of Finance and Justice officials met to seek clarification of the intent of the act with regard to TCP. In this meeting Finance officials confirmed the policy view. Later that same day the policy intent was confirmed in a letter to us, and I have tabled that letter with you. In light of the policy and legal advice received, Revenue Canada issued an advance ruling to this effect on December 24, 1991.
[Translation]
I must comment on the matter of the quality of the documents supporting the decisions that were made. The Auditor General has raised certain concerns. I have personally reviewed the entire file on this case and I am satisfied that it contains the key elements in support of the decision taken.
I recognize however, that more detailed notations of outcomes of deliberations should have been prepared as the review progressed. As a result, I have revised the procedures followed in the rulings Directorate to ensure that henceforth a proper record of the considerations that are an important part of the decision-making process to issue an advance income tax ruling or opinion be prepared; the appropriate explanation and analysis continue to be provided with our written request to the Department of Finance or the Department of Justice in order to convey a full appreciation of the issue and its potential impact; the statement of the intent of the law, together with any appropriate analysis of tax policy received from the Department of Finance be sufficient to clarify the policy intent and, finally, complete documentation and analysis be retained in the permanent advance tax ruling or opinion file in support of the interpretations made.
.1000
[English]
In summary - and I thank you for your patience - the Auditor General expressed a number of key concerns in his May report: the need to clarify the Income Tax Act, the concerns regarding the lack of documentation and the view that an advance tax ruling should be made public. These concerns, I believe, have been addressed.
With regard to the rulings questions, I believe Mr. Dodge and I have been able to describe for you today the policy intent and the rigorous process Revenue Canada has in place to ensure that decisions taken are of the highest quality. I have tried to show you how the 1991 ruling in particular conformed fully to a rigorous process resulting from sound analysis and consultation and checks and balances.
Finally, members of the committee, I remain firmly of the view that, based on the advice received, the letter and the intent of the law were respected fully in this case.
I am at your disposal, of course, to answer your questions.
Thank you.
[Translation]
The Chairman: Mr. Desautels might perhaps briefly want to share his reactions on all this. I don't know if we're all living on the same planet.
[English]
Mr. Desautels: Mr. Chairman, I can offer a few quick reactions to the comments I've just heard from Mr. Dodge and Mr. Gravelle.
Mr. Dodge indicated that in the end this was a relatively simple call for Finance to make and that the act did intend that residents can hold taxable Canadian property. I have to say that while maybe Finance thinks that way, this did represent a controversial argument or situation, even among officials of Revenue Canada, leading up to that final conclusion. Not everybody thought it was such a simple call, I must say. In fact it resulted in what some might view as a basic change in a fundamental principle.
A decision like that can go one way or the other, depending on many factors and a lot of technical implications, including the use of trusts and so on. A decision like that is not usually very clear-cut. People can argue on both sides of the issue, and in this case it was argued on both sides of the issue. But that is not my main concern.
My main concern is with the consequences of this decision. Whether or not it was clear-cut or a simple call, the consequences are quite significant. That's why I thought on the one hand there should be more appropriate justification or explanation of the decision at the time, because of the huge consequences. Better still, there should eventually be clarification of the intent of the act in this area.
I'm happy to hear from Mr. Dodge that the department would welcome a review of this to ensure that all of this corresponds with what parliamentarians intend the act to accomplish. I'm also encouraged by what Mr. Gravelle had to say about the process and the documentation of such decisions in the future.
That's all I have to say for the moment, Mr. Chairman, but I would be happy to answer your questions.
The Chairman: Mr. Williams.
Mr. Williams (St. Albert): Thank you, Mr. Chairman.
This is a very serious matter. We're dealing with decisions that, according to the documentation provided, were made based on meetings with no minutes taken. We don't know who made these decisions. We have to get to the bottom of this.
I would therefore move that this committee request that the clerk administer an oath to the witnesses so we have that on record before we start.
.1005
[Translation]
The Chairman: Do any of the members have anything to say on this motion?
[English]
Mrs. Barnes (London West): Do we have legal counsel here for our committee?
[Translation]
An honourable member: It's not a matter of legality, it's a matter of procedure.
[English]
The Chairman: No, I think it's clear in our rules in Beauchesne's:
[Translation]
- 859. Any committee of the House may order its witnesses to be examined on Oath.
An honourable member: There have been precedents.
Mr. Brien (Témiscamingue): We will support the motion.
The Chairman: Any other comments?
[English]
Mr. Hubbard (Miramichi): Mr. Chairman, we probably should adjourn for a few minutes to look at that, but I would assume that witnesses who come would certainly abide by the rule of land, which is to tell the truth before committee.
In terms of the significance of this, I think we should reassess it before we make a decision on the motion. It's the very basis of our entire tax system that we're looking at today. From that point of view I would suggest, Mr. Chairman, a brief adjournment. We'll look at this issue and make our decision accordingly.
The Chairman: Does your party want to look at that or the whole committee?
[Translation]
Mr. Brien: Mr. Chairman, I think it's useless to have any kind of long debate on this. I don't see how the taking of the Oath by our witnesses could impede the progress of our work.
Given the seriousness of the situation and the importance of the matter we are looking at, I think the request is justified. Any debate is useless. Let's vote without further ado and if the witnesses object to the taking of the Oath, they can explain why.
[English]
The Chairman: If you want a couple of minutes to discuss it in your party, I will adjourn for two minutes. The other members are ready to vote.
[Translation]
We're taking a two minute recess.
.1009
.1011
The Chairman: I think all my colleagues are now in a position to vote.
Mr. Paradis.
Mr. Paradis (Brome - Missisquoi): Although this request is a little unusual, we will vote in favour of the motion.
It is important, especially at this stage of the game, to show as much transparency and openness as possible although I would reiterate that this request is not customary.
The Chairman: Agreed.
Motion carried unanimously
In accordance with our rules of procedure and in conformity with citation 860 of Beauchesne, you can either take an oath or make a solemn declaration or affirmation.
Will Mr. Elkin be a witness?
Someone's voice: Yes.
The Chairman: Can he be called?
[English]
The Clerk of the Committee: The witness has the choice of an oath on the Bible or affirmation.
Mr. Barry Elkin (Principal, Audit Operations, Office of the Auditor General of Canada): I, Barry Elkin, do solemnly, sincerely and truly affirm and declare that the taking of any oath is, according to my religious beliefs, unlawful.
The Clerk: That is the form in the parliamentary book.
Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth, so help you God?
Mr. Elkin: Yes, I do.
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): I, Shahid Minto, do solemnly, sincerely and truly affirm and declare that the taking of any oath is, according to my religious beliefs, unlawful. I do also solemnly, sincerely and truly affirm and declare that the evidence I shall give on this examination shall be the truth, the whole truth and nothing but the truth.
.1015
[Translation]
The Clerk: Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth?
Mr. Desautels: I do.
The Clerk: Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth?
Mr. Lefebvre: I do.
The Clerk: Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth?
Mr. Gravelle: At all times.
[English]
The Clerk: Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth, so help you God?
Mr. Dodge: I do.
The Clerk: Do you swear that the evidence you shall give on this examination shall be the truth, the whole truth and nothing but the truth, so help you God?
Mr. Farber: I do.
[Translation]
The Chairman: First, I'd like to point out to the witnesses that this is not a reflexion on them or their trustworthiness. In any case, the unanimous vote of the committee shows that each one of the parties represented in the House considers the matter is important and within the context of our Standing Orders. I simply wanted to point out that this in no way impugns your credibility.
We'll start with a ten minute round. Mr. Brien.
Mr. Brien: We're faced with a rather serious situation in that a lot of money has escaped taxation according to the Auditor General's report. Moreover, there is the matter of many hundreds of millions of dollars that might slip out of the tax net in the future.
I would point out there is a clear divergence of views between the Department of Finance and the Auditor General's interpretation both as to the substance and the form. I would also like to say that I'm rather concerned to find that the Deputy Minister of Finance thinks it would have been unusual to gather more extensive documentation and that he's not trying to obtain more information on the decisions and consequences that may flow while the Auditor General tells us there should have been more extensive documentation because of the probable extreme seriousness of the matter we have before us.
My first question is for Revenue Canada and its Deputy Minister. In view of the divergent of views held by the Auditor General and Revenue Canada now supporting the position of the Finance Department, do you have the power to stop this decision until this whole matter has been fully clarified?
Mr. Gravelle: The legal opinion we obtained as well as the notice of intent according to the provisions of the legislation are compatible and are only the reflection of the state of the legislation. So we gave an advance ruling as is provided for by the present wording of the legislation and unless the act is changed by Parliament, I don't see why we should reverse the decision we made.
Mr. Brien: Fine. There is a divergence of views concerning the intent of the act between the Department of Finance and the Auditor General according to whom the intent of the legislator was not to go as far as the Department of Finance and its interpretation. On 23 December, thanks to the elasticity of the definition, it would seem that certain people got a nice Christmas present but the Auditor General does not agree on that interpretation. So it should be emphasized that the auditor of the government's public accounts is not in agreement and there is a problem.
All that seems more than enough for me and without any legal opinion to the contrary, I would ask you if in theory you have the power to say that the ruling must be suspended.
Mr. Gravelle: If you examine the policies and procedures surrounding the advance ruling process, Mr. Brien, it is clear that when we arrive at a decision we are subject to that decision because it is binding on the department. It is presently the case because we are convinced that the decision is a reflection of the state of the act as it exists at this point.
