[Recorded by Electronic Apparatus]
Tuesday, June 4, 1996
.0930 
[English]
The Chairman: I call the meeting to order.
The finance committee is continuing its investigation into taxable Canadian property. We have with us again today, from the Office of the Auditor General of Canada, the Auditor General himself, Mr. Desautels, accompanied by Messrs. Minto and Elkin.
Gentlemen, thank you very much for coming back before us on this very difficult and complicated issue.
[Translation]
We will begin the questions with Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): Mr. Desautels, Mr. Minto, Mr. Elkin, welcome again to the Standing Committee on Finance. I'm very pleased to welcome you here this morning, especially since we have noted that although we questioned the senior officials of the Department of National Revenue and the Department of Finance very closely in the past three weeks, we have not managed to shed light on the cases you denounced when you tabled your report, that is the 1985 and the 1991 cases dealing with the transfer of over $2 billion in assets to the United States without one penny of taxes being collected on capital gains.
Although these officials did give us some technical clarifications on the interpretation of the Income Tax Act, we noticed that the notion of taxable Canadian assets was misinterpreted by these officials and we saw that within one week, there had been an accelerated process of reflection, decision-making and counter decision-making to arrive at the cases that you documented so well in your last report.
Mr. Desautels, don't you think that in those two cases, regardless of the mandate given by the Minister of Finance to the Standing Committee on Finance, namely redefining tax policy to avoid similar cases in future to those you have denounced, it would be a good idea for these two specific cases that you denounced in your report to be referred immediately to the Standing Committee on Public Accounts in order to enable that committee to analyze them and to shed light on the matter for the greater benefit of the Canadian public and of Members of Parliament?
Mr. L. Denis Desautels (Auditor General of Canada): I don't think it would be appropriate for me to suggest to parliamentarians which committee should examine various aspects of our report. We work based on the premise that we report to Parliament and the House of Commons. As you know, our report, by order of the House, is automatically referred to the Standing Committee on Public Accounts.
I wrote to the chairman of the Standing Committee on Public Accounts the day our report was tabled to suggest certain priority issues. Among these, there was of course the note on advance rulings in the case of family trusts. That's all we did, and I think it would be inappropriate for me to go further and suggest to parliamentarians which committees should examine which aspects of our report.
Mr. Loubier: Normally, when the Auditor General's report refers to specific cases that are nebulous in terms of the administration of public funds or decisions made pursuant to the Income Tax Act, the Standing Committee on Public Accounts must examine these cases, Mr. Desautels.
Mr. Desautels: The Standing Committee on Public Accounts is well empowered to examine issues of management, control, and the kinds of issues that we see most frequently in the Auditor General's reports.
Personally, I think that in the current case of family trusts or advance rulings, and especially the issue of taxable Canadian assets, by highlighting an issue of internal control and management, we put the finger on the possibility that the application of the legislation is going in a direction that may not correspond to the intentions of parliamentarians in the past.
.0935
We put our finger on a policy issue, but in an indirect way. I think that the policy issue that we've identified comes under the jurisdiction of the Standing Committee on Finance. I was in favour of seeing that policy issue referred to this committee.
Mr. Loubier: If the point was to take action so that in the future, tax policy is not interpreted the way it was in the December 1991 case, this issue would come under the mandate of the Standing Committee on Finance. However, the two specific cases you raised in your report, where two billion dollars in assets were transferred to the United States without any capital gains tax, and which are an aberration just as is the use of public funds for inefficient and unproductive purposes, should normally be examined by the Standing Committee on Public Accounts. That's the mandate of that committee, if I go by the brochures issued by the Auditor General.
Mr. Desautels: The Standing Committee on Public Accounts has gathered a certain amount of expertise on what one could term issues of control, management and accountability. Insofar as the issue contained some of these elements, I would be the first to say that the Standing Committee on Public Accounts is empowered to examine that kind of issue.
Mr. Loubier: Mr. Desautels, we had three weeks of sporadic hearings before the Standing Committee on Public Accounts and the Standing Committee on Finance, and you attended some of these hearings along with senior officials of the Departments of National Revenue and Finance. Do you think that this exercise has shed any light on these two cases - that of 1985 and the matter of 1991 - and on all the issues surrounding the management of these cases up until the publication of the advanced ruling in March 1996? Do you believe that all possible light has been shed on the process that led to these decisions and others that came subsequently?
Mr. Desautels: I can't say that all possible light has been shed on this. In the note, we said that there were aspects of the process followed in the preparation of the advanced ruling that we did not understand, or that were poorly documented. I think that the hearings that took place up until now have allowed us to shed a certain amount of light on that, but not all questions that we asked ourselves at the time have been completely answered.
I'm not in a position to say today that we know absolutely everything on the way events unfolded.
Mr. Loubier: Therefore, for the benefit of Parliament - because you report to Parliament - and for the benefit of the public, it would be to our advantage to shed all possible light on these two cases that you've denounced, that of 1985 and that of 1991, in the course of the normal business of the Standing Committee on Public Accounts, correct?
Mr. Desautels: I'm going to be consistent in what I say. I suggested that the Standing Committee on Public Accounts examine this issue when I tabled my report and I continue to believe that would be a very valid exercise.
Mr. Loubier: Thank you, Mr. Desautels. I have no further questions at the moment.
The Chairman: Thank you, Mr. Loubier.
[English]
Mr. Grubel.
Mr. Grubel (Capilano - Howe Sound): I have no questions.
The Chairman: Does anyone from the Bloc or Reform Party wish to put something on the record before their convention in Vancouver?
Mr. Williams (St. Albert): As a more frequent member of the public accounts committee, I would like to see the contents of your report, Mr. Desautels, be an issue taken up by the public accounts committee rather than dealt with here at the finance committee.
I think it's appropriate that we continue with the investigation. I think you have raised some serious concerns regarding the implementation of policy. We have seen the deputy ministers of Finance and National Revenue try to explain the new version of taxable Canadian property, which seems to have shed some new enlightenment on the Department of National Revenue. We have seen the Minister of National Revenue, first of all, declare a moratorium on advanced tax rulings on this issue until such time as the issue was clarified.
.0940
I can't ask you any questions regarding the policy of the government on these areas, but do you feel it would be more appropriate that we continue to take this issue up at public accounts? I'm talking about the investigation by public accounts regarding the circumstances contained in your report. Or should we continue, for example, here in the finance committee to look ahead at what should be done in light of this information while investigating what happened back in 1985 and 1991? Would it be appropriate to split the two into two separate issues?
Mr. Desautels: Mr. Chairman, I'd like to reiterate that I don't think it's my role to suggest to parliamentarians specifically which committee should handle which question. I have raised in my report a question dealing with the administration of certain advance tax rulings, which has also identified a potential policy implication. As for which committee handles which one of two issues, I'm very careful not to suggest to you exactly how it should be done.
