EVIDENCE
[Recorded by Electronic Apparatus]
Wednesday, October 2, 1996
.1628 
[Translation]
The Chairman: Good afternoon, everyone. We apologize for the delay. Personally, I did not show up because I thought the bells would be ringing until 3:30 p.m.
As we're starting a little late and we provided for only a single meeting on this very important subject, I would suggest to colleagues that we continue our meeting after the 5:30 p.m. vote if the witnesses can remain.
[English]
Mrs. Barnes.
Mrs. Barnes (London West): One suggestion. If it's acceptable to everybody, I would be prepared to pair with yourself or maybe another member to keep it going through the vote, if our whips can arrange that. We've done that in other committees before. I feel sympathy for the people sitting around here. If we could arrange that and get some people working on it, we could work through the vote that's coming in about an hour. I for one would be prepared to pair with the Bloc or -
The Chairman: I personally would have no problem with that.
Agreed?
Monsieur Hopkins.
Mr. Hopkins (Renfrew - Nipissing - Pembroke): I just wanted to say, Mr. Chairman, it could be either that or we agree there will be no votes during the time of the vote in the House. But I'm agreeing to pair if that's what you want to do.
.1630
[Translation]
The Chairman: Pursuant to Standing Order 108(3)d), the Standing Committee on Public Accounts continues its consideration of Chapter 1 of the May 7, 1996 Report of the Auditor General of Canada entitled ``Other Audit Observations - Revenue Canada - Family Trusts''.
We have with us Mr. Denis Desautels, Auditor General of Canada. Welcome, Mr. Desautels. Could you introduce the people with you?
Mr. Denis Desautels (Auditor General of Canada): With me are Messrs. Minto and Elkin.
The Chairman: Mr. Gravelle, Deputy Minister of National Revenue, welcome before us once again.
Mr. Pierre Gravelle (Deputy Minister of National Revenue): I have with me Mr. Robert Beith and there are other colleagues from the department who can help answer some questions if the committee so wishes.
The Chairman: Mr. Beith is Assistant Deputy Minister of the Appeals Directorate, isn't he?
Mr. Gravelle: Yes, Mr. Chairman.
The Chairman: From the Department of Finance we have Mr. David Dodge.
Mr. David A. Dodge (Deputy Minister of Finance): With me is Mr. Don Drummond, the Assistant Deputy Minister, and other officials who may assist in answering your questions.
The Chairman: Before getting underway, for the benefit of our committee colleagues, you know that this week I told you about a request the steering committee made to have me write to the Deputy Minister of National Revenue to ask him to provide us with a copy of the revisedDecember 23, 1991 memo as mentioned on page 1.17 of the Auditor General's report.
It was specified and went without saying that any information that might be used to identify the taxpayer would be deleted. This request was ratified by the whole Standing Committee on Public Accounts. For the benefit of my colleagues, I would like to say that we do have in hand the original English version, with abundant deletions, as well as a French version. I believe the clerk sent you all a copy.
When your turn comes for questioning, Mr. Gravelle, I will certainly have questions to put to you because even though it goes without saying that any information that might be used to identify the taxpayer must be deleted, it seems to me you made abundant use of correcting fluid. You must have used at least a gallon. I am probably not intelligent enough to understand all that, but I must tell you that it's not only the information that might identify the taxpayer that was deleted. That was the general comment I had to make.
[English]
Mr. Williams (St. Albert): Mr. Chairman, in the steering committee we had a long discussion about this particular meeting and we are going to be confining ourselves to the process of December 23, the events leading up to December 23, the environment around that particular time, changes introduced by the minister since then, and so on.
I have quite a few questions I would like to ask, and I note that Mr. Gravelle's statement is sixteen pages long, Mr. Dodge's statement, in small print, is about six pages long, and we have a statement from the Auditor General. By the time we hear all that we'll be leaving. I note specifically that Mr. Dodge's statement seems to be more focused on the tax issue, which we're really not going to be delving into today.
Therefore, Mr. Chairman, I would request that unless the statements by the witnesses are rather short, they give us a verbal synopsis and we append their written report to the minutes of the meeting as if read in.
[Translation]
The Chairman: I have no objections if it favours -
[English]
Does everybody agree with that?
.1635
Mrs. Barnes: That's fine.
[Translation]
Mr. Desautels: Mr. Chairman, I will be brief. As you said, the committee intends to look more specifically into the circumstances surrounding the decision of December 23, 1991 and the changes made to the administrative procedures since that time.
Even though I am focusing on those events, there are many facets to consider. I would like to stress the importance of one issue the resolution of which is sure to have enduring impact. It is an issue raised by the Finance Committee in the report of its hearings held pursuant to my May 1996 report. I think it can best be expressed as a series of questions.
[English]
First, how should Revenue Canada balance its dual roles as interpreter of the law - especially where it may be ambiguous - through its advance ruling services and its role of guardian of the tax base?
Second, to what extent should Revenue Canada take into account the nature and consequences of the transactions it's asked to rule upon?
Third, what should Revenue Canada's policy be on issuance of advance rulings where there is evidence that tax avoidance could be involved or where there's likely to be a large loss of tax revenue or impairment of the tax base?
Fourth, what is the Department of Finance's responsibility in providing timely advice when sought by Revenue Canada, supported by adequate analysis of the potential impact of an advance ruling, and what is Revenue Canada's responsibility to critically examine that advice?
[Translation]
These questions are evidently linked to the issue of sound documentation and proper analysis to support these decisions.
I'll leave it at that, Mr. Chairman. Mr. Minto, Mr. Elkin and I will be pleased to answer your questions or provide any additional explanation.
The Chairman: Mr. Gravelle.
Mr. Gravelle: During the first meeting of this committee, my presentation was to indicate to the members of the committee the rather rigorous procedures we follow when examining requests for advance decisions. This appearance will give me the opportunity to elucidate the events that surrounded the meetings of Monday, December 23, 1991.
I would simply like to say that concerning the process surrounding the examination of this advance decision in particular, in conformity with the rules and procedures of the department, we undertook the examination of the request in early November 1991. Things followed their course according to established practice of questioning the representations made by the taxpayer as set out by departmental policy. During this whole examination process, we had a prevailing legal opinion even though we did test other working hypotheses.
At the very outset, we had also asked the Department of Finance to elucidate the intent of the tax policy concerning the question that had been submitted to us. When I saw the file for the first time around December 20, on the Friday, I saw that even though we had a rather convincing legal opinion, we were still lacking a clear, specific and written opinion from the Department of Finance.
That's when I asked my colleagues, quite correctly, to meet the senior officials of the Department to clarify the question. I was conscious of the importance of the decision. I was very conscious of the legislation's ambiguity and I was also conscious of the tax consequences of the decision.
.1640
What followed was simply the natural course of events. When Mr. Lefebvre, the Assistant Deputy Minister, had to leave on Friday, as he had to be away from Ottawa for some weeks, I asked the people in charge of the Advance Decisions Division to ensure continuity and organize the following meetings with the Minister of Finance.
At the time, I did not know that it would necessarily end on the Monday, 23 December, but the fact remains that the discussions that happened following that allowed us to obtain clarification from Finance, which clarification allowed us to come to the conclusion that we were well advised to give a favourable answer to the taxpayer as the legal opinion and the tax policy opinion converged. I will be happy to elaborate on those events of December 23.
I would also like to say that it is very important to see that the fact of finalizing such a decision towards the end of December is not unusual. I will probably have the opportunity to discuss this further with the members of the committee. The end of December is the end of the tax year for many taxpayers and many of them must make tax decisions at that point. It's quite natural.
[English]
In fact, by the end of December, in the last three months of the year, we do receive a fair number of requests. In December we're called on to issue, on average, twice the amount of advance rulings we normally issue on a month-by-month basis. What is interesting for you to understand is that this was not an exceptional case. It was really part of the decision-making process of the department, and I will be pleased to report on that.
The Auditor General pointed out, and quite rightly so, that there were a number of deficiencies in the process generally in the department. He had made an excellent report in 1993 about the decision-making process and our decision-making procedures and policies. One recommendation he made was that we should, for the sake of transparency, issue all advance tax rulings. I'm pleased to report to you that this is now in place, of course subject to proper checks and balances so we don't compromise confidential taxpayer information.
He also pointed out that while - and it's chapter 1, on the issue of TCP. It involves a lot of documentation and meetings and discussions and representations. The fact of the matter is that those particular discussions that took place on December 21 were left undocumented in our files, and this is unacceptable. There should always be a good paper and audit trail for all these key decisions. I'm pleased to report that on the basis of his observations, on the basis of the recommendations or observations of members of this committee, members of the finance committee, and certainly my minister, we now have in place rigorous procedures to make sure deliberations, interdepartmental consultations, at all times are fully documented so there will be a good proper trail for audit purposes and future references.
A deficiency was also pointed out by the Auditor General that some inconsistencies occurred far back in 1985. I regret that very much. The fact of the matter is that back in 1985 we were not fully automated to ensure the myriads of technical interpretations and opinions and advance tax rulings were fully put in an on-line database. I'm pleased to report that since 1993 we do have that. So the discrepancy that occurred in 1985 would not occur again today.
Perhaps, Mr. Chairman, I should complete my statement right now and open up the floor for discussion after Mr. Dodge has addressed the meeting briefly, so we can respond to members' concerns and questions.
Thank you.
[Translation]
The Chairman: Thank you, Mr. Gravelle.
[English]
Mr. Dodge.
Mr. Dodge: Thank you, Mr. Chairman.
As you know, earlier this afternoon the Minister of Finance tabled notice of a ways and means motion to amend the Income Tax Act. This notice adopts all the recommendations made in the finance committee's majority report.
The Auditor General had noted two issues with respect to what we're discussing today. Those concern process and policy. Mr. Gravelle's dealt with the process issue and I think the notices tabled by my minister today do address the policy issues.
.1645
Because I've tried to explain in my full remarks how the five motions would operate, all I will say, Mr. Chairman, is that we're really dealing with the question of whether we should have a system that taxes people when they leave Canada or a system that waits to tax them when those people sell the property that they're left with. That's the real issue at stake here.
As part of this, we have to establish whether we're prepared to give up our tax rights over former Canadians for a period of several years, or whether we believe it's more important that the gains accrued on property but not yet realized when people leave Canada ought to be subject to Canadian tax. The amendments say that in Canada we will exercise our right to collect the tax on the gains accrued while people were living in Canada.
Finally, just let me conclude by saying there's one thing that the whole issue is not about: it's not about family trusts. You face exactly the same tax policy questions whether you're talking about the transaction that the Auditor General described in his report or determining what rules to apply to the small businessman who, for example, moves from Windsor to Ann Arbor while owning shares in a small Ontario company.
The rules we have put down today deal with the broad issue of taxpayer migration, including that of family trusts. The rules thereby are changed such that the tax on capital gains accrued while people were living in Canada will be exigible at the time the taxpayer - whether a trust or a natural person - leaves Canada, rather than only at the time the gain is actually realized when the property is sold.
I and my officials would be happy, Mr. Chairman, to expand on this should you wish.
The Chairman: Thank you, Mr. Dodge.
[Translation]
Mr. de Savoye.
Mr. de Savoye (Portneuf): First, I have a request. I have seen the memo. As you said so well yourself, correction fluid flowed abundantly. I thought that in the case of an advance decision, the department decided the merits of the request. But I now see that the advice is so closely tailored that even the distance between two commas could not be revealed to this committee because it would have revealed very specific information on the taxpayer's identity. So everything was whited out. In brief, Mr. Chairman, I request that the original document be tabled with this committee.
The Chairman: Mr. Gravelle, what is your reaction to that?
Mr. Gravelle: Mr. Chairman, as I explained in the letter I sent you, the document you have before you is exactly what it is. It is a document which, at the time, did not surface. It was neither signed nor sent. It was prepared based on the information the decision officers had at the time before we finished the interdepartmental consultations and decisions. The document was prepared in case, at the end of the day, we had to render a negative decision. The minister would have had to be advised about the nature of the request and the reasons for which the response was negative in case there were representations.
As I explained, I did not see this document on December 20 or 23. I only found out about it when I saw reference to it in the Auditor General's report. The reason it did not surface earlier is because, finally, when interdepartmental consultations had been completed, it was decided to render a positive decision and thus it was no longer necessary to inform the minister.
On the other hand, I understand full well that the members of the committee would have wished to have more information. I also know that the chairman, when he made his request, told me that I had to make sure that no confidential information concerning the taxpayers was revealed.
.1650
[English]
The fact of the matter is that the information contained in this memorandum relates amply, extensively, to the particular situation of the taxpayer. Neither I nor anybody else in the department has unilaterally used liquid paper on this, Mr. Chair, I can assure you. We sought the advice of the Department of Justice before finalizing a response to your request.
[Translation]
The Chairman: Mr. de Savoye.
Mr. de Savoye: Mr. Chairman, I am tabling a motion pursuant to the powers of this committee as per the Standing Orders of the House. This committee has the right to receive the document in its original state and, in view of the situation, I believe it is in the public interest that this committee see this document in its original state. It will help us ask the proper questions and get the proper answers. I was going to say that we are in the dark but, in actual fact, it is more like a whiteout.
The Chairman: The motion is in order. So it is being asked that the document be tabled in its original state. I don't want to appear directive, but because of respect for the provisions of clause 241 which preserves confidentiality and despite a legal opinion, our committee has ceased any undertaking to obtain the name of the taxpayer. Do you wish the name of the taxpayer to be revealed?
Mr. de Savoye: This committee has the right to obtain the document in its original state and we should have it in its original state. If the name alone were to be deleted, I would have no objection. But nothing else should be deleted, as we would then lose the substance. At this point, there is no substance left.
The Chairman: You wish to add something Mr. Gravelle?
Mr. Gravelle: Mr. Chairman,
[English]
I simply want to add for the committee's consideration that section 241 would not extend protection only to the name of the taxpayer or the identity of the taxpayer, but also to any information related to the taxpayer. That is the advice we have received from the Department of Justice. I simply think the section 241 exemption goes far beyond simply the identity of the taxpayer.
