[Recorded by Electronic Apparatus]
Tuesday, March 18, 1997
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[Translation]
The Chairman (Mr. Michel Guimond (Beauport - Montmorency - Orléans, BQ)): Good afternoon, all.
The Standing Committee on Public Accounts is meeting pursuant to Standing Order 108(3)(d) for consideration of Chapter 37 of the November 1996 Report of the Auditor General of Canada concerning Revenue Canada - Enforcing the Income Tax Act for Large Corporations.
Before proceeding with our witnesses, I would ask for the members' unanimous consent to proceed with a change to the committee's projected order of business which means we would meet in camera tomorrow at 3:30 p.m. to look at a draft report on Chapter 26 of the Auditor General's Report on the Canada infrastructure works program. Tomorrow's meeting would be cancelled and held on Tuesday, 8 April, instead of the meeting on the Government of Canada's accounting conventions, more specifically the way of accounting for the payments for the Maritime provinces in 1996 for the harmonization of the sales taxes as well as the accounting for setting up the Canadian Foundation for Innovation, all this being done in the presence of the Auditor General and the Department of Finance. It was difficult to count on the presence of the Minister of Finance or Deputy Minister of Finance for that meeting although it would apparently be possible for them to meet with us around April 21. So, colleagues, I would ask for unanimous consent to hold tomorrow's meeting on April the 8th. Do we have unanimous consent?
Some honourable members: Agreed.
The Chairman: Thank you. The report we agreed to the other day will be adjusted in consequence.
Gentlemen, witnesses, we are now ready to hear you. With us today we have Mr. Desautels, the Auditor General of Canada, as well as Mr. Shahid Minto, Assistant Auditor General, and with him is Mr. Barry Elkin, Principal, Audit Operations. We have three witnesses from the Department of National Revenue: Mr. Barry Lacombe, Assistant Deputy Minister, Verification, Enforcement and Compliance Research Branch; Mr. Robert Beith, Assistant Deputy Minister, Appeals Branch; and Mr. Ed Gauthier, Director General, Auditor Directorate, Verification, Enforcement and Compliance Research Branch. Gentlemen, welcome to the Standing Committee on Public Accounts. You have the floor, Mr. Desautels.
Mr. Denis Desautels (Auditor General of Canada): Thank you, Mr. Chairman. I am pleased to be here this afternoon to discuss Chapter 37 of my 1996 Report. This audit looked at Revenue Canada's program for auditing the largest corporate taxpayers. As you know, these taxpayers present a significant challenge to Revenue Canada due to their sophistication, level of international activities and the large amounts of tax many of them pay. The report points out that the large file program covers about 6,000 corporations, who pay around $4 billion annually in federal corporate taxes - a substantial portion of total corporate taxes. Our audit report summarizes the strengths in Revenue Canada's program and highlights some key areas where improvements are needed.
I would like to note at the outset, Mr. Chairman, that this audit did not take an in-depth look at the international aspects of Revenue Canada's work. As we explain in the report, Revenue Canada has recognized that international transactions represent an area of high risk to the Canadian tax base. A separate directorate has been established to specialize in the taxation of international transactions and we are currently auditing the work of that directorate.
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However, we did note that there were fewer referrals of transfer pricing cases from the large file auditors to the international auditors than we would have expected. A transfer price is the price charged between related parties for goods and services. Since the parties do not deal at arms length, there was a real opportunity to manipulate the prices in order to reduce the overall tax bill. I am pleased to note that the 1997 budget indicates that Revenue Canada will be devoting more resources to transfer pricing audits.
I'd now like to turn to the main points of our observations.
[English]
It is well recognized that it is virtually impossible to write tax legislation to cover every aspect of situations applying to taxpayers. Revenue Canada uses administrative policies to deal with gaps in the legislation. I realize that this is important in the short term for the smooth functioning of the system. I have concerns when administrative policies are used as a long-term solution for legislative gaps. This practice is contrary to the basic principle that Parliament sets the rules for taxation. It could also have a negative impact on the tax base because administrative policies do not have the force of law if they are challenged in the courts.
One of the two policies we discuss in the chapter allows related corporations resident in Canada to transfer losses within the corporate group with certain restrictions to pay tax on the profits of the group rather than on the profits of the individual companies. This practice has been allowed since 1988 even though the Income Tax Act contains no comprehensive loss-consolidation regime. But because there is no regime, taxpayers sometimes have to go to inordinate lengths to achieve the consolidation. This is costly both for the taxpayer and for the auditor who has to review the scheme. It also raises questions of equity because some companies are restricted by regulations or covenants from carrying out the necessary transactions to achieve this loss consolidation.
Similarly, we are concerned about the administrative policy on interest deductibility. There has been a great deal of uncertainty in this area since a court decision in 1987 overturned Revenue Canada's then administrative policy. However, because legislation has not been introduced to deal with the issue, Revenue Canada continues to apply its administrative policy. It's not clear to us why the administrative policy has not been legislated.
Our audit of the large file program also included a review of the process followed by Revenue Canada auditors in selecting the issues they audit. We found that several improvements have been made in this area. The department is using more specialists and improved audit tools to help auditors select the best issues. At the same time we found that many auditors are not taking full advantage of these specialists and tools. Selecting the most important issues to audit is critical because if auditors do not do this, then they are unlikely to achieve the best results from their audit effort.
Despite the improvements we found, we continue to have concerns. We identified a need for auditors to use a more top-down, risk-based approach to issue selection. We found little documentation supporting such an approach. Our discussions with case managers revealed that few of them were looking at their cases from this viewpoint. The risk in not following such an approach is that significant non-compliance may go undetected.
This kind of analysis is important so that auditors are more able to identify non-compliance that may not be readily apparent from the disclosures taxpayers have made. In our view, the department will need to invest time and resources to train its auditors fully because top-down, risk-based analysis is not easy. As we point out elsewhere in our chapter, more emphasis needs to be placed in ensuring auditors have the appropriate skills, and issue selection is one of the key skills. The pay-off will be reduced risk of revenue loss to the treasury and reduced compliance costs to the taxpayer.
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[Translation]
Another one of our concerns is staffing. An adequate, competent and motivated workforce is essential for the effective and efficient delivery of the large file program. This is because of the sophistication of the taxpayers and the complexity of the files being audited. Most of the case managers and auditors we talked to took pride in their work and derived satisfaction from the intellectual challenges it provides.
At the same time, we observed a number of staffing issues that need to be resolved. For example, some regions have been having difficulty staffing up to the levels considered necessary by headquarters to deliver the program. The gap was about 14% in 1995-96 in the two largest regions. As well, difficulties in filling vacant positions have resulted in temporary assignments and acting appointments to fill those positions over extended periods of time. This causes instability and tensions in the work place that make it difficult for auditors to be at their most productive.
Management is aware of the problem and has committed to improve those aspects of planning and staffing processes that are under its control.
Let me turn for a moment to the issue of accountability. Revenue Canada is given considerable resources by Parliament to carry out its mandate. Part of that mandate is enforcing the Income Tax Act. Revenue Canada is therefore accountable to Parliament for the results of its enforcement activities.
We observed that the results that are measured by Revenue Canada and reported to Parliament for the large file program are designed to reflect the Auditor's contribution to the final reassessment or refund of taxes and in our view they do this fairly. However, they do not give a complete picture because they do not necessarily reflect the cash impact of the audits. There are often other issues that enter into the final reassessment or refund of taxes at the end of an audit that are not reflected in the results. This is particularly true for large corporate taxpayers who are audited annually.
Exhibit 37.9 gives an indication of the possible differences. You will note that in one case the auditor increased the corporation's taxes, and that this was reported as the result of the audit. But because of other adjustments the taxpayer received a refund and this was not reported. In the other case, the taxpayer's actual reassessment was higher than the adjustments found by the auditor and reported to Parliament. In our view, it is essential that both the auditor's efforts and the cash effect of the audit be reported so that the Parliament and other stakeholders get a complete picture of the results of the large file program.
Many of the reassessments issued at the end of the audit for a large corporation are objected to and appealed. This occurs because the taxpayer agrees with Revenue Canada's interpretation of the law with respect to the issues being reassessed. It also occurs because the amounts are usually large and it is often cost-effective for the taxpayer to present its case to Revenue Canada's appeals directorate and, ultimately, the courts.
We, of course, do not disagree with this process. Our concern is with the reporting of results. The dollar results of appeals are not reported to Parliament. Therefore, members of Parliament do not have a complete picture of the final results of the audits for the large file program. The results that are reported by the Department may well overstate the actual amounts that will be received by the Crown when all the appeal stages have been exhausted. This could also affect the revenue projections prepared by the Department of Finance.
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[English]
Mr. Chairman, I'd like to draw some overall conclusions on the large file program. Our report discusses the many strengths of the program. In particular, I'm encouraged by the department's move to build a more transparent and cooperative relationship with taxpayers. While it's too early to tell how successful this approach may be, improving the relationship between Revenue Canada and taxpayers should benefit both parties. As well, the department's initiative to become more current with its audits is commendable.
Our report has also identified significant opportunities for improvement that we believe could further strengthen the program. These opportunities include strengthening the way issues are selected for audit, filling vacant positions with people who have the right skills, and providing access to more learning opportunities for auditors. Revenue Canada is dealing with very sophisticated taxpayers in this program and it needs to work hard to assure Parliament and Canadians that these large corporations are complying with our tax laws.
In my view, the work already done by the department, when coupled with the improvements we have recommended, should contribute to accomplishing this objective and should result in more efficient and objective audits.
I thank you, Mr. Chairman. We would be pleased to answer any questions you may have.
[Translation]
The Chairman: Thank you. We shall now go to Mr. Lacombe, whom we welcome to this committee. In my personal name and speaking on behalf of the members of this committee, I congratulate your new boss, Mr. Wright, for his appointment. We're sure that we'll have the pleasure of seeing him as soon as possible.