I've usually dealt with the public accounts committee on all issues dealing with probity, internal control, management, and accountability. Of course, the public accounts committee has an interest in this, and I wrote to the public accounts committee suggesting they review this note the day I tabled the report, but beyond that I cannot actually suggest to members of the House of Commons which committee should study the specific questions I raise.
Mr. Williams: You have heard the testimony by the Deputy Minister of Finance and the Deputy Minister of National Revenue, and you've read the legal opinions that are now public knowledge regarding the fact that Revenue Canada had serious reservations. In fact, they had more than serious reservations; they were quite inclined to decline the advanced tax ruling as requested but received this letter of comfort from the Department of Finance. That department provided this new interpretation of taxable Canadian property, which has now been articulated by the officials from the Department of Finance to be that all Canadians can hold taxable Canadian property and it's only defined as such when they become non-residents.
Was this type of new thinking given to Revenue Canada, which changed its mind, in your opinion a normal interpretation of the act - if you feel comfortable expressing an opinion on that - or was it a new concept that was being introduced by the Department of Finance at this time?
Mr. Desautels: I'll ask Mr. Minto to answer that question.
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman.
Mr. Chairman, as we stated at the last meeting we continue to be puzzled about the basis of that interpretation. What we attempted to do, sir, was go back to Finance and try to find out how they arrived at that conclusion. In doing so, we asked for the analysis, the documentation, the kind of research that would have been done to figure out the consequences of this.
.0945
We were informed that there was no documentation available to that effect. We even attempted to then speak to the people who would have made this decision and ask who made the decision in Finance on this issue. We were unable to ascertain who made the decision in Finance. Therefore, we really cannot add any more to what we have said on how the decision was arrived at.
Mr. Williams: I find it very disconcerting that issues of this magnitude have absolutely no documentation. We can lament about that as long as we want. The issue, as it appears from my perspective, is that a new line of thinking materialized from these decisions emanating from these informal, undocumented meetings.
My question is, is the Auditor General concerned - and reported in his May 7 report - that this new interpretation has caused a situation whereby we may be seeing tax erosion?
Mr. Desautels: Mr. Chairman, we stated in our report that there was ambiguity in the current legislation around that whole issue. I believe even people in Finance and certainly Revenue Canada agree that there is a certain amount of ambiguity around that whole notion of taxable Canadian property. Our concern was to make parliamentarians aware of that ambiguity. Now, having noted the ambiguity and having noted the decision made, certainly in our view the decision made does reduce the ambiguity, but at the same time, as a policy objective, it does allow new tax planning opportunities.
I'm not judging whether that's right or wrong, but it is in fact one of the results of what happened. I, for one, am just asking whether or not this is what legislators intend in this whole area. I'm going to leave it at raising the question at that point.
Certainly the interpretation given clarifies certain things, but I think at the same time you have to recognize - and I'm not a technician - without going to the specifics, it does open up certain possibilities in terms of tax planning in that area.
The Chairman: Thank you, Mr. Williams.
Could I just pick up on some of the things that arose out of our last meeting? There was a question from Mr. Dhaliwal, which suggested that trusts were used mainly to reduce tax liability. The response of Mr. Elkin was that certainly trusts are also used to sprinkle income. You can have discretionary beneficiaries, etc.
Is it your position - and I'm just trying to understand this - that trusts can be used to reduce taxes in this way, income sprinkling?
Mr. Barry Elkin (Principal, Audit Operation, Office of the Auditor General of Canada): No, Mr. Chairman, I was just responding to a question. In fact, trusts are used that way. I have no position as to whether they should be used that way or not.
The Chairman: No, but are they used to reduce income or not?
Mr. Elkin: They can be used to -
The Chairman: To reduce income taxes, I mean.
Mr. Elkin: If you can sprinkle income, obviously you can spread income over a number of people. Certainly that could produce a lesser tax burden than if one individual or one trust paid tax on the total income.
The Chairman: Are you familiar, Mr. Elkin, with the amendments that were made to the Income Tax Act last year, which preclude sprinkling to preferred beneficiaries?
Mr. Elkin: Are you talking about the elections to preferred beneficiaries?
The Chairman: Yes.
Mr. Elkin: Yes, I am familiar with them.
The Chairman: Does that not take away any tax advantage that might have existed in the past from sprinkling?
.0950
Mr. Elkin: I think you could perhaps have beneficiaries you're in fact distributing income to, sir, rather than beneficiaries who can elect to receive income. So possibly there are still opportunities. I'm not questioning whether in fact that should be or shouldn't be. It's obviously a decision that Parliament should make.
The Chairman: Oh, I understand that. I'm not asking you what the law should be at this point, because we're certainly going to have to get your opinions on what amendments we should make.
You would agree that the main tax advantages of the family trust in sprinkling income among the children, which is what it's established for, has been removed. Children are a factor.
Mr. Elkin: On the elected beneficiary, it's my understanding that this has been removed with respect to the elections.
The Chairman: Okay, good. I just want to set the record straight on it.
The Auditor General's report concluded that the tax ruling in question may have circumvented the intent of the law, and I was asking in our last meeting what ``the law'' actually means. I wasn't exactly certain what your position on this was. Does the law mean the Income Tax Act or the Income Tax Act plus the Canada-U.S. tax treaty?
Mr. Desautels: I can clarify the record to a certain extent on that.
When you asked me those questions last time, I stated my view that the Canada-U.S. treaty was secondary to the Income Tax Act. I see now that this remark could be viewed as a comment on the legal status of the two documents, and this is not the sense I was trying to convey.
As I see it, the principal function of the Income Tax Act is to impose taxes and the principal function of the Canada-U.S. tax treaty is to determine, in cases where both countries impose taxes on the same person, which country's claims would take priority. So in my own mind, therefore, I consider the imposition of tax to logically precede the sorting out of the two countries' claims on a single taxpayer.
I understand that both the Income Tax Act and the Canada-U.S. treaty have the force of law, and in circumstances where both apply, the tax treaty would take precedence over the act. We're not taking exception to the treaty. We merely pointed out, for one thing, that under the treaty a person who's been a resident of Canada for less than 10 years -
The Chairman: No, just a second. That's not my question.
Mr. Tremblay (Rosemont): That's very interesting. It can go -
The Chairman: Excusez-moi, monsieur Tremblay.
In other words, in case of inconsistency you now agree that the treaty must prevail. If there is inconsistency between the treaty and the Income Tax Act, will the treaty prevail?
Mr. Desautels: To sum it up, Mr. Chairman -
The Chairman: I'm asking you a very specific question. In the event of inconsistency between the Income Tax Act and the tax treaty, which one prevails?
Mr. Desautels: The treaty would take precedence over the Income Tax Act. That's what I said.