[Translation]
Mr. de Savoye: Mr. Chairman, when a committee examines a matter within its purview, as in the present case, it so happens that no limits are prescribed in the matter of demanding the production of documents. I am referring to the sixth edition of Beauchesne, 848 (1), page 236. This committee has that power and it's up to this committee to decide whether it wishes to exercise that power despite any and all other considerations we have been seized of.
The Chairman: Mr. Hopkins.
[English]
Mr. Hopkins: I think over the years this committee has trod very carefully about protecting the confidentiality of the taxpayer. It doesn't matter whether they're wealthy or they're poor, once you go past a certain line you are treading on the confidentiality of taxpayers. When you go that far, what's the next step after that? I think this committee, as a public accounts committee, should be very careful about going in accordance with section 241. We know how these procedures work. You get one bite of the apple and you want the second bite and finally you want the core. What you are actually doing is biting right into the core of the integrity of the tax system. I'm certainly not in favour of doing anything that would reveal, in any way, the identity of a taxpayer in Canada, because if it is done with one, it can done with all.
.1655
[Translation]
The motion is lost
The Chairman: I would simply like to settle one thing. I am getting rather impatient with cell phones. A committee is an extension of the House of Commons and those gadgets are forbidden on the floor of the House. The next time I hear a cell phone... I am about to have a fit. I'm warning you in advance: shut off your cell phones or if you want to go on using them, go out into the hallway. Cell phones are shut off in this room. This is the third time -
[English]
One strike, two strikes, three strikes, you're out.
Mr. Silye (Calgary Centre): Mr. Chairman, turn yours off too.
[Translation]
The Chairman: Mr. de Savoye, ten minutes.
Mr. de Savoye: Mr. Chairman, I'll be sharing my ten minutes.
[English]
Mr. Silye: He's already had ten minutes.
[Translation]
Mr. de Savoye: Mr. Chairman -
[English]
Mr. Silye: He used up his time.
Mr. Loubier (Saint-Hyacinthe - Bagot): He put a motion. It isn't question time. Are you kidding?
Mr. Hopkins: Could any comments be directed to the chair, please.
Mr. Silye: Mr. Chairman, could you clarify this? Didn't you start the first round with ten minutes, and didn't Mr. de Savoye use some of it up?
The Chairman: No.
Mr. Silye: I know he has some left.
The Chairman: It was like a point of order. We don't count that in the ten minutes.
We will start the second ten-minute round with Mr. de Savoye.
[Translation]
Mr. de Savoye: Mr. Chairman, I will be sharing my ten minutes with my colleagues. First of all, I would like to ask if the document we have before us is really the memo that was tabled on December 23. I don't doubt the integrity of our witnesses, but to ensure that the truth and only the truth is told, I would like to have them sworn in and confirm that the memo we have before us is really that of December 23.
The Chairman: We don't have a Bible.
Mr. Paradis (Brome - Missisquoi): To solve the problem, could we perhaps understand the witnesses are going to testify under the same oath as the previous time?
The Chairman: Was Mr. Minto sworn in? So they'll all be testifying under the same oath they made during the meeting of May 16, I think. I thank the past president of the Quebec Bar. Go on,Mr. de Savoye.
Mr. Rocheleau (Trois-Rivières): I'll take up the relay on this one, Mr. Chairman, if you don't mind. I have a few questions for Mr. Gravelle.
Mr. Gravelle, in the context of the waiver accepted by the trust and its trustee, could you tell us if it's still possible for the government of Canada to get back the money that was transferred?
Mr. Gravelle (Mr. Chairman): I would simply like to confirm that the waiver and the commitment are still valid and still in place.
Mr. Rocheleau: So you're saying that we could potentially get this money back if the government of Canada decided to do so? That's what I wanted to know.
Mr. Gravelle: Taking into account the advance decision, the application of the legislation and of the treaty, yes.
Mr. Rocheleau: Are you in a position to tell us whether, after this transfer of assets from the Canadian to the American trust, those assets are still in the USA?
Mr. Gravelle: Yes.
Mr. Rocheleau: You know that the assets and the trust are still in the USA and not elsewhere?
Mr. Gravelle: Yes.
Mr. Rocheleau: If the canadian government were to decide to recover those assets, how could it be done?
[English]
Mr. Gravelle: Mr. Beith.
.1700
Mr. Robert M. Beith (Assistant Deputy Minister, Department of National Revenue):Mr. Chairman, as it stands today there is no reason for the government to pursue any of the assets in the States. They are out there subject to an advance ruling. There is a waiver and an undertaking. We assume the parties will honour the undertaking that is out there. If there are any dispositions within the 10-year period they will self-assess and report these. There would be no reason for the government to pursue these assets at this time.
[Translation]
Mr. Rocheleau: Mr. Chairman, my question is technical. If the Canadian government were to decide to take the means necessary to recover those assets, what tools could be used taking into account the existing international agreements? What is the mechanism?
Mr. Gravelle: The question we had to answer in the advance decision was whether the property that was going to be transferred was taxable Canadian property. We answered that question in the light of the legal opinions and opinions from finance.
That taxable Canadian property is subject to the present legislation and the terms of the advance decision and is also governed by the application of the treaty between Canada and the USA. So there is no legal way to go and get those assets if they are not claimable.
If the assets are sold within 10 years, as specified in the commitment and the waiver, they will be taxable. Taxes will be paid on capital gains in the USA. There will be a credit in the USA and taxes payable in Canada. On the other hand, under the treaty, if the taxable Canadian property is sold after the ten year period, as present legislation stands, and Mr. Dodge can confirm this, the property will be taxable only in the USA and not in Canada. The treaty, of course, prevents double taxation.
So this isn't the flight of capital. It's not evasion. It's not getting around the Income Tax Act. It's simply a matter of applying the legislation dealing with taxable Canadian property.
Mr. Rocheleau: This isn't clear. Before, the deputy minister admitted that if the Canadian government wanted to do so, it could. The longer his answer gets, the less clear it is. So I'd ask the Auditor General to shed some light if he can and give us an opinion on this. Can the government do it and if it can, how can it do it? If we agreed to say that it can, what mechanisms does it have available?
Mr. Desautels: I'm not sure I can answer the question in much detail. According to my understanding of things, if it decided to change its mind, the department could still assess the transaction for which there was an advance ruling. But that's a decision that has many consequences. I'm the first to recognize that advance rulings made in the past bind the government. That's a very important principle. So if the government were to decide to proceed differently, I imagine it would have the means to do so but I couldn't tell you exactly how it would go about it.
The Chairman: Mr. Loubier, you have two minutes left.
Mr. Loubier: Mr. Gravelle, in your letter you say you discussed things with Mr. Lefebvre who was in charge of advance rulings and policies in your department. You had a discussion with him on Friday, December 20. This discussion led to the writing of a memo which, as you said yourself in your letter, stated that the shares in question were not taxable Canadian property. How is it that between December 20, the day you discussed this with Mr. Lefebvre, and the night of December 23 the decision was totally reversed?
.1705
Second, how is it one of the greatest experts and the main person responsible for advance rulings suddenly felt the need to leave when a crucial decision was about to be made three days later? We're not talking peanuts, Mr. Gravelle. We're talking two billion dollars that left the country. Why did Mr. Lefebvre not take part in the discussions of December 23?
Mr. Gravelle: I would like to reassure the members of the committee. I will answer your question, but first a little introductory comment. This request for an advance ruling followed the normal course of events for any advance ruling.
Mr. Loubier: Mr. Gravelle, my question is a clear one: why, in a matter of three days, was the decision reversed in the matter of the interpretation of the definition of taxable Canadian property and why did Mr. Lefebvre, who is in charge of those advance rulings suddenly leave while you kept the ``party'' going the whole day of December 23 and handed down a decision totally reversing the first analysis of taxable Canadian property? Answer my question. I don't want any assurances. In any case, that's not the question we're asking. Why was Mr. Lefebvre not there? How is it that things changed in the absence of Mr. Lefebvre in the space of three days?
Mr. Gravelle: No decision was reversed on December 20, 21, 22 or 23. I took cognizance of -
Mr. Loubier: ``We are of the opinion the shares are not taxable Canadian property''. That is the first memo after the discussions with Mr. Lefebvre, Friday December 20. On December 23, there were discussions all day in the absence of your department's specialist, the main person responsible, and a totally opposite decision was rendered the night of December 23. You think that's normal?
The Chairman: Mr. Loubier, we'll let Mr. Gravelle answer your two questions and we'll then go to the Reform Party for ten minutes.
Mr. Gravelle: I'll answer. That Friday, I had a meeting with Mr. Lefebvre. I knew he was supposed to be out of town for two weeks. As I always do with my assistant deputy minister who have to be away on business or for other reasons, I got an update of the main cases to ensure continuity. We talked about a lot of things and, amongst other things, he told me there was a request for an advance ruling that needed further discussion because we had not settled the questions of tax policy interpretation. I thanked him and simply said: let's make sure we complete the discussions with Finance so we can make a positive or negative ruling.
There was no reversal. On the Monday morning, there was a first meeting with Mr. Beith, who ensured continuity with the advance ruling agents and a director of advance rulings. They came to see me that morning and said: ``Here's where we are with the file. We have a legal opinion that is very constant and allows us to give a positive advance ruling. It's the best interpretation of the act. As there is ambiguity in the Act, it would be useful to have an interpretation from the Finance Department.'' We set up a meeting at a higher level with Finance and went to see the person responsible for the integrity of tax policy in Finance. That's what happened that day.
The memo you have before you was prepared by the rulings officer in case the consultations between Finance, Justice and ourselves had led to a negative ruling. It was simply in anticipation of -
[English]
The Chairman: Mr. Williams.
Mr. Williams: Thank you, Mr. Chairman.
Mr. Gravelle, in your opening remarks I think you said this ruling was not exceptional. There was about $400 million or $500 million, give or take, in federal taxation at stake with this particular ruling. I don't think you'd really be dealing with advance tax rulings of this magnitude every second day. Am I correct in saying that?
.1710
Mr. Gravelle: When I said there was nothing exceptional about this ruling, it was in the sense that it conformed to our internal review procedures and our consultations with the taxpayers' representatives, with the Department of Justice and the Department of Finance.
I agree with you, Mr. Williams, that the amounts involved were substantial. That is why we did not wish to conclude hastily one way or the other. It was of critical importance to me and to my senior officials that we get clarity of the tax policy intent.
Mr. Williams: If I look at the memorandum that was tabled at today's meeting, prepared for the Hon. Otto Jelinek, obviously you have put forth the pros and cons, the arguments on one side and the arguments on the other side. You presented a clear point on page 2, item 4, that you'd have to concede there was taxable Canadian property. However, you are of the view that this position is wrong in law, and so on. The letter reads for itself.
You tell me there was no decision made until the decision to approve the undertaking. It seems rather strange to me that when people ask for an advance tax ruling you would go to great lengths, as Revenue Canada, whose job it is to apply the law, to explore opportunities for the taxpayer by saying ``If you go this way, I think we can approve it; however, if you go that way, I don't think we can''. If I'm correct, the normal procedure for an advance tax ruling is for the taxpayer to make a presentation to Revenue Canada saying ``I wish to complete this particular transaction in this particular way. Am I correct in saying that my interpretation of the Income Tax Act will have these implications?'' The advance tax ruling system comes back and says yes or no. Am I correct in that very quick synopsis?
Mr. Gravelle: I simply would like to point out first that the decision to give a positive ruling was not arrived at on the basis of an undertaking or a waiver.
Mr. Williams: I didn't ask about the undertaking. I just said the normal procedure is to say, ``This is what I want to do. This is what I think the income tax implications are. Am I correct, yes or no?'' Is that the normal procedure?
Mr. Gravelle: It is part of the normal procedure, but I would like Mr. Beith, who is very close to the rulings process, to respond more fully.
Mr. Beith: Mr. Chairman, in some cases that is the situation, if you have a relatively simple set of facts and clear law. However, in the rulings process you don't often get requests where the law is that clear, as applied to the facts. The reason people come for rulings is because there's a degree of uncertainty and there is complexity inherent in a series of transactions.
It's not unusual, in my experience, that in the course of discussions with a taxpayer's representatives they have an initial proposal to achieve their objectives. They state what it is, and let's assume it's for good business or personal reasons. In discussion with the representatives, issues will arise in the law that may have been identified by the requester. They may have been identified by the rulings officers. There will be discussions of alternative courses of action - what if we do it this way or that way? This may well come from the taxpayer's representatives. So you have a dynamic process, and the transaction can evolve to achieve their goals in a way that satisfies the law and achieves the taxpayer's goals within the law and tax policy that is acceptable to Revenue Canada. It's not unusual for that to occur.
Mr. Williams: Therefore, if I were to send in an access to information request for the first ten advance tax rulings granted in 1992, I would find that you discussed alternatives, pros and cons, and said you could do it this way or that way. Would I find that?
Mr. Beith: You might well find that different alternatives were discussed.
Mr. Williams: Mr. Gravelle, I'm going back to your testimony under oath on May 16, 1996. I'm looking at the questions I asked you regarding political involvement. I asked you several questions. I asked whether you had discussed this matter with any cabinet minister on, before, or subsequently to December 23, and you said not to your recollection. I asked you if you discussed it with any member of the Privy Council Office, and you said no, which was a clear and unequivocal statement. I also asked you later if you had discussed this matter with any cabinet minister. Because I got a less than definitive answer, I went on, is it possible you discussed this matter with any cabinet minister before December 23, 1991? You said, I don't recall. But when I continued and I asked, is it possible you discussed it with a cabinet minister on December 23, you said, I don't recall. However, when I asked if you discussed it with a cabinet minister subsequently to 1991 but before the election of 1993, you said definitely not.
.1715
So you're quite clear and definitive about December 24 and subsequently, but you have a problem of recollection for December 23 and before.
Mr. Gravelle, did you receive any communication from a cabinet minister or a cabinet minister's aide on December 23 or before, or did you send any communication, written, electronic, or otherwise, to a cabinet minister or cabinet minister's aide in that period?
[Translation]
Mr. Gravelle: No.
[English]
As I said in my statement, there was no political interference in this ruling, or in any ruling, for that matter. I can attest to that. This ruling in particular, and I affirmed this in my statement to you, which was tabled, was confined to the discussion of the ruling, confined to the taxpayer's representatives, Revenue Canada, and Justice and Finance officials.