[English]
Mr. Barry Lacombe (Assistant Deputy Minister, Verification, Enforcement and Compliance Research Branch, National Revenue): Thank you very much, Mr. Chairman. We will pass along your kind words to Mr. Wright. I'm sure he's looking forward to meeting with the committee, and given the work of the Auditor General, I'm sure he's going to have many occasions to meet with the committee. We look forward to that.
Let me also thank you, Mr. Chairman, for this opportunity to speak with you on the subject of our large business audit program. As the Auditor General's report indicates, this is one subject to which we're devoting a great deal of attention.
Compliance with the Income Tax Act by large Canadian corporations is something that we take very seriously. As you know, we have an audit program that encompasses all major corporations and the companies under their control. Overall, this program affects some 6,000 corporations.
Auditing these corporations, as the Auditor General has pointed out in his report, raises complex challenges for Revenue Canada. The factors that contribute to the complexity of our work include the size of these corporations, their geographic dispersion, their multinational activities, their diversification, and their economic importance. For these reasons, we are continually enhancing our expertise in order to improve our review of these corporations.
In addition, we work hard to foster better relationships between the department and these large corporations, both to make the audit process more efficient and effective and to improve compliance. We view making sure that large corporations are complying with the law as important in reinforcing the public's confidence in the fairness and the integrity of the tax system.
I'm pleased to note that our efforts are having the desired effect, as the Auditor General has pointed out in his November report.
We're also very pleased with the Auditor General's recommendations. I'll address those in turn in a few moments.
As you may know, in the report the Auditor General states that Revenue Canada's large file program provides a coordinated approach to auditing the tax returns of the largest and most complex corporations. Management has paid considerable attention to the program and has several initiatives in place to improve it. We've very encouraged by the Auditor General's favourable comments, while recognizing that we still have some improvements that need to be made.
As you know, in 1994 we developed an action plan to reduce the period of time between the time a return is assessed and the time it is audited, and that initiative has greatly improved the situation. Perhaps I can give members a little example.
It is not as useful to be looking at tax avoidance schemes four, five, six, or seven years after the fact. The more current the look, the better able you are to identify them and take appropriate and timely action. This is one of the benefits that will accrue and is accruing from our new approach to large business audits. In 1995 we announced a new approach to large business audits. This new approach is based on cooperation, openness, and transparency between the taxpayer and the department.
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If you'll allow me, I'd like to touch on some of the parameters of this new approach as they were discussed in the Auditor General's report.
We are establishing audit protocols, we are moving to audit in real time - that is, we're actually conducting audits before the taxpayer files - and we're doing coordinated audits. The audit protocol provides a written framework that will govern the audit process in the relationship between the department and a specific large corporation. There are a number of benefits, including enhanced certainty in the audit relationship, faster audits, more timely resolution of outstanding issues, reduced errors, and reduced costs for both parties. To date, 15 protocols have been signed and discussions are under way with another 80 of Canada's largest corporations. I might also say that a number of other corporations are currently operating on the basis of the protocol relationship, and we intend to move forward with protocols for that group of corporations as well.
Our real-time audit should also bring greater certainty to everyone involved in the large business audit. In a real-time audit we conduct the audit before the corporation files a tax return, as I've said. Already it is proving beneficial for both corporations and the department. It saves substantial amounts of time for both parties because records and staff are immediately available. It also provides greater certainty for corporations about their tax liability on audited issues, and it reduces their interest costs. For us, it means we're looking at issues more quickly. This is particularly important when we're talking about coupling real-time audits with coordinated audits.
In coordinated audits we are looking at all dimensions of the corporation at one time. Coordinated audits will cover income tax, GST, payroll, tax avoidance, international, and the like. Indeed, what we're doing is bringing teams involving these various specialist areas to review each of the large corporations and to determine if indeed there are transactions that we should be looking at in more detail.
To promote these new initiatives we've taken a number of steps. We've done it through brochures and pamphlets, we've done it by meeting with large corporations, and we've spent a lot of time with our large file case managers to ensure they're onside with what we're doing.
Let me now turn directly to the recommendations the Auditor General raised.
The Auditor General recommended that we continue to consult with the Department of Finance in an effort to improve the process of recommending legislative changes so that changes reflecting accepted administrative policies can be recommended to Parliament sooner. I want to assure the committee that we're very active in fulfilling this responsibility through our legislative recommendations area.
During the first seven months of the current fiscal year, our field offices made a number of referrals to headquarters. Our auditors in the field are aware of the need to identify ambiguities in the law, as it is a mandatory item in each audit report. These referrals are passed on to our legislative policy area, and necessary recommendations are then made to the Department of Finance. As a result of these recommendations, the Department of Finance announced 15 changes in the recent federal budget. This goes to us ensuring that we can get the most value-added from our audit efforts. We want our auditors to contribute to these proposals, because they're seeing it at the core and we want to make sure we're getting that value-added.
Other recommendations of the Auditor General were that Revenue Canada train its case managers to do more strategic analysis of their cases, that we implement a challenge review process for issues selected for audit, and that we ensure the rationale underlying the issue selection process is adequately documented. We have discussed each of these points at recent meetings of the large file steering committee and at the national large file workshop that was held in February. Let me simply say that we agree with the Auditor General on these points.
I might point out here that one of the things that we've done so that we can get the kind of strategic analysis to which the Auditor General refers is to define a new role for our large file case managers. That new role becomes enforced because they're now responsible for managing the team of auditors who are going to be looking at a specific corporation.
In addition, we are in the process now, because we've received a higher grade for our large file case managers, of filling those positions. Those positions, given the higher grade, will involve more strategic analysis, more risk assessment, more insurance that all issues have been examined.
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Let me also say that to strengthen this, in future we intend to have our experts, be they international experts or tax-avoidance experts, as well as the large file case manager, sign off on the audit to indicate that all issues have been examined and considered.
Turning to the issue of striving to better meet the special needs of auditors working in specific industrial sectors, in December 1996 all our tax service offices received three more checklists on the types of audit issues for specific industries. We are currently developing checklists for five other industries.
I'd also like to remind committee members of our ongoing efforts to expand our industry specialist service. Staffing action is currently in progress, and we'll be increasing the number of industry specialists from six to eighteen. Once we've digested those, we'll be extending even further. These positions are being upgraded to recognize the vital role industry specialists play in helping to ensure consistency in applying the law and our policies, and in interfacing with the industry.
Another Auditor General recommendation was that Revenue Canada provide more information to Parliament on the results of the large file program. This would include information such as actual taxes billed or refunded and the number of subsequent appeals.
Let me also say that we were very pleased to hear the Auditor General say that the way in which we do measure things now is an accurate reflection of the final reassessment that is provided as a result of our audit efforts, and that remains a very important measure for us.
Nevertheless, as we have said before the committee in previous appearances, we agree that we need to improve this kind of information. In that regard we're involved in the construction of a data warehouse system that will meet these information needs. It will also serve a number of other purposes for the department.
In response to the recommendation that Revenue Canada accelerate its efforts to analyse compliance levels for taxpayers in the large file program, I would first like to remind the committee that we audit every return of the primary file in a large file case. With respect to other files, we select them for audit on a risk assessment basis. We are continuing to prove our risk assessment selection, and, as the Auditor General notes, we have strengthened the compliance research capacity within the department by creating a compliance research directorate. This directorate has already started to do the kinds of analyses the Auditor General refers to, and like the Auditor General, we believe this is going to yield important benefits for the department.
The Auditor General also recommended that we improve its processes so that the resources needed to manage a large file program effectively and efficiently are available and used on a timely basis, especially in key regions. We're continuing to staff our positions as efficiently and effectively as possible. We also closely monitor resource utilization in the large file program and will continue to do so.
In response to the Auditor General's concerns about delays in resolving staffing issues in the large file program, I can ensure you that we're continually examining ways to streamline the staffing process so that we can reduce unnecessary delays and paperwork.
We agree with the Auditor General's recommendation that we should continue our efforts to reduce apprehension in the workplace, and our consultations with manager staff and unions will continue. I can tell the committee members that we meet on a quarterly basis with our unions related to our auditors and that we have excellent working relationships with them.
Finally, the Auditor General recommended that the department expand learning opportunities for case managers and auditors to ensure that they have the appropriate skills. Clearly our large file case managers are vital to the success of the large file program, and we believe we have a robust training program for both managers and auditors in place. Nevertheless, we think the Auditor General's advice is sage advice and we will be doing everything we can to expand training and learning opportunities for our large file case managers and all our auditors.
We also believe that by introducing the issue challenge concept, as outlined in the Auditor General's report, in and of itself will increase learning opportunities and enable large file case managers to learn from each other, which may be one of the best ways of learning.
In addition to formal training courses, we do have the large file case managers who attend national workshops, and we spend a substantial amount of time devoted to current technical issues. They also attend technical sessions put on by the industry specialists and on tax avoidance. They are responsible for managing the compliance relationship with large corporations. They need to be current and they need to have a good understanding of all the potential issues.
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All in all, we believe we're on the right path, and we support and intend to act diligently on the recommendations that have been made by the Auditor General.
We'd be pleased to answer any questions from the committee, Mr. Chairman, and thank you very much for the opportunity to do that.
[Translation]
The Chairman: We'll now go to Mr. Rocheleau for a ten minute round of questioning.
Mr. Yves Rocheleau (Trois-Rivières, BQ): I would like to thank the two witnesses. My first question is for the representatives from the Department of Revenue and I'd like to get their reaction to what the Auditor General has said, especially when he mentions a matter of principle, taking into account the legitimate and correct nature of Revenue Canada's procedures when it issues administrative policies in cases that are not already covered by legislation.
However, in view of how the Auditor General puts the problem, one might wonder where this good idea of using administrative policy should stop. What kind of guidelines can be used to see to it that an administrative policy that is a good one to deal with a new situation is written into the legislation? What guides the Department of Revenue and what encourages the department to see to it that this policy is written into the legislation, as it is recognized it is Parliament that, in the final analysis, is the principal in a matter such as this, not the technocrats or bureaucrats from the Department of Revenue? Even though the public interest is already being preserved, the fundamental rules of the game still have to be recognized. What's your reaction to the very relevant and very important comment made by the Auditor, knowing the fundamental rules of the game that are supposed to be regulating our community's behaviour?