The Chairman: Okay, thank you very much.
Is it the treaty that was circumvented, in terms of the provisions, by this ruling?
Mr. Desautels: Mr. Chairman, we're talking about circumvention. We're talking in quite specific terms, and we were talking about -
The Chairman: No, no. Let me -
[Translation]
Mr. Loubier: On a point of order, Mr. Chairman. Last week, when the Auditor General appeared, you displayed exactly the same attitude as this morning, that is, an unacceptable attitude.
The Auditor General has huge responsibilities before Parliament and he's not here to be trapped by hypertechnical questions on a case that is far removed from the one of interest to us, which is to shed all possible light on the rulings made by senior officials in December 1991 concerning the notion of taxable Canadian assets which was not applied to Canadian residents and that allowed them to transfer two billion dollars without paying one cent in tax.
Therefore, Mr. Chairman, I would ask you to do the decent thing and be more respectful toward our guest. The Auditor General is an important person and he accounts to Parliament and Members of Parliament. I find it very unfortunate to see you behave this way.
.0955
If you have questions for him as a Member of Parliament, like any other member around this table, ask him your questions, but please, allow him to answer and stop displaying the attitude you've had since the beginning of this meeting.
The Chairman: Mr. Loubier, I have two things to say. I will ask him very specific questions and I will ask him for very specific answers.
Secondly, I don't have to take any lessons from anyone regarding the respect that we owe to the Auditor General, his office and his function.
Mr. Loubier: Well then, make sure that your behaviour, your statements and the tone that you use are consistent with your thoughts, because that has not been clear since this morning.
The Chairman: Thank you very much, Mr. Loubier. I have a great deal to learn from you.
[English]
Yes, Mr. Dhaliwal.
Mr. Dhaliwal (Vancouver South): On a point of order, Mr. Chairman, I think some of the your questions are very good and interesting; however, I think it's important for all of us, as committee members, to get the full answer from the Auditor General on this very complicated issue. I would like to hear his full response to each of the questions.
The Chairman: Mr. Grubel.
[Translation]
Mr. Loubier: Mr. Chairman, on a point of order. Your questions may be very interesting, but the tone you are using is unacceptable, as well as the vindictive nature of your questions and the fact that you are being impolite. If I compare this with your questions to the senior officials of the Department of National Revenue and the Department of Finance, there's a major gap here.
I get the impression that you're not very pleased with what was denounced in the Auditor General's last report and that you may have things to hide as a government, but we as Members of Parliament are responsible and want to shed all possible light on the case raised by the Auditor General and no one will stop us from doing so.
The Chairman: Can we continue with the questions?
[English]
When we come to the treaty, which we now understand prevails over the Income Tax Act in the case of an inconsistency, which article are we dealing with in the tax treaty in this particular ruling?
Mr. Elkin: If you're talking about the possibility of the taxpayer claiming exemption from Canadian tax under the treaty, it's article XIII.
The Chairman: Which part of article XIII?
Mr. Elkin: I'll have to get my act, but I believe it's part 3 or part 4.
The Chairman: Okay. I think you'll find it's part 4.
In that case, Canada can tax a non-resident only where the non-resident in Canada was in Canada for 120 months out of the past 20 years, where the non-resident owned the property when he emigrated from Canada, and where that property is disposed of by the non-resident within 10 years of leaving Canada. Is that correct?
Mr. Elkin: Yes, I believe you're quoting from part 5.
The Chairman: In other words, under the treaty there is a limitation on Canada's right to tax non-residents.
Mr. Elkin: Absolutely.
The Chairman: Was the intent of the law as expressed in article XIII.5 circumvented in this case?
Mr. Elkin: I think when you're coming to the treaty in this particular case there is the opportunity to do so because there was a new trust that received the asset. You have to remember there was a Canadian resident trust. That Canadian resident trust did not move out of Canada with the assets. It distributed the assets to a non-resident trust. The avoidance, in our view, was as a result of the combination of two sections, the roll-over section 85 -
The Chairman: There are a lot of sections here, and I wanted to deal with a very specific issue. Was article XIII.(5) of the treaty circumvented? Was the intent of that article circumvented?
Mr. Elkin: By taking the undertaking, yes. The undertaking was taken to get around this problem. It was recognized that this posed a problem.
.1000
The Chairman: So if they hadn't taken the undertaking, the intent of the law would not have been circumvented. The intent of the law is that when you have a non-resident of Canada who is a resident in the U.S., the circumstances under which Canada can tax are quite limited.
Mr. Elkin: If she hadn't undertaken the undertaking, you wouldn't have the ruling. The ruling was provided on the condition that the undertaking and a waiver were given. They're an integral part of the ruling.
The Chairman: Just so I understand this better, if there had not been an undertaking, would the intent of the law have been circumvented as expressed in the treaty alone?
Mr. Elkin: Based on the evidence Mr. Dodge put before the committee - I'm not sure if it was the PAC committee or this particular committee - clearly Canada wanted to maintain its hooks on property that went out of the country for a defined period of time. The testimony he gave was in connection with the U.S. treaty. When assets moved from Canada to the U.S., we wanted to maintain our right to tax them for ten years. This wouldn't have happened.
The Chairman: The treaty would otherwise preclude that.
Mr. Elkin: He wanted to ensure Canada's rights were not overridden by the treaty. That was his view of the policy intent.
The Chairman: Isn't that admirable in terms of our revenue officials trying, in spite of the fact that the treaty would not have permitted taxation except in rare circumstances, to ensure we might get taxes?
Mr. Elkin: On the question of the waiver and the undertaking, if you're saying it solves this problem in itself, that could be a laudable -
The Chairman: You're saying....
[Translation]
Mr. Loubier: I asked a question; let him answer. When he has finished his answer, you can ask another question. Do we need another chairman to chair you? This is incredible.
The Chairman: Mr. Loubier, you are so polite. Thank you very much. I have a great deal to learn from you.
Mr. Loubier: This doesn't make sense.
The Chairman: Thank you, Mr. Loubier.
[English]
My precise question is this, Mr. Elkin: did the ruling circumvent the provisions of the treaty that said there are only very rare circumstances under which the non-resident can be taxed by Canada?
Mr. Elkin: In my view, it did, sir.
The Chairman: Okay. Would you explain why the intent of article XIII.5 was circumvented? My reading of the intent of article XIII.5 is that there will be very rare circumstances under which Canada can continue to tax and that the U.S. will have predominant taxing power in these circumstances. First of all, is my reading of the intention of that article wrong? Secondly, how did the ruling support that?