The doubt raised by the Auditor General essentially questions the merit of the act as it presently stands concerning the treatment to which taxable Canadian property is subjected.
Mr. Brien: Yes, I know that, and that has nothing to do with my question. I'm simply asking you to answer my question and I'm not interested in your opinion on the rest of it.
Do you have in theory the power to say that the decision will be suspended? Not for the two trusts in point, because you are bound by your advance ruling, but for anyone else who might want to use the same stratagem.
.1020
So could you say that your interpretation of the act has changed and thus suspend the effect of the advance ruling?
Mr. Gravelle: Our interpretation of the act...
Mr. Brien: No, tell me if you have the power to do it.
Mr. Gravelle: We could suspend an advance ruling for the future if the act were changed, if a court decision was contrary to the advance ruling or if the taxpayer, in a specific case, subsequently applied the transaction to facts and procedures that we are not provided for in the request for an advance ruling. But for the time being, and I'm answering your question very directly, I have no solid base to rescind the advance opinion we gave and which is in actual fact compatible with the advance opinion we gave in 1985.
Mr. Brien: Now that you mention it, I have a question on that. There is something not very clear because what was asked for in 1985 was an advance opinion which is not the same thing as an advance ruling. You're now saying that the advance opinion you gave was incorrect. How is it you did not advise whoever was requesting the ruling that the opinion you provided was incorrect?
Mr. Gravelle: One must make a distinction between a technical opinion and an advance ruling. Some of the technical opinions we give and we give hundreds and hundreds, sometimes simply rest on a phone call or a simple written request. To my knowledge, but I can't be held to this, we did not communicate with the tax representative who contacted us in 1985 to get a technical opinion.
Mr. Brien: Then how do you explain that in 1991 you were about to repeat the 1985 decision and that you did not advise the one who had been incorrectly informed because you say that the opinion you did provide was incorrect? Please explain why you didn't find it relevant to advise that the opinion you gave at the time was inaccurate. Is that normal?
Mr. Gravelle: That is not normal and should not happen, but what can I say? I can simply say that we have before us a fact that I deplore.
Mr. Brien: Agreed. I would now like to talk about the whole analysis that led us to the 23rd of December 1991 where we see that Revenue Canada was going towards an unfavourable decision and the Assistant Deputy Minister had even written a memo in that vein early on the day on December 23. You mandate is to apply and interpret the act and you also tried to interpret the legislator's intent because all of that is part of your work. Your interpretation was that at that point, on the morning of December 23, you should not give a favourable ruling. But on the 24th, after the meeting of the 23rd, you changed your mind. And today you are defending your opinion of the 24th.
What is going on? You'll tell me that the Department of Finance had written a notice concerning the intent of the act according to the legislator, but this was already been taken into account during your analysis. Is it the Department of Finance that made the decision and forced you to make that decision or would your interpretation today still be that the opinion given was not the right one?
Mr. Gravelle: I'd like to provide some demystification of the circumstances surrounding the activities of December 23. I emphasize that the Department of Finance did not intervene to force any kind of decision. The Department of Finance gave us an interpretation of the legislator's intent thus playing its proper role and that at our request. That request was made, if memory serves, as early as November to further clarify the legislator's intent.
During that whole period, especially from the beginning of December on, I was aware that there was a debate within the advance rulings Directorate to know which was the best way of implementing and interpreting the act.
.1025
At the very beginning of the process, we had knowledge of the 1985 technical interpretation and the very detailed opinions of the taxpayer tax representative and we did exactly what we do. During this whole advance ruling process, our officers are there to question and systematically examine all possible applications of the act. It's a checks and balances system that works.
We also knew that the best interpretation, the most plausible interpretation of the act according to the Department of Justice was that we could give a positive advance ruling; the doubt that subsisted was as to the confirmation of the legislator's intent. And on December 23, or 22 or 21... I remember it well because I discussed all those matters with my colleagues. We knew since the beginning of November that the taxpayers wish us to deal with this advance ruling before December 31 to be able to implement or deal with the advance ruling.
I also mentioned before during my presentation that a great number of advance rulings are asked for during the last month of the year. That's quite in conformity with reality in that area of activities.
Mr. Brien: Yes, agreed.
I have one last question I would like the Department of Revenue and the Auditor General to answer. It is a two pronged question.
I've twice heard the expression ``simple process'' and ``rather simple decision'' also raised by the Deputy Minister of Finance. If that was that simple and that clear, the opinion from the Justice Department allowed you to go both ways. You could go one way or the other depending on the interpretation of the Department of Justice legal council and give either a favourable or unfavourable ruling which you could defend from a legal point of view.
As it was simple, how is that on December 23 there were so many meetings and discussions on the same subject involving the most senior officials of both departments? That's the first part of my question.
I'd also like to ask the Auditor General if, in his opinion, Revenue Canada changed its interpretation during the process, in other words between the morning of December 23 and today. As far as Revenue Canada is concerned, it seems to me there was a major change in terms of positioning because the latter seems to be saying today that the recommendations given by Finance are excellent while previous documents said the contrary.
I'd like to hear the Auditor General on that, and also on what the Deputy Minister said.
Mr. Desautels: I'll ask Mr. Minto to answer the question.
[English]
Mr. Minto: Mr. Chairman, the last documentation we have is from December 23, when a revised memorandum was prepared for the deputy minister advising that the taxpayer's proposal was not acceptable. What happened subsequently is what we were trying to find out by looking at further documentation. We cannot tell you why they changed the position.
.1030
The Chairman: Mr. Williams, ten minutes.
Mr. Williams: Mr. Dodge, now that you're under oath, do you stand by the contents of your opening statement?
Mr. Dodge: I do.
Mr. Williams: Mr. Gravelle, do you stand by the contents of your opening statement now that you're under oath?
Mr. Gravelle: I do.
Mr. Williams: Thank you.
Mr. Gravelle, there was a serious debate in your department regarding the issue in question, and you changed your mind at meetings on December 23, which are not documented as to the rationale or who was there. Who was at these meetings?
Mr. Gravelle: On December 23 there was a first meeting in my office... No, there was a first meeting involving Mr. Robert Beith, Mr. Robin Read and Mrs. Carole Toussaint, to review the status of the file. This was followed by another meeting that Mr. Beith, Mr. Read and Mrs. Toussaint had with me. I was informed at that meeting that we had not yet received from the Department of Finance a conclusive view as to tax policy.
I remember asking my officials to meet with senior Finance officials that day to elicit a formal reaction to our earlier request for clarification of the tax policy issues. I also asked that legal opinion be ascertained. This was followed by another meeting Mr. Beith, Mrs. Toussaint andMr. John Bentley, counsel, had with Mr. Short of Finance and, I gather, if I remember, withMrs. Carole Muirhead and Mr. Simon Thompson of Finance.
Following that meeting, Mr. Beith and Mr. Bentley met with me and reported that Finance officials had stated at the meeting that it was clear that a Canadian resident owning taxable Canadian property is in accordance with tax policy. At that same meeting with me, Mr. Bentley confirmed the Justice view, that the property is taxable Canadian property in the hands of the Canadian trust.
Mr. Williams: There were three meetings that day in the Department of Finance.
Mr. Gravelle: No.
Mr. Williams: Sorry, the Department of Revenue.
Mr. Gravelle: There were three meetings that day in the Department of National Revenue and there was one in Finance.
I should also say, Mr. Williams, if I may -
Mr. Williams: No. Thank you.
Mr. Dodge, you had some meetings in your department. Were you involved, and who was at these meetings?
Mr. Dodge: No, sir, I was not involved. The particular meeting referred to was the meetingMr. Gravelle talked about. Al Short, Carole Muirhead and Simon Thompson were present.
Mr. Williams: There was only one meeting in your department, and that was with senior members of National Revenue. Give me these names again, please.
Mr. Dodge: Mr. Al Short, Mrs. Carole Muirhead and Mr. Simon Thompson.
Mr. Williams: So there were no internal meetings in the Department of Finance at the senior level in these undocumented meetings...that made the decision that Canadians could own Canadian taxable property.
.1035
Mr. Dodge: That I cannot answer, because much of the conversation and much of the thinking process that would have led up to that could have taken place by people talking over the telephone or by people talking directly with each other. Obviously the three senior officers involved, the names of whom I've just given you, gave some thought to what was going on prior to this particular meeting to which Mr. Gravelle has referred.
Mr. Williams: It's been quoted in the newspapers that Mr. Mazankowski, who was the Minister of Finance, is aware of this situation and I think was aware of it when he was the minister. When did you first become aware of this, Mr. Dodge?
Mr. Dodge: When did I personally become aware of this issue?
Mr. Williams: Yes.
Mr. Dodge: Is that the question?
Mr. Williams: That's the question.
Mr. Dodge: Basically towards the end of the Auditor General's investigation in the department.
Mr. Williams: Why would a minister know and you not know? You're the deputy.
Mr. Dodge: First of all, I would note that I have no idea whether the minister knew or did not know. Secondly, of course I was not the deputy at the time.
Mr. Williams: Thank you.
You state in the second paragraph of page 6 of your opening remarks: ``The context of the policy question we had been asked was complex, but the question itself was straightforward''. You also said in your opening remarks that difficult issues have lots of material and easy questions have little or no material.
The Auditor General has stated that he considers this a complex matter. There is no question that the Department of Revenue considers this a complex matter. Do you consider this complex question that you were asked to be so simple that it didn't require documentation?