Mr. Williams: But you seem rather hazy, saying possibly, but you don't recall that you did have these communications or discussions. But you're quite definitive in saying for December 24, 1991 and subsequently you have no hesitation in saying there were no communications with ministers. However, you have hedged your bets about December 23 and before.
Mr. Gravelle: Well, I'm not hedging my bets.
Mr. Williams: You are saying quite clearly and quite definitively that you did not discuss this with any cabinet minister or cabinet minister's aide?
Mr. Gravelle: Yes.
Mr. Williams: You had no communication to him or from him?
Mr. Gravelle: I did not. I didn't even discuss the outcome of the decisions with any cabinet minister.
When I was so definite about the Privy Council Office, it goes without saying that never would we discuss taxpayer affairs and information with other departments, which are not entitled to have access to that information.
Mr. Williams: Did you discuss the matter or have communications with or from or to any senator?
Mr. Gravelle: No.
Mr. Williams: Did you have any communications with or to any member of the government?
Mr. Gravelle: No.
Mr. Williams: You are absolutely definitive today that there was no way you communicated, discussed, wrote, or received letters or memoranda of any kind from anyone in political office?
Mr. Gravelle: Yes, sir.
Mr. Williams: You're absolutely sure about that?
Mr. Gravelle: Yes, sir.
Could I add one comment? Not only that, but the taxpayer's representatives and the taxpayer itself or himself or herself did not even approach my office about this ruling.
Mr. Williams: They certainly approached somebody close to your office, there's no question about that, Mr. Gravelle.
Mr. Gravelle: Yes, my rulings officers.
Mr. Williams: Thank you.
Mr. Dodge, you said the discussions you had between your department and Revenue were informal meetings, yet Revenue Canada had stated quite explicitly on a certain date, November 12,I believe, that Finance was told to leave the interpretation of the act to Revenue Canada. Yet through an informal discussion on December 23, Revenue Canada changed its mind.
Why does Finance have enough influence over Revenue Canada that they can change Revenue Canada's position through informal discussions on one morning just before Christmas, a position that affects $500 million of potential tax revenue, even when Revenue says you shouldn't even be involved?
.1720
Mr. Dodge: The Department of Revenue quite appropriately comes to us when there's a question on a difficult issue with respect to the underlying policy. They ask us if this is the intent of the policy and if this is the way the law was written. We try to provide that answer.
Sometimes an issue is murky and it takes a lot of work to get at it, regardless of the amount of money involved. At other times the issue can be cleared up relatively quickly. When Mr. Gravelle's officials came to see our officials on this issue, it turned out that the policy issue and the legal issue involved could be cleared up relatively quickly, and that was done, as far as I know, Mr. Williams, at a meeting on the 23rd, the results of which were confirmed in the letter from Mr. Short, which I believe has been tabled.
Mr. Williams: Based on -
The Chairman: Your time is finished, Mr. Williams.
Mr. Williams: Can I ask one last question?
The Chairman: You will be coming back.
Mr. Hopkins, you have ten minutes.
Mr. Hopkins: Thank you, Mr. Chairman.
When we discussed holding this meeting, there were three main themes that we were interested in following through on. Number one was the rules and procedures, the procedures that were used then and that were in force then, the procedures that have been changed since then, and the projected changes in procedures. But we didn't know then that the projected changes were going to come today. Those are the three main areas: procedures then, the changes, and procedures now.
Mr. Gravelle, I believe you indicated that no decision had been made, therefore no decision could have been changed. Am I right in that?
Mr. Gravelle: Yes, sir.
Mr. Hopkins: Let me get on to the first theme. Can you give us a capsule roundup of what the procedures were in 1991? Can you explain what some of the complexities actually were and what some of the challenges were that you had in making this decision? I will leave that one with you and I'll come back later with another question.
Mr. Gravelle: The issue of Canadians holding TCP was not a subject that had been discussed at any tax conferences, in legal papers or in the context of previous advance tax rulings, say, for example, in the 1985 tax ruling.
When we were asked to rule in 1991, we were confronted with a series of tax provisions that were fairly complex, if not ambiguous. As is the normal process in any advance tax ruling, our rulings people are there to effect a challenge function to ensure that however good, comprehensive, logical, and legally sound taxpayers' representations in support of a tax ruling are, we still, nonetheless, ensure consistency with the integrity of tax policy and law.
This was the whole reason why we continued throughout to also elicit tax policy advice from the Department of Finance - which we did ultimately - while seeking the ``better view of the law'' from the justice department.
The file, Mr. Hopkins, is fairly thick. The taxpayer provided very extensive representations and legal research. The file contains annotations by the rulings officers of all meetings with the taxpayer and internal discussions.
.1725
Mr. Hopkins, where we failed is when, after all the discussions on the Friday and the Monday, this remained undocumented in our file. The Auditor General quite rightly pointed this out. One would probably be surprised that, in effect, a very complex issue would suddenly be clarified for us in the context of a two-page letter from the Department of Finance. But this does not mean there were not extensive discussions between Finance officials and ourselves to arrive at this conclusion.
The reason, Mr. Hopkins, we take great pain in making sure we leave no stone unturned before we rule negatively or positively is we want also to protect the integrity of the system, the integrity of the law and the integrity of the tax base.
You were asking a second question, Mr. Hopkins. What has changed since then is we have made absolutely sure, through firm directives to our rulings officers and our staff, that all key internal, interdepartmental or external discussions pertaining to a particular case have to be substantiated, articulated, documented and recorded in minutes.
Mr. Hopkins: Thank you.
Through you, Mr. Chairman, I would like to ask Mr. Gravelle to now give us a synopsis of the changes that have taken place since this government took office. What changes in procedure have this government made that the previous government had changed?
Mr. Gravelle: We have built, starting in late 1993 into 1994, and put in place an automated database for all legal opinions, Justice opinions, Finance opinions, internal technical interpretations, advice and so on, including any advance ruling decisions made. So a rulings officer can no longer avoid checking the whole database before proceeding with the examination of an advance tax ruling.
The second important initiative taken by this administration and by my minister is the imposition of a moratorium on advance tax rulings pending clarification of the law in deference to the concerns expressed by this committee and the finance committee. The Minister of Finance and the Minister of Revenue, our ministers, were very keen in ensuring this important aspect of the law received sufficient airing and examination by parliamentarians before we could proceed to issuing additional rulings in this area.
This moratorium, Mr. Hopkins, still stands, even in light of the ways and means motion tabled today. This is for the very simple reason that the Minister of Finance has indicated that, although the ways and means motion becomes effective immediately, there would be an opportunity for consultation on some aspects of the ways and means motion before the legislation is finalized. So we will continue to hold on the moratorium pending legislation.
Mr. Hopkins: Thank you.
Again through you, Mr. Chairman, and for the record of this committee, because I assume we'll be writing a report to the House on this, could you give us a capsule explanation of what policy measures the minister's statement puts in place from today on?
Secondly, are you satisfied and is the Auditor General satisfied that the statement made today by the Minister of Finance will give clearer direction for the future in all these matters?
.1730
Mr. Dodge: Let me start with the changes, if I may, Mr. Chairman.
There were five recommendations from the finance committee, all of which have been adopted in the motion that Mr. Martin tabled today. The first had to do with the classification of property. The finance committee had noted a certain discrepancy in the rules that applied here, and these discrepancies and so on have been cleared up.
The second thing was to clarify the scope of the definition of TCP. The committee's conclusion that property should be treated as TCP in both residents' and non-residents' hands flows, of course, from the finding that such treatment is dictated to arrive at the proper result in tax policy return terms. What we've done today is spell out this result in a clear way, and that's what the paragraph in the ways and means motion is designed to do.
The third recommendation of the committee dealt most directly with the subject matter of Revenue Canada rulings. When a trust distributes property to a non-resident beneficiary, the tax on distribution can be deferred provided that the property in question is TCP. Some property, such as Canadian real estate, is TCP at large - that is, irrespective of who owns it - while other property is TCP only to certain persons. For example, shares of a public company are generally not TCP, but will be if they require a process of an exchange for other property that was.
What we've done is implement the committee's recommendation that confirms the intended operation of the act. That's important because it's part of what Mr. Gravelle referred to. There was some ambiguity, and what we've tried to do there is clear it up.
In broad policy terms, the single most important issue was the issue of whether Canada ought to impose tax on the accrued gains on capital property at the time of the emigration of the taxpayer - whether it be an individual or a trust - or at the time of a distribution from the trust. So while the other changes clarify the law, this one changes it, because the Auditor General raised the issue that maybe it was inappropriate that the gains it had accrued while the taxpayer was resident in Canada could possibly not attract tax to Canada - it would attract tax, but not to Canada - if indeed the taxpayer didn't dispose of that property until at least ten years after he left Canada.
This is an important, significant change, because what it says is that the tax on the accrued gains will accrue to Canada. It could be either paid at the time of emigration, or the taxpayer can post surety for it and pay it at the time of the actual disposition of the property. If you recall, in the discussions of this committee and the finance committee we noted that there was a real policy issue here that the Auditor General had raised. The finance committee recommended a change in the policy. The Minister of Finance, in his motions today, has accepted the finance committee's recommendation.
Finally, the fifth thing that was done today was to impose an additional information reporting requirement when a taxpayer, whether it be an actual person or a trust, emigrates from the country.
So those are the five things that are covered in the motions that were tabled in the House today.
The Chairman: Thank you.
Mr. Hopkins.
.1735
[Translation]
First, we will hear the Auditor General's comments.
[English]
Mr. Desautels: If I may add my own views on this, I must say that we saw the Minister of Finance's announcement for the first time this afternoon, just before the start of this hearing. My comments are therefore preliminary comments, as I will need a little more time to review the technical details.
With that qualification, I would nevertheless say that, at first glance, the response appears to be a fairly thorough response to the concerns we have raised. I'm pleased by the seriousness with which our concerns have been taken.
It seems as though the changes proposed would definitely clarify the legislation, and it also seems that the changes proposed go in the direction that I thought was basically intended by the law, by the Income Tax Act, and by Parliament. In fact, I noted very quickly that some of the technical changes were very similar to some of the comments we made during testimony to the finance committee. From what I've seen so far, I think the changes seem to respond to the concerns we've expressed before now.
[Translation]
The Chairman: Before getting into the five-minute round, I have two brief questions for you, Mr. Gravelle. I know Mr. Dodge has made much about the 3:10 P.M. ministerial statement, but personally I would prefer to understand what happened on December 23. I would prefer to hear you on what really happened on last December 23.
Mr. Gravelle, I'd like to get back to your note rather than the letter accompanying the memo you sent me. At the bottom of page 1, in the last paragraph, you say:
- The memorandum was prepared by the rulings staff on Sunday, December 22, 1991.
Mr. Gravelle: I confirm that, Mr. Chairman.
The Chairman: Second, a bit further on in the same paragraph you say:
- ...the draft memorandum was never brought to my attention.
Mr. Gravelle: The existence of that memo was not brought to my attention either December 20, nor over the weekend, nor the Monday, nor ever because of the culmination of the discussions we held with Finance and Justice on December 23.
This note was prepared simply on the initiative of advance rulings officers. It is not abnormal for my department's employees, including myself and my assistant deputy ministers, to work weekends whether in December, January, February or March. That's how we manage the volume of work in my department.
I am speculating here, but what with the short notices and all, he probably took that initiative figuring that if the decision was negative on the Monday, it would probably be better to have prepared a memo for presentation.
I can promise you that the memo is not even a reflection of how the internal discussions evolved within the Advance Rulings Directorate. It had strictly to do with the perception the officials had had at the outset without having had the benefit of the detailed discussions with Justice and Finance, in other words that at the outset a positive decision could not be made because it wasn't sufficiently clear that Canadians could be the owners of taxable Canadian property.
.1740
The Chairman: They took the initiative personally to meet on December 22 to draft that? No one told them to do so?
Mr. Gravelle: That is correct.
The Chairman: I see. No problem. I take your word for it.
You have five minutes, Mr. Loubier.
Mr. Loubier: My first question is to the Auditor General.
You mentioned that there was some ambiguity in the interpretation of the Act. You stated that the Act was interpreted in such a way that the concept of taxable Canadian property was a applied to residents. This should not have been done.
In order to better understand the answer you gave a little earlier, the government now says that there will be no further problems because the concept of TCP will apply to everyone, both residents and non-residents. For you, the Auditor General, the situation is clearer, however, the moral issue remains. It concerns the application of a concept, which normally covered non-residents. Of course, your role is not to -
Mr. Desautels: I am reserving the right to examine the proposed technical changes in greater detail. As I said, I saw the Department of Finance's press release for the first time about an hour ago. My interpretation is that the act provided that the concept of taxable Canadian property would be limited to certain situations. This is a way of taxing capital gains at a particular time, when the person emigrates or when the property is sold.
Mr. Loubier: The government says that in future there will be no ambiguity, because the concept will apply to everyone and this will solve the problem. The government has chosen to do this rather than to act on the perhaps more logical recommendation that the concept of TCP should be clarified so that it applies to non-residents only. I know it's not your job to set tax policy, but you have to raise ambiguities and twisted interpretation of our tax laws. I agree with you on that.
I just wanted to make this clarification, because the answer you gave earlier may have seemed -
Mr. Desautels: Mr. Loubier, we intervened to say that the interpretation given seemed to run counter to the Act and to a whole series of technical interpretations. The Act states that all capital gains must be taxable at some time.
Mr. Loubier: Excellent.
Mr. Desautels: If I understand the focus of the proposed changes, the government is planning to tax capital gains more rigorously than in the past.
As I said, I am reserving the right to study in detail the recommendations presented today.
Mr. Loubier: Definitely. We will invite you back.
Mr. Gravelle, earlier, my colleague asked you how we could be sure that the two billion dollar trust that was transferred to the United States is still there. You gave a very vague answer. I am going to ask the question again. How can you trace the two billion dollar trust? How can you know whether the trust is still in the United States? How can you know whether it complies with the conditions set out in the notice of waiver, which, in my view, is meaningless as far as international law and tax conventions go?
Mr. Gravelle: We have ongoing exchanges of information with our tax treaty partners. This is a way for our audit staff to obtain information. Our audit staff can also get in touch with the Canadian trust, which still exists, and with the taxpayer's representative, who is still in the country.