Mr. Elkin: Mr. Chairman, Mr. Farber gave the answer, I believe, to this committee or to the public accounts committee. If I can quote from the blues, he said:
- In the transaction at hand there was a very clear intention on the part of the rulings process that
the underlying property would not be disposed of for 10 years. A waiver was given in regard to
that. So there was a very clear intention on the part of the taxpayer not to use treaty protection
with regard to any disposition of the property if it were to occur before the 10-year period, and
at any rate to clearly undertake not to dispose of it.
The Chairman: So the circumvention of the intent of the law as expressed in the treaty was to attempt to get more taxing jurisdiction from Canada rather than less.
Mr. Minto: Mr. Chairman, we are dealing with two issues at the same time here. The first issue, sir, is specifically whether there was circumvention of the treaty. By forcing them to give the undertaking and making that as a condition of the ruling, yes, it was.
The Chairman: Answer my question, Mr. Minto.
.1005
Mr. Minto: Let me try, sir. The second part of your question asked whether that was a logical thing to do.
The fact of the matter is that that is unenforceable. It was window dressing. You've got window dressing here. That makes it look very kosher, but that was not enforceable, sir. So how is it logical if you can't enforce it?
The Chairman: I'm not dealing with the enforceability of the undertaking. I'm dealing with what the law that you have claimed has been circumvented said.
Mr. Minto: That's the first part -
The Chairman: It says that in very few circumstances Canada will have the right to continue to tax.
Mr. Minto: Mr. Chairman, perhaps I can address that specific issue.
The Chairman: Yes.
Mr. Minto: The issue you raise is that the person has been given certain rights under the treaty. As a condition of this ruling the person was asked to give up those rights. So surely there's circumvention.
The Chairman: They were circumvented then to the extent that they tried to help the Canadian fist acquire more money, more tax revenue.
Mr. Minto: Now let me try to answer that specifically, sir.
The Chairman: Yes.
Mr. Minto: In trying to do that, the undertaking was unenforceable. It was against the law. Jurisprudence existed in Revenue Canada's files. They were aware of that and therefore it was window dressing.
The Chairman: Do you think the taxpayer in this case would have exercised that right?
Mr. Elkin: Mr. Chairman, the condition of the undertaking was that the taxpayer in giving the undertaking specifically said the undertaking was given on the condition the shares of family trust be considered to be taxable Canadian property. That was the key issue.
The Chairman: We will come to that issue. You're saying the intent of the treaty was circumvented because even though there was very limited tax jurisdiction by Canada, the waiver might have gone further.
Mr. Minto: No, Mr. Chairman.
A voice: The intent of the law, not the intent of the treaty.
[Translation]
Mr. Loubier: Mr. Chairman, can we also ask questions?
The Chairman: You have a brief question, Mr. Tremblay?
Mr. Tremblay: Could I ask a brief question, specifically on the subject you have broached?
The Chairman: Yes.
Mr. Tremblay: In a transaction like this, normally one should pay capital gains tax and it's quite clear that the objective was precisely to delay the payment of capital gains tax. The Department of Finance was quite clear on this: its objective was to ensure that the taxes that were lost... In reality, it was being delayed as long as possible, because gains are not taxed as long as transactions have not taken place.
We're told that we didn't lose anything because there was no transaction. By allowing this, the aim was to ensure that there would be no transaction for at least ten years and at the end of ten years, if ever there was a transaction, the United States would collect the tax.
Of course, it wasn't necessarily in the taxpayer's interest to transfer his funds for tax reasons given that he would pay tax in the United States. It was very clearly admitted that in this case, Canada would lose this tax, and it would be paid to the United States instead.
It seems to me that this question is very clear. It is in a taxpayer's interest not to pay this tax right away. That's exactly why we're here. To my mind, it's very clear.
The Chairman: Thank you, Mr. Tremblay. Since it's so clear, I'd like to ask other questions.
[English]
There are other provisions in the Income Tax Act that are involved here. When the family trust acquired the shares in the private corporations, did they become taxable Canadian property?
Mr. Minto: Mr. Chairman, I'm going to ask -
The Chairman: Let me ask you this because it's a very complicated issue. Are the shares in private corporations taxable Canadian property?
Mr. Minto: Mr. Chairman, I'm going to ask my colleague, Mr. Elkin, to help us on this matter. Just for the record I do have to get, with all due respect, sir, one word in.
.1010
Sir, you said we had said certain sections of the treaty had been circumvented. Our contention is the intention of the act, intention of the law, as shown both in the act and the treaty -
The Chairman: No, I understand that. That's why I'm trying to find out which precise provisions have been circumvented because that's your charge. This is what I'm trying to get to the bottom of.
Would you agree with me that under section -
[Translation]
Mr. Loubier: Once again, on a point of order. Are you the only one to pursue the business of this committee today?
The Chairman: Yes, only me.
Mr. Loubier: Do you have a monopoly on having the floor?
The Chairman: No.
Mr. Loubier: Today are you replacing all your Liberal, Reform and Bloc colleagues?
The Chairman: As...
Mr. Loubier: It would have been nice to see you carry out a proper examination such as this, when Mr. Dodge and Mr. Barber appeared. I would have liked you to put the onus on them, because they are the ones who have been incriminated. They are the ones who are denounced in the Auditor General's Report and it's up to them to justify their actions, their decisions. It's up to them to tell us why the December 1991 advanced ruling was only published in March 1996. It's up to them to answer the questions.
What was their rationale during those eight days where we went from a Revenue Canada decision to not transfer this tax exempt family trust to a decision to authorize a tax exempt transfer? They should come and answer.
Mr. Chairman, I don't know what your game is today, I don't know what the Liberals' game is. Do you have something to hide here? Do you have friends who are involved in this $2 billion transfer? Is that it? Are you trying to undermine the credibility of the Auditor General's team because of that? Is that the bottom line?
The Chairman: Mr. Loubier...
Mr. Loubier: Is that what is driving your attitude today? Mr. Chairman, I would like you to stop monopolizing the truth and give the floor to others, because I think you're quite particular, thank you, this morning.
The Chairman: It's impossible to monopolize things when you're here. Secondly, at the last meeting, I gave you as much time as possible. It was your choice. Thirdly, I have the feeling that our witnesses are quite capable of defending themselves. They don't need your intervention. Fourthly,...
Mr. Loubier: If you stop monopolizing the discussion, maybe things would proceed better, Mr. Chairman.
The Chairman: ...you'll have all the time you want to correct my mistakes, let me assure you. It will also be possible for you to call back Mr. Dodge and all the Department of Finance officials.
Mr. Loubier: I'm asking you the question because you're not just the Chairman, but also a participant. As such, you are subject to committee rules. What are you trying to accomplish with your almost violent interrogation of the Auditor General? What are you trying to accomplish,Mr. Chairman? What is your goal this morning?
The Chairman: I have a very simple goal. The Auditor General
[English]
has said the ruling may have circumvented the intent of the law. I am trying to understand how exactly he feels the law was circumvented.