Mr. Dodge: Let me clarify something here. The transaction was extraordinarily complex, and much work must always be done to understand what is really going on in the transaction. That was not the point of what I said in my opening remarks. The point I made in my opening remarks was that the policy here is very clear.
Mr. Williams: The policy is very clear.
Mr. Dodge: Let me complete what I was saying.
That is not to say it may not be appropriate for Parliament to re-examine the policy, but the policy itself is clear.
Mr. Williams: The policy itself is very clear, Mr. Dodge.
In the second paragraph of page 5 of your opening remarks, you talk about partnerships and TCP. Were there any partnerships involved in this particular ruling?
Mr. Dodge: I'm advised there were not.
Mr. Williams: You have stated that it's a simple statement of policy that residents can hold onto TCP. If I transfer some real estate to a relative of mine in the United States, can I designate that as TCP?
Mr. Dodge: The question is if you sell - ?
Mr. Williams: No, transfer. I said if I transfer property to a relative in the United States, can I have it designated as TCP? I'm a Canadian resident.
Mr. Dodge: No. That's a sale. Whether or not your relative pays you for it, that is treated as a sale.
Mr. Williams: So if I have a trust that owns a property and I transfer it to a trust in the United States, does that mean I can hold TCP?
Mr. Dodge: Again, let's be careful of what we're talking about. If in fact it is a distribution from the trust to a beneficiary of the trust, then indeed the issue is quite clear here.
Mr. Williams: It's getting a little bit more complex, I think.
Mr. Gravelle, you state that you took comfort from the letter you received from the Department of Finance. According to the Auditor General, all the documentation in the file up to December 23 was negative in providing the ruling to the taxpayer. Is that correct?
.1040
Mr. Gravelle: Not all the information, by and large. There were some constructs leading to a different conclusion.
The thrust of the legal advice was that the better view of the legislation is that a resident could hold TCP -
Mr. Williams: Thank you.
Mr. Gravelle: - and what was left, Mr. Chairman, to be determined was the intent of the legislation, which was subsequently confirmed. I remember telling my officials that this is an important matter. I knew that we had ruled positively in 1985. It was the right thing for my officials to put this request through a very rigorous process of examination, and we were going to have a departmental position only on the basis of legal advice and tax policy advice. Once this was resolved, I was satisfied that we could proceed.
The Chairman: Thank you, Mr. Williams. Your time is over.
Mr. Hubbard.
Mr. Hubbard: Next week we go back to our constituencies. I'm sure that many of us as members of Parliament will receive concerns and criticisms unless we have a plausible explanation of what happened here, and I hope we do get one.
In terms of Revenue Canada, we have corporations that pay taxes, we have individual taxpayers, and we have family trusts. Could you as deputy minister inform this committee of how many family trusts you deal with in Revenue Canada?
Mr. Gravelle: I'm told that we have in excess of 100,000.
Mr. Hubbard: It's my understanding that most of those would be trusts set up at the death of a taxpayer where certain property might be held in the family. Then we have other trusts such as the one we just looked at here, which are trusts made up to avoid capital gains taxation. Is that correct? There are some very special big trusts in this country that are set up simply to avoid the 1972 capital gains taxation system.
Mr. Gravelle: We have to be careful, Mr. Chairman. You are trying to look at the intent behind the establishment of a particular trust. I can answer that there are certain trusts that -
Mr. Hubbard: Would you answer then, Mr. Gravelle, how many trusts have existed for longer than five years in this country?
Mr. Gravelle: I could try to get that information for you.
Mr. Hubbard: The perception we have here is that an application was made in November and was revised in terms of an amendment made to the application.
Back home there are a number of people who deal with Revenue Canada. Almost on a weekly basis I get somebody coming to my office and saying they have a difficulty with a tax ruling. Generally it takes six months to as much as a year for an individual taxpayer back there, whether it be a UI case or other arm's length.
But here we find a major amount of money that apparently is in the form of shares in Canadian corporations, and we get Revenue Canada looking at $2 billion with implications in terms of tax revenues to Canada of probably at least several hundred million dollars. We get a request put in on November 7. We find that everyone seems to be running to get an answer for it. What was the demand? What was the intent? What was the desire of your department in trying to give such a quick ruling?
In fact, on December 23, two days before Christmas...and writing a letter, which to many taxpayers would look like a Santa Claus letter, on Christmas Eve of 1991 - why was this happening as such a process? Are you concerned about the transparency of it? Are you concerned about the perception the day before Christmas? Why was it done?
Mr. Gravelle: Mr. Chairman, I'm very concerned about the perception. As I stated, I think it is of critical importance that Canadians of all walks of life have confidence in our tax system. We strive every day not only to uphold the law, but to assist taxpayers in benefiting from their rights under our legislation. We do our best to uphold the charter of rights of taxpayers.
.1045
This particular request was not given preferential treatment, I can assure you. I took great pains to try to describe to you the rulings process. It is well known. It is described in a public document -
Mr. Hubbard: Can I interrupt just for a moment? In terms of preferential treatment, we are told that up until about December 23, and probably the 22, the report was coming to your office to recommend that this not be considered favourably. On the day of December 23, and probably in terms of your own staff on the day of December 24, two days before Christmas, and a day before Christmas, when many people in many public offices leave at noon, a letter went out.
Now, do you consider that we should accept that this was not preferential treatment?
Mr. Gravelle: It is certainly not uncommon for me, Mr. Chairman, in my job as deputy minister, to deal with taxpayer problems, whether it is a goods and services tax credit or a child tax benefit payment, or any other kind of tax situation, on December 23 and 24. I've even been called on December 25.
Mr. Hubbard: In a ruling of this magnitude? When I operate I like to think things over at least for a day or two. We are told that two people made this decision, you and another person. Is it true that two of you reversed the recommendations that were coming to your office?
Mr. Gravelle: Mr. Chairman, I never reversed a decision -
Mr. Hubbard: Recommendation, I said, Mr. Deputy.
Mr. Gravelle: - or even a recommendation. My sole objective was to ensure that we made a final determination on the basis of both policy and legal advice.
Mr. Hubbard: May I come back to that? My time is short here. We were led to believe that when a trust moves to another country it can be taxed back in Canada. I'm concerned about this trust. Did it only move to the United States? Is it being watched by Revenue Canada, or has it moved now to another country beyond our taxation arm?
Mr. Gravelle: I would have great difficulty, Mr. Chairman, giving any details of the particular taxpayer because of section 241.
Mr. Hubbard: I did not ask about the particular taxpayer, Mr. Deputy. I asked, is Revenue Canada watching the money that's been in this trust? Where is it now? Do you know where it is, and can it be reached under Canadian tax law?
Mr. Gravelle: I can assure you that we have the file before us. It is the subject of public discussion -
Mr. Hubbard: I did not ask for the file. I asked, Mr. Deputy, do you know where the money is, where the trust is held? Is it in a haven or is it still in the United States?
Mr. Gravelle: I don't have the information to your question.
Mr. Hubbard: In terms of trusts of this magnitude, how many family trusts in this country are beyond, say, $500 million?
Mr. Gravelle: I would be pleased to provide that information.
Mr. Hubbard: Can you please do so?
I would ask the Auditor General, then, in terms of the information we've just received, it appeared in terms of the answers he gave to our questions that until late December the files would reflect that the decision was going against the taxpayer and that this classification, in terms of the change of a trust out of the country, would not be permitted.
Is that true, Mr. Desautels?
Mr. Minto: Yes, that would be true.
Mr. Hubbard: So in your opinion, up until December 23 the files would reflect that the recommendations going to the deputy minister were that the ruling would not be in favour of the taxpayer in question.
Mr. Minto: I refer you to our chronology on page 17 of the English version -
Mr. Hubbard: Not chronology; I would simply like to have, Mr. Minto, a yes or no.
Mr. Minto: Yes, sir, until December 18 a memo clearly was prepared by the assistant deputy minister advising the deputy minister that the department was unable to rule favourably. It's very clear.
Mr. Hubbard: So the impression you gave and the statements you have made clearly indicate that a change was made within the deputy minister's office by two people who made a ruling on this case, and the case was in favour of the taxpayer.
I asked yesterday, and probably you could reflect on this again, in terms of December 31, was that a factor, in your opinion, on why this decision was made on December 23?
.1050
Mr. Minto: If I may, I recall all the times we've spoken about the matter, and I don't recall ever saying the decision was reversed by two persons, or that only two persons were involved. We've consistently said that because of the lack of documentation we do not understand the basis of the decision. December 23 was important. The deputy minister said to the taxpayer -
Mr. Hubbard: Mr. Minto, are you saying it was not necessarily two people? I had the impression from previous information that it was two people, a deputy and another person, who made the decision against the file as it existed up until that time.
Mr. Minto: We would not have given you that impression, sir. The fact of the matter is, the decision was made at a high level. It was senior management. If you look at our documents you'll note -
Mr. Hubbard: Okay. Thank you, Mr. Minto.
[Translation]
The Chairman: Agreed. We'll now start with the five minute round. But just before that, I have a brief question for you, Mr. Gravelle.
Mr. Tremblay (Rosemont): Five minutes?
The Chairman: Yes, five minutes. I have a question for Mr. Gravelle.
In what you were saying before, you referred to the legal point of view and the intent of the act. Did you at all consider the potential impact that might have on our tax base? I'd like a brief answer.
Mr. Gravelle: I know that the department officials who examined this file took into account all factors involved.