Mr. Loubier, this was a very important decision. Some very specific undertakings were made by the taxpayer and we have to be sure that the taxpayer -
Mr. Loubier: I am familiar with your role, Mr. Gravelle. I know what you are supposed to do, but I would like to have some clarification. How can you be sure that you are keeping track of this two billion dollar trust? How can you be sure that it is not violating one of the conditions? For example, if the trust were to decide to liquidate its assets before the end of the ten-year period under a tax convention between the United States and Barbados, which could happen, how much would the notice of waiver be worth? How can you trace these assets and what could you do if the conditions were broken, for example, if the assets were liquidated before the tenth year?
.1745
Mr. Gravelle: We would be able to take action against the Canadian trust, because of the nature of the undertaking.
Mr. Loubier: And if the Canadian trust gets two opinions, one from the Department of Finance and the other from the Department of Justice, which state that the total assets of the trustee are TCP, what legal action could you take with respect to such a trust, which has not complied with its undertakings?
Mr. Gravelle: I will ask Mr. Beith to talk about the quality and nature of the undertaking, but I can attest to the credibility of the taxpayer and of the very well-known tax expert, who is in constant contact with us. I have every reason to think that the taxpayer will not take any unilateral action without informing us first.
Mr. Loubier: You seem to be relying on moral suasion, Mr. Gravelle. You are sure that if100 or 115 million dollars could be made somewhere, moral suasion will be enough to ensure that the owner of the original trust will meet the conditions, even though he is not bound by law to do so, even though these commitments mean nothing in international law, and even if he were to invoke a different tax treaty, one signed by the United States and Barbados, or by the United Kingdom or South Korea?
You are in fact saying that because of moral suasion, there will be no problem? You are saying that because of the two opinions, one from the Department of Finance, and the other from the Department of Justice, which state that all the assets of these trusts are taxable Canadian property, and as a result of moral suasion, you will be able to collect the money owing? So you will tell this trustee that part of his trust is still Canadian and that you are going to seize part of his assets, even though he has two opinions stating that these assets are taxable Canadian property? Did I understand you correctly?
Mr. Gravelle: Canada's entire tax system is based on the fundamental principle of self-assessment. We have investigation procedures to ensure that taxpayers behave correctly.
[English]
Mr. Silye: Mr. Chairman, I'd like to point out that the Auditor General was correct in bringing this issue to the forefront and I think the majority report of the finance committee was totally out of line in criticizing the Auditor General for so doing. I'm glad now that the finance minister and everybody here from the departments are complimenting the Auditor General for doing this, belatedly. Right from the start the Reform Party has always said we took except to this criticism.
I don't think the Auditor General agrees - and he is here; he can confirm it - with the reversal of the original decision, or the reversal of the original recommendation that came forward. In his audit he refers to the fact that a memorandum was prepared on December 18 and a memorandum on December 20, and in both memoranda senior officials concluded it would be inappropriate for the department to rule favourably. Then a later decision to rule favourably overruled this position. There is a lack of documentation and analysis of this key decision and its potential impact.
First of all, this is not normal for an advance ruling. A transaction was done. This individual had done a transaction. It was a fait accompli. He came to the department wanting a favourable ruling to dispose of these assets in a certain way. It was determined by a group, either in Revenue or in Finance, that these assets were not taxable Canadian property, because they were private shares converted to public shares and the public shares were not, or something like that. So the transaction was done, and that is in violation of the department policy on advance income tax rulings. Your policy is not to go into areas where the transaction is done. You do your ruling and that's it, the customers have to take their lumps.
Because of a side agreement to bring this transaction on side, to bring this transaction into the realm of taxable Canadian property, somebody in your department - I want to know who - recommended that this undertaking be taken, that a waiver be signed by the taxpayer, even though that undertaking, according to a decision from Colin McPhail vs. Her Majesty the Queen, would not be enforceable by Canada if the taxpayer later reverses its position and claims treaty protection. Your own people point that out. There is no documentation for this reversal to rule favourably as opposed to unfavourably.
.1750
Mr. Gravelle, this is very serious, and this is what the Auditor General is pointing out. My concern is that we're saying, oh yes, we fixed the loophole, and oh yes, we've declared what a TCP is, and oh yes, it's all been done, it's all taken care of.
We're trying to look at what happened in the past. Was there any influence or pressure on you to change your opinion? Why did the Department of Finance and the Department of Revenue bend over backwards to rule favourably on such a sizeable amount? When I've had to fight Revenue Canada on some audits and been in dispute in a grey area, by golly, they were reluctant to give up a frigging penny -
Some hon. members: Oh, oh!
Mr. Silye: - and yet they're ready to give up $500 million.
I don't question the decision, because somebody has to make a decision and whatever they make.... There are competent people involved here, but given what the Auditor General has pointed out, why the reversal and why rule favourably? Why let somebody leave the country untaxed, with assets that they built up and developed in the country?
Mr. Beith: Mr. Chairman, the member has asked quite a number of questions. I will try to deal with them. If I omit one, perhaps he can -
Mr. Silye: I'll come back -
Mr. Beith: - point that out to me.
You mentioned that we were ruling on completed transactions. I guess you're referring to the transactions that had taken place in prior years when there was an exchange of private company shares for public shares. It is true that these transactions had taken place, and the characterization of the public company shares in the hands of the trust was an important facet of the ruling.
But we were looking at proposed transactions. We were looking at a beneficiary going non-resident. We were looking at a trust going non-resident. We were looking at the movement of these public company shares so that they would move non-resident.... We had to determine the character of these public company shares in the hands of the family trust at the time. That required a look at how these shares were acquired. It's not unusual to require background information in rulings in order to determine the tax impact on proposed transactions.
You mentioned a reversal of decision and the memoranda that were being drafted in the week ending December 20. There was no decision made in the week ending December 20 that was reversed on December 23. No decision had been made. But in the course of the week of December 20 there were ongoing discussions with the taxpayer's representatives. As the document that was tabled today indicates in part, different solutions were being explored and discussed. There were ongoing discussions with the finance department and with the justice department as to the legal position and the tax policy position.
At the same time, the taxpayer was looking for a ruling for its own reasons. We were satisfied with the merits of these reasons by the year-end. The rulings people were not sure they would get these matters cleared in time or cleared quickly enough. In their minds, there was sufficient doubt that it might be an unfavourable ruling. Therefore, they started to prepare briefing notes that might go to the deputy or the minister in anticipation of representations. In fact, these memoranda were never forwarded and never signed.
You mentioned lack of documentation and analysis, and in particular the files for the meeting of December 23. That is correct. There were no particular notes made of several meetings that took place on that day. Obviously documentation had been accumulated in the file, and considerable analysis had taken place in the rulings file, which was certainly available to the people who were involved in the December 23 meetings.
You mentioned the side agreements and the undertaking in particular. It is true that it was not enforceable. We knew that. The undertaking was offered as an act of good faith in the good intentions of the parties not to seek treaty protection in the course of the ten years if there were any dispositions. We took that on its face value. It was a condition of the ruling. If they don't meet that condition, in effect the ruling is void.
What else?
Mr. Silye: Why does the department bend over backwards?
The Chairman: Your time has expired.
Mr. Silye: You'll come back to me though, won't you?
The Chairman: Yes.
.1755
[Translation]
Would you like to add something, Mr. Desautels?
Mr. Desautels: If I could, Mr. Chairman, I would like Mr. Minto to tell us something about the department's intention, that is, whether it plans to issue a favourable ruling or not. We have the impression that the department had decided to issue a favourable ruling for some time, but that the letter of December 23 had been drafted, if I understood Mr. Gravelle correctly, in case the favourable ruling were rejected.
[English]
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman.
I would like to refer members to exhibit 1.4 on page 117 of the English version of our report. You will note that back on December 3, Revenue Canada advises Finance that it intends to refuse to grant a favourable ruling. At that time they thought enough about it to say they would even take it to the general anti-avoidance rule committee to recommend certain action.
It is the same with December 12. The Revenue Canada rulings review committee, not an individual but the committee, decides a favourable ruling should not be provided.
Again on December 12, Revenue Canada advises Finance that it will not rule and requests Finance to leave the interpretation of the act to it.
You come down to December 18. A memorandum is prepared for the ADM for Revenue Canada, advising the deputy minister the department is unable to rule favourably.
On December 20, senior officials prepare a memo on the same basis.
Then we come to the December 23 memo, which has been tabled in a separate forum.
So I think to say that all along we were going one way and this one memo was a contingency memo...I'm sorry, sir, the documents do not support that, when you go back to the evidence we saw in their files.
I have to say for the record, sir, that today is the first time we have heard the explanation that this was a contingency memo. In all our discussions we have not been informed of that before.
When you look at the cumulative effect of these five different occasions, and then the sixth, this memo, certainly the impression we have had from the evidence we have seen is that the ruling was going the other way; that everybody was saying no. Then we were looking primarily for some bridging. All this documentation and evidence was going one way. Something changed. The bridging had to come with some analysis and documentation. Where was that bridging? That is what we could not find.
On the second issue, sir, I could clarify just for a minute about the waiver and how it could be exercised. If you look at paragraph 1.58, I believe, the only way that waiver can be exercised is by Revenue Canada arguing this was not TCP; the public company shares were not TCP. But if they argue that, then they're arguing against the very essence of the ruling that has been given already. There is this inherent contradiction, sir, which is not explained anywhere.
I wanted to bring that out because we were told earlier we could exercise the waiver. But to do that, you go against what you have ruled already.
[Translation]
The Chairman: Are you confirming, Mr. Gravelle, that the memo was drafted just in case? Are you confirming or denying that?
Mr. Gravelle: What I can say is that internal discussions within the Advance Ruling Directorate had reached the stage at which we had obtained a majority legal opinion supporting a favourable advance ruling. However, inter-departmental discussions were not complete, and that is why no decision had been made.
In early December, we had asked for an opinion from the Department of Finance. When I was informed of this on December 20, we still had not received a written reply from the Department of Finance. We simply had to conclude that internal and interdepartmental discussions had not yet been completed. If the memo had been drafted on the 22nd and typed on the morning of the 23rd, this was simply to cover the possibility of a negative ruling once the discussions with the Department of Finance were concluded.
.1800
Believe me, I'm being frank here. I'm telling you the truth.
The Chairman: Was it the assistant deputy minister, Mr. Lefebvre, who ordered that the memo be drafted?
[English]
Mr. Beith: Mr. Chairman, I should point out that I think as early as November 19, 1991, Justice counsel had pointed out the better view of the law was that these shares were taxable Canadian property to the Canadian resident. This was known by the ruling staff November 19. In discussions from there right through to the end of the matter, there were continued discussions with counsel on this position and counsel was consistent in maintaining this view.
I might say, though, nevertheless and quite properly, the rulings officers were concerned about the tax result. If it was taxable Canadian property in this particular circumstance, there might not be tax in Canada once the shares had left the country because of the treaty application. There would be tax, but perhaps not in Canada. This was causing them some discomfort.
They also continued the discussions at that time with Finance. There had been a formal letter sent to Finance on December 3. It was not responded to until December 23. There were informal meetings and phone calls throughout this three or four weeks, with no clear position emerging from Finance at that time. As Mr. Gravelle said, as time was running out and no decision had been made and they anticipated representations, they chose to put together draft memoranda that have been tabled today, as well as other draft memoranda prepared for the deputy.
[Translation]
The Chairman: Mr. Beith did not answer my question. I asked whether Mr. Lefebvre had ordered the drafting of the memo. We could ask him. Mr. Lefebvre has been sworn in since May 16 as well. Did he ask his officers in the Rulings Directorate to draft this memo?
Mr. Denis Lefebvre (Assistant Deputy Minister, Policy and Legislation Branch, Revenue Canada): Mr. Chairman, the Auditor General has seen all the documents in the file. I think he can corroborate this. The memo was similar to an earlier one drafted several days before.
There were also some memos prepared at my request for the deputy minister, probably around December 18 or 19.
The content was roughly the same. It was simply a logical next step. Mr. Beith mentioned it. We had a legal opinion - which the Auditor General can confirm as well - which said that the best interpretation of the Act was to issue a favourable ruling. I had some discussions with my staff and the Advance Rulings Directorate, because, and it is important to mention this, the tax results showed clearly that if these assets were deemed taxable Canadian property, the income tax would then be postponed, and the property might not even be taxable, because of the tax treaty. Hence, not only was the income tax postponed, but the property was not taxable.
We were uncomfortable with this opinion, and we decided at that time to study all the possible arguments. This is in fact apparent if you read the documents in the file. The conclusions are there and we do not deny them. So we assembled all the arguments we thought could justify a no, even though we thought the taxpayer was entitled to the benefits of the Act, as provided for in our charter of taxpayers' rights.
We documented this position. We also held preliminary discussions with the Department of Finance. However, we did not manage to determine whether the position could allow for the implementations of the provisions of the Act which apply to taxable Canadian property, because there was no amount, Mr. Chairman. If something is considered taxable Canadian property, whether the amount is large or small, this property can leave the country and be taxable only later on, at the time of the disposal of the property.
.1805
We then try to define a category of taxable property. We now have to determine whether this particular property can be included in this category.
I should say that on December 19, I would have sent the memo I had prepared for the deputy minister with all these arguments if the discussions had been completed and the decision had been made. I did not send it, because we were still holding discussions with our lawyers and with the taxpayer. The Auditor General did point out that there were a number of meetings with the taxpayer and telephone calls to him. He suggested something, and we regretfully answered that we were uncomfortable and could not make a decision.
So the decision had not been made, because if it had been made, these memorandums would have been sent.
So I completely support the account of the facts presented by the deputy minister and Mr. Beith.
[English]
The Chairman: Mr. St. Denis, you have five minutes.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman.
It's fairly obvious to me that the fishing expeditions of our friends across the way are just that - fishing expeditions. They are coming up with nothing because there is nothing untoward that has happened here.
I have known Mr. Gravelle in a professional way for many, many years. I think the main message coming out of all this for me is that the credibility of our public service ranks among the highest in the world. I'm bothered by the tone of some of the questions being put to very honourable people.
What we saw today in the minister's announcement is an example of good government, good government working with a good public service to try to provide the very best of laws and regulations possible for Canadians. It seems to me, Mr. Chairman, there were areas of doubt, not of blame.