[Translation]
Mr. Loubier: And, according to you, the onus shouldn't be on Mr. Farber, who is here, andMr. Dodge and Mr. Gravelle?
[English]
The Chairman: In our system it's always the accused who has the burden of proof -
[Translation]
Mr. Loubier: I didn't hear you ask an even so slightly aggressive question of the officials who were here last week and the week before. What then is the reason for your attitude this morning,Mr. Chairman?
The Chairman: I have the feeling that you may think that our witnesses need your protection, Mr. Loubier.
Mr. Loubier: No, no. It's not a matter of protection, but of decorum, of decency and of proper unfolding of this committee.
[English]
The Chairman: Mr. Grubel.
Mr. Grubel: Mr. Chairman, I find it very disturbing to be discussing motives in this committee. Let the questions and the answers and the facts speak for themselves.
Some hon. members: Right on!
Mr. Grubel: If the chairman had been allowed to follow his line of questioning, we would now be through and there would probably be another opportunity for the Bloc to ask new questions. I find this fruitless and I wish we could get on with hearing the substance of the questions rather than discussing motives.
An hon. member: Hear, hear!
Mr. Tremblay: Can we hear the substance of the answer, too?
An hon. member: Hear, hear!
.1015
Mr. Grubel: I beg your pardon, but sometimes if one establishes a certain fact it is important to keep the questioning on track. We have heard of people filibustering. I am not saying these gentlemen are filibustering, but it is necessary -
Mr. Tremblay: They are.
Mr. Grubel: At any rate, Mr. Chairman, I hope somehow this microphone can be cut off for a little while so we can hear what is going on here.
The Chairman: Thank you all for your very cogent interventions on all sides.
Could I just get a few other things clear so I understand what's happening? Section 115(1)(b)(iii) says that shares in private corporations are taxable Canadian property.
Mr. Elkin: I would agree with that, yes.
The Chairman: Section 107(5) says that if a trust distributes taxable Canadian property, there's no taxation of accrued gains?
Mr. Elkin: That, sir, is the crux of the avoidance.
The Chairman: No, I said if.
Mr. Elkin: I said if - I agree with if, sir -
The Chairman: Yes, but trust distributes - I'm just trying to -
Mr. Elkin: If a trust distributes taxable Canadian property, the distribution is on a tax-free basis.
The Chairman: Good. If the family trust had distributed shares in a private corporation, would there have been tax?
Mr. Elkin: If a family trust had distributed shares in a private corporation to the non-resident?
The Chairman: Yes.
Mr. Elkin: They would have been taxable Canadian property to the non-resident -
The Chairman: So there are no non-resident consequences at that time?
Mr. Elkin: The non-resident would pay tax like anybody else who had private Canadian -
The Chairman: If, instead of distributing the shares in a public corporation, which are less than 25% of the shares of that corporation, they distributed 25% of the shares of a public corporation, would that have been taxable Canadian property with no tax consequences at the time?
Mr. Elkin: The provisions you're talking about, the 25% ownership, the way I read them only come into play when there's a disposition by the non-resident. They are irrelevant before a disposition. So whether or not the trust had 25% at the time the distribution was made, it could have had 10% at the time the distribution was made. If it subsequently owned a 25% interest, tax may be due under the provisions of section 115. In addition to that, there are obviously anti-avoidance rules dealing with section 115 that deal with the five-year carry-over period.
The Chairman: Now, I want to deal with the next transaction here - and we will come to the crux of the matter very soon - the exchange of private corporation shares for less than 25% of the shares in a public company. Would you agree section 85(1)(i) covers that and says that if taxable Canadian property is disposed of, assuming the private shares were taxable Canadian property, then the public shares become taxable Canadian property under that section?
Mr. Elkin: I am not convinced section 85(1)(i) was intended to do that. I believe that section 85(1)(i) was intended to prevent a non-resident from avoiding tax. It was not prevented as a means - it was not aimed as a Canadian. As a Canadian, it doesn't make any difference what type of capital property you receive, you're taxable on all the capital property.
I understand the way it's been interpreted. I take exception to the way it has been interpreted.
The Chairman: I'm not pretending this is easy, simple tax law, but -
Mr. Elkin: It isn't, sir.
The Chairman: Really the crux of our discussion here is whether a resident of Canada can own taxable Canadian property. There's only one ambiguity in this whole thing. Can a Canadian resident own taxable Canadian property under the structure of the act?
Mr. Elkin: And was it an intention, a conscious intention, of the legislators to have that happen?
The Chairman: Okay. I understand that. Now, would you tell me what provision in the act or treaty deals with the issue of whether a resident of Canada can own taxable Canadian property?
Mr. Elkin: There are many provisions that deal with who can own taxable Canadian property. The one that was relied on was section 97(2)(c).
.1020
The Chairman: Just a second. There's no provision that definitely says a Canadian resident may own or may not own taxable Canadian property.
Mr. Elkin: I would agree with you. The provision used was 97(2)(c).
The Chairman: Okay. So since there is no specific provision dealing with this very important issue, which is the crux of our ruling and the dispute, you would agree the law is ambiguous. I think you've used that term in the past.
Mr. Elkin: I would agree with you that the law is ambiguous. The difficulty is we've taken an ambiguity and perhaps turned it into a loophole. That's where the problem comes.
The Chairman: Okay, fine. I want to get to that because I'm not smart enough to take these big steps. I just want to take little bites at a time. So let me ask you some more questions about facing this ambiguity.
I take it you agree that trusts as well as other taxpayers are entitled to advance rulings when there's an ambiguity.
Mr. Elkin: Absolutely. Everybody should be entitled to an advance ruling.
The Chairman: This is why there were probably 600 tax rulings issued by Revenue Canada last year - because there are ambiguities in our income tax law. If there was no ambiguity, the taxpayer would not bother to seek a ruling?
Mr. Elkin: That's right.
The Chairman: Rulings should be available for wealthy taxpayers as well as poor taxpayers?
Mr. Elkin: Absolutely.
The Chairman: In spite of the fact that in your report there was a lot of emphasis on the concept of family trusts, the fact that a family trust got a ruling is not really a major issue?
Mr. Elkin: The major issue with respect to avoidance -
The Chairman: Family trusts are entitled to rulings?
Mr. Elkin: Family trusts are entitled to rulings, but the major problem with respect to this is the interaction of two provisions, and one of the provisions, 107.(5), deals specifically with trusts.
The Chairman: With taxable Canadian property.
[Translation]
Mr. Tremblay: There's a limit! You're asking questions that a grade schooler should know. You have a PhD in taxation. So what is your point? Everyone knows. Your question implies that rich citizens may being denied the right to obtain rulings. They are the only ones who asked for rulings. There's a limit. What is your point? What are you trying to infer? Nothing at all? You know the answers to all the questions you've just asked. I'm sure that you knew the answers before asking your ten last questions.