The Chairman: Including the tax base?
Mr. Gravelle: Including the tax base. We wanted to make sure the ultimate decision would be adequate.
The Chairman: Mr. Tremblay, five minutes.
Mr. Tremblay: I'll try to be brief.
I think I understood you to say that your decision on the policy is based on the fact that we have a tax agreement with the USA and that, thus, the Canadian tax potential is protected for ten years. Is that correct?
[English]
The basis of your decision...
Mr. Dodge: Under the treaty we would have the right, for 10 years, to tax.
[Translation]
Mr. Tremblay: When you have billions of dollars, you can easily wait ten years. I remember that in 1971-1972, for example, when capital gains were taxed, the Molson Corporation sold the Canadian hockey club and then bought it back after waiting the required number of years. Now, if they keep on losing, the company will be able to resell the club and claim a capital loss for tax purposes.
What I'm concerned about is that we have more and more people with dual and triple citizenship and several residences, as a result of increasing globalization. It's imperative that we act now.
The question that was asked seems to me to be a serious one, in terms of policy. Given that the ruling was published, I think it's urgent that action be taken.
We want to know how long Canada's tax base is protected. In the case of the United States, it's ten years. What will happen if we wait ten years? Do they keep the money?
[English]
Mr. Dodge: Canada has the right on taxable Canadian property for someone who moves from Canada to the United States, for 10 years. If the asset is not disposed of within that 10-year period, we lose the right.
Mr. Tremblay: So we can lose millions? Or $1, if you like; it's the same for me.
Mr. Dodge: Under our own law, for someone who stays here we only tax on realizations.
Mr. Tremblay: I understand that.
Mr. Dodge: This says if a taxpayer emigrates to the United States, for taxable Canadian property other than real estate - real estate we always have our hands on - after 10 years -
Mr. Tremblay: We lose.
Mr. Dodge: - we lose the right to tax the totality.
.1055
[Translation]
Mr. Tremblay: Given today's globalization, it seems to me that the situation is urgent. We know that in view of the ruling that was handed down, those that do this before a change is legislated would have the perfect right to do so.
I remember very clearly what happened in 1971. If I looked through my files, I could find dozens of companies such as Molson that sold their assets before they paid capital gains tax. Could this situation reoccur without us noticing? You will understand our concern regarding the tax potential at a time when we're cutting back old age pensions and imposing cuts on everyone.
[English]
Mr. Dodge: I understand perfectly, which is precisely the reason we've said it is appropriate for the finance committee to review the basic scheme of the act.
[Translation]
Mr. Tremblay: Mr. Dodge, you are also responsible for policy.
Mr. Dodge: Yes.
Mr. Tremblay: You have recommendations regarding policy. I'm concerned about putting this in the hands of a committee when we should perhaps be acting immediately. Do you understand?
I'm putting the question to you because you're familiar with this. In two months, we may know a little more, but I'm sure that you know already. Wouldn't it be best to take action immediately to avoid what happened in the early 70s, when capital gains were taxed? That's essentially our concern.
As you've just said, and Mr. Gravelle stated it as well, these people have a right to do this. We can't come back on this. You've just said that if we wait ten years, they can keep the money and that's fine. Indeed, a millionaire or multimillionaire can wait ten years in Florida.
The Chairman: Mr. Dodge.
[English]
Mr. Dodge: This is a difficult issue and it does require a lot of work, but let me clarify two things.
First, the taxpayer himself or herself does not avoid tax. Indeed, they may in the end personally incur more tax depending on the jurisdiction to which they move. Generally speaking, although by no means always, with respect to Canada and the United States there's not an advantage to the taxpayer, because not only does the United States tax capital gains but they also have death duties. So if you ask if I am worried that there will be a whole lot of movement because of pure avoidance possibilities, I'm not really worried.
There is the question of which jurisdiction gets the tax. That's a very important issue. There is the other side of it that Parliament must consider, which is that we would have to accord the same treatment to people moving to Canada. It's not simple, but it's very important for the committee to consider.
[Translation]
The Chairman: Thank you, Mr. Tremblay.
Mr. Williams.
Mr. Tremblay: There are more people who move to sunnier climes.
[English]
Mr. Williams: In exhibit 1.3 of the Auditor General's report, it says that on December 19,Mr. Gravelle, a draft legal opinion was received by the Department of National Revenue. Would you provide a copy of that legal opinion to this committee?
Mr. Gravelle: Yes, we will.
Mr. Williams: Mr. Dodge, on page 6 of your statement you say that the question itself was straightforward, but you keep referring to the complexity of the matter. When did Finance decide that Canadian taxable property could be held by Canadians?
Mr. Dodge: I don't quite understand the question because...since 1971 -
Mr. Williams: Since 1971.
Mr. Dodge: There was a very complex transaction here.
Mr. Williams: No, no, my question was quite clear. On page 6 you say the question itself was straightforward: a resident of Canada can hold TCP since 1971, approximately.
.1100
Mr. Dodge: The answer basically is yes. It's become, Mr. Williams...and this goes back to the previous member's question because -
Mr. Williams: No, no, the date.
Mr. Dodge: It's been there since the revisions to the law following Carter in 1971.
Mr. Williams: Let me quote from the ruling that was issued in 1985.
- Our ruling is that the trust will not be deemed by subsection 48(1) of the Act to dispose of its
shares in the public corporations which it acquired as a result of an exchange of its ownership in
shares of a private corporation when it ceases to be resident in Canada...
Mr. Farber: Mr. Chairman, the issue involved in that particular transaction was one where there was to be an exchange of shares -
Mr. Williams: My point, Mr. -
Mr. Farber: - from private company shares to public company shares.
Mr. Williams: I'm not interested in the transaction of the exchange. Mr. Dodge said that since 1971 Canadians can own TCP. The ruling in 1985 said, in the future tense, that when it becomes a non-resident it can hold TCP. Can you explain why? You say that since 1971 it was a simple situation; however, the ruling said when - future tense - it goes overseas.
Mr. Farber: That, I believe, was the essence of the ruling. When the trust went non-resident and there was an exchange of shares from private company shares to public company shares, the only means by which Canada could ensure its taxation rights was if the property that went into the trust was TCP and the exchange of property was also TCP. So when the trust was non-resident and holding public company shares, that property, which under other circumstances would not have been TCP, was deemed to be TCP.
Mr. Williams: Mr. Chairman, I think they're trying to confuse the issue on us. I look at the advance tax ruling. I look at Mr. Dodge's opening statement, where he tries to draw strength from one issue in the Income Tax Act that allows partnerships. If I can cite his opening statement, he said that when most of the underlying property in the partnership is TCP, then the interest in the partnership is TCP. However, you stated there was no partnership involved in this particular issue. The Auditor General has stated quite clearly that the only reference to TCP being held by Canadians is in this partnership clause. I want to know why it appears that the Department of Finance flip-flopped on this issue.
Mr. Dodge: The Department of Finance has not flip-flopped on the issue.
Mr. Williams: Mr. Chairman, the documentation and the evidence we are seeing here are obfuscating the situation rather than clarifying it.
Let's go back to the opinion that was issued in 1985, one week after the ruling was issued.Mr. Gravelle, you said in your statement:
- Our fundamental objective is to ensure that both the letter and intent of the law are respected and
that the ruling request is dealt with in accordance with the principles of fairness, consistency
and equity.
Mr. Gravelle: As far as I'm concerned, the opinion given in 1985 was unfortunately incorrect, but it was not made public at the time.
[Translation]
The Chairman: Mr. Paradis.
Mr. Paradis: This is a very important issue. The essential concern of Canadian taxpayers as a whole is with regard to taxes that are already quite high. In any event, it's always too high for everyone. In that sense, this is an issue that is of grave concern to members of the committee.
.1105
What's especially troubling in all this is that the answers have all been negative up until December 22 and all of a sudden, on December 23, two days before Christmas, everything changed after a series of meetings that are difficult to understand.
Paragraph 1.48 of the Auditor General's report states:
- 1.48 Documents contained in Revenue Canada files indicate that, over the two months during
which the ruling request was considered, officials concluded repeatedly that the Department
should not rule favourably.
I would like to underline the importance of the Auditor General's work, and you should congratulate him.
In the Revenue Canada booklet entitled The Rulings Directorate Service, there is reference to service delivered to the general public. It states on page 15:
- The Office of the Auditor General regularly examines the directorate's work including the
advance rulings and technical interpretations that it issues.
My first question will be for Mr. Dodge. I'm referring to point 1.54 of the Auditor General's report, concerning the problem of advance rulings.
It is my understanding that in order to get an advance ruling, you have to be in a position of proposed transactions. It's written just about everywhere that the transactions must not already have been completed.
In point 1.54, the Auditor General mentions that:
- However, the exchanges were completed transactions.
I therefore have difficulty reconciling the Auditor General's statement, when he says that the exchanges were completed transactions, with the very notion of advance rulings and your opening statement, which said that the transactions would probably not have been completed if the ruling had not been favourable.
Secondly, Mr. Dodge, I have a sub-question. You mentioned that you were not Deputy Minister of Finance at the time. Who was Deputy Finance Minister at that time?
Mr. Dodge: At the time, it was Fred Gorbet. At that time, I myself was Associate Deputy Minister for International Affairs in the department.