One of the points made today by the minister in his announcement was that this wasn't a question of family trust, it was a question of emigration of capital. I think, for the record, it would be helpful if we tried to clear this up so confusion can be at least minimized in this area. In fact, it isn't just emigrating capital within family trusts. It's emigrating capital in all the areas being dealt with here.
Mr. Dodge, could you talk to us a bit about this, please?
Mr. Dodge: We discussed the real issue at stake here both in this committee and in the finance committee. The Auditor General had pointed out that maybe the law isn't as clear as it could be, and there was clarification. The real question was about capital gains on this particular type of property - this is essentially shares of small business - that have accrued while a taxpayer is a resident in Canada. Should this accrued gain be taxed in the hands of Canada at the time the taxpayer emigrated, or should it be taxed, as the law previously stated and as all other gains are taxed when people stay in Canada, at the time of realization?
.1810
Since 1972 the law had said that it should not be taxed at the time of realization. The reasons, if you go all the way back to that time, were that it was seen as difficult to evaluate those sorts of shares - they didn't trade normally in the market - and, perhaps very importantly, that it would be difficult for many of the emigrants in that position to actually raise the money to pay the accrued tax on those shares; that is, because these shares did not trade, they would actually have to go out and borrow the money to pay. So at that time, as the law stood for this particular class of property, the idea was that the tax should only be payable, subject to treaty, at the time the assets were actually disposed of.
The Auditor General raised a good question, one that is very valid. He suggested that we perhaps ought to treat it as we would if you held shares in IBM or Moore Corp. or anything else. That is, we should tax the accrued gains at the time of emigration and tell the taxpayer that he or she would have to raise the funds to pay it.
What the government has done is come down sort of in the middle here. To deal with the issue that the Auditor General raised, and that Mr. Loubier has raised many times, it has said that the tax revenue would accrue to a foreign jurisdiction if it took more than ten years before the assets were disposed of, and that the tax would be exigible at the time of migration, but the taxpayer could in fact post a bond or other form of security acceptable to Revenue Canada so that he or she would not be forced into maybe liquidating a small business that otherwise shouldn't be liquidated.
That is the main thrust of the change that the Minister of Finance put into the House this afternoon. It changes the structure of the law that we have had since 1972, but in a way that we hope will not impose undue hardship in terms of people having to liquidate these sorts of assets in order to pay their taxes. We will, however, obviously have to consult on the fine details of this so that we aren't catching something that wasn't intended to be caught.
The Chairman: One quick one, Mr. St. Denis.
Mr. St. Denis: It is quick, Mr. Chairman.
I'm assuming that once the t's are crossed and the i's are dotted, these measures will be consistent with measures in our fellow OECD countries and will fit nicely within our Canada-U.S. tax treaty.
Mr. Dodge: Mr. Chairman, as the honourable member says, they do fit, but we are being very tough. We already had one of the toughest codes with respect to taxation of emigrants. This will toughen it up further. It will certainly be among the top two or three toughest in the world, and much tougher than that of the United States, most of Europe, Japan. So it is a tough code, but it's within the international norms.
Mr. St. Denis: Thank you, Mr. Dodge.
The Chairman: Mr. Williams.
Mr. Williams: I have to say that I'm getting a little bit frustrated, Mr. Chairman. I thinkMr. Gravelle is pretty cavalier in the way he runs his department. I think we have been stonewalled and sandbagged here this afternoon and we are not getting all the complete answers.
I am concerned, Mr. Chairman, because I look at page 1-23 of the Auditor General's report and Revenue Canada's comments, and it says:
- Whether this provision applies to the transactions proposed in the ruling depends on whether a
resident of Canada can own taxable Canadian property.
- He goes on to say that ``this issue is complex and involved ambiguous provisions of the law''.
This was written after they knew the contents of the report, but before it was made public. The department sat and did nothing about it; they left the loophole wide open, but Mr. Dodge and his department told Mr. Gravelle, in an informal meeting on December 23, that it is taxable Canadian property and to let this thing go through.
When Mr. Dodge made the first presentation to this committee, he gave us a table showing the analysis of the decision-making. It showed how they treated property for non-residents and that this was non-taxable Canadian property. Later on, in front of the finance committee, he said all Canadians have taxable Canadian property, it's not a big deal. But we go back to the report here and they're saying it's ``complex and involved ambiguous provisions of the law''. We have all kinds of sandbagging. We have situations in which we're talking about contingency memos, but the Auditor General says it was not a contingency memo, it was the real thing that was going to go forward and be the decision until it was reversed. I think these are the types of things that are causing Canadians to lose faith in the income tax system.
I look at your testimony of May 16, Mr. Gravelle, when you said that during the entire month of December you were aware that there was a debate within the advance tax rulings directorate to know which was the best way to implement and interpret the act. Today you said you weren't aware until December 20. We find there are things such as undertakings that are not enforceable, but they are taken as acts of good faith involving $500 million worth of taxpayers' money. That department is a shambles. This cannot continue, and Canadians should and do expect a lot better when they're talking about this kind of money.
I think we are being stonewalled and sandbagged. There is a lot more to this particular December 23 than meets the eye. Somebody knows and somebody isn't saying. That's the point that we should have out here, Mr. Chairman.
Let me ask you this, Mr. Gravelle. On May 16 you said you knew about this debate throughout the entire month of December - and let me quote you:
- 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.
- Do you stand by that statement, or was it December 20?
Mr. Williams: It is your job to apply the act, yet you take something in good faith that you know is not enforceable. Is that the way you run your department and the Income Tax Act? Can I, as a taxpayer, get one of these?
Mr. Gravelle: The integrity of the tax system is at stake. We would not do something - decide or otherwise refuse to decide - unless we had the clarity of the law in terms of legal advice and policy advice, particularly when it comes to rulings.
I wish to assure committee members that on December 20, when I was made aware of the status of the file, I insisted that before we closed the file, we should seek that additional written advice from the Department of Finance, because due regard to the integrity of the tax system and the rights of the taxpayer were involved. I believe this was the right thing to do. I believe, Mr. Chairman, that all the rulings officers and the senior officers in the rulings directorate and in Mr. Lefebvre's office did exactly what they had to do in the circumstances.
Mr. Williams: Mr. Chairman, in section 1.38 of the Auditor General's report they tell us that the ten-year deferral rule only applies if a trust has been in Canada for ten years prior to its movement out of the country. Yet we have had all this testimony, all the time, that the ten-year rule is there and that we can collect the taxes for up to ten years if they dispose of the assets. But they are saying quite specifically that unless the trust has been in Canada for ten years before it leaves, that rule doesn't apply.
.1820
There is no mention in this letter of December 23, in what we can read, that the department discussed that. Yet it seems this was a technical interpretation that was not addressed. Therefore the entire claim that you can claim this money for up to ten more years after it leaves the country is absolutely and completely false if that statement is correct.
Is the statement in point 1.38 accurate, that a trust has to be in Canada for ten years before the ten-year deferral after it leaves applies?
Mr. Beith: I can confirm that under the treaty, for Canada to have a right to tax taxable Canadian property it ought to belong to a former Canadian resident who had been a resident in Canada ten years out of twenty.
Mr. Williams: Well, then, was this trust a resident of Canada for ten years?
Mr. Beith: No, sir, it wasn't. However, an undertaking -
Mr. Williams: I've made my case.
Mr. Beith: - was offered by the taxpayers, because as I testified earlier to say, there was discomfort about the tax result within the rulings.
The Chairman: Are you finished?
Mr. Beith: No, I'm not finished, Mr. Chairman. I would like a chance to clarify this.
Taking an undertaking was not an illegal act. The undertaking itself was not enforceable; we knew that. The taxpayer can choose to self-assess under the Income Tax Act, where it says he may claim protection under the treaty. If he chooses not to claim protection and self-assesses, that is quite acceptable and quite legal to do. That was the position we were offered. We knew it wasn't enforceable. However, it is a condition of the ruling, and as a condition of the ruling, the ruling would be in jeopardy if that condition were not met.
Mr. Williams: We waived the law.
Mr. Beith: No, sir, we didn't. We applied the law to the fact that this was taxable Canadian property in the circumstances.
I testified at another committee in another situation that I might not personally believe an undertaking is necessary, but a taxpayer has a right to the benefit the law gives him. If he's not taxable under the treaty, then perhaps he should get that benefit. Nevertheless, it was offered here, it was taken, and we expect them to respect it.
[Translation]
The Chairman: You have five minutes, Mr. Rocheleau.,
Mr. Rocheleau: We should remember that we are here to try to get a better understanding of what went on in the days and weeks preceding Revenue Canada's ruling. I'm referring here to paragraph 1.54 of the Auditor General's Report, which states that this operation had been carried out and that the exchange transaction had already been done.
I will read paragraph 1.55, where it states that:
- Revenue Canada's Information Circular 70-6R2 states that ``advance income tax rulings will
be given only on proposed transactions''.
- So they have to be advance transactions, not transactions that have already been carried out, as is
the case here. To continue:
- Completed transactions are normally dealt with by audit. This was the case here.
So the rulings officials were the ones, as you described it, Mr. Gravelle, who drafted the memorandum dated Sunday, December 22, 1991. I would like to know, Mr. Deputy Minister, given that the exchange transaction had already been carried out, why was the file not given to the staff in audit, rather than the staff in rulings?
[English]
Mr. Beith: I can only repeat that the taxpayer came with proposed transactions. There was to be a movement of a trust and a beneficiary out of the country. There was to be a transfer of shares out of the country. It was important to know whether or not these shares were taxable Canadian property as they left Canada. To determine that issue, we required to know the history of these shares and how they came to be in the hands of the Canadian trust.
.1825
[Translation]
Mr. Rocheleau: Mr. Chairman, we have to be clear here. The auditor says that the operation had already been carried out, and you are saying that we must determine whether that was going to be done. So we have to agree on certain basic premises. Personally, I believe the auditor's premise, unless he had changed his mind in the light of subsequent information. Perhaps we should ask the auditor whether he maintains his position.
[English]
Mr. Minto: If you look at paragraph 1.54, what we tried to explain was that when we look at the minutes of the meetings, when we look at the minutes of discussions, when we look at the memo prepared for the deputy minister and the minister, we find that everywhere it says the essence of the whole transaction, the essence of the ruling, is whether the shares are taxable Canadian property or not.
I just draw your attention back to exhibit 1.4, where we say that on December 12 the rulings committee decides a favourable ruling should not be provided. The reason they decided that was in their opinion and that of this other committee this was already a completed transaction. When we weighed all the evidence, sir, we came to the conclusion that the transaction had been completed and the rulings perhaps should not have been given.
Just for the record, we have not changed our understanding yet.
Mr. Beith: Mr. Chairman, transactions were proposed to take place in December 1991. These were proposed. At the time the ruling was being discussed with the rulings people, in December, these transactions had not taken place. It was planned that they would take place before the end of 1991. It is clear, and I don't think the Auditor General would argue with this, that proposed transactions were the subject of the ruling request. However, in order to determine the tax implications arising from these transactions that were proposed we had to look at the character of the shares, the classification of the shares in the hands of the trust at the outset, which meant inquiring or being advised how these shares came into the hands of the trust. These are the alleged completed transactions. But what was ruled on was the transactions that took place at the end of December 1991, and these were proposed transactions.
[Translation]
Mr. Rocheleau: Thank you. I don't know whether I find this answer satisfactory, because there is a contravention -
[English]
Mr. Minto: Mr. Chairman, he's absolutely right, some parts of the transaction had to take place. But it's a question of whether you go with the form or you go with the substance. It wasn't just the auditor who ruled or who felt the transactions were complete; it was the department's own committee that came to that conclusion. If you look at the response the department provided us, on page 14 it says the crux of the rulings is the nature of the shares of the public company owned by the trust, whether they are taxable Canadian property to the trust...and they go on.
So the crux of the transaction was this issue. They are absolutely right, there were other things around that which had to be decided. But the main event had already taken place. So we just reviewed the documents and we went back to the ruling and said fine.
Mr. Chairman, the department has not agreed with us throughout this instance. We take note of their point.
The Chairman: Mr. Silye.
Mr. Silye: I'd like to pick up and continue on the use of the side agreement, because as the Auditor General pointed out, that's a very significant issue. It's significant because in the opinion of the Auditor General - and I refer to -
The Chairman: I want to be sure they understand your good questions. Go ahead.
Mr. Silye: Of course.
Notwithstanding Mr. St. Denis' glowing compliments, a serious issue is involved here. He can be partisan all he wants -
Mr. St. Denis: I'm being fair.
.1830
Mr. Silye: So am I. I'm trying to find out what happened. There's an issue here that the Auditor General points out. He points out that this waiver and the undertaking were used to put this transaction onside. In other words, Revenue Canada would have ruled unfavourably had this side agreement not come up. I want to know who suggested the side agreement and whose idea it was.
Second, Revenue Canada issued the ruling on the condition that the taxpayer provide a waiver and an undertaking. While the undertaking and the waiver were used to treat the transaction as if they fell within the intent of the law, they did not change the nature of the transaction. In the view of the Auditor General's office, the waiver, the undertaking and Revenue Canada's statement to them clearly show that Revenue Canada found the transactions offensive and, at the very least and more likely, in circumvention of the law's intent.
The integrity of the tax system is at stake here, in terms of the intent under the law and the transactions, and further, the Auditor General continues and points out that the transactions in question did not involve a taxpayer who left Canada with taxable Canadian property. They involved a trust resident in Canada that distributed public company shares to a trust resident in the United States. For this reason, the Auditor General's office questioned whether this comparison provides an appropriate frame of reference.
It's within that scope that I am asking the finance department and the revenue department who ultimately initiated the side agreement.
Finally, who is ultimately responsible for the favourable ruling when all the indications for two or three months were that they were going to give an unfavourable ruling until this side agreement came along? In the view of the Auditor General's office, the use of waivers and undertakings could violate the basic principle that the right to tax rests with Parliament.
The ruling violated the department's policy on advance income tax rulings, and this is my concern. What happened? Who suggested the side agreement? If taxable Canadian property is so easily defined, why did it take the Department of Finance so long to give Revenue Canada a definition? That's what I'm trying to get to the bottom of. What happened in the past? What happened in this instance?