The Chairman: But maybe...
Mr. Tremblay: Ask questions you don't already have the answers to.
The Chairman: We'll see.
[English]
Is it your concern that these particular trusts got these advance rulings?
Mr. Elkin: Maybe you could clarify that, sir. I don't know what you mean. Anybody can get a ruling. I have no objection to anybody getting a ruling.
The Chairman: Okay. Could I also ask you if there is any evidence of wrongdoing by any official or any evidence of political interference or that anyone acted in bad faith?
Mr. Minto: Mr. Chairman, let me deal with that very precisely. We have seen no evidence of bad faith and we have seen no evidence of wrongdoing. But we have not seen all the documentation that should have been there and we do not understand the basis for the decisions.
The Chairman: Okay, thank you. You've indicated you've seen no evidence of bad faith or wrongdoing.
We now face a situation where the taxpayer has applied for a ruling on a very, as you said, ambiguous portion of the law. Revenue Canada is faced with the difficulty of being asked to issue a ruling. Do you agree Revenue Canada must obey the law in giving rulings? That's probably a self-evident question.
Mr. Minto: Everybody has to obey the laws, whether it's Revenue Canada, you or I.
The Chairman: Where Revenue Canada was faced with an ambiguous law, do you feel it was proper for them to consult Justice as their counsel?
.1025
Mr. Minto: Mr. Chairman, a system is set up for rulings, in which advice is sought from Justice and Finance. That system is followed. In this case, yes, it was followed.
The Chairman: In this case the Department of Justice told National Revenue in writing that its opinion to Revenue Canada was that the ruling was proper; in other words, residents of Canada could own taxable Canadian property.
Mr. Elkin: No, Mr. Chairman. Justice opined on whether or not the shares distributed by family trust could be considered taxable Canadian property, whether a Canadian can own taxable Canadian property. To my view, Justice didn't opine on the ruling. It just gave that narrow interpretation as to whether a Canadian can own taxable Canadian property.
The Chairman: The official of Justice who was before us at our last meeting indicated that in his opinion - and he was the one who had issued it - the better view was that a Canadian resident could own taxable Canadian property.
Mr. Elkin: Mr. Chairman, the issue is whether that was in fact the policy intent. I would be glad to go through your arguments with respect to paragraph 97(2)(c) and put -
The Chairman: No, no, all I'm asking is.... Revenue Canada consulted Justice, and Justice told Revenue Canada that the ruling would be valid, that it was the better view of the law.
Mr. Elkin: Yes, and Justice's opinion was based on a letter from Finance.
The Chairman: Okay. Also, Finance was consulted as to what the intent of the law was.
Mr. Elkin: That's correct.
The Chairman: They also supported the position taken in the ruling.
Mr. Elkin: I'm not sure whether they supported it. Justice and Finance made no mention of undertakings, no mention of waivers, and nobody dealt with a critical issue as to whether the TCP characteristic in the Canadian resident trust was going to be carried through to the non-resident trust. Nobody dealt with a very, very fundamental issue. It was taken to a point.
The Chairman: Thank you.
[Translation]
Mr. Loubier: Mr. Chairman, I rise on a point of order. I had a motion distributed that the Bloc Québécois is tabling this morning, because I've noticed that our discussions this morning are based on the specific cases of 1985 and 1991, when the mandate that the Minister of Finance gave to the Standing Committee on Finances was not to analyze these specific cases of 1985 and 1991, but rather to make recommendations on amendments to be made to tax policy to make sure that this type of case no longer occur.
So here is my motion. I'd like us to debate it until attrition.
I move that the Chairman on the Standing Committee on Finance be mandated...
Please, let me read my motion.
[English]
The Chairman: A point of order from Mr. Campbell.
Mr. Campbell (St. Paul's): We were in the middle of questions of the witnesses before us. I just received the motion from Mr. Loubier, which I was in fact expecting. I'd be delighted to speak to it and get into a discussion about it. I don't know as a matter of procedure, Mr. Chairman, whether it's appropriate to interrupt our testimony this morning or leave this for the end of the meeting. I would prefer to ask Mr. Loubier's indulgence to continue with questions on both sides of the table of our witnesses and then come to this motion.
We've invited these gentlemen back very much at the urging of opposition as well as of government members, and I'd like to have the opportunity to hear the rest of their testimony before we get into the motion.
[Translation]
Mr. Loubier: Mr. Chairman, I rise on a point of order. We've heard all the questions you asked this morning. The answer were the same as last week, the week before and two weeks ago. We are going nowhere as far as the Minister of Finances' mandate for us is concerned. Allow me to read the mandate that the Minister of Finance gave us.
The Minister of Finance gave the Standing Committee on Finance the following mandate:
- The Committee would be asked to examine and make policy recommendations concerning both
the taxation of non-residents gains on Canadian property and the treatment of capital property
belonging to immigrants to and emigrants from Canada.
- That is from the letter of the Minister of Finance to the Chairman of the Standing Committee on
Finance.
.1030
So I suppose that the Chairman of the Standing Committee on Finance, which is you,Mr. Peterson, be given the mandate to undertake action before the chairman of the Standing Committee on Public Accounts in order that the latter conduct a more in-depth inquiry, as is his role, into the specific 1985 and 1991 cases, such as described by the Auditor General and which resulted in one or more residents being able to take advantage of the notion of taxable Canadian assets to avoid the payment of capital gains taxes on a sum of two billion dollars transferred to the United States, and that the Finance Committee, as specified in the mandate conferred upon it by the Minister of Finance,
[English]
``examine and make policy recommendations concerning both the taxation of non-residents' gains on Canadian property and the treatment of capital property belonging to immigrants to and emigrants from Canada''.
[Translation]
I am tabling this motion because I think it is important that that the facts concerning the two cases, in 1985 and 1991, be discussed in the committee whose responsibility they are and not the Standing Committee on Finance. I can tell you that from the start - if you'll allow me to buttress the arguments in favour of my motion - , we've asked the Standing Committee on Public Accounts questions and we haven't received clear answers to the questions we've asked, either from the senior officials of the National Revenue Department or from those of the Department of Finance.
Under its mandate, the Standing Committee on Public Accounts can conduct an inquiry. It is responsible for dealing with the cases brought up in the Auditor General's Report and, as the Auditor General mentioned this morning, clearing up these cases. As for us, our mandate is to make sure that tax policy is amended so that such cases can no longer occur.
I'd like to read an excerpt from a little brochure entitled Auditing in Parliament. In this little booklet, on page 11, concerning the Standing Committee on Public Accounts, they state the following and I quote:
- Although the Auditor General's Report attracts considerable attention when it is released each
year, its long-term impact is felt when it is examined by the House of Commons Standing
Committee on Public Accounts.