With regard to the first question,
[English]
the ruling did not apply to completed transactions, Mr. Paradis. The ruling dealt with a consequence of a transaction that had not taken place, i.e., the change of residency of the trust and the transfer of the public shares outside of Canada. That's what was asked for - a ruling on that issue. That's the ruling Mr. Gravelle's department gave.
[Translation]
Mr. Paradis: I would like to come back with a similar question for Mr. Gravelle.
The last page of the booklet I referred to earlier contains an organizational chart of the rulings directorate on advance rulings. The chart indicates ``Manufacturing Industries Partnerships and Trusts Division''. Could you tell us who was responsible for that division at the time and who was in charge of this matter?
Mr. Lefebvre: The officer responsible was Mr. John Chan.
.1110
Mr. Paradis: For the second question, look a little higher in the organizational chart. Who was the director of the Manufacturing Industries, Partnerships and Trusts Division?
Mr. Lefebvre: Ms Carole Toussaint.
Mr. Paradis: And the director general?
Mr. Lefebvre: Mr. Read.
The Chairman: Your time is up, Mr. Paradis.
Mr. Paradis: I'll continue later.
The Chairman: Before I give the floor to Mr. Rocheleau, I have a question for the Auditor General. Mr. Desautels, I would like to know whether you agree with Mr. Dodge's answer toMr. Tremblay earlier, when Mr. Tremblay was emphasizing the urgency of the situation. Mr. Dodge seemed to be saying that this was not necessarily urgent. Do you agree?
And now I'd like to refer to your comments. First of all, I noticed that you entitled your audit observations: ``Serious concerns''. The text reads:
- In our view, the transactions ruled on may have circumvented the intent of the law regarding the
taxation of capital gains. Therefore, we are concerned that Revenue Canada may have eroded
the tax base by forfeiting a legitimate future claim to many millions of dollars in tax revenue.
Mr. Desautels: Mr. Chairman, I've said repeatedly that I believed this was an extremely important subject that merits attention as quickly as possible. And I said this morning that what is of greatest concern to me is not necessarily what happened when the advance ruling was handed down, but rather the consequences of that decision on future transactions that other people may wish to complete.
Therefore, I think that the sooner that we examine this issue, the better. Whether this is done by a committee or by the Department of Finance itself, I think we have a choice, but I maintain that it is relatively urgent that this issue be examined.
The Chairman: Thank you.
Mr. Rocheleau, five minutes.
Mr. Rocheleau (Trois-Rivières): My question is about paragraph 1.31 of the Auditor General's report. In this debate, we referred to both protective trust and family trust and you end paragraph 1.31 by stating:
- Trusts are specifically forbidden from making this election.
Mr. Desautels: I would ask Mr. Elkin to answer that question.
[English]
Mr. Elkin: Yes, the statement that was made in paragraph 1.31 is accurate. The statement says the law allows an individual and a corporation resident in Canada who leave Canada to elect to have public company shares become taxable Canadian property upon giving satisfactory security to the Minister of National Revenue, and trusts are specifically prohibited from making this particular election.
[Translation]
Mr. Rocheleau: Therefore, it is a trust. Here, it's a trust that has taken advantage of these provisions. They stated clearly that ``trusts are specifically forbidden...''
.1115
[English]
Mr. Elkin: In Revenue Canada's view, when the private company shares were exchanged for public company shares, the public company shares became taxable Canadian property, so it wasn't necessary to make an election.
[Translation]
Mr. Rocheleau: Thank you.
The Chairman: Mr. Williams.
[English]
Mr. Williams: Mr. Gravelle, I'm still concerned about the flip-flops in the documentation as listed in the Auditor General's report. Did you discuss this matter with any cabinet minister on, prior to, or subsequent to December 23?
Mr. Gravelle: Not to my recollection.
Mr. Williams: Did you discuss it with any member of the Privy Council Office?
Mr. Gravelle: No.
Mr. Williams: Mr. Dodge, you said you became aware of this when it was raised by the Auditor General, yet it's in the newspapers that Mr. Mazankowski, who was the Minister of Finance, was aware of the issue. Does Mr. Mazankowski normally discuss these matters with his staff, outside your purview?
Mr. Dodge: I cannot confirm what the newspapers say. That question would most appropriately be put to Mr. Mazankowski.
Mr. Williams: Are you aware of any cabinet minister or any member of the Privy Council Office offering advice on this particular issue?
Mr. Dodge: No, I'm not.
Mr. Williams: I'm still very much concerned about how you can tell me this is taxable Canadian property, especially when the Auditor General stated, regarding the Income Tax Act, that trusts are specifically exempted from making an election.
You're saying this is taxable Canadian property in the hands of a trust resident in Canada, yet your own guidelines, Mr. Dodge, from the Department of Finance, specifically state that only non-resident gains of taxable Canadian property...
It talks about deemed realization and emigration. It goes through the whole situation. At no point in these guidelines does it suggest that any Canadian can hold TCP, and yet, in opposition to all the recommendations, advice and decisions by Revenue Canada, you say it is a simple, clear question that has been obvious since 1971.
Mr. Dodge: The clear scheme of the act is that TCP can emigrate with tax at realization.
Mr. Williams: TCP owned by Canadians who emigrate? Or does it become TCP at the time the Canadian emigrates?
Mr. Dodge: Clearly here, if definitionally - and that's important, Mr. Williams - this were not TCP, then there would be a very easy avoidance potential.
Mr. Williams: My question, Mr. Dodge -
Mr. Dodge: You're asking about definitions.
Mr. Williams: I'm asking when it becomes TCP. All the references in the Income Tax Act except for partnerships say Canadians cannot have TCP, but you're telling me that since 1971 this has been a simple, obvious question.
Why are we having tax rulings that are deemed to be of a very complex nature? Why is the Department of Revenue issuing opinions to the contrary? And why is the Department of National Revenue requiring letters of comfort from the finance department before it does a complete and absolute turnaround, Mr. Gravelle, in order to satisfy this particular taxpayer?
Mr. Gravelle: I do not believe there was a flip-flop on the part of Revenue Canada and I do not agree that we were trying to cater to a particular taxpayer.
.1120
Our sole objective throughout that process was to ensure we arrived at the proper conclusion following extensive deliberations, checks and balances within the department and policy and legal advice.
Mr. Williams: I have one last question, Mr. Chairman.
It's stated in the Auditor General's report here that on December 23 a revised memo prepared for you stated that the taxpayer's proposal was not acceptable, and the letter suggested possible alternatives to the taxpayer's proposal. Is it the Department of National Revenue's policy to issue tax advice?
Mr. Gravelle: It is not our policy to issue tax advice. It is certainly our policy to engage in an examination of all the issues and alternatives with a taxpayer or with a taxpayer representative.
Mr. Williams: Isn't that advice?
Mr. Gravelle: I don't think it's advice, no.
[Translation]
The Chairman: Mr. Brien has asked for the floor.
Mr. Brien: I have a question for Mr. Lefebvre.
You were present on December 23, 1991. The Deputy Minister's opinion and your expertise of the interpretation of the legislation led you, on December 23, to issue an advice according to which there should be no favourable rulings with regard to a request from a taxpayer.
On what did you base yourself to make that statement at the time?
Mr. Lefebvre: When requests for rulings are received, there is an unwritten law that could be confirmed by any practitioner that uses any service which states that the response is negative as long as the practitioner or the representatives have not convinced our ruling officers that a favourable decision can be taken. There is an unwritten law that states that the burden of proof is on those who have all the information regarding the transaction, who plan their transaction, who examine all its aspects and who must convince us before we make a ruling to confirm that their interpretation of the law is correct.
You will understand that these transactions are complex and the documentation is quite imposing. So throughout the examination of these rulings, it is normal that officers say no as long as they are not convinced that a favourable ruling can be handed down.
This is the way things are done in all rulings, because once we say yes, it's all over: the ruling is sent. As long as there are discussions within the department, it means we are not convinced.
I'm sure you can imagine how the file was handled. Positive elements have been identified, but there were also negative elements. We were not in a position to say yes until such time as we received additional information that allowed us to hand down a positive ruling.
Mr. Brien: Therefore on the morning of the 23rd, on your advice and on your recommendation, it was still a non favourable ruling. You still had sufficient doubts to hand down an unfavourable ruling.
And after a series of meetings in the course of the 23rd, a series of meetings and an opinion, you finally arrived at a decision that was contrary to the opinion you had that very morning.
First of all, I would like you to explain what happened and why there was this change of opinion. Secondly, wouldn't have been preferable, given the complexity of what was at stake, to wait for the legal opinion and not hand down an advance ruling at that time but wait a little until it could be based on more solid arguments resulting from a more in-depth analysis? From Revenue Canada's standpoint, there was no urgent need to issue an advance ruling on December 23.
Let me summarize my two questions. First of all, what made you change your mind during the course of the day on December 23rd? Next, why didn't you wait and find out more before issuing the advance ruling?
Mr. Lefebvre: Ever since November 7th, as the Auditor General has confirmed, there had been abundant documentation and in-depth analyses done. The legal opinions received from the Department of Justice, from the beginning, had confirmed that the best interpretation of the law would lead to a favourable ruling. There had been confirmation for about a month during the discussions that had taken place.
We'd had discussions with the Department of Finance. But for the rulings as they are reported, there had not been any conclusion.
.1125
During the discussions that took place, I presume that a great deal of time was taken to understand the facts, since the factual data in this transaction were complex.
As Mr. Dodge indicated, before you arrive at a point of law, you have to decorticate the transaction, understand the facts and reduce the large number of questions that arose at the outset.