[English]
Mr. Lacombe: Thank you very much for the question, Mr. Rocheleau. Let me come at this in two ways. Clearly, everything we do has to be in accordance with the law.
In the case of losses and consolidated losses, as the Auditor General notes in his report, I believe, we are operating within the law. The law itself does contain a number of provisions dealing with losses between unrelated parties to ensure there's not migration of losses between unrelated parties. So in the case of losses between related parties, it follows that we are operating within the parameters of the law. That is not an issue.
Many of these things sound simple on the surface but are quite complex. For example, a number of countries have quite complex laws about losses between related parties. In some sense, because they try to be explicit and cover every situation, they too encounter difficulties. In these cases, what we do is make clear what our administrative practices are. The community knows them. We present these at the Canadian Tax Foundation and those kinds of things, and clearly we encourage our colleagues in the Department of Finance to move forward with changes in the law.
Sometimes the issues are exceedingly complex and it takes time to get them properly constructed. As I've said, in the case of losses, a number of countries have quite detailed rules and they don't work all that well either.
In terms of the question of interest, again, as the Auditor General points out, I believe, in December 1991 a ways and means motion was tabled by the Department of Finance. They consulted the tax community, and the conclusion was that the law would be so complex as to be virtually unworkable. Finance is still studying the issue, but again, this is an area where it's complex and it takes time to develop the appropriate legislation.
So what we do when we have administrative policies is make sure they're clearly understood. People can challenge them, but we make sure they're clearly understood, and we have to operate within the parameters of the law.
[Translation]
Mr. Yves Rocheleau: I'd almost feel like asking the Auditor General whether, as parliamentarians, we should be satisfied with this answer that is not easy to interpret. Intellectually speaking, do you find it satisfactory?
Mr. Desautels: If you don't mind, I'd ask Mr. Elkin to answer your question.
[English]
Mr. Barry Elkin (Principal, Audit Operations, Office of the Auditor General of Canada): Mr. Chairman, there's no question that the issues of loss consolidation or interest deductibility are complex issues.
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I think the problem with the loss consolidation issue is that it creates a certain inequity. There are certain corporations that, because of regulatory concerns or other issues, are unable to take advantage of a policy that's in existence. So there's an inequity between those corporations and corporations that are not restricted in some fashion.
A number of years ago a plan or a proposal was presented to Parliament dealing with loss consolidation. That never proceeded, so certainly there are methods of dealing with the issue, or ultimately we have to come to terms with the issue.
The other thing that happens when you have an administrative policy is you get a certain amount of creeping, and that can happen over time. What I mean by that is you can start out at day one and decide that related companies, companies that can take advantage of this provision or this administrative policy, are at least 95% owned. Then it starts going down to 85%, or 75%, or, we use as an example, 67%. So you have a continual creeping and changing of the rules. This could create concerns with respect to equity.
The issue with respect to interest deductibility is we're now back to where we started before the Supreme Court decision. So we're in fact dealing with rules that the Supreme Court has said are not the proper rules. So it's a question of dealing with legislation that's contrary to the court's interpretation of it. This causes us some concern.
Our feeling was that if you're dealing with this issue and in fact you're allowing taxpayers to take advantage of the administrative policy, somehow you have to come to terms and legislate what in fact you're enforcing, how you're enforcing.
[Translation]
Mr. Yves Rocheleau: Of course, this is a complex matter but what concerns me is that as far as Revenue Canada's organizational culture is concerned, if the administrative measure is legitimate and good, then one would feel like submitting it to Parliament as soon as possible for it to become a law and more of a comfort for everyone involved. If I'm not mistaken, there's a danger it might be invalidated and the tax base would then be penalized. In my opinion, what is at stake are the fundamental rules and principles of the British parliamentary system that should guide the relations between Parliament and the public service.
I believe I understand there's an aspect concerning non-arms length corporations and the transfer of losses which is interesting and funny. If, within a group of corporations, you can have non-arms length corporations that can transfer their losses to the others and if the principle is good for corporations, couldn't it be good also for couples where a spouse suffering losses would be able to transfer them to the other spouse enjoying profits? If it's good for corporations, then why wouldn't it be just as good for individuals? What's the justification for this in our society?
[English]
Mr. Robert Beith (Assistant Deputy Minister, Appeals Branch, Department of National Revenue): Mr. Chairman, perhaps I could respond to that observation.
There are sanctions in the Income Tax Act that prevent income splitting between couples. However, one could conceive of a situation where a couple had separate businesses that they held in corporations and that they had ownership through a holding company. In a circumstance like that, they might be able to ensure that any losses incurred in one or other of the businesses was absorbed by the profitable company.
So couples in business could structure their affairs to get the same relief that has been extended to the corporate domain.
[Translation]
Mr. Yves Rocheleau: Why make a distinction between corporations and individuals? Why couldn't we apply what's good for corporations to individuals, or to couples, in this instance? How can this be justified on a definitive basis? I suppose that in some cases, there's a great advantage in transferring losses to the non-arms length corporations thus decreasing one's profits and paying less income tax.
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[English]
Mr. Beith: Really we're talking about fiscal or tax policy, and there are restrictions in the corporate world with respect to unrelated corporations. There are clear limitations that they cannot acquire losses of other companies. There are limitations in the statutes that, as a matter of tax policy, limit or prevent income splitting between couples of let's say wage and investment income.
But I have indicated they could get to the same situation as related corporations operating a business, so in that event there is no discrimination. If they structure their affairs the same way as the corporate world, and own their businesses through holding companies and through shares, then if losses are incurred, they would get to the same result. In other words, the leaf is being extended to business losses against business profits, as opposed to other sources of income.
[Translation]
The Chairman: Thank you.
[English]
Mr. Silye, for ten minutes.
Mr. Jim Silye (Calgary Centre, Ref.): Thank you, Mr. Chairman.
Good afternoon, gentlemen. I would like to start my questioning by reading a statement and getting your reaction to it, Mr. Lacombe. My statement reads like this:
- Owing to nature of their operations, large corporations have more opportunities to take
advantage of the complexity of the Income Tax Act.
Mr. Lacombe: Let me respond to that in two ways.
First of all, as we said in the opening statement, because of their complexity, the risks are greater for larger corporations. Those risks are greater because of the nature of the transactions they have. They also tend to have more international transactions, which raise transfer pricing issues, and so on. The risks are higher, and it's because of that higher risk that we audit all the large complex corporations on an annual basis.
But when they take aggressive interpretations of complex sections of the act - that's what it is, aggressive interpretations of complex sections of the act - that is tax avoidance. Revenue Canada's job is to challenge those aggressive interpretations and to reassess them where we think those interpretations are too aggressive. But that is tax avoidance.
Mr. Jim Silye: Some of these large corporations do have revenues that are generated offshore or internationally. Is there anywhere in these large corporate returns that they have to declare their foreign asset holdings, or do they just declare their revenues?
Mr. Lacombe: They have to give us information on foreign affiliates.
Mr. Jim Silye: Which are corporations.
Mr. Lacombe: That's correct, but this applies to trusts and partnerships as well. They have to give us the kind of information on their foreign affiliates or their foreign relations or foreign activities. Indeed, we'll be strengthening that with the new reporting requirements that have recently been announced.
Mr. Jim Silye: How many audits did you do on the large corporations last year?
Mr. Lacombe: Basically, I've come at it in a different way. We audit all the large complex corporations and all their subsidiaries and related corporations on an annual basis, so that's100% covered.
For others - and the large corporation program covers corporations with $15 million or more in annual income - we would be auditing about 35% to 40% of them in any given year.
Mr. Jim Silye: What's a large corporation, then?
Mr. Lacombe: Anything with annual revenues of $15 million or more.
Mr. Jim Silye: You said they're audited at 100% every year.
Mr. Lacombe: The large complex ones? About 6,200 are audited every year, and then the others are audited on the basis of 35% to 40% a year.
Mr. Jim Silye: Of those large corporations that you audit every year, how many are reassessed? Based on what their interpretation is, how many are reassessed?
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Mr. Lacombe: I don't have an exact number here, so I might be going out on a limb. I would assume every one of them probably has had some reassessment or other, and that is because of the way in which they interpret particular sections of the act. As I've indicated earlier, they might be a little aggressive in their interpretation of it.
Mr. Jim Silye: How many of these assessments have included a penalty?
Mr. Lacombe: I don't have that number but I can get it for you.
Mr. Jim Silye: There are some, though?
Mr. Lacombe: Yes.
Mr. Jim Silye: And do they occur basically with interpretation of administrative policy versus interpretation of the act itself?
Mr. Lacombe: It would be interpretation of the act, and of course hopefully all of our information bulletins and other information reflect the act. But in some cases, it may be that they don't file a return. As you know, there are some returns that have to be filed and there are penalties associated with them if they're not filed. So there are a series of reasons, but penalties are indeed levied.
Mr. Jim Silye: On assessments, is there a high appeal rate?
Mr. Lacombe: I think the appeal rate probably runs in the order of about 25% to 30%.
Mr. Jim Silye: Who sets the policies? I sometimes find it very interesting that we pass a budget here in the House of Commons or the finance minister announces something through a news release and it's already in place in the marketplace. It's not even law yet, but the government is collecting taxes on it. A ways and means motion then gets tabled about five months later to catch up with it and make it legal.
Mr. Lacombe: Let me say that I'm not an expert in this area. You'd probably want to talk to someone from the Department of Finance. My sense of it, however, would be something like the following: measures coming out of a budget usually take effect the night of the budget, and the ways and means motions are usually tabled with the budget, so what we essentially do is prepare on the basis of that ways and means motion. Generally, we really don't act otherwise until the ways and means motion takes force and effect. So by and large, the measures that we implement quickly would be budget measures and ways and means motions associated with the budget.
Mr. Jim Silye: You indicated that Revenue Canada is trying to improve its relationship with corporations through a more comprehensive approach. In other words, audit everything while you're there rather than coming back every six months for a separate aspect of a company's financial affairs.