- The Public Accounts Committee reviews whether public money was spent for the approved
purposes and with due regard for efficiency, economy and effectiveness.
- The Committee bases much of its work on the Auditor's General Annual Report. Throughout
the year, it holds hearings...
- This is still the Standing Committee on Public Accounts.
- ... attended by the Auditor General and senior public servants of the audited departments to
review audit findings.
- After the hearings, the Committee may report and make recommendations to the House of
Commons. The audited department is generally expected to report back to the Committee on
what he has done in response to these recommendations. In this way, the Public Accounts
Committee completes the loop of accountability.
Up until now, we don't even know who made the ruling of 1991. Public servants' accountability, which is the business of the Auditor General, does not exist in those cases. We don't know who made the ruling and for what reason. Up until now, the sections of the Income Tax Act have been mixed up; the interpretations are becoming twisted. It's unacceptable. Only a focused inquiry, headed by the Standing Committee on Public Accounts, can correct this situation.
[English]
Mr. Campbell: If there's a motion before us and we're now speaking to the motion, I will speak to it. I am disappointed that this motion, which I suspected was coming this morning, was presented in the middle of testimony. We've imposed on the witnesses.
Mr. Dhaliwal: I don't think this motion has really been accepted. I think we're in the middle of asking questions to the Auditor General and his staff, who are here giving up their valuable time. I have questions I still want to ask them.
I think this should be left until we've asked the questions to the witnesses. Then the committee can have an opportunity to discuss this motion. I don't support discussing this motion at this time. We're here to discuss questions with the witnesses. We should carry on and then deal with this motion. Therefore, I don't think this should even be considered as a motion. I haven't seen that we've accepted this motion. Why are we debating it before it's accepted as a motion on the floor?
.1035
The Chairman: I would like to rule, Mr. Dhaliwal, on your point of order. I know of nothing in the rules that prevents those who have accused the chair of cutting the witnesses short from cutting them short themselves by posing a motion.
Thank you, Mr. Campbell.
Mr. Campbell: Thank you, Mr. Chairman.
To continue, I'm quite indifferent to whether we debate and deal with this motion now or later, but I think it is manifestly unfair, considering that the opposition had asked specifically for us to have these hearings and we're proceeding.
If there's anything that's become clear to me through the questioning this morning - and it was certainly clear to Mr. Loubier at the beginning of this process, although he seems to have changed his mind in the last few days - is that it's very hard to divorce the work we're trying to do here on the law and what the law may be for the future, whether we have adequate laws dealing the emigration of Canadians, whether we apply those laws in the appropriate manner, without looking at the particular case that the Auditor General and his colleagues have spent so much time investigating.
I must say that in the beginning, Mr. Chairman, I was somewhat skeptical about whether it would be a good use of our time to look back to the particular case rather than look forward to changes in the law, but I've become convinced over time, in particular with the appearances by the Auditor General and his colleagues, that you can't divorce the two.
In fact, if we want to know what the law should be or ought to be or perhaps even what it is, we have to understand how it's been applied. It is simply impossible to divorce the two. That is why I am convinced now that this committee not only has the authority, but also ought to look at both the process of the past and what the future should be in terms of law and the application of that law.
As far as this motion is concerned, if it's being debated right now, I am opposed to it. I think we should get on with our questions this morning of the Auditor General and his colleagues. I know some of my colleagues here at the table have additional questions they would like to ask.
There was some suggestion here that there was repetition in the questions from the chair. I could suggest that the same is true of Mr. Williams' questions from the other side and Mr. Loubier's questions over two days. We each have our own view of what are appropriate questions and whether they've been answered sufficiently, but I would like to get on with the testimony this morning. Since we have the Auditor General and his colleagues who have taken their time to be with us, I'd like to proceed.
If you want to call the question now or put it off and call it later, either is fine with me. Let's deal with it.
The Chairman: Mr. Solberg.
Mr. Solberg (Medicine Hat): Mr. Chairman, I am going to have to leave soon. I would like to lay this issue of the motion to rest. I would urge that we wrap it up now and move forward.
Motion negatived
[Translation]
Mr. Loubier: Mr. Chairman, I asked for a recorded vote. Please allow me one final comment before proceeding.
[English]
The Chairman: I'm sorry, we just voted on it.
[Translation]
Mr. Loubier: Allow me one last comment before we vote.
[English]
The Chairman: Okay. We will give you -
[Translation]
Mr. Loubier: I find it very unfortunate that, after three days of deliberations with senior public servants of the Departments of National Revenue and Finance, and after also having heard the arguments of the Auditor General's team, things are at a point where, on the Liberal side, they want to duck the issue. Our mandate is to redefine tax policies, but the specific cases of 1985 and 1991 will remain in limbo. That means that the public...
[English]
The Chairman: Excuse me, we've already voted on this.
[Translation]
Mr. Loubier: ... interest is not being served by the Liberal Party of Canada and its MPs. It isn't normal that they do not want to shed some light on such a financial scandal.
[English]
The Chairman: On a point of order, Ms Whelan.
Ms Whelan (Essex - Windsor): On a point of order.
[Translation]
The Chairman: Order, please. Another MP has the right to do the same thing as you,Mr. Loubier, and rise on a point of order.
[English]
Ms Whelan.
Ms Whelan: Mr. Chairman, we just voted on the motion. The discussion on the motion is finished unless there's a new motion on the floor.
The Chairman: I heard Mr. Loubier vote on it as well.
Ms Whelan: I would like to proceed back to the witnesses, which is why we're here.
.1040
The Chairman: With consent, I'm prepared to revoke that vote and go to a recorded vote on the issue. Do I have consent?
Some hon. members: Agreed.
The Chairman: Okay, we're having a recorded vote.
[Translation]
We'll give you what you've asked for.
[English]
The Clerk of the Committee: On the motion proposed by Mr. Loubier, we are going to vote. I'm calling the votes.
Motion negatived: nays 7; yeas 4
The Chairman: I declare the motion defeated.
Given the fact that Revenue Canada was confronted with the task of giving a ruling, which you feel they had to give because taxpayers have a right to demand rulings where the law is ambiguous, and that they went to Finance and Justice to get opinions on what the ambiguous law's intention should be, do you have any problem with their having gone to Justice and Finance to obtain those opinions?
Mr. Minto: Mr. Chairman, let me start with the first premise on the question, that Revenue Canada had to give the ruling. The fact of the matter is that rulings are provided as a service, there is nothing in the law that says they have to give the ruling. Having said that, the taxpayer has the right to come and ask for a ruling; there is no problem with that. I think they properly went to Finance and I think they properly went to Justice, as I said earlier.
The Chairman: Good. Did they have any choice, given the advice to them by their two principal advisers as to how that ruling should be given?