Who initiated the side agreement? Whose idea was that? It seems to me that somebody in the departments bent over backwards to give somebody a very nice Christmas present.
Mr. Beith: Mr. Chairman, first, there was no intention...and in fact the revenue department was not trying to get side agreements in order to bend the law, if that is effectively what the Auditor General was saying.
Mr. Silye: If the waiver and the undertaking hadn't been given or received by Revenue Canada, would it have ruled favourably or unfavourably?
Mr. Beith: We could have.
Mr. Silye: You could have ruled favourably?
Mr. Beith: Yes. A waiver was offered by the taxpayer because it was uncertain as to whether or not the property was taxable Canadian property at the critical time.
Mr. Williams: He says it's no problem. Everything's taxable Canadian property.
Mr. Beith: I can only speak from the revenue department's perspective. We had a legal opinion that said ``the better view''. We also had advice from counsel that there was a contrary argument available. We've admitted that and that's clear. The tax policy position had not emerged until December 23, not clearly, but there were discussions going on with the finance department, where it was still unclear what that position was.
Mr. Silye: Is the Auditor General's criticism of the transaction in question - questioning whether this is taxable Canadian property or not - a valid criticism? I refer to the Auditor General's description of this:
- ...the transactions in question did not involve a taxpayer who left Canada with taxable Canadian
property. They involved a trust resident in Canada that distributed public company shares to a
trust resident in the United States. For this reason we question whether this comparison
provides an appropriate frame of reference.
Mr. Silye: Could you comment on that?
Mr. Beith: It was our view that it did not lose that character. It had been deemed to be taxable Canadian property under - I'll get technical - paragraph 85(1)(i) and subparagraph 115(1)(b)(ix), and the particular subsection, 107(5), would not make any sense if it was not carrying through to the beneficiary as taxable Canadian property. If there was any doubt about that, I understand it's been looked at in the ways and means.
.1835
Nevertheless, the view Revenue had at the time was that it would flow through as taxable Canadian property to the non-resident trust.
[Translation]
The Chairman: To clarify things, I would just remind members, that in accordance with the rules we agreed on in March, we begin with a first ten-minute round, followed by a second five-minute round and a third five-minute round then I give the floor to colleagues in the order in which they request it. They clerk makes a note of the order of speakers.
Mr. Paradis: That seems new to me.
The Chairman: Not at all. The clerk pointed out to me that this has been our practice since March. You missed the good committee meetings, Mr. Paradis.
[English]
Mr. Hopkins: I have a point of order. I may say this is all the more reason why this committee must spend one meeting making up our rules. Other committees in the House of Commons have rules under which to operate and we have to do it. So we can put that on our list for our steering committee meeting.
The Chairman: Maybe we can discuss it tomorrow morning at the steering committee meeting. But I took this example from Stan Keyes, who was the chairman of the transportation committee when I was elected in 1993. I started with this procedure, and when I arrived in March 1 continued with this procedure. Colleagues just have to put their names on the list.
[Translation]
Mr. de Savoye.
Mr. de Savoye: I am not a tax expert, Mr. Gravelle, but I did notice that the Auditor General is concerned about the consequences of this ruling. I'm trying to translate all of this into language I understand, that is in language regarding income tax payable. I understand that according to your decision, taxpayers can postpone paying income tax that would otherwise be due. I also understand that after a ten-year period, the situation will change and there will be certain consequences. At what point will the income tax of this taxpayer become payable here in Canada? Are there any circumstances that would mean that this income tax is not payable in Canada?
[English]
Mr. Beith: I perhaps missed the latter part of the question, but the answer to the first part of the question is that the taxes would not become payable until there's a disposition of the shares within that ten-year period.
Mr. de Savoye: After which?
Mr. Beith: After ten years there would be no tax payable in Canada. Presumably there would be tax payable in the other country.
[Translation]
Mr. de Savoye: So, if I understand correctly, the consequences of your ruling, which, from what you say, are perfectly in keeping with the requirements of the Act, will mean that if the taxpayer waits for ten years before disposing of his assets, there will be no income tax payable here in Canada. To me, that is an important ruling. I am sure that in my whole life I will never pay as much income tax - and I do pay my income tax - as this particular taxpayer has avoided paying. So this ruling has significant consequences!
Is the Act designed properly? Should it be reviewed? Why did you not decide to inform the minister of the extremely important consequences of this ruling? I'm interested to hear your answer.
[English]
Mr. Dodge: The tax on capital gains is only payable on disposition of the asset. It's not paid on accrual.
The taxpayer might not dispose of the asset for twenty years. No tax is payable over that period whether he's resident in Canada or he's resident abroad.
.1840
So there is absolutely no basis in what has been said about all of a sudden there was a bunch of tax lost.
Mr. de Savoye: Hold on a minute. Maybe I didn't understand well, but what I understood is that if those assets are disposed of prior to the ten-year limit, then taxes are payable to Canada. If they're disposed of after the ten-year limit, then no taxes will ever be - at disposition time, whenever that happens - payable in Canada. Is this right?
Mr. Dodge: That is correct.
Mr. de Savoye: Actually, Canada probably will be losing taxes in how many years from now?
Mr. Dodge: It's very important to recognize what happens on migration. A migration issue triggered it. With due respect to the Auditor General, it was a forward transaction, and that was the migration of the trust.
[Translation]
Mr. de Savoye: Mr. Chairman,
[English]
that is not the essence of my question. Why didn't you tell the minister about the huge consequences of the application of the law, if that was the application of the law?
By the way, what is the site of residence of the fiduciary? Does the fiduciary reside in the States? The assets are in the States. Where does the fiduciary reside?
Mr. Beith: My understanding is the U.S. trust has U.S. trustees.
Mr. de Savoye: I just wanted to see who will get the tax money.
The Chairman: Would you like to complete, Mr. Dodge?
Mr. Dodge: If I could, because this is the essence and why we agree the Auditor General raised a good policy question.
The issue here was when a taxpayer leaves Canada, should the Canadian authorities claim the right at some future date on disposition, or at the time of migration claim the gain accrued up to the point at which the taxpayer leaves? As I said, if you migrate with shares of IBM or anything else, that is exactly what we do.
Or should we continue the practice we had, for good and sufficient reasons I talked about earlier, of taxing this sort of asset only on disposition, plus more, because we could then tax gains that accrued after he left Canada? Or should we claim our tax only to the point in time when he leaves and then, as we have said, make it payable at the time he disposes of the assets?
This was the policy question involved. This was the policy question the Auditor General raised. This is a question for Parliament to decide.
Mr. de Savoye: Why didn't you tell Parliament?
Mr. Dodge: This was a question for Parliament to decide. Indeed, when the Auditor General made his report and raised the issue and there had been discussion of the issue, Mr. Martin put that directly to the finance committee and asked them the question as to whether this should take place. The finance committee recommended that yes, they would like to see a change in the law, a change in the policy. Today Mr. Martin acted to make the change in the policy. This was the point here.
The Chairman: Thank you, Mr. Dodge.
Mr. Hubbard.
Mr. Hubbard (Miramichi): Thank you, Mr. Chairman. I have just a few quick points here.
I'm a little bit confused about some of your last statements on whether the trust left the country or whether the holder of the trust left the country. You're talking about trusteeship. Who was the taxpayer in this instance?
.1845
Mr. Beith: There was more than one taxpayer, I guess. The trust that left - and I'm really using the language in the Auditor General's report here - the protective trust, moved to the States and changed trustees, so it became -
Mr. Hubbard: Did the beneficiary of the trust leave the country?
Mr. Beith: That is my information.
Mr. Hubbard: That is what we're assuming here. I was confused by that.
We did have a short-term trust here. When you put money into a trust, if we're talking about shares in a public or a non-public company and we talk about $2 billion, I'm not clear on whether the $2 billion was the capital gain, which some people around the room seem to be saying - $2 billion wasn't taxed - or it could have been no money that was taxed, or that could have been taxed, because the capital gain on the increase in the value of those shares from the time they were deemed until they could be realized in 1991 could have been nil. So could you inform our committee if there actually was a major capital gain that was lost, or is it just a sum of money that left, or a certain number of shares, which in any event probably could not have been taxed in any case?
Mr. Beith: Again I refer to the Auditor General's report. It was shares of a public company that were in the trust, and they were said to be of a value of $1 billion.
Mr. Hubbard: But the point I'm asking is if they had been realized -
Mr. Beith: If there had been a capital gain, it would have been somewhat less than that.
Mr. Hubbard: Can you give us...? Our friends here are saying we lost maybe $1 billion in taxes. But in effect, when you study that file, perhaps the actual loss of taxation was much less than that, if there actually was a loss.
Mr. Beith: It's considerably less than that. But frankly, given section 241, I'm loath to disclose any information that hasn't already been disclosed.
Mr. Hubbard: I would believe, though, as part of that department, you could give our committee some indication if there was a 10% capital gain or.... The amount is there, the $2 billion, but really we're spending much talk here about nothing. Maybe the taxpayer was at a loss when this was moved.
Mr. Beith: I think you would assume that if it had been taxed on date of leaving as a capital gain, there would have been significant tax.
Mr. Hubbard: Would $500 million be, in your opinion, a significant gain?
Mr. Beith: It would be less than that.
Mr. Hubbard: It would be less than $500 million. Would $200 million be a significant gain?
Mr. Beith: I should perhaps not hazard any more guesses, because frankly, I don't know the accurate number. But I would say it's less than $500 million.
Mr. Dodge: But the one thing that is clear, Mr. Hubbard, is that had the transaction not taken place, no tax would have been payable.
Mr. Hubbard: The other question I have is why was there such a rush, why was there such a hurry, to do this in 1991? Trusts are usually money or shares or assets put in over a period of time. Why did the last week of 1991...? Apparently this transaction must have occurred after Christmas Day, 1991. It couldn't occur on December 26 because it was a holiday. It was in the last five days of 1991. Why did the taxpayer have such an urgent demand to have this ruling done in 1991?
Mr. Beith: December 31, 1991, or December 31 of any year, is important for business and personal tax reasons. It's not unusual, and I think Mr. Gravelle said so in his opening statement, that we get a significant number of rulings near the year-end from people who wish to complete the transactions before the end of the year for legitimate tax planning reasons. I understand that was the circumstance in this case.
[Translation]
The Chairman: I will now give the floor to another Liberal member of Parliament, the second in a row, Mr. Paradis.
Mr. Paradis: I'd like to start by congratulating the Auditor General again, as I did the other day. I would also like to say that on the first day of our hearings, we discussed the fact - and I mentioned this at the May 16 meeting - that Revenue Canada publishes a short brochure for taxpayers entitled Rulings Directorate - Service. That is the title of this brochure.
.1850
It discusses the services available to taxpayers generally and on page 15 of this Revenue Canada brochure, it states that the Office of the Auditor General of Canada regularly studies the work of the Directorate, including the advance rulings and technical interpretations it publishes.
I would point out that Revenue Canada publishes this brochure for all Canadian taxpayers. Thus, if we place the Auditor General's work within this context of Revenue Canada's brochure for all Canadian taxpayers, I think there is no problem.
However, given the announcement that was made today, the Minister of Finance has acted on the recommendations made by the Finance Committee and has taken steps to plug up loopholes that may have existed, if they did in fact exist. I think that everyone will hear about the technical details of this ruling, of this Notice of Ways and Means Motion, which was announced by the Minister of Finance.
In this respect, it is reassuring to see that after the Auditor General's comments, the government acted quickly and gave the Finance Committee a mandate to look into this. In addition, it has made the decision announced today. Of course the problem that existed in 1991 - and I've said this on a number of occasions - occurred when the previous government, a Conservative government, was in power. Furthermore, the role of the Public Accounts Committee is to look at situations once they have happened.
I will not go into the technical details. Some of my colleagues have discussed the technical details at length, but I do not intend to do so. Rather, I would like to try to put myself in the position of the average taxpayer and say that this matter seems disturbing. The appearances are disturbing because of the lack of documentation - and the little documentation we have does not necessarily support the final ruling - about the amounts of money involved, which are significant, the trust itself, which is not an instrument used by people every day, the dates, the closeness of the Christmas holidays, the speed with which the ruling was made, and so on. All of this together means that the appearance of this case is disturbing for some people.
I think that there is problem with transparency within the department, and Mr. Gravelle told us that this would be corrected. This may have already been done, since there is talk of putting more documentation into files in future, publishing advance rulings, and so on. In other words, there is talk of taking a whole series of measures to ensure that the problem of transparency that occurred in 1991, under a Conservative government, can be corrected. I see therefore that the government is taking steps to ensure greater transparency in future.
My question is more particularly to the Auditor General. He told us, on May 16 last, that there was no reason to call into question the integrity of senior departmental officials. However, can the Auditor give us some facts, tell us what he heard during our hearings and add anything to what he's already told us?
Finally, after this evening's meeting, the next stage will be for us to sit down together as a committee and draft a report. For this next stage, Mr. Desautels, have you learned anything that shed any further light on this matter that you would like to tell us about so that we can write a more complete report than the one you have already submitted?
Mr. Desautels: To answer the first question, Mr. Chairman, I am still saying exactly the same thing I said last May about the integrity of the officials of the department.
.1855
At that time, I said that we did not understand the ruling in technical terms, and that we found there was inadequate documentation.
We had no indication that there had been any interference or lack of integrity on the part of anyone, but we did not investigate this matter specifically. Our investigation was focused on the technical interpretation that had been given. That is what we told you in May, and that is what I'm repeating here today.
As far as lessons for the future go, I do not want to comment at this time on the proposed changes to the Act. I think that the Department's decision to publish advance rulings in a shorter length of time in future is a step in the right direction. In fact, we've been recommending such a practice for several years.
Similarly, as far as documentation goes, we were particularly frustrated by the lack of documentation throughout this case, where changes in the department's position were perceived.I am assured that in future, this type of situation should not occur, and we will continue to periodically audit the department's advance ruling activities. We will also be able to assure you of the quality of the documentation for future rulings.
Mr. Paradis: One supplementary question, if I may, Mr. Chairman.
I would just like to mention, Mr. Auditor General, that we are going to have to draft our report on this matter quickly. If you have any comments that you would like to add to what you've already said, both in your report and orally here, we would appreciate getting them as quickly as possible.