Mr. Lacombe: Absolutely.
Mr. Jim Silye: You mentioned things like the corporate tax, the GST, and the payroll tax. Could you either define or give me an example of what a payroll tax is?
Mr. Lacombe: Yes, source deductions. How's that?
Mr. Jim Silye: Source deductions. What do they include?
Mr. Lacombe: Source deductions, Mr. Silye, would be the system by which the corporation deducts tax at source for all of its employees. You know those pay cheques that you get every two weeks?
Mr. Jim Silye: Yes. So is a tax at source a payroll tax?
Mr. Lacombe: It's an income tax, but it's deducted at source.
Mr. Jim Silye: What other examples are there?
Mr. Lacombe: We would look at employer-provided benefits of one type or another.
Mr. Jim Silye: Is unemployment insurance a payroll tax?
Mr. Lacombe: Yes, unemployment insurance is a payroll tax.
Mr. Jim Silye: Is CPP a payroll tax?
Mr. Lacombe: We don't look at CPP.
Mr. Jim Silye: You don't tax it?
Mr. Lacombe: It's not taxed.
Mr. Jim Silye: Is the CPP not a tax?
Mr. Lacombe: No, it's a contribution to the pension plan.
Mr. Jim Silye: Is UI not a contribution? Isn't that what unemployment insurance is called - or was?
Mr. Lacombe: It's not a tax either. It's a premium for employment insurance.
Mr. Jim Silye: So is UI not a payroll tax either?
Mr. Lacombe: No, it's not.
Mr. Jim Silye: So UI is not a payroll tax and the CPP is not a payroll tax. Is worker's compensation a payroll tax?
Mr. Lacombe: Yes, but it's provincial. Worker's compensation, CPP, and employment insurance are all premiums paid to provide protection of one type or another.
Mr. Jim Silye: Are they payroll taxes or not?
Mr. Lacombe: Some people call them payroll taxes and some people don't, so it's a little bit of a semantic game. Each of them has a specific purpose associated with it. As you know, in the case of CPP, it's a contribution toward pension benefits.
Mr. Jim Silye: But if the government sets the rate and the government forces you to pay it, isn't that a tax? Or is it a program?
Mr. Lacombe: It's a program with a premium or contribution rate relative to what the overall purpose of that program is.
If you're trying to get at the point of whether something is a payroll tax or not, if you read some articles, some people say it is a payroll tax and other people say it's not a payroll tax.
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Mr. Jim Silye: What I'm trying to find out as a politician is.... I used to sit and listen to former Conservatives and Liberals debate, and they used to say that payroll taxes kill jobs. I want to know what the payroll taxes are that kill jobs.
Mr. Lacombe: Our job is to worry about compliance and to make sure that, in the case of employment insurance, the premiums are appropriately paid. Similarly, with regard to income taxes to be withheld from an employee's salary, we want to make sure they are properly withheld. So our job is to worry about compliance.
Mr. Jim Silye: I want to get back to compliance and retaining the integrity of the tax system. Based on your auditing of the large corporations, would you give their submissions to Revenue Canada and their cooperation with Revenue Canada an A plus, an A minus, or an A?
Mr. Lacombe: Let me say that I could give them an A plus, an A minus, or an A, and in some cases a C, a D, or an F.
Mr. Jim Silye: It depends on the corporation.
Mr. Lacombe: It depends on the corporation.
The good news in all this -
Mr. Jim Silye: What causes the complexity, then? What are the major disputes over? Can you cite one or two examples of what causes Revenue Canada to clash with either corporations or individuals?
Mr. Lacombe: Let me give you two areas. One area would be aggressive interpretations of the law, taking us into tax avoidance schemes of one type or another that we challenge. The other is the international issue. As the Auditor General pointed out in his opening statement, transfer pricing is a very important issue.
Transfer prices are essentially the prices at which goods and services are sold in non-arm's length transactions between affiliates across international boundaries. As you might imagine, the way in which those transfer prices get established can shift income and expenses and therefore taxes. Those would be two key areas in which we're always alert.
Mr. Jim Silye: Thank you.
The Chairman: Mr. Hubbard, you have ten minutes.
Mr. Charles Hubbard (Miramichi, Lib.): Thanks, Mr. Chairman.
In terms of this overall look, we have, as the Auditor General points out in his remarks,6,000 companies - corporations - and about $4 billion in revenues. Those revenues are at what average rate in terms of those 6,000 corporations?
Mr. Lacombe: I think if you just took a rough estimate of the average corporate tax rate, it would probably be in the order of 28% or something like that. In the budget documents there was a calculation relative to corporate profits of income taxes and capital taxes, and I think the rate there over that time period ranged between 32% and 41%. It's in the budget documents. There's a little section that I'm sure you've all seen. When you include the capital tax side of it, you end up with somewhere between 32% and 41%. The interesting news in this chart that's in the budget documents is the way in which taxes track corporate profits. When profits go up, corporate taxes go up.
Mr. Charles Hubbard: That's the point I was trying to reflect on, especially with these big banks that have made profits in the billions. It's a surprising figure to see a quote of $4 billion, so that must relate to a particular time. If we assume that some of the propaganda we're getting from the lobbying groups for the banks.... I would think that we'll soon have much increased revenue from the corporate sector. Would that be a fair statement to make, Mr. Lacombe?
Mr. Lacombe: As profits go up, taxes go up. That's the relationship that's shown in the budget. Our own compliance research work suggests that those relationships hold, so we would expect to see that happen.
Mr. Charles Hubbard: With the transfer of debt or the transfer of tax breaks or the transfer of R and D - whatever it might be from one company to another company.... I think a lot of Canadians today are concerned about these conglomerates that are buying up smaller companies. I can think of certain manufacturing companies in the past ten years that have had tremendous amounts of credits that they can take into the corporate sector with them.
A company buys out a company that has a very poor balance sheet and has a lot of these so-called credits. Is there a concern about transferring these from one to another in terms of these conglomerates that we see being developed in some sectors?
Mr. Lacombe: We would look at all of these very carefully.
Maybe I could ask Mr. Gauthier to give you a more detailed answer, Mr. Hubbard.
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Mr. Ed Gauthier (Director General, Audit Directorate, Verification, Enforcement and Compliance Research Branch, Department of National Revenue): It did become a concern. Over the past few years there have been some legislative amendments brought into the act to ensure that you cannot use the credits and losses from companies that were acquired - in other words, arm's length parties. When we talk about the consolidation, the only time, in theory, you should be able to use the credits and the losses of other companies is when they are within a related group. There have been some amendments put through Parliament to stop the acquisition of losses and credits from other corporations.
Mr. Charles Hubbard: With respect to this committee that you say is constantly meeting to review points that need clarification or legislation, how often would that group meet? Does it meet monthly or quarterly? In terms of preparation, you have to go to Finance to look for solutions to some of the situations you encounter, so how often does your group meet to make proposals to Finance?
Mr. Lacombe: We meet with them more or less on a weekly basis, and that's for issue-specific things or things that are on our radar screen - kind of an alert system. We then have a monthly meeting with them, and that's a more in-depth meeting, in which we're actually putting things on the table. As you suggest, Mr. Hubbard, we've actually done more work to lay out the concerns we have, the particular reasons that we think a concern is arising, and what may need to be done to deal with it.
Mr. Charles Hubbard: Mr. Lacombe, in terms of training and people that you manage to maintain your department, it appears to be like the old gunslinger or moneyslinger group that is out there trying to arrange books in such a way that it gets the most favourable tax advantages. Do you maintain a high quality? Are you having difficulty getting auditors to work in your department? How does the system work in terms of the people you have in your employment?
Mr. Lacombe: Maybe I can give you two examples, Mr. Hubbard. First of all, we've instituted an audit quality program. Under this audit quality program, we actually review audited files. There's a group that does this. They meet with the taxpayers and tax professionals. What we want to do is ensure that the file was well audited, draw the lessons from things that have worked well, and correct the things that have not worked so well. We go out and do that. All of this is to improve the way in which we conduct our audits and the performance of our individual auditors.
I'll give you three. The second thing is that, as I mentioned earlier, we have been trying to fill AU-6 positions. We've increased the grades for our large file case managers and for our industry specialists. So we had an internal and external competition. We received about 8,000 applications from outside the department for those positions. That's a measure of people wanting to come and work at Revenue Canada. We also like the increased grade, because we want to retain those good people that we have. So getting those higher grades was very important to us.
The third point, Mr. Hubbard, is that we run well over a hundred training courses per year, and we have over 15,000 participants in those training courses every year. These are our auditors. Some auditors may be taking more than one course. It is a major training operation. In doing that, we rely on the best experts we can find to do those training programs. I should also tell you that there are a number of provinces participating in those training programs that we offer. We try to do that.
Mr. Charles Hubbard: I have only a few minutes. I have one point. In terms of what Mr. Rocheleau was asking, it was always my impression that when you become a corporation or part of a corporation, you file an annual return. I'm somewhat confused with this business about transferring some of your losses to another corporation that you might be involved with.
Could you explain to our committee...? Is this a point that you are concerned with? I have some difficulty in terms of accepting that one corporation could transfer its losses to another related corporation and thus avoid taxation on it.
Mr. Beith: Actually, Mr. Chairman, the Auditor General has set out some examples in his report that demonstrate how it can be achieved. It's not done by electing or by journal entries. These are real transactions that related corporations enter into. They can borrow money, which creates interest as a deduction. That money can be invested or lent, which would also create an interest return or an income return. These have equal and opposite effects between related companies, whose income positions can be pluses or minuses.
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There are quite a number of other examples, but that is what comes to mind immediately.
The statute itself, I might say, allows companies to wind up, and losses in the company being wound up can be absorbed by the parent company. The statute also allows companies to be amalgamated, and the surviving or emerging amalgamated company can use the losses that were in the original company.
Mr. Charles Hubbard: Thank you, Mr. Chairman. I just wanted to clarify that point, because I think we got the impression before that it was simply a transfer of the bottom line, but it is a transfer of business between companies that you are trying to monitor.