The new key element that came forward on the 23rd, and that was obvious in the file, is that we received confirmation that the policy intent was consistent with the legal opinion we had received, and that not only the letter but also the intent of the law were the same.
We therefore had all the information required to hand down a ruling; there was no particular reason to wait until the new year.
Mr. Brien: In the case of extremely complicated research and development in Quebec, Revenue Canada had not issued an advance ruling because of the complexity of what was at stake. Why is it that in this particular case, you took the risk of issuing an advance ruling when today the Auditor General is contesting the interpretation or the compliance with the spirit of the law?
Since in the case of research and development in Quebec you had not issued an advance ruling, why did you feel it was important and necessary to do so in the other case?
Mr. Lefebvre: In the case of the research and development, we did not hand down an advance ruling because on the one hand this was not requested and on the other if we are to base our ruling on facts, it would be difficult to do so with facts that will only take place in the future.
Therefore, we do not hand down rulings that guarantee for investors that there will be research and development in the future, because we have to wait and see whether that will be the case.
In the case of an advance ruling, which was not requested in that particular instance, all the aspects of the proposed transaction must be described to us so that we can understand them properly; the ruling will only be valid if the transaction takes place exactly as anticipated.
Mr. Brien: Things don't have to be done that way.
The Chairman: Thank you, Mr. Brien. Before I give the floor to Mr. Paradis, I would like to put a question to Mr. Lefebvre.
The Auditor General's timetable indicates that on December 19th, a draft legal opinion was received. Did that opinion recommend a favourable or an unfavourable decision?
Mr. Lefebvre: The documentary evidence that the Auditor General has indicates that the meetings took place in December, before the 19th, at which time the draft opinion was made available. During a meeting with legal counsel, we'd noted that he said that the best interpretation of the law was such that we had to hand down a favourable ruling.
However, he also noted that we could argue the case. In support of the position taken by the ruling officers, who had analyzed the consequences and the vast sums of money at stake and we were not convinced at the time that we should say yes, the lawyer warned us that the best interpretation of the legislation was favourable. That's documented.
On December 19th, at our request, the lawyer provided us with a draft opinion which said that we could put forward arguments. That's all it said.
The Chairman: He did not give a favourable or unfavourable interpretation?
Mr. Lefebvre: In that draft opinion, he said that we could argue in favour of not handing down a ruling.
The Chairman: Mr. Paradis.
Mr. Paradis: With your permission, Mr. Chairman, I will give my time to my colleague who may have a few questions.
The Chairman: Yes.
[English]
Mr. Ianno (Trinity - Spadina): This is very short. Mr. Minto, do you agree with whatMr. Lefebvre was stating? Was it confirmed in your analysis?
Mr. Minto: Mr. Chairman, could the member be a little more specific about which particular part?
Mr. Ianno: I mean what he was just referring to in terms of the previous ruling that the department was stating.
Mr. Minto: In terms of the legal opinion, we find ourselves in a slightly awkward situation here. We have referred to two legal opinions, a draft and a final one. We were precluded from providing any more information on that by the department, which claimed privilege at that time, as it has a legal right to do. I notice that they're talking about it today, so I presume they've waived the privilege and we can talk about it now.
.1130
We would have liked to include material relating to that, but we were precluded. I would be delighted to talk to you -
Mr. Elkin: Has the privilege been waived?
Mr. Gravelle: Mr. Chairman, we have tabled with the committee the January 13 legal opinion. In answer to a question earlier, I said that we would provide the draft legal opinion of December 19. I will ensure that the committee gets any other related document or information that would be pertinent and would help the committee.
Mr. Ianno: So Mr. Minto can discuss that now?
Mr. Gravelle: Of course.
Mr. Minto: Mr. Chairman, our reading of the December 19 draft legal opinion was that it did not support giving a favourable ruling. It really made the argument on both sides and did not come down with a final decision. But I think it would be very useful for the committee to look at it.
Mr. Ianno: Thank you very much.
[Translation]
The Chairman: Three minutes, Mr. Paradis.
Mr. Paradis: My question is for Mr. Gravelle concerning the advance ruling policy.
In the same pamphlet written for Canadian taxpayers in general, it is stated on page 5:
- An advance ruling is a written confirmation that the Directorate gives to a client in the private
sector on behalf of the Department concerning the tax results of proposed transactions.
- The Rulings Directorate does not provide advance rulings for transactions that are already in
progress or for transactions that have been completed. Instead, the department's income tax
field offices will provide opinions on these types of requests.
According to the information we have, the property was acquired by a trust in exchange for shares...
Therefore, they're talking here about the past. The transaction had already taken place. How on December 23, 1991, can it be said that this is an advance ruling?
Mr. Gravelle: Mr. Chairman, I can answer that question. As my colleague Mr. Dodge stated, we always recognized that the acquisition of the shares had already taken place. We were dealing with an early request for a possible transaction, which concerned the transfer of shares to another country. It is in that respect that we agreed to provide an advance ruling, on a future transaction, a future event which consisted in a transfer of shares.
Mr. Paradis: If I may, Mr. Chairman, I would like to ask a supplementary question. If I understand correctly, the exchange of shares had already taken place. However, I imagine that the transfer of shares was part of the planning of the projected transaction. Are you completely isolating that transfer or was it part of the overall transaction when presented to you?
Mr. Gravelle: I think that the transfer was part of the overall transaction, that it was simply noted on the file by the taxpayer. The taxpayer wanted to know whether a change in residence, together with a transfer of shares to a location outside the country, would have the expected tax consequences.
Mr. Paradis: Thank you, Mr. Chairman.
The Chairman: Mr. Tremblay, five minutes.
Mr. Tremblay: You begin to issue public shares for your private company, and after 20 years they are still valid and you transfer them to the United States. That was the situation on which you delivered a ruling.
Many people are in that situation, involving a lot of money which could be transferred outside the country. The assets in question amount to several billion dollars.
[English]
Mr. Dodge: Obviously one can't put a precise number on it, but yes, there could be a lot of money.
Mr. Tremblay asked me earlier if it is urgent, and I said it's complex and difficult. I don't know quite what you mean by urgent, but what I would note is that we've asked the other committee to get back to us by September.
.1135
Mr. Tremblay: We know there are people from Hong Kong coming to Canada, but we know that overall there are more people going south than north when they have accumulated billions. Maybe when they are young they are here, but later on they are outside.
More than that, we know our economic situation is not that good. Taxes are high in Canada, and with the deficit and debt we have, we know that taxation will be high for as far as we see. If we add to that the problem of our savings plan pour la retraite, it's still worse. So if you have billions, or even a million, it may be better to go out now before you change your mind. That's my point.
[Translation]
The decision will focus on that. What is important is the tax base concerned. You can then deal with the issue of fairness, but in the short term what matters is the tax base concerned and the ability of people to act now. In my view, it is important to indicate to people that a review could be carried out quickly.
I believe that is already done by the Auditor General and through the reference of the Minister of Finance to the committee. When I say it is necessary to act quickly, it is because we can now base our position on earlier examples. As you will remember, when we carried out a fundamental transition in Canada and moved from taxing estates to taxing capital gains, we witnessed a very high number of transactions in just a few months. That is what we want to avoid.
[English]
Mr. Dodge: First let me be clear. Those two situations are very different because there was a real potential of total avoidance in the first case. Here it's not a question of avoidance, Mr. Tremblay, but a question of who collects.
I go back to my original statement. This is not so simple a policy issue. It's important and urgent, as the Auditor General has said, that it be addressed, but the outcome is not absolutely clear where the right place to end up is. Remember that a taxpayer moving from Canada to the United States, with significant capital gains in something like an apartment building or a private corporation or whatever, still remains subject to the Canadian tax for ten years. Secondly, while in many states in the United States, though not all, the actual rate of tax on the capital gain would be slightly lower, there are also death duties. So it's not as you would have indicated.
Mr. Tremblay: I understand that, but when you have billions of dollars, you know in which state the tax is less.
[Translation]
Should we establish an average of taxation rates in the United States in order to prove that point to show where it is the least expensive? We have a problem of international tax havens, to which we referred in other reports. I would think that the people using them do not do so in order to lose money.
I cannot therefore base my argument on the fact that people will transfer billions of dollars to the United States so as to have to pay more taxes. I have difficulty in accepting your argument. I understand that that is not a public role. We respect that, but at the same time we are in a serious situation, particularly as the international mobility of individuals has significantly increased in terms of their capital. Would you agree with that?
Therefore, I do not accept your argument. Action has to be taken quickly. And I would point out to you that this is a particularly serious problem since there is an issue of fairness involved, as the Auditor General pointed out, at a time when Canadians need a clearer vision and must be able to believe in the absolute fairness of the system since they are being more and more heavily taxed.
Therefore, on the basis of fairness alone, action must be taken urgently. That's why we are having this meeting today and you are here.
.1140
If it was also shown that there have been significant transactions over the next few weeks, we would all be responsible for that.
[English]
Mr. Dodge: What Mr. Tremblay is saying is extraordinarily pertinent. This is a very important issue. It has been referred immediately to the finance committee to try to deal with it, and we should try to deal with it urgently.
But to step up and simply say we would have a V-Day the day the taxpayer leaves Canada and all accrued gains would be taxed at that point may be unduly harsh. I think very much about the 65- or 70-year-old person who has arthritis and moves to Arizona and has shares in his or her private company or owns an apartment building. It does become very harsh.