Mr. Desautels: If I have anything to add, I will do so, Mr. Chairman. But at this point, I can tell you that we mentioned everything we knew and that we answered your questions candidly.
Mr. Paradis: Thank you.
[English]
The Chairman: Mr. Williams, five minutes.
Mr. Williams: Thank you, Mr. Chairman.
Mr. Gravelle, you heard my comments earlier about your department and the way it's being run. I heard Mr. Beith say they took this waiver, which they knew was unenforceable, as an act of good faith because, if I understand the treaty, the trust hadn't been in Canada for ten years so the treaty would have caused it to be taxable when it left. Therefore, they said they would go on the self-assessment and gave you the waiver in good faith.
Do you have the right to make public policy to that extent, as a deputy minister - to waive the treaty and take a waiver in good faith?
Mr. Gravelle: In this case it was a matter of deciding whether, in tax policy terms and from a legal perspective, the contemplated transaction was justifiable and acceptable and not offensive to the law. We've said all along, Mr. Williams, that it was a complex issue. At the conclusion of the extensive discussions among the three departments, I was presented with the conclusion of our technical people and our legal people that we could rule and, not only that, accept the waiver. This was the position of the collective departments.
Mr. Williams: On December 23, Mr. Gravelle, in the letter from Mr. Short, of the Department of Finance, to Mr. R. J. Read, in your department he says the following in paragraph 3:
- The policy intent was to have the gains with respect to such property continue to be subject to
Canadian tax except to the extent provided otherwise by a tax treaty -
.1900
Mr. Beith: I don't believe there's a rap to take, Mr. Chairman. We didn't waive anything and we didn't undertake anything. The taxpayer voluntarily undertook that he would self-assess under the Income Tax Act and would not claim protection under the treaty. He was not forced to do so. There was no duress to do so. Our first job was to determine the application of the law that was consistent with tax policy. Having done that, a waiver and an undertaking, which are two separate things, were put on the table and offered. We had to look at whether we should take it or not.
The waiver allows us to assess the family trust that is still in Canada.
Mr. Williams: Let me ask Mr. Elkin if he shares your point of view.
Mr. Barry Elkin (Principal, Audit Operations, Office of the Auditor General of Canada): No, that's not necessarily correct, Bob.
Because the trust was not in Canada for ten years, immediately upon selling the property, the trust could claim exemption under the treaty.
Take a simple scenario. If at 7 p.m. tonight the Canadian trust had those shares and sold those shares, we would reap capital gains tax. Whether it would be $1 or $100 million, I don't know. If, instead of doing that, at 7 p.m. tonight the trust distributed those shares to a U.S.-based trust, it could sell the shares at 8 p.m. and Canada would reap no tax because you could claim exemption under the treaty.
It appeared to me that was a concern to Revenue Canada. The way I view it, it said, we want to try to negate the effect the treaty has on Canada's tax base, so let's pretend that trust was in Canada for ten years by taking a waiver. I think the evidence clearly shows that the ruling was given on the condition that a waiver and an undertaking be provided. That's a fact.
The other thing that's important to know is that the undertaking specifically states it was given as a condition of the Canadian trust receiving a ruling that those shares were taxable Canadian property. That was a condition of the waiver.
Mr. Williams: So they gave the waiver on the condition that Revenue Canada give them the policy intent of December 23 that the treaty applied was waived altogether. Deputy ministers who say they have no contact with any political people of any kind say they can take these decisions behind closed doors, keep them secret for years, and that's the way the Department of Revenue operates. Is that right, Mr. Gravelle?
Mr. Beith: Mr. Chairman, I can't agree with what's been said by Mr. Elkin or the member. We didn't waive anything. We applied the law to the facts after consulting Justice and Finance and giving it deliberation.
I have mentioned already that there was some discomfort that we might not get taxed following these transactions within the ten-year period because of the treaty. That was undoubtedly raised with the representatives in the course of discussions, as a point that was concerning the rulings officers. The taxpayer's representatives met that by saying it wasn't a problem for them to undertake that they would not claim treaty protection. We weren't doing anything.
Mr. Williams: But they had complete treaty protection, because as soon as they went abroad it wasn't taxable in Canada. They wanted to get out of the country tax-free and they were prepared to waive anything to get out of the country tax-free. Once they were out of the country, they were tax-free on what was left. That is the point. Is that right, Mr. Elkin?
Mr. Beith: They were not necessarily tax-free once they were out of the country. They may well be taxable in the jurisdiction where they are now, particularly if they have -
Mr. Williams: If they dispose of the assets 25 or 50 years hence.
The Chairman: Thank you, Mr. Williams.
[Translation]
Mr. Rocheleau, I will give you a minute. Mr. Silye, you'll have a minute as well. I think that we will be able to adjourn the meeting in 3 to 5 minutes.
.1905
Mr. Rocheleau: I have two brief questions, Mr. Chairman.
The first is to the two deputy ministers, who will answer as they see fit. In all the representations made at the meetings, did anyone consider the tax implications of a favourable ruling? Did anyone think about the impact of the ruling on Revenue Canada in the long term? At the last meeting,Mr. Gravelle told us that there were several hundred thousand family trusts in Canada. Did anyone consider the precedent such a ruling could establish?
My second question is to the Auditor General. What would have happened with the case if it had been referred to audit officers rather than to the staff in advance rulings? Why did you mention this technical aspect in your report?
Mr. Gravelle: Mr. Chairman, I will give a very quick answer, and my colleague, Mr. Beith, could speak in greater detail, because he was personally involved in this case. All the consequences and aspects of this case were fully examined by the department's staff. They also discussed these issues, including the tax impact, with officials at the Department of Finance and the Department of Justice.
But perhaps Mr. Beith would like to add something.
Mr. Rocheleau: In other words, a favourable ruling was made even though the staff realized the financial catastrophe this would mean for Revenue Canada.
Mr. Gravelle: I can tell you that the favourable ruling was issued after a full study of the case. It was supported by a legal opinion and by the opinion of the Department of Finance.
I can also tell you that if either of these opinions had been missing, there would have been no advance ruling, because the most important concern of the department is to ensure full compliance with the tax system. If there are any perceptions to the contrary, we simply cannot perform our role. That is why representatives from the Office of the Auditor General, with whom we work closely, are constantly in our department. In addition, that is why there is provision for informal remedies and for formal remedies, involving the courts.
The Auditor General often tells us that we do excellent work, as he did recently, or he tells us to be more careful about various aspects. This has always been a way of improving our work. It is therefore a very, very open and very transparent system.
Mr. Rocheleau: Mr. Assistant Deputy Minister, can you tell us what the impact of this decision will be in terms of the Canadian tax system?
[English]
Mr. Beith: Mr. Chairman, there's no way for us to measure the impact of the ruling if other taxpayers have carried out and are carrying out similar transactions.
[Translation]
The Chairman: There, you got your answer.
[English]
Mr. Silye, excuse me.
[Translation]
Mr. Desautels: I believe Mr. Rocheleau asked a second question. He asked what would have happened if the Department of Revenue had not made an advance ruling and had instead left it up to the auditors to rule on that transaction.
It is impossible to reply to that question. If the department had refused to provide a positive ruling, we really do not know if the taxpayer would still have gone ahead with that transaction. It might have happened.
Mr. Rocheleau: I'm referring to point 1.55. If this had been left up to the auditors rather than to the staff who make advance rulings, would the outcome have been any different?
Mr. Gravelle: Mr. Chairman, I would like to say, and I think my colleague Mr. Desautels would agree with me, that the role of the auditors at the department is to examine activities that have been completed. That is the auditor's traditional role.
The staff making advance rulings is trained to interpret the law, assess prospective transactions and ensure that all necessary counsel is obtained in order to make an appropriate judgement.
.1910
Thus, there are two roles and two different areas of responsibility and expertise.
[English]
Mr. Silye: Mr. Gravelle, given that tax rulings are complex and by its nature an advance ruling fits a particular unique situation - but just in case other people fall into a similar category - doesn't the department issue tax bulletins on important tax rulings? If this was a significant policy change or it was a complicated enough transaction, or not complicated, depending on whatever, why didn't a tax bulletin go out after 1991 to chartered accountant firms and so on about what happened, what your advance ruling was: should this happen and you have private shares going to public shares and you want to transfer from one trust to another, this is the way we would generally look at this? Why wasn't that issued?
Mr. Gravelle: Literally hundreds and hundreds of information circulars, technical interpretations, are made available electronically and in other forms to the Canadian public and the tax practitioner public. Traditionally, when it comes to advance rulings, we have published those that were the object of issues and concerns that were regularly and constantly canvassed by a great majority of taxpayers. This was not sufficiently transparent and satisfactory.
I'm pleased now to say that effective January 1, 1996 we have put everybody on notice - all the way back in 1995, with the tax-practising community - that rulings will be published within ninety days of their being granted, subject to the taxpayer or taxpayer representative having an opportunity to review what we intend to publish to ensure we would not compromise in any shape or form the confidentiality of the taxpayer. This is happening. I'm pleased to respond that we now have.... I will just consult my notes to give some of the statistics for this year in light of that undertaking.
From January to mid-June 1996 we issued 220 rulings. Some 75% of these rulings have been published. The remaining 25% have been severed, are the subject of consultations with taxpayer representatives, and will be published within the ninety-day commitment. From June 1996 to date, as we speak today, we have issued 104 rulings. I have been assured by my colleagues in the rulings division that these will be published in time.
[Translation]
The Chairman: Colleagues, I believe this concludes our meeting. I would like to thank the witnesses for coming. I would also like to thank you for your indulgence and discipline. Thank you.
The committee is adjourned to the call of the Chair.
Chapter 1 - May 7, 1996 Report
of the Auditor General of Canada
Mr. Pierre Gravelle
Deputy Minister of
Revenue Canada
to the
Standing Committee on Public Accounts
House of Commons
October 2, 1996
Check Against Delivery
INTRODUCTION
Good afternoon, ladies and gentlemen. I appreciate the opportunity to come back before you today, with my colleague, Mr. Dodge, to continue our discussion of the issues raised in Chapter 1 of the Auditor General's May 1996 Report.As you know, since we last met, these issues have been the focus of considerable study and debate.
I was pleased by the recent reports of the Finance Committee, which contained a number of clear recommendations for legislative reform in this complex area, as well as what I consider to be excellent recommendations for process improvements within Revenue Canada. I will return to these a little later.
From our earlier discussions, I believe that this Committee's prime area of interest concerns the processes and circumstances that led to the issuance of the Departmental ruling in December 1991.
My opening remarks on May 16 sought to clarify these issues and I believe that the Committee's discussion today would be informed by a brief re-capitulation of a limited number of the key considerations.
THE 1991 RULING
Concerns have been raised that this ruling may have been inconsistent with the intent of the law.It has also been speculated that this ruling was expedited to arrange for its issuance before the end of tax year and that senior officials improperly overruled the recommendations of rulings officials.
None of these allegations is true.
Let me quickly review the salient facts.
The request for the 1991 ruling in question was received in November of that year. The ruling was issued some 45 days later.
There is nothing unusual about this ruling having been issued within this timeframe. Indeed, in 1995, my department issued 41 percent of all advance rulings in less than 60 days of their being requested.
Additionally, issuing a great number of rulings in December is the norm. This is, for many, the end of tax year and for this reason, more rulings are requested in the last three months of the year. Indeed, our statistics show that the number of rulings issued in December is twice the average number issued in the other months.
Further, it is not unusual for the department to issue a significant number of rulings in the last week of December (i.e. five working days). For example, in this period in 1991, 19 rulings were issued. In 1992, 33 rulings were issued in the same period. In 1993, there were 42 rulings and in each of 1994 and 1995, 28 were issued.
When the ruling request was first received, a rulings officer was immediately assigned to the file and began researching and analyzing the attendant issues. The officer also began preliminary discussions with counsel at the Department of Justice.
During this period, the Department focussed its consideration on the key issue of whether certain private company shares represented Taxable Canadian Property (TCP) in the hands of a Canadian trust.
The discussions with the Department of Justice, even at this stage, revealed Justice's clear position that the better view of the law was that a Canadian could hold Taxable Canadian Property and, consequently, that the Department was in a position to rule favourably in this case.
The Justice position remained consistent throughout and was ultimately confirmed at the end of all interdepartmental consultations and deliberations.
The rulings officer, in keeping with the normal challenge function within the rulings process, continued to explore alternate avenues in view of the ambiguity in the law and the absence of clear policy direction.
This course of action is totally in keeping with the rigorous approach taken in the examination of any rulings request by an officer. It was also totally consistent with the rulings process described during my appearance before you on May 16, last.
It was with this in mind, that the rulings organization asked counsel at the Department of Justice whether, notwithstanding the better view of the law, they would concur that the alternative position was supportable.
Counsel, once again confirmed that the better view of the law was that the Department could rule positively. However, counsel also indicated that the proposed unfavourable position was arguable, but not the better view of the law. Justice formally offered this view on December 19, 1991.
On Friday December 20, I met with Mr. Denis Lefebvre, the Assistant Deputy Minister responsible for, amongst other things, the rulings function. This meeting was convened to discuss a range of issues which Mr. Lefebvre wanted to bring to my attention prior to his departure, that evening, from Ottawa.
One of the issues discussed with me was the ruling request. I was apprised of the Justice view and informed that, while there had been ongoing consultation with the Department of Finance, we had not yet received their formal tax policy position.
After discussing the main elements of the case with Mr. Lefebvre, I asked that we obtain immediately from senior officials in the Department of Finance a written articulation of the policy intent behind the legislation governing Taxable Canadian Property (TCP).
It was also agreed that the Department's Senior Policy Advisor, Mr. Bob Beith, would act as ADM for this issue in Mr. Lefebvre's absence and would oversee the conclusion of this ruling request.
On Monday morning, Mr. Beith and other senior officials met with me to review the status of the case and discuss the planned meeting with the Department of Finance. Immediately after this discussion, these officials, together with Justice Counsel, met with Mr. Al Short, Executive Director, Legislative and Tax Policy Branch of the Department of Finance.
At that meeting, the facts and the law were reviewed and it was concluded that the Income Tax Act did contemplate the holding of TCP by both resident and non-resident taxpayers.
This position was confirmed in writing that same day. I previously tabled a copy of that letter with this Committee.