Mr. Lacombe: Exactly.
[Translation]
The Chairman: Before giving the floor to Mr. Rocheleau, I have a brief question forMr. Lacombe.
In the detailed presentation you sent to the committee - not in the brief presentation you made a few moments ago - you said;
- According to another recommendation, Revenue Canada was to provide Parliament with more
information on the results of the large files program...
- You also said:
- We will be in a position to seize that kind of data thanks to the implementation of a new system
called Data Warehouse that we are now setting up to address our data needs.
From now on, presentations are going to have to be adjusted to provide more specifics. It's too bad that your are laughing two minutes after the joke's been told; this kind of sarcasm is much better when you get it in the original version, but such are the vagaries of bilingualism. When someone says they're setting something up, I want to know when. This committee is used to seeing dates pushed back and delayed ad nauseam. When is this data warehouse system actually going to be operational?
[English]
Mr. Lacombe: As you can appreciate, Mr. Chairman, the data warehouse is a significant project. It's also a project that we're working on with the provinces. We're involving provinces in our work on it. We have the project team in place. The work has already started. The first release of it is scheduled for the end of this year or early next year, and that will be block one.
Block two of it will be scheduled for completion at the end of next year. This is for us a very important project. It enables us to apply technology so that we can make more efficient and effective use of the kind of information we would like to have so that we can better manage. I might also tell you that we started this project by doing project plans and those kinds of things about eight months or a year ago. Our colleagues from MRQ have been talking to us about it as well, and they're very interested in what we're doing.
So it is a real project. This is not wishful thinking. In my case, Mr. Chairman, what I'd rather do is just go to heaven, but I don't want to die.
[Translation]
The Chairman: Perfect. Mr. Lacombe, as I found your answer very interesting and I take you at your word, could you send the clerk of the committee this action plan concerning the implementation of all stages? When we have a bit of free time, we'll do a follow-up. We'll call you back before us and we'll write to you again to find out how the implementation is going. But we trust you. Don't think we doubt your word.
That's it, I'll give the floor to Mr. Rocheleau for five minutes.
Mr. Yves Rocheleau: To get back to this matter of loss consolidation.
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In paragraph 37.26 of your Report, Auditor General, you say that the Income Tax Act
- ...contains no comprehensive loss consolidation regime. Revenue Canada's administrative
policy is based on explanatory notes provided by the Department of Finance.
- Further on, you state:
- ...one of the schemes we saw involved over 30 individual transactions to accomplish the loss
consolidation. We question why taxpayers should have to go to such lengths if it is Parliament's
intent that they be allowed to pay tax only on the net profits of the group.
Mr. Desautels: There are no bugs under the carpet here. I think it is a most important principle. We believe the actions and interpretations of the Department of Revenue should be supported by the Income Tax Act. Thus, insofar as possible, when one uses administrative interpretation as a support, it should be for the briefest possible time.
In the case of loss consolidation, we're only describing the situation as it exists. It's a fact. I agree with the interpretation given earlier; you can't just use a loss to offset taxable income. You have to go through a whole series of stages and complete a whole series of transactions to attain the objective. I can tell that these transactions have one objective only, even if they are completed, and that is to obtain a certain tax result. They have no other business objective.
We think it's important to ensure that these situations are only temporary. I think that even the people from Revenue and Finance recognize that it's preferable for this to be strictly temporary. I hope we'll find a solution before long. It's a matter of principle and respect for parliamentarians as well as a matter of equity vis-à-vis certain taxpayer groups.
Mr. Yves Rocheleau: Do we have time for comments from Revenue Canada?
[English]
Mr. Lacombe: The only further comment I could offer, Mr. Rocheleau, is that we don't mind raising this issue with our colleagues in the Department of Finance. But I would point out that it is a complex area and that a number of countries have tried detailed legislative prescriptions and they have not worked. They have created problems of a different kind.
The other point I would like to make is the point I made earlier. The Income Tax Act does contain a number of provisions that block sophisticated transactions designed to transfer losses between arm's length parties. What we are doing with our administrative policy is not.... It fits within the law. It's consistent with the law.
In light of your concerns, we will raise this again. I assure you we have in the past. We will raise this again with our colleagues in the Department of Finance.
Mr. Beith: Can I add something?
Mr. Lacombe: Yes, Bob.
Mr. Beith: Mr. Chairman, the Auditor General has indicated that this practice commenced in 1988. Actually it's a much longer standing practice than that. The reason it was mentioned in 1988 is that the general anti-avoidance rule was introduced through tax reform. The Department of Finance made it very clear that, in their view, the general anti-avoidance rule ought not to apply to these transactions that are structured for tax planning purposes. As long as these stats are legally effective, they stated quite clearly that they thought they were consistent with the scheme of the act, and the object and spirit of the Income Tax Act, and were not abusive. That was the reason it was mentioned in 1988. It's a practice that's been around for some years.
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As has been said here, it has been addressed as to whether or not there should be an appropriate structure for this, whereas Mr. Lacombe has said the conclusion is that it would be overly complex. Therefore, we tend to live with this situation and the business community lives with the situation. The rules are well known, and these steps have to be legally effective.
The Chairman: Mr. Minto, do you want to add something to that?
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman.
Mr. Chairman, the issue was one of principle about who had the right to tax and how do you find out the intention of Parliament. As we were doing this audit, sir, we requested a copy of the administrative policy that deals with this very matter. What we were given are the following documents: IC88-2 dealing with GAAR; the 1994 Canadian Tax Foundation/Revenue Canada round table extracts, ATR44; and two speeches given internally to tax avoidance auditors.
So even internally - and this adds to the complexity of the whole matter, sir - there wasn't one place you could go to find what is the policy. I think this is the issue we're dealing with today, that it has become very complex. People have to go through so many transactions to achieve a purpose, and if that purpose is what is intended by Parliament, then surely we can make it easier for the taxpayer, and when you make it easier for the taxpayer....
I just draw your attention to paragraph 37.27, where we say it's also a big challenge internally for Revenue Canada's own auditors because it is so complex. It takes up a lot of their time and a lot of their resources. So I think it is a question of levelling the playing field, that people who can do sophisticated tax planning, who have access to things, could perhaps arrange these transactions whereas others may not be able to.
We appreciate the problems. It is very complicated. It is not an easy thing. There is no easy solution, but it has been out there for a long time. I just come back to the principle that the Auditor General stated it's Parliament that decides how to tax and what to tax, and not administrative policy.
The Chairman: Mr. Silye, five minutes.
Mr. Jim Silye: Thank you, Mr. Chairman.
Mr. Lacombe, I don't know if you know this or not, but since I've been in this House of Commons I've been a strong advocate of tax reform. I really believe that our Income Tax Act is convoluted, complex, and confusing. That's obvious from your answers today about auditing large corporations that are willing to pay their share of tax and the confusion they have - not the ones that are trying to evade tax. I wouldn't respect those people either. I'm talking about your tax avoidance people - and they have the right to avoid tax. That's a legal right of all taxpayers, corporate or individual.
I believe, though, that this is a big issue. I think the national revenue department is a $2.2 billion department, and it costs us a lot of money to continually audit. I think we need to rewrite our Income Tax Act and we need a simplified tax system somewhere down the road. I think we need fewer rates and the lowest rates. It's the high level of taxation that forces people into the underground economy, or what they perceive to be high.
For instance, since 1992 the personal exemption has not been changed even though inflation has been relatively low for the last three or four years. If you took an average of just 2% or even 3%, perhaps 2.5% - I don't know what the average has been - over the five-year period, that's 10%. Bracket creep has led to the higher tax revenues for the government. I don't think that was their intent. I think these lower income people, and all people in fact, are being punished because we can't keep up with everything and people are paying more taxes, and they should be getting a$7,200 exemption, which would have been the same as 1992, and we're not doing that.
We have an Income Tax Act that your department has put out this year, and I think this is really going to tick a lot of people off. That's why I was trying to lead into it through the corporate end in my earlier round of questioning on how much do these corporations have to declare on their tax return. Do they actually have to declare foreign property assets if they don't generate revenues? But, of course, most balance sheets would if it's a corporate entity, and you would find it on there.
On an individual basis, you have a section in there now...and there's nowhere in the Income Tax Act where it says you must declare.... There's no law that says you must declare foreign assets on your income tax. Your income tax is solely for the purpose of reporting your income in this country or world income. It's a voluntary system basically. The check or control we have on individuals is audits, and we need to do that because there are problems individually as well.
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There's no law that says this, but yet it's in this tax return and I find that offensive. I don't know who had the arrogance to order that to be done. It must have been done by the minister, whoever was the minister, whatever year it was decided, after an announcement by the finance minister that he's going to make this mandatory. But we're out of whack here, and now your department is saying you don't have to answer it; don't answer it. Now some CAs are advising their clients, you had better, because if you don't they'll red flag you as you have something to hide.
This is the kind of thing that increases the underground economy. It increases the animosity between taxpayers, corporate or individual, and Revenue Canada. How did something like this happen? What can we do to clarify this?
Mr. Lacombe: Let me deal, Mr. Silye, with this year's T-1 return and the foreign reporting requirements that were identified in the T-1 - the three questions. As I hope you can appreciate, a large number of returns get printed. They get printed well before they're issued in January or late December.
Mr. Jim Silye: There's no law that said you had to do this.
Mr. Lacombe: Let me just continue. At the time it was anticipated that the legislation would be moving. It was. Mrs. Stewart said this clearly in the House. We printed it. As soon as it became clear that this was not going to be the case and the issue was raised, Mrs. Stewart, the minister, stood up in the House and said those three questions do not have to be filled in. In fact, if anyone fills them in, the department will destroy the information.
We went out instantaneously to all the tax preparers so they would change their software whereby they would not be collecting answers to those three questions. We have written to all sorts of professional associations, accounting associations, and so on to redress the situation.
The basic point you're making is one that you don't have to do this, and we've come out in every way possible to make it clear you don't have to do that. I believe we've also had the information set up in each of our tax service offices and so on. The minister, I think, raised this in the House in response to a question -
Mr. Jim Silye: I know she has.