So in looking at it, it's not quite so clear-cut as we might be led to believe, but it is undoubtedly extraordinarily important that the issue of taxation of capital gains on migration be reviewed by Parliament, because it has not been reviewed since 1971. We're basically working on the same rules we had then.
The Chairman: Mr. Williams.
Mr. Williams: Mr. Gravelle, when I asked you if you had discussed this matter with any cabinet minister, I got a less than definitive answer. Is it possible that you discussed this matter with a cabinet minister before December 23, 1991?
Mr. Gravelle: I don't recall that, Mr. Williams.
Mr. Williams: Is it possible you discussed it with a cabinet minister on December 23, 1991?
Mr. Gravelle: I don't recall that either.
Mr. Williams: Is it possible you discussed it with a cabinet minister subsequent to 1991 but prior to the election in 1993?
Mr. Gravelle: Definitely not.
Mr. Williams: Did you discuss this with a cabinet minister subsequent to the election of 1993 and prior to it being raised by the Auditor General when he became aware of it?
Mr. Gravelle: No.
Mr. Williams: Mr. Dodge, are you aware that anybody in your department had discussed this matter with a cabinet minister prior to December 23, 1991?
Mr. Dodge: No, I'm not aware of anyone.
Mr. Williams: Is it possible?
Mr. Dodge: I cannot deny the possibility.
Mr. Williams: Mr. Gravelle, in the ruling that was issued at exhibit 1.2 of the Auditor General's report, on page 1.14, you requested a waiver. If this was a simple issue, why did you request a waiver?
Mr. Gravelle: Mr. Lefebvre.
Mr. Lefebvre: There is no great magic to this waiver.
In all the discussions that lead to a decision, the first step is to fully understand the facts. The taxpayer comes in with this complex transaction. There are a number of trusts. The Auditor General has indicated in a number of boxes on a couple of pages that there was a series of transactions. We question those people until we fully understand.
Some of the questions we raised... Our rulings officers are really doubting Thomases in the sense that we want to give the taxpayer a fair deal but we are concerned that we may miss something. That's the nature of the job.
In those discussions the question was asked, ``Well, is there something next? There's a movement. Is that part of a larger series of transactions?'' The issue was raised earlier about whether the public shares were exchanged for the private shares just prior to moving to the States.
Mr. Williams: But Mr. Lefebvre, you knew exactly -
Mr. Lefebvre: If I could just -
Mr. Williams: Carry on briefly, please.
Mr. Lefebvre: I have not answered your question yet.
We are concerned that the transactions that are put before us, even when we understand them very well, are part of a larger series of transactions that, taken together, could lead us to believe this is an avoidance transaction. Then we may have to consider the anti-avoidance clause.
.1145
In this particular case we had raised that concern. Once this has moved to the United States, are you immediately going to do some other transactions? The taxpayer wanted to put us at ease, so he said -
Mr. Williams: My point -
Mr. Lefebvre: Listen, if that's a concern for you, I'm going to give you an undertaking. We had further discussions and I'm going to give you -
Mr. Williams: I understand what you're saying. Let me ask you this question -
Mr. Lefebvre: That's the only context on that instrument.
Mr. Williams: Let me ask you this question. When you issue a tax ruling, you state the facts. You don't say ``and anything else that may come along''. You state the facts and if any additional facts are introduced to the transaction, you're allowed to vary your decision on a ruling. Am I correct? If additional facts affect that particular situation, you can say the ruling does not apply. Is that correct?
Mr. Lefebvre: If the taxpayer presents to us a transaction and we give a ruling, it is stated in a standard paragraph in every ruling that if the taxpayer does not do the things he said he would do, in the manner he said he would do them, then the ruling is not applicable. That is in the sense that since he did something different from what we considered, the law will be what it is at the time.
Mr. Williams: Did you include that statement in this particular ruling?
Mr. Lefebvre: Yes, I'm sure. I haven't looked at it, but it's a standard paragraph.
Mr. Williams: Do you still have doubting Thomases in your department?
Mr. Lefebvre: That's the only thing I have.
The Chairman: Mr. Telegdi.
Mr. Telegdi (Waterloo): Mr. Chairman, I'm finding that the questions are longer than the time given for answers.
I have a policy question and I'll ask Mr. Dodge. There's real mobility of capital taking place, much more than ever before. Of course, Canada can be the recipient of that mobility depending on what happens in Hong Kong and various parts of the world.
The Chairman: A short question, Mr. Telegdi.
Mr. Telegdi: My question is short, Mr. Chairman, much shorter than yours.
I'll give you all the time to respond to this, because I think it's important.
To what extent are our laws preventing or encouraging people to move capital to this country? What are the implications if it's perceived that our tax laws are not fair vis-à-vis other countries?
Mr. Dodge: That is an extraordinarily good question, one that I could not do the hon. member any sort of justice by trying to answer quickly. That is precisely, absolutely the issue that underlies the reference we've made to the finance committee to look at this.
Our law here essentially dates from the deliberations of the Carter commission in the middle to late 1960s. You're absolutely correct that capital and people were not nearly as mobile at that time internationally as they are today.
There is a huge benefit to this country from that international mobility. There is a huge benefit to Canadian citizens from having the ability to move around the world. Indeed, and this comes back to Mr. Tremblay's point, there are a lot of people who become non-resident for tax purposes for a period in their lives, when they go to somewhere else with their firm to do business for a few years and then come back.
Fundamental to the act was an attempt to be pretty neutral towards this mobility, to not throw up barriers to a Canadian leaving Canada and to not throw up barriers to a foreigner coming and investing and working in Canada. That was the basic intent, if you remember, of the aphorism of Carter, ``a buck is a buck is a buck'', and just try to be extraordinarily neutral.
That is the philosophical basis of the law. But situations evolve, transactions are becoming increasingly complex, and the ways in which financing is done are becoming increasingly complex.
.1150
Therefore we thought Mr. Desautels was raising a very important and fundamental policy issue here in the broadest sense: whether the Income Tax Act as it stands is appropriate in the context of 1996, given the importance of migration both in and out of Canada.
That is fundamentally the exact question that has been put to the finance committee. We've asked them to report back by the time Parliament opens in the fall so there can be a good and full discussion of this extremely important but not very easy issue.
Mr. Telegdi: Obviously we have a lot of people immigrating to Canada, and we have actually encouraged people to come with capital. Do we have any idea at all of what kind of balance or surplus we might have?
Mr. Dodge: I certainly do not. We can undertake to try to look at it, but that is very difficult to ascertain.
Don't forget it's not just individuals; it's also corporations. So it's not easy to get that precisely, but we will try. It's an important issue. We will try to prepare some documentation on that issue. The question is absolutely an appropriate question.
The Chairman: Thank you, Mr. Telegdi.
[Translation]
Before giving the floor to Mr. Brien, I have a short and specific question for Mr. Minto. Why would the committee find the draft of the legal opinion of December 19 interesting? You said that you were sure that the committee would find it interesting. Mr. Gravelle undertook to provide it to us, but I am dying to see it and wonder if I'll be able to get through the weekend without knowing what is so interesting about this legal opinion.
[English]
Mr. Minto: Perhaps I can make your weekend a little better, sir.
You will notice that following that legal opinion on December 20 and on December 23, the department maintained its position in memorandum that a favourable ruling should not be given. So the draft legal opinion had been received by the department by that time, and that is why we thought it was... If you look at the sequence of events, you will find that even following that draft legal opinion, the department's position had not changed.
[Translation]
Mr. Brien: I have a question for the Auditor General. Given the need to protect the tax base in the short term, is it necessary to change the legislation in order to act or could other measures be taken, such as suspending advance rulings, pending a more comprehensive decision?
Mr. Desautels: Mr. Chairman, I don't think I can fully answer Mr. Brien's question. Perhaps the officials from Revenue Canada or the Finance Department could better answer that question.
The department probably has procedure to indicate that it is reviewing certain legislative provisions, and that could act as a warning for people considering transactions in those particular areas.
I think that the officials from both departments would be better able than I to answer your question.
Mr. Brien: I would like to have an answer from Mr. Gravelle or from Mr. Dodge, who seems to wish to speak.
Mr. Gravelle: If I understand your question correctly, you are asking me if we have procedures for informing taxpayers that certain provisions of the Income Tax Act are being reviewed.
Mr. Brien: And therefore it would probably be wise not to presume that the same ruling would apply as in the past.
Mr. Gravelle: I think that at the present time the public are aware of the discussion concerning taxable Canadian property, given the questions asked in the House and the statements of the Auditor General. The government's position is also known to the public, since it was stated when it was announced that the question was being referred to the Finance Committee.
Mr. Brien: But you also know as well as I do that taxpayers are quicker than we are. If you don't act in the short term, they quickly understand the game. Indeed, that's what they are doing at present. If I had a trust and was in the same situation as the two taxpayers being reviewed, I would act quickly to have the advance ruling applied to my case rather than waiting for possible amendments. As far as we are concerned, the problem remains completely unresolved. We will have missed the boat.
.1155
Mr. Gravelle: I am very familiar with the type of situation you are talking about, but please understand that the advanced ruling delivered is based on two opinions we received, one from the Department of Finance and the other from the Department of Justice. The legislation is such that we are sure we correctly applied it in the case of this advance ruling.
And even if we did not deliver an advance ruling on a similar transaction tomorrow morning, the taxpayer could take the publication of the 1991 decision and argue in court that his rights should be respected.