This letter, together with the advice from the Department of Justice clearly indicated that the law and the policy intent behind it were consistent. In view of this, a positive ruling was issued on December 24, 1991.
PROCESS IMPROVEMENTS
Let me now turn to process.I am indebted to both the Auditor General and to the Finance Committee for having brought to our attention certain deficiencies in our processes and I am pleased to inform this Committee that a number of improvements have already been implemented, as promised by Minister Stewart.
Consistency Between Rulings and Opinions
In 1993, Revenue Canada instituted a complete electronic database of all rulings and opinions issued in order to improve consistency between rulings and opinions dealing with similar areas of the law.It is now standard procedure in the Rulings Directorate that all draft rulings and opinions are checked against this database before they are finalized.
In 1993, the Auditor General produced a report on the Advance Income Tax and GST Rulings Process which was extremely supportive of these processes. The only significant recommendation which the Auditor General made concerned the need to publish rulings in the interests of consistency and transparency.
We implemented this recommendation. Following a comprehensive process of public consultation, particularly with tax practitioners, Revenue Canada, at the annual conference of the Canadian Tax Foundation in November 1995, announced its intention to publish all advance income tax rulings in severed form starting in 1996.
Since January 1996, all advance tax rulings are electronically published, with appropriate editing to ensure taxpayer confidentiality, and distributed to various income tax publishing houses in Canada, and made available to the public through Revenue Canada's tax services offices within a target of 90 days of their issuance.
There were 220 rulings issued from January to mid-June 1996. Seventy-five percent, which represents 166 of the 220 rulings, have been published, and the remaining 25 percent (54 rulings) have been severed and forwarded to taxpayers for approval to publish.
From mid-June 1996 to date, 104 rulings have been issued. All of these rulings are expected to be published within our 90-day timeframe.
Documentation
We have acknowledged that certain of the meetings held concerning the December 1991 ruling were not properly recorded.On the advice of the Auditor General, we have already taken steps to ensure that improved accounts are kept of all major deliberations and the tax policy interpretations that result from them.
We have revised procedures to ensure that a proper record is prepared of the considerations that play an important part in the decision-making process to issue an advance income tax ruling or opinion.
Moratorium
While not a process issue, one other important change that my Minister implemented when this matter was raised by the Auditor General concerned the moratorium on advanced income tax rulings. As you know, this moratorium was extended by Minister Stewart on September 19 and will remain in place until the law in this area has been changed.
CONCLUSION
In conclusion, I would like to make several points. First, it has been suggested that there might have been political interference in the development of this ruling. I wish to be clear on this point: cd there was no political interference. Discussions of this ruling request were confined to the taxpayer's representatives and Revenue Canada, Justice and Finance officials.Second, you have received a severed copy of a draft note to the Minister of the day that was prepared for my signature. The Auditor General has noted that this draft memorandum set out reasons why the taxpayers proposal was not acceptable.
I should like to point out that:
- this note, a version of which you now have, always remained in draft format;
- the note was never signed, nor was it brought to the attention of the Minister;
- I never saw the note until this matter was brought to my attention by the Auditor General in his report;
- the note was drafted in the Rulings Directorate only as a contingency to advise the Minister prior to anticipated representations by the taxpayer, had we ruled negatively; and finally,
- consideration of the Finance and Justice positions later that same day overtook the position presented in the memorandum.
I am grateful for the advice that the Auditor General has provided in this matter. I am also grateful for the clear direction provided by my Minister in responding to these issues.
I am also pleased that, during committee deliberations, he has clearly indicated that he has - and I quote - ``... never ... had any reason to doubt the integrity of senior officials at Revenue Canada in all of the work that I've done so far with that Department.'' This is an important endorsement from the government's auditor.
I hope that I have also shown that my Department has acted quickly on the sound advice from the Auditor General and the Finance Committee to improve its processes.
Now, ladies and gentlemen, my colleague, Mr. Dodge, is going to speak to you regarding a number of other issues related to our discussion today.
Thank you.
OPENING STATEMENT OF L. DENIS DESAUTELS, FCA
AUDITOR GENERAL OF CANADA
BEFORE THE STANDING COMMITTEE ON PUBLIC ACCOUNTS
ON CHAPTER 1 - REVENUE CANADA
OF THE 1996 MAY REPORT
OCTOBER 2, 1996
2. Even when focusing on those events there are many facets to consider. I would like to stress the importance of one issue the resolution of which is sure to have enduring impact. It is an issue raised by the Finance Committee in the report of its hearings held pursuant to my May 1996 report. I think it can best be expressed as a series of questions:
- How should Revenue Canada balance its dual roles as interpreter of the law - especially where it may be ambiguous - through its advance rulings service and its role of guardian of the tax base?
- To what extent should Revenue Canada take into account the nature and consequences of the transactions it is asked to rule upon?
- What should be Revenue Canada's policy on issuance of advance rulings where there is evidence that tax avoidance is involved or where there is likely to be a large loss of tax revenue or impairment of the tax base?
- What is Finance's responsibility to provide timely policy advice when sought by Revenue Canada, supported by adequate analysis of the potential impact of an advance ruling, and what is Revenue Canada's responsibility to critically examine that advice?
4. Thank you, Mr. Chairman, I and my colleagues, Mr. Shahid Minto and Mr. Barry Elkin, will be pleased to offer any clarification or assistance that you may require.
Public Accounts Committee
October 2, 1996
Opening Remarks
David A. Dodge
Deputy Minister
Department of Finance
Mr. Chairman, we appreciate the opportunity to appear before the Committee today in
furtherance of the discussions on the Auditor General's report concerning certain
income tax rulings issued by the Department of National Revenue.
As Honourable Members know, we appeared before the Committee on this matter shortly after the Auditor General's report was issued. Since that time, the Standing Committee on Finance has also held hearings on the report, and has recently issued its findings.
Earlier this afternoon, the Minister of Finance tabled a Notice of Ways and Means Motion to amend the Income Tax Act. This Notice adopts all of the recommendations made in the Finance Committee's majority report. The income tax amendments to implement the Notice will, if enacted, apply as of today.
Copies of the release announcing this action, which includes the Notice and background information, have been made available to all Committee members. I would like to take this opportunity to provide a brief explanation of the changes that have been proposed, and following that to answer any questions that members of the Committee may have.
The Auditor General has raised two issues: the process and the policy. My colleague has dealt with the process issue, and I hope in my remarks to address the policy concern.
Before doing so, however, I think it's important to remind ourselves what the issue first raised by the Auditor General, and since studied by the Finance Committee, is and is not about.
The real question is whether we should have a system that taxes people when they leave Canada, or should instead wait until those people sell the property they've left with. As part of this, we have to establish whether we're prepared to give up our tax rights over former Canadians after a period of several years, or instead believe that it's more important that gains on property that accrue - but aren't realized - while living in Canada ought to be subject to Canadian tax whenever that property is ultimately sold.
What's it not about? It's not about family trusts: you face the same tax policy questions whether you're talking about the transaction described in the Auditor General's report, or are determining what rules to apply to the small businessman who moves from Windsor to Ann Arbor while owning shares of a small Ontario company.
It's also not about $2 billion having escaped Canadian tax. If a taxpayer moves money outside Canada, this is not evidence of an abuse or a loophole. It is the normal functioning of a developed 20th-century economy. Nor is the system proven to be defective if it lets $2 billion worth of other property be moved to another country without immediate tax. That simply returns us to the original question: when and under what circumstances should tax apply to emigrating taxpayers.
It's those questions to which the changes put forward today relate. Since the income tax changes have been put forward in direct response to the recommendations made in the Finance Committee's report, it is perhaps easiest and most efficient to describe those changes using the Finance Committee's work as a backdrop.
Recommendation 1: Classification of Property
First, the Finance Committee noted certain discrepancies in the rules between significant shareholdings of public stock and other shares, partnership interests and trust interests. While public company stock is treated as TCP to a taxpayer that owned 25% or more of that stock at any time within the past 5 years, interests in certain companies, partnerships and trusts are treated as TCP only if, within the past 12 months, more than half of their underlying value was attributable to TCP. The Committee was unable to point to a reason for the different periods selected for the two groups of property, and recommended that a 5-year rule be applied in all cases.The second concern noted by the Finance Committee in this regard relates to property used by a non-resident in carrying on a business in Canada. When that property is simply taken out of Canada, any gains accruing on it while it was held in connection with the Canadian business are properly subject to Canadian tax. To ensure that this result is achieved, the Committee recommended that all such property be treated as having been sold at its fair market value when it is no longer used in the Canadian business.
Our response to this recommendation is found in paragraph (2) of the Notice.
Recommendation 2: Clarify scope of TCP definition
Second, the Committee suggested that the issue as to whether a Canadian resident could hold TCP be resolved: that is, the law should be clarified to provide that both residents and non-residents of Canada can hold TCP. Irrespective of one's views as to the appropriateness of the precise recommendation, a suggestion to clarify a potentially ambiguous rule should be unobjectionable to all concerned: unclear law serves nobody well. The Committee's conclusion that property should be treated as TCP in both residents' and non-residents' hands flows, of course, from its finding that such treatment is dictated to arrive at the proper result in tax policy terms.The position that we have maintained throughout this debate is that the rules work sensibly only if the concept of TCP has application to all taxpayers. Accordingly, the Finance Committee's recommendation to spell out this result is something we can fully endorse, and the first paragraph of the Notice of Ways and Means Motion is designed to cover this recommendation.
Recommendation 3: Distribution of trust property
The third recommendation of the Committee is the one that deals most directly with the subject matter of the Revenue Canada rulings. When a trust distributes property to a non-resident beneficiary, tax on the distribution can be deferred provided that the property in question is TCP. Some property, such as Canadian real estate, is TCP ``at large'' - that is, irrespective of who owns it. Other property is TCP only to certain persons: for example, shares of public companies are generally not TCP, but will be if the shares were acquired in a rollover transaction in exchange for other property that was TCP.The rule which allows trust property to be distributed to a beneficiary without immediate tax applies if the property in question was TCP to the trust. Obviously, such treatment would be appropriate only if the property also represented TCP in the beneficiary's hands, and that is precisely the manner in which Revenue Canada administers the rule.
However, the Finance Committee noted that this rule could also benefit from a clarifying amendment, and recommended that such a change be made. Inasmuch as the Committee's recommendation simply confirms the intented operation of the Act, it is clearly a suggestion we would endorse: subparagraph 6(b) of the Notice reflects this change.
Recommendation 4: Emigrant's accrued gains
The Finance Committee's fourth recommendation is the most significant change put forward in its report. The suggestion in this regard is that emigrating individuals be required, on departure, to compute and post security for their Canadian tax on gains accrued on all property other than treaty-exempt assets such as Canadian real estate and Canadian business assets.As the rules currently stand, individuals - including trusts - are not subject to tax on TCP when they emigrate from Canada. Individuals other than trusts are also able to defer their tax on non-TCP, provided they post adequate security for the tax otherwise owing.
The Income Tax Act provides that any property - whether it is TCP or not - that is not subject to tax on departure is taxable when it is eventually sold. However, Canada's tax treaties may apply, if the property is not sold until several years after the taxpayer has left Canada, to limit the force of our domestic rules; in other words, gains on some property that were not taxed when the individual departed may only be taxed by the new country of residence.
This is by no means an unusual result: the vast majority of countries impose no income tax on emigrants. Nor is it wholly irrational: the taxation rights that Canada gives up over its former residents are matched by what it acquires in respect of immigrants from other treaty countries.
However, the Finance Committee has suggested that it is important not only that emigrating taxpayers be liable to tax when they eventually sell the property that they acquired before they left Canada, but also that it is Canada that should collect the tax in respect of pre-departure gains on such property.
The Committee's report, as we understand it, does not state that emigrants should be liable to pay Canadian tax on their gains at the point of departure. Rather, it suggests that a calculation should be made of the tax that would be owing on those gains, and that taxpayers be able to post security for that tax until the property is actually sold and proceeds become available to satisfy the Canadian income tax bill.
The Finance Committee's recommendation in this regard is captured in paragraph 5 of the Motion. Subparagraph 6(a) is also relevant: it would give rise to Canadian tax when a trust distributes property to non-resident beneficiaries.
Recommendation 5: Information reporting
The last of the five recommendations found in the Finance Committee's majority report relates to information reporting. Specifically, the Committee found that there was a reasonable basis to require emigrating taxpayers to complete an information return listing their property holdings at the time of departure.The information provided on such a return would, as the Committee has suggested, indeed be helpful to Revenue Canada in tracking subsequent property sales. It would also serve as a cross-check on the tax payable on non-TCP at the time of departure. And it may reinforce in taxpayers' minds the obligation to pay Canadian tax on certain properties after leaving Canada.
Since emigrating taxpayers are generally already required to file a Canadian tax return for the year in which they depart, the additional obligation of completing and submitting an information statement with their tax return should not present an unreasonable compliance burden.
That said, there's no point in generating paper for paper's sake, and paragraph 4 of the Notice, which would implement the Finance Committee's recommendation on this point, proposes an exemption from this reporting requirement for taxpayers whose property holdings are below $25,000 at the time they leave Canada.
Consultation
Although that concludes my opening remarks dealing with the income tax changes announced earlier today, I would like to make a point about our desire to hear from interested parties on the proposed changes. It is important to recognize that these changes do reflect considerable input - from the Auditor General, the Finance Committee, and representatives of the tax community who appeared before that Committee during its deliberations on the subject. However, we recognize that there may be some issues which require further attention, including: how the new rules would interact with other country's tax systems; whether the information we're asking to be provided is reasonable; if there are any potential problems with the system for providing security for the taxes owed; and how trust distributions to both resident and non-resident beneficiaries will be dealt with.In our view, while the proposed changes are both reasonable and responsive to the concerns that the Auditor General and the Finance Committee have raised, there are likely certain aspects of the proposals that can be improved upon and we are genuinely interested in receiving comments on that score.
That concludes my rather lengthy but hopefully comprehensive opening remarks. I would like to close by noting our thanks to the Finance Committee for its considerable work on this issue, and would commend its report, as well as that of the Auditor General which prompted that Committee's work, to any members of this Committee that have not yet reviewed them in detail.
We would be pleased to answer any questions.