Mr. Lacombe: - and clarified it very early on before even a lot of the ball got rolling on this.
Mr. Jim Silye: You giving your answer and me bringing this up is also another effort on my behalf to make sure Canadians don't have to worry about that. But this leads us to administrative policy versus the law and versus who decides. If Parliament is the one that decides what gets taxed and who gets taxed and how it's taxed, then why are we now going to use the Income Tax Act? Who is making this decision - is it the finance minister, is it the finance department - that you have to declare your assets? It has nothing to do with income on an individual basis. Why?
Mr. Lacombe: I believe the bill is before the House. It was part of the large package that the Minister of Finance tabled a few weeks ago. That bill will be debated in the House, Mr. Silye.
I hope you understand our perspective. You can put your conception on it, and I understand where you're coming from. I hope you understand ours. Believe it or not, we were trying to provide service and help. When you're making judgments because you have to get these forms printed, sometimes you make judgments about where the legislation might be, and at the time that judgment was made, because these things were printed months in advance, we made a judgment on it. That judgment, even in the T-1, was surrounded by a red box; a red mark around the box talks in the T-1 about proposed legislation, not yet passed, and so on. So even there we tried to put the safeguards in.
.1710
I just hope you'll understand there was no malice involved. This was just trying to make sure that if something was supposed to happen, taxpayers could deal with it. That's why we flagged it as proposed legislation. Then when it turned out that wasn't going to be the case, the minister stood up in the House and basically said clearly to Canadians that they don't have to fill in those three questions on the T-1.
Mr. Jim Silye: But you will next year.
Mr. Lacombe: You will have to next year. The bill is in the House, and I assume it will be debated in the House and will follow its normal course.
The Chairman: Mr. Culbert, you have a six-minute round.
Mr. Harold Culbert (Carleton - Charlotte, Lib.): Thank you, Mr. Chair. I appreciate that very much. I'll try to have short questions and hopefully short answers.
Mr. Chair, there are a couple of areas in the Auditor General's report with which I'm particularly concerned. One item is number 17 on page 4 and number 19 on page 5, where it states:
- But because of other adjustments the taxpayer received a refund and this was not reported.
- In the other case, the taxpayer's actual reassessment was higher than the adjustments found by
the auditor and reported to Parliament in number 17.
- Therefore, Members of Parliament do not have a complete picture of the final results of the
audits for the large file program.
I will go on and just pose a series of questions, because they fall together. I'm assuming all or most of the 6,000 large corporations are actually making use of the most modern technological accounting systems, which are probably available for them in order to provide accounting information to their officers and directors, as well as to Revenue Canada auditors.
Do most large corporations comply with a system approved by Revenue Canada or that is compatible with Revenue Canada for the testing and reporting they are presenting? Also, is there a lack of legislation from our perspective that would allow this simple process to easily happen? Finally, I guess from my perspective, is it not most beneficial for both parties, the large corporations themselves as well as Revenue Canada, to indeed develop accounting systems for specific purposes that provide the requirements of both parties?
Mr. Lacombe: Thank you very much for those questions. Let me respond in the following way.
In terms of the large corporations, yes, they all have advanced accounting information systems. For our part, we have computer audit specialists who know the systems of all the large corporations and can go in and pull out whatever it is we need. They know them inside out, and the large corporations are cooperative in letting us do that.
Following on your point, we are doing some things to take even greater advantage of information technology. For example, we're going through a corporate tax return redesign so that they file the whole thing electronically. In doing that, we've been working with the CICA. So there's a common frame of reference for the information and certain software developers, so to speak, so that that can happen with almost no interface at all. It just happens naturally. That's an exceedingly important project for us, and it is going to enable us to do even more of what you're suggesting we be able to do.
To date we have not had a problem accessing the system of any large corporation. There's a lot of commonality in the software of the accounting packages they use amongst these large corporations.
Mr. Harold Culbert: So it would provide the information you and your auditors would require. If I were a director of one of those corporations, it would be something I would think I would want to see as well, to ensure the proper instruments were indeed in place.
.1715
Just to follow up on the comment that was made earlier, you would know in your line of business that private corporations do indeed have pension funds. Even the large corporations have pension funds. In many cases, as a condition of employment, employees are required to pay premiums to their private pension funds. Is that a payroll tax or is it a premium?
Mr. Lacombe: In my view, that's putting money aside today so you can have a nice retirement in the future. To me, that is basically an investment. You're investing for your future and providing for a future benefit.
Mr. Harold Culbert: It is much the same as it would be with a Canada pension fund.
Mr. Lacombe: That's right, or CPP.
Mr. Harold Culbert: The only difference would be that there are components in the Canada pension fund that indeed are a protection. An example would be disability or spousal benefits.
Mr. Lacombe: That's absolutely right. But all these things have a benefit, so you're actually purchasing a benefit.
Mr. Harold Culbert: If I may, Mr. Chair, I have a couple of brief ones here. We hire accountants or auditors from large corporations from time to time as departmental auditors, and from time to time the large corporations hire staff from Revenue Canada as their auditors or accountants. How does this work? Are there problems as a result of these inner changes?
Mr. Lacombe: We tend not to go with interchanges for our audit staff, simply because of the confidentiality requirements of the Income Tax Act, and so on. But large and small corporations do hire Revenue Canada auditors and, subject to the conflict of interest code, they work in the private sector.
Similarly, we have people from the private sector who are interested in working with Revenue Canada and they apply for competitions. But they're governed by the conflict of interest guidelines.
We have tended not to use a great deal of interchanges simply because we worry a little bit about someone saying they saw this or that tax record. If someone's going to join Revenue Canada from outside, we tend to take them in as a regular, indeterminate employee. Similarly, when our employees leave, they're subject to the conflict of interest guide.
Mr. Harold Culbert: Thank you.
The Chairman: Mr. Pagtakhan, welcome back.
Mr. Rey Pagtakhan (Winnipeg North, Lib.): Thank you, Mr. Chairman.
Is it true that Revenue Canada continues to apply the same administrative policy that has been overturned by a court of law?
Mr. Beith: Are you referring to the interest deductibility?
Mr. Rey Pagtakhan: Yes.
Mr. Beith: The case that was decided in 1987 dealt with the borrowing of funds to repay capital of a trust and whether the interest was deductible. The direct analogy to that related to our administrative practices of corporations borrowing to redeem shares.
We looked at that closely and discussed it with our colleagues at Finance and Justice. We were and still are concerned that in the face of that Supreme Court judgment, the practice of allowing interest in these circumstances is problematic.
As we said today, that did lead to a ways and means motion. Unfortunately, the Finance solution to the problem created more problems through complexity, and the ways and means motion has not been acted upon. However, the issue is still under study by Finance, and hopefully a solution will be found soon.
In the meantime, in order to provide certainty and stability to taxpayers, we've maintained the practices that have been out there in the public forum for some years through our interpretation bulletins.
Mr. Rey Pagtakhan: Are you telling me then that the practice you continue has been overruled by the court?
Mr. Beith: In my view, one of the practices has clearly been overruled by the court.
Mr. Rey Pagtakhan: This is one of the practices you continue to implement as though it had not been overruled by the courts.
Mr. Beith: That is correct.
Mr. Rey Pagtakhan: Do you have a concern about it as a department?
Mr. Beith: Yes, we have concerns about it, and we raise the matter frequently with the Department of Finance as to what action will be taken on the ways and means motion or, if that cannot be acted upon, what options are available to us.
Mr. Rey Pagtakhan: I may stand corrected because I'm not a lawyer, but my understanding of regulations emanating from law is that regulations have the force of law. If regulations have been overcome by a court of law, then that ought to have no more force of law. Am I wrong in that interpretation?
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Mr. Beith: No, you are not wrong.
Mr. Rey Pagtakhan: Thank you so much.
Do you agree the dollar results of appeal should be reported to Parliament to ensure the revenue projections by Finance would be within the margin of what is deemed an acceptable variation?
Mr. Beith: We have risk management practices in appeals where we look at the amounts in issue and we look at the impact should these cases be lost at the courts. We meet with Finance quarterly. We feed into their fiscal monitor, which I think they publish every two months. We alert them as to what significant appeals we have in our system that might have an impact on revenues. Depending on what comes out of that information, Finance is able to adjust its projections.
Mr. Rey Pagtakhan: I suppose that is then reported to Parliament.
Mr. Beith: The fiscal monitor is a public document. The projections would be in the budget documents.
Mr. Rey Pagtakhan: It would be in the public domain.
Mr. Beith: Yes.
Mr. Rey Pagtakhan: What would be the prescription, from your experience and expertise, to solving the complexity we have? As a friend of the committee, would you be prepared to provide us with a prescription as to how to solve this complexity in a fashion that is split even to non-tax consultants and non-tax lawyers like us? Is it possible to ask this of you?
Mr. Lacombe: I would think that is an interesting and important question and one that is probably best placed before the Department of Finance. I'm sure they have some work under way taking a look at some of these issues. It really is a matter that falls under the domain of the Department of Finance.
Mr. Rey Pagtakhan: How can you maintain, taxation-wise, that one company truly is different from another, as it is a sister or brother of one, particularly for the purposes of the consolidation of losses, and still maintain the fairness to the overall company? Is there a way to do it? You can make it so distinct. In other words, it is just like an individual citizen. You can be twins, identical twins, but you still pay taxes separately. Can we make it that way and still be fair to the corporations?
Mr. Lacombe: We have to draw a distinction between related corporations, unrelated corporations, and individuals in terms of the movement of losses and so on. In the case of related corporations it is permitted, assuming the transactions that result in the movement of losses are legitimate transactions to move.
Mr. Rey Pagtakhan: In other words, they are sister corporations.
Mr. Lacombe: Right. It is not possible to move losses between or amongst unrelated corporations. In the case of individuals, as Mr. Beith said earlier, if the individuals were involved in a business and they structured the business, then of course they could be treated like related businesses.