Mr. Brien: Therefore, in your view, it is now the responsibility of the legislator to clarify the intention of the Act.
Mr. Gravelle: I think so.
Mr. Brien: That's fine. I have my answer.
Mr. Dodge talked about protecting the tax base for 10 years in the United States. There is therefore a certain level of protection for Canada since this would be taxable Canadian property.
But the taxpayer could also argue that the tax convention also applies to him. In short, Revenue Canada should also argue the opposite position to its advance ruling so as to recover taxes from those people. You mention that in your report and I would like you to clarify that point.
I would like Revenue Canada to explain why it was only in March 1996 that you knew that only a few people had benefitted from that interpretation of the Income Tax Act. Why did it take several years for the advance ruling to be known?
Mr. Gravelle: I acknowledged that at the beginning in my introductory remarks. The Department makes an enormous effort to provide all taxpayers with information circulars and technical bulletins of interpretation. We also offer technical opinions to anyone requesting them.
I have acknowledged from the beginning that we have not managed to make public on a consistent and timely basis the advance rulings delivered on very specific issues and transactions related to a particular taxpayer.
I have indicated to you today that as from January 1, 1996 the policy of the Department has been that all advance rulings received and given will be published within 90 days of the advance ruling being transmitted.
Mr. Brien: And the Auditor General?
Mr. Desautels: Mr. Chairman, Mr. Minto would like to answer Mr. Brien's question.
[English]
Mr. Minto: The question was raised about the enforceability of the waiver, I understand.
The waiver is a limited waiver. It is limited only in the sense that Revenue Canada would have to go and argue that this was not taxable Canadian property. But that was the essence of the ruling. So in order to enforce the waiver, the department would have to argue against itself. That is what we brought out.
[Translation]
Mr. Brien: Mr. Dodge would like to speak.
[English]
Mr. Dodge: I would like to piggyback on that.
The real danger here would be if exactly that happened; then we've opened up a massive loophole. That's why the original decision was absolutely consistent with the law. It's very important to understand that point, which seems to have been ignored by some parties.
Mr. Ianno: Could we have Mr. Minto respond to that? There seems to be a difference of opinion.
Mr. Minto: The original decision was made conditional upon getting away with an undertaking. It was not independent of that.
[Translation]
The Chairman: Mr. Williams.
[English]
Mr. Williams: I would like to ask one question of Mr. Gravelle.
I'm reading from the Revenue Canada comments to the Auditor General:
- In interpreting the law that applies to the transactions to be undertaken, Revenue Canada
determines the intent of the law by considering not only the words of the particular provision,
but also the context in which the particular provision is found.
Could I ask your department, Mr. Gravelle, to table with this committee a detailed, specific response to how this particular section of the act, which speaks about partnerships and taxable Canadian property held by Canadians, applies in this particular situation, in light of the paragraph in the Auditor General's remarks?
.1200
[Translation]
The Chairman: Yes? A motion of adjournment?
Mr. Brien: No. Given that we still have a lot of other questions to ask, we should continue.
The Chairman: Please...
Mr. Brien: We still have questions to ask. I would like the witnesses to come back.
The Chairman: Just a moment, Pierre. I think this is an important motion. We will give the Parliament Secretary to the Minister of Revenue time to sit down.
Mr. Brien: Given that we have to continue our examination of this question and that we will have to see these witnesses again and other witnesses so as to obtain further information on this issue, I move that, in accordance with Standing Order 108(1)(a) of the House of Commons, Revenue Canada, should communicate the names of the people involved in the present situation.
[English]
The Chairman: Mrs. Barnes.
Mrs. Barnes: I'd like to restate what I stated the very first time the Auditor General came into this room. I put it on the record then and I put it on the record today. There are laws in this country. There are very serious provisions in the Income Tax Act that talk about confidentiality.
We are here because this is an important part of our tax legislation. It is important for Canadians to have confidence in their system. An important policy area has been identified, and my understanding is that will be immediately going to the finance committee, right after this break period.
I can only reiterate that the Department of National Revenue and the Minister of National Revenue do not deny or confirm any individual's... The most important thing for everybody to understand at all times is there are very specific provisions of the Income Tax Act saying we do not give out the identities of individual taxpayers or corporate taxpayers, or any specific information.
If no one understands that, I have copies of those sections I can provide you with so you can read it in black and white, as I said to the Auditor General the first time he was before this committee.
[Translation]
The Chairman: Mr. Gravelle, what would your answer to that question be?
Mr. Gravelle: I feel bound by section 241 of the Income Tax Act, which was proclaimed by an Act of the Parliament of Canada. The integrity of our tax system is based on one essential condition, namely the complete confidentiality of taxpayers' information, which would include their identity.
The Chairman: Mr. Gravelle, I should remind you that paragraph 862 of Beauchesne reads as follows:
- 862. Witnesses must answer all questions directed to them even over other their objection that
an answer would incriminate them.
- Legally, a witness cannot rely on any argument to refuse to answer a question. Witnesses are
literally at the mercy of the committee. Thus, a witness cannot refuse to answer a question on the
ground that there could be a risk of legal proceedings, or because an oath has been taken not to
disclose the matter under consideration, or because the matter was a privileged communication
such as that between a solicitor and a client, or even because the answer might incriminate him.
That is how I understand section 241, and I think that even Mr. Gravelle would not be able to answer that question.
Mr. Brien: You quoted citation 862 of Beauchesne and part of a legal opinion which was given. Since you are a lawyer, I would like to point out that citation 863 states that a witness cannot refuse to answer any question on the grounds that there could be legal proceedings, ``because an oath has been taken not to disclose the matter under consideration, or because the matter was a privileged communication such as that between a solicitor and a client,...''
Even that could not be given as a reason. You know that this is very serious: ``or on the grounds of advice from counsel that the question cannot be answered without risking self-incrimination...''.
Therefore, it is in the hands of the committee. If there is a motion asking the Deputy Minister to provide information of interest to us in our examination of the situation, that can be done in camera. There is nothing to say that it must be done in public. It can be done in camera, and there will certainly be no authorization to make such information public.
.1205
The committee can therefore hear information and call witnesses so as to continue its examination of the issue.
According to the legal opinion given to the House of Commons in 1994, that is possible and we have the power to do so. Do you want to do that? That is a different matter, but it must be recognized that we have the power to do so.
[English]
The Chairman: Mrs. Barnes.
Mrs. Barnes: I am just going to reiterate that I believe the Income Tax Act is extremely clear here. I find it amazing that seven minutes after the termination of the potential time for this, this is sprung here. It doesn't surprise me; I think it's normal right now.
I would remind the chair that this meeting is supposed to be over. There should be an examination of the rules of this committee about tabling of motions and time periods, which happens to go on with other committees around this place. Maybe we should look at that, Mr. Chair.
About tabling of motions, I know the justice committee, which I used to sit on, required something around 48 hours' notice before you acted. I believe this is not something that should be done in camera. Most people in this country understand that the Income Tax Act is extremely clear, and that's the basis on which we operate.
I would request that he withdraw from trying to get this information in this manner.
[Translation]
The Chairman: Ms. Barnes, with all due respect, I must indicate to you that the 48 hour rule must be followed.
The clerk informs me that the 48 hour rule applies in the Justice Committee, but that they have never adopted a rule on the notice required before tabling a motion.
[English]
Mrs. Barnes: My point exactly.
[Translation]
The Chairman: Ms Barnes, it is true that we agreed to stop at noon, but the meeting is not over. Technically, we have a motion before us and we must debate it. Those colleagues who wish to speak on it may do so, and we will then vote on the motion.
Mr. Paradis.
Mr. Paradis: Mr. Chairman, if I understand correctly, it is a matter of legal interpretation.
Perhaps our committee should submit this question to the legal counsels of the House so as to obtain their opinion, which would not be based on some past event or other cases cited to us, but rather on the present situation.
I would therefore propose this approach.
Mr. Brien: Following the statement by my colleague from Brome - Missisquoi, I think we could support the motion subject to the committee decision being confirmed through a legal opinion.
You could therefore adopt the motion, which will be confirmed by a new legal opinion authorizing us to do so. If we have the necessary authority, the request would be automatically transferred to Revenue Canada.
The Chairman: Do you want to amend it accordingly?
Mr. Brien: I'm ready to do so if...
Mr. Paradis: Personally, I think this is a fundamental issue. It deals with Section 241 of the Income Tax Act. I want the committee to be completely aware of what is involved before voting on such a motion.
For that reason, Mr. Chairman, I recommend that you ask the appropriate services in the House for a legal opinion.
The Chairman: But that is the motion before us. I don't think I have that power.
[English]
Mrs. Barnes: Just table your motion, then.
[Translation]
The Chairman: I don't have that power.
Mr. Telegdi.
[English]
Mr. Telegdi: It's 12:10. The meeting was supposed to conclude at noon. I move we adjourn.
[Translation]
Mr. Brien: The motion is in order.
The Chairman: Excuse me. There is a motion to adjourn which is in order, not debatable, and on which we can vote immediately.
All those in favour of adjourning immediately, please raise your hand. All those against adjourning immediately, please raise your hand.
Motion carried
The Chairman: Before concluding, I would inform you that we are going to meet in the steering committee. I would therefore like to inform the witnesses that we may need their expertise during the week of May 27. I cannot presume to know the decision of our steering committee, but the committee may decide to pursue its consideration of the issues further. Thank you for your cooperation.
The meeting is adjourned.