In the case of individuals, they would have to structure their affairs that way. This is not designed just to allow people to claim whatever losses they would like against income.
The rules are really quite tight insofar as they relate solely to the movement of losses between related companies.
Mr. Rey Pagtakhan: You may not have to answer this question. I have two more questions, Mr. Chair, since you asked more than two questions.
The Chairman: We can come back.
Mr. Rey Pagtakhan: I have only two more questions, Mr. Chair.
The Chairman: Okay.
Mr. Rey Pagtakhan: Is the staffing of one for every 20 large corporations in your view sufficient to do your job effectively and efficiently?
Mr. Lacombe: I think that's an excellent question. As I explained earlier, the way we're changing our large file program, what we're doing is actually increasing the number of people. But they're going to be specialists in international transactions, international tax audit specialists, tax avoidance specialists, and so on. They're all going to form part of the team so that we bring the full range of skills more directly to the audit of the large corporations.
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As the Auditor General pointed out in his report, in some of our offices the current large file case manager would go and get someone from tax avoidance and say, I need your help to take a look at these tax avoidance issues. In some cases, that wasn't happening.
We want to make sure that everything gets reviewed, so you will see the number of people involved in each large file going up. They're going up, not just in terms of number but also in terms of skill, so we can bring in the international skill, the tax avoidance skill, whatever skill we need.
Mr. Rey Pagtakhan: In an Ernst & Young survey you didn't have a chance to go to in your presentation - but it is in your written brief -
Mr. Lacombe: Yes.
Mr. Rey Pagtakhan: - I was struck that of the respondents, over two-thirds, 50% or 44%, gave a very good view, or at least gave you the impression.... My concern is that only 5% of the people surveyed responded. Would you attach any significance to a survey where only5% responded?
Mr. Lacombe: My guess is that it would depend on how large that 5% was. This was a survey done by Ernst & Young in the U.S. My guess is that the sampling error would probably be pretty large, but I don't know.
But I think it might not be a bad thing to draw some inferences from this. As the survey pointed out, in terms of being diligent and addressing transfer price issues amongst those who responded, Revenue Canada was by far the greatest demander of information.
I can tell you that we've increased the number of international audits sevenfold over the last two years. We've increased our number of international auditors by 300%, and the budget announced further increases for our international auditors. So this is an area where we're being very diligent, simply because it's in a very important area and it contains a lot of risk.
Mr. Rey Pagtakhan: I congratulate you on the initiative and energy with which you are pursuing this.
Thank you, Mr. Chair.
The Chairman: Mrs. Barnes.
Mrs. Sue Barnes (London West, Lib.): Thank you, Mr. Chairperson. I would like this question answered by both.
Mr. Lacombe, in your opening remarks you mentioned real-time audits. I'd like to know something, maybe as much for information purposes for most people: what exactly is a real-time audit? Who picks this up? Whose initiative is it? What benefits and deterrents are there?
I have a question for the Auditor General. Do you see this in a positive or negative light, and would you be encouraging larger corporations to get into real-time audits? My understanding is that at this time there are not huge numbers taking advantage of this system.
If I have time, I'll have a second question. Maybe we could start with the department.
Mr. Lacombe: Thank you very much for the question. Real-time audits essentially mean we're in there auditing a corporation and their transactions more or less as they are actually occurring. So we're seeing them, in some sense, before they actually file their income tax return.
From our point of view, that brings real benefits. First, it enables us to enhance compliance because, as I indicated earlier, we're seeing those transactions as they occur. We know what the parameters of those transactions are. If we need to get information, the people involved in the transactions are there and available to us. If there's something wrong with those transactions, we can take timely action.
When we notice something about a particular series of transactions.... One of the things about aggressive tax avoidance schemes is that they tend to be replicated elsewhere; people talk to each other. It enables us to identify it there and go and look at other areas where we think it might be a problem. So we think it's going to lead to much better compliance.
From the point of view of the taxpayer.... And this is very important for our large corporations, but for every Canadian corporation, simply because they operate in a competitive environment, it means three things.
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First, it means that if we can do this, and do it in real time, the contingency reserves they would have to keep because of uncertainty about taxes owing are no longer required.
Second, it means that interest that would normally be associated with assessments dating back four or five years are no longer there. They don't have to incur those interest costs. Those interest costs can be quite substantial, and they're not deductible. So we think this frees up resources that might be used for more productive investments by these corporations.
In addition to that, it means more effective use of audit staff, both for ourselves and the corporation. Sometimes we go back and we're looking for documents that are five or six years old. It's difficult to find them, the people who were there at the time of the transaction have left the corporation, or are on different jobs, and so on. It's hard to reconstruct it. So we think all of that is good.
There are two deterrents. The first one is the history of the relationship between, say, the department and certain corporations. Where this has been like that, it takes a long time to be able to overcome that clash, that unproductive time. I'm pleased to say that we're making good progress with a lot of corporations where that was the case previously.
The other deterrent for non-compliance is that, of course, the more we see, the better the compliance, and the greater chance that there's not going to be non-compliance. To us that is a very major benefit. Sometimes if a corporation has a long history of very aggressive tax planning - abusive to some extent - they may not like us in there taking a look at their transactions as they're actually occurring.
I don't know if that answers your question.
Mrs. Sue Barnes: Who initiates this? That is my only other point.
Mr. Lacombe: We both do. In some cases, corporations have come to us and they say, we want to do this; we think this is a very good idea. In other cases.... We're out talking to all the large corporations about this right now.
Mr. Desautels: I will ask Mr. Minto to reply to that.
Mr. Minto: At the time when we were doing our own audit of Revenue Canada and looking at the large file program, the department had signed three protocols under this new approach to doing audits of large corporations. At that time it was very early in the game to see how well this new approach to business audits was working, but it looked extremely promising. I think at least in the concept and the discussions that they had initially, our feeling was that there were advantages for both sides to this, if it was implemented properly and properly followed.
Our understanding was that the real-time audits would be done only at the request of the taxpayer. The taxpayers would then have to disclose certain information and certain principles they were using. That may have changed since we have been in the department.
I think the caution we raised...and I just raise that again. It's in paragraph 37.41 of our report. We say that:
- Improving the relationship between Revenue Canada and taxpayers should benefit both parties.
At the same time, Revenue Canada will have to remain vigilant that its auditors retain the
professional inquisitiveness required of all auditors.
Mrs. Sue Barnes: Thank you, Mr. Chairperson. I'm going to switch entirely now. A lot of the Canadian public are used to hearing through their media about large corporations that don't pay taxes or pay little taxes. If somebody is paying at a high tax rate personally, it's pretty difficult to understand why some corporations could end up with a very low amount of tax being paid on profits, say, of $500,000, or so. I think there was a report in Ontario about a year ago that mentioned450 corporations not making tax payments of any substantial amount.
From Revenue Canada's perspective, I want to know how that would occur and if there would be any policy reasons for how that could be managed.
Again, I would invite the Auditor General's department to give its views on that issue as well.
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Mr. Lacombe: Let me give an answer, and then maybe Mr. Beith or Mr. Gauthier can chip in. You have to be careful about taking a snapshot at a given point in time, largely because corporations can carry losses forwards or backwards. So you have to take a look at the history of a corporation in context. What we do know, as I indicated earlier, is that as corporate profits move up, tax revenues tend to trace them, as is outlined in the budget.
There's the issue of deferred taxes, which people frequently allude to, and I think the report that was done in Ontario alludes to that. You have to be careful about deferred taxes because what deferred taxes generally represent are differences between generally accepted accounting principles that are used to identify the fiscal position of the corporation on its balance sheet and certain things that are permissible under the Income Tax Act because governments want to see particular objectives achieved. Perhaps the most noticeable of those would be capital cost allowances, which may allow a quicker write-off of a particular asset than would be the case under generally accepted accounting principles. In some way you have to account for that difference, and that shows up in the phrase ``deferred taxes''.
Ultimately, if you take a faster write-off today, you're going to get a slower write-off five or six years from now because you will have already written it off. So you ultimately pay the taxes on that, and that's why it's called deferred taxes. That's one of the reasons it happens, the way in which capital cost allowances, the movement of losses amongst years, work for corporations.
The point I'd like to make is that taking a snapshot at any one point in time can give quite misleading results. The other point I'd like to make about the Ontario study is that it was done in 1991, which was not a bell-wether year for corporate profits. Therefore, you probably would have seen a number of these corporations coming out of the economic situation of the late 1980s carrying forward a number of losses and using them against the start of the turn-up in the economy, and maybe some improvements in profit would have occurred in 1991. So you can't take a snapshot of this.
Bob or Ed, do you wish to add anything?
Mr. Gauthier: I think there are other items that also come into play. Certain corporations would have been, as Barry said, using the losses of previous years, but certainly there are also credits and resource allowances they would have been benefiting from, which are in the Income Tax Act itself, in which case you would have accounting income but really no tax income. Another item would be the inclusion of dividends, which are really not taxable between corporations. So from an accounting perspective it looks like income, but from a text perspective it is not.
Mrs. Sue Barnes: Would R and D be part of that?
Mr. Gauthier: Yes, that would also be part of it.
Mr. Desautels: Mr. Chairman, I think the question has been well answered by the Revenue Canada people.
Let me just add one more comment. In fact, you're dealing here with a very complex world with very complex tax legislation and with corporations operating in a multinational fashion involving very sophisticated financial transactions. You also have a clientele here that is well equipped to deal with Revenue Canada. They are very sophisticated themselves, and they can retain the best of tax advisers. Generally, they have no intention of paying any more taxes than they legally have to. So I think all I'm saying is that it's important that in this area Revenue Canada be just as well equipped and just as sharp as the taxpayers on the other side in this general field.
Mrs. Sue Barnes: Thank you very much, all of you.
Thank you, Mr. Chairperson.
[Translation]
The Chairman: Mr. Rocheleau.
Mr. Yves Rocheleau: Still on this matter of loss consolidation, Mr. Lacombe, you said you saw the committee found this question to be important and you'd take it up with the Finance officials. However, as Revenue's representative, do you find this point is important? Do you find it's all right and normal that Revenue Canada's administrative policy, to quote the Auditor General, rests on explanatory notes provided by the Department of Finance?
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Should we correct this situation? I really wonder because a bit further on, still in 37.26, it says:
- In 1985 the Minister of Finance proposed a corporate loss transfer system involving simple
elections. Legislation was never enacted to implement this system and instead we now have this
administrative policy.
- 37.27 Complex restructurings to achieve loss consolidation present a real challenge to Revenue
Canada's auditors.
[English]
Mr. Beith: Mr. Chairman, I'd like to clarify that with respect to the consolidation of losses that could be accomplished by trans-legally effective transactions that involve the transfer of income-bearing assets, whether they be of an investment nature or of a business nature, the administration reacts to these transactions. It's not an administrative policy - we apply the law to these transactions. The fact is that the law deals with transactions, transaction by transaction, and their impacts are provided for in the Income Tax Act, which can allow taxpayers in these circumstances to get the benefits they seek.
There are specific rules that prevent unrelated companies from being able to transfer their losses effectively. There are no specific rules that say yes, you can consolidate losses between unrelated companies. The only mention outside of the statute about consolidation of related losses is -
[Translation]
Mr. Yves Rocheleau: I'll be more specific. On page 37-11, the Auditor General states:
- In 1985 the Minister of Finance proposed a corporate loss transfer system [...]. Legislation was
never enacted to implement this system and instead we now have this administrative policy.
[English]
Mr. Beith: My response, Mr. Chairman, is that there is no administrative policy. Revenue is applying the law to protect the transactions that get the results taxpayers are seeking. Certainly, consolidation as a concept has been discussed and is present in other statutes in other countries, and it's not present in the Canadian statute.
The election process that was referred to in 1985 apparently was canvassed. I personally can't say what happened to it. It was a finance department proposal, perhaps at the ministerial level as well as at the departmental level. In any event, nothing took place with that.
[Translation]
Mr. Yves Rocheleau: Could I ask the Auditor General if he has any reaction?
[English]
Mr. Elkin: I think the history of the situation is that in 1985 the finance department published a proposal for a corporate loss transfer system for Canada, which was not enacted. In 1988 the general anti-avoidance rule was introduced, and Finance's explanatory notes discussed the transfer of income or deductions within a related group of corporations. They didn't define related group.
They say the general anti-avoidance rule will not apply in most circumstances, even though transactions may appear to be primarily tax motivated. Taking from that, one can say that the general anti-avoidance rule was designed to upset transactions that appear to be primarily tax motivated.
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In 1990 Revenue Canada gave examples of non-offensive profit-loss consolidations to supplement their information circular dealing with the general anti-avoidance rule.
Revenue Canada then in 1992 issued a ruling that allowed for the circular flow of funds within a corporate group where the subsidiaries are 100% owned to allow losses to offset profits. Again, that ruling refers to the 1988 GAAR explanatory notes for justification for giving this ruling. So it seems to me that Revenue Canada has ruled on this situation and has justified it based on what the finance department said with respect to the GAAR transactions.
In 1994 Revenue Canada clarified its position on in-house loan loss consolidation schemes at a Canadian Tax Foundation conference. Again it refers to Finance's explanatory notes related to the introduction of the general anti-avoidance rule. Revenue Canada points out that most schemes it had reviewed were not subject to the general anti-avoidance rule because the transactions were legally effective and met the technical provisions of the act.
I think one of the key questions is, what is Parliament's intention with respect to loss consolidations? We're sitting in the position that I can't tell you what Parliament's position is with respect to the concept of loss consolidations.
With respect to the example we pointed out in one of the exhibits - the complex example dealing with something like 30 transactions - there are specific provisions in the Income Tax Act that deal with losses when a corporation has been wound up or amalgamated.
One could argue that those provisions wouldn't let something happen on a wind-up or amalgamation that happened under this specific set of transactions. Again, it's a fuzzy situation. As was previously pointed out, we couldn't go anywhere in Revenue Canada and get an answer as to what this loss consolidation situation is. What is the policy?
The Chairman: Mr. Pagtakhan.
Mr. Rey Pagtakhan: Thank you.
I got a different impression, when I posed an earlier question, that an administrative policy, the implementation of which has been overturned by a ruling of the court, continues to be implemented. In light of this answer, has that answer changed?
Mr. Beith: Mr. Chairman, in response to the other question about interest deductibility and the court case -
Mr. Rey Pagtakhan: That's a different story.
Mr. Beith: Yes. I conceded that that is an administrative policy that in my view - and I guess I'm speaking for me - was inconsistent in one respect with the court case for one administrative policy that's found in an interpretation bulletin we are still applying.
Mr. Rey Pagtakhan: It's different from the loss consolidation.
Mr. Beith: Yes. With respect to the loss consolidation, which is not a language you will find in the Income Tax Act, all Revenue Canada is doing is applying the law. The general anti-avoidance rule came in 1988, and it became relevant to the taxpaying public how that rule would be applied.
The Chairman: That's not been overturned by a ruling of the court?
Mr. Beith: Not at all.
[Translation]
The Chairman: Mr. Rocheleau.
Mr. Yves Rocheleau: The Auditor General's wording seems to say that the Department of Revenue is being dragged along by and is at the mercy of the Department of Finance. Is this something to be deplored? Should it be denounced? Is it proper? Who should make recommendations to Parliament? Is it up to Finance or Revenue? Who will tell parliamentarians to act otherwise and change the rules of the game in view of all this complexity?
The Chairman: Was your question for the Auditor General?
Mr. Yves Rocheleau: No, I was quoting the Auditor General.
The Chairman: Sorry, I must be getting tired.
Mr. Lacombe.
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[English]
Mr. Lacombe: The Department of Finance is responsible for tax policy and tax legislation. The only point I would make, as I made earlier, is that in a number of cases you're dealing with complex issues, and finding a solution that works obviously takes time. You also obviously don't want to put in place a solution that's going to make matters worse. As we pointed out on the interest issue, the ways and means motion of December 1991 was indeed released. The tax community was consulted, and they said it was so complex that we shouldn't proceed with it. As Mr. Beith said earlier, Finance is continuing to look at it.
In terms of the losses, as Mr. Beith has said, we are looking at individual transactions. What we're doing is essentially legally effective.
As I've said to you, Mr. Rocheleau, we will raise the concerns of this committee with our colleagues in the Department of Finance on these two issues, as the Auditor General has done in his report, and we will see where we go from there. But tax policy is the responsibility of the Minister of Finance.
[Translation]
Mr. Yves Rocheleau: I'll quickly go back to my last question. Between you and me, is this system of any advantage to anyone or is it free, objective and complicated and that's all there is to it? Is anyone profiting from the status quo?
[English]
Mr. Lacombe: What's probably happening from the status quo in terms of profiting is that the tax professionals have certainty, they know what the rules are with respect to losses, and they know what the rules are on interest.
So who's profiting? I think the tax community is, by having at least a set of rules that are workable. Given the alternatives that have been put in the public domain or given the experience of some other countries that have tried and ended up writing quite complex legislation around these, which created more problems, it's probably the tax community that's benefiting from this.
It's easy to say that if this didn't exist, it would be easy to administer. What I'd like to do, Mr. Rocheleau, is send you some legislation from some of the countries that have the detailed prescriptions. You can look at it and judge for yourself whether that's a better situation or just how easy it would be to audit those particular sets of rules.
This takes time. Clearly we want the problems fixed, but you also want to deal with problems in a way that does fix them. In some cases, that clearly takes time, and given what's happened on proposals that have come out of the Department of Finance on these issues, they weren't seen as being fixes.
I will send you, with your agreement, information on other countries, so you can see that when you try to fix these through detailed complex pieces of legislation, you may end up with greater difficulty.
[Translation]
Mr. Yves Rocheleau: Of course, as a deputy minister, you understand how important it is in these hard times for all taxpayers to pay their equal share and make a just contribution to our tax system, because that's what we are demanding from our fellow citizens at the lowest end of the scale, right now. That's why this debate is very interesting. Everyone should pay according to their means. I'd like to hear the Auditor's comments on my last question. Is the status quo profitable for anyone?
Mr. Desautels: We touched upon that question very briefly in our Chapter 37 and more particularly in paragraph 37.26. Of course, we do state that those who do profit from the situation are those who can organize their business in such a manner as to be advantaged by that interpretation, which is something some taxpayers aren't in a position to do for all kinds of different reasons. So one might wonder about the equity.
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Earlier on, mention was made not only of the principle of respect for parliamentarians, but also of the matter of equity. This policy may be of profit to some taxpayers who have the means to organize their affairs better than others who are prevented from doing so for whatever reason.
The Chairman: Thank you, Mr. Desautels.
[English]
Mrs. Sue Barnes: I just want to check whether there is something that will be sent to one member. I presume it will be sent to the clerk and distributed to all members of the committee.
The Chairman: Yes. This is the practice.
Mr. Lacombe: It's my error, Mr. Chairman. I apologize for that.
[Translation]
The Chairman: As is our custom, the Auditor General will now say a few words in conclusion.
Mr. Desautels: Generally speaking, I'm happy with Revenue Canada's reaction to our chapter. I'm also satisfied with the projects undertaken by Revenue Canada, except, of course, for the matter of administrative measures that are used for prolonged periods.
As I mentioned earlier in answering Ms Barnes, we're dealing here with a very difficult sector and very sophisticated clients. So it's important that the department be as well equipped and as well prepared as the taxpayers.
Finally, I think it is primordial that Revenue Canada follow-up with its projects and on our recommendations and that it is very important that it maintain its capacity in that area at all times.
The Chairman: Thank you for your participation, gentlemen and colleagues.
The Standing Committee on public accounts will now adjourn until Tuesday, 8 April, for the two week parliamentary recess.
For the benefit of those watching us on television, even though there's a parliamentary recess in Ottawa, it doesn't mean that our Mps are enjoying some sort of holiday. We have a lot of work to do back in our ridings.
Thank you and we'll be seeing you.
The meeting stands adjourned.