Mr. Minto: Yes. If you look at paragraph 1.46 of our report, you will find that there is a whole body in the Income Tax Act and the administrative procedures that point to one direction. Out on the limb is paragraph 97(2)(c), which is sort of designed for partnerships. They went for this one rather than the body of the evidence.
The Chairman: I'm not debating right now the validity of the opinion. You obviously think it circumvented the intent of the law.
Mr. Minto: Absolutely.
The Chairman: But Revenue Canada, when faced with an ambiguous provision, asked the advice of Finance and Justice and both of them told Revenue Canada that its ruling should be as it was issued.
Mr. Elkin: Mr. Chairman, I think there are also incidences in which Revenue Canada would get an opinion from Finance or Justice, look at the opinion, and decide not to rule or even litigate because the issues at stake were enormous.
There are times when they are responsible for administering the law, and there certainly are times when it is questionable as to whether they can even win an issue in court but still proceed because the issue is a big issue. You'd want to try to do everything you can to protect the integrity of your legislation. I would expect them to do that - not necessarily to just accept what their counsel says.
The Chairman: So what are your guidelines for telling us the circumstances under which Revenue Canada, in granting rulings or issuing them, should ignore the advice of its counsel in Justice and Finance?
.1045
Mr. Elkin: I don't know if I can give you a clear set, but certainly what I would expect them to do is to take a look at the implications of the ruling and decide if that's where they want the law to go.
Just as an example, they received advice from Justice and from Finance. They issued a ruling with caveats, with waivers and undertakings, yet in the ruling they published there was no mention of the caveats. So, again, we push it open.
When you take a look at the body of law, I really don't think we have all sorts of sections that deal with how we're going to try to get security from non-residents with respect to taxable Canadian property. We didn't look at issues like this on how the ruling impacted on that. We didn't look at issues on whether there's now a possibility that you can in fact move funds to jurisdictions where there are no tax treaties - in fact, to tax havens.
We also talked about the fact that we have a situation where we try to leave the impression that a taxpayer has perhaps moved to the U.S. and the taxes are going to be higher in the U.S.
Sir, I think we should have also considered whether in fact the taxpayer could have had a bump up in the U.S., either at the time the 85.(1)(i) rollover was done, or perhaps now. I don't know what the taxpayer did, but there are two sides to the coin, and we should have gone through and analysed them.
Sir, the evidence shows that on November 17 or November 19, 1991, Revenue officials made their first contact with Finance officials. At that point in time, none of the Finance officials were at all aware of the type of issue they were dealing with. They couldn't give any opinion on whether a resident or a non-resident could or couldn't own taxable Canadian property.
When we looked at the letter from Finance, it had a caveat at the end. It says they'll have to review further the issues discussed. Maybe the issues discussed that had to be reviewed further had an incredible impact on this ruling and how taxpayers can use the law.
We interviewed the person who signed the letter. He has no recollection of the meeting. He told us that it was Finance's style that this type of decision would be made by policy officers. They would bring it before him, brief him, and a letter would go out. We don't even know who made the decision at Finance.
In addition to that, sir, there was no documentation. You didn't know what the situation was on November 19, to when you ruled on December 23, and you had no information. What, as an auditor, should I do?
The Chairman: I have to put myself in the shoes of the person in Revenue who asked the advice of their counsel in Justice and Finance. I'm not sure they were required to investigate the procedures Justice and Finance went through to arrive at the opinions delivered to them.
Mr. Elkin: Sir, I think they are. By definition, Finance is a policy department. By definition, Revenue is an administrative department. Clearly, you want to ensure that policy doesn't in an unintentional way really creep into the administrative process. You want to have an impartial administrative process.
In my view, it would certainly be very prudent to follow through and to not just accept advice. My colleagues bring me advice every day of the week, sir, and I do my best to decide whether I'm going to rely on it.
The Chairman: I can assure you, Mr. Elkin, that Mr. Loubier never accepts my advice.
Mr. Elkin: He probably wouldn't accept my advice either, Mr. Chairman.
The Chairman: I guess what you're saying is that even though you've gone to your lawyers, to our justice department, and to the persons in charge of making tax policy, Finance, and they said the ruling would be appropriate, Revenue has an added obligation. We maybe cannot define the circumstances.
But does this mean that having sought out these areas, having studied them and made their own conclusion on it, that they should...? Is there a third body who can arbitrate on these things, apart from the courts? Should you have a department that will investigate these things before the fact in order to prevent what you consider to be wrong rulings?
.1050
Mr. Minto: Mr. Chairman, you're really getting into an area that perhaps the committee would like to explore further - what to do with the things.
The Chairman: Of course I am.
Mr. Minto: What we are here to testify about are the transactions and the things as we saw them at that time.
The Chairman: I have a problem if you're saying they had a responsibility to go further than listening to Finance and Justice. I would welcome further testimony from you at some later time on the circumstances under which that happens. I suppose it might depend on who the taxpayer is.
Mr. Elkin: Absolutely not.
The Chairman: Or how much money is involved.
Mr. Elkin: Absolutely not.
The Chairman: Okay.
Mr. Minto: Mr. Chairman, just a last word on this.
[Translation]
Mr. Tremblay: Isn't that impugning motives?
The Chairman: Sorry.
Mr. Loubier: We have to repeat it because the light wasn't on.
Mr. Tremblay: If it wasn't impugning motives, what was it? There is a limit. And he goes beyond it regularly. do you want chaos in this committee? A bit of decorum, please.
[English]
The Chairman: I am delighted that Mr. Tremblay, who is not a member of the committee, has come here to help the members of the official opposition, who have obviously needed his assistance today.
Thank you for your valuable contribution, Mr. Tremblay.
[Translation]
Mr. Loubier: I rise on a point of order, Mr. Chairman. Mr. Tremblay has the right to express himself. As to you, we gave you the right to express yourself today. This is terrible. Mr. Chairman, you're talking without saying anything and what you say is a real joke. It's a real free for all this morning. I no longer recognize the Standing Committee on Finance. It's a real joke, a big joke, with a capital J, Mr. Chairman, and you're at the heart of it. It's unbelievable.
Mr. Tremblay: It's a farce.
[English]
Mr. Minto: Mr. Chairman, we have to conclude on the point you raised.
Sir, it's very fundamental that Revenue can seek advice on tax administration, but it is accountable for the decisions. Finance does not take the responsibility for the decisions, Justice doesn't either, and if Revenue doesn't take the responsibility, then nobody will.
My lawyer can tell me I can buy a house and my banker can too, but I decide whether I do it or not. I take this responsibility. That is the point being made here. Revenue is responsible for making the decisions and takes advice from a whole slew of people.
The Chairman: I agree with that totally. When they get unequivocal advice from Justice -
Mr. Tremblay: [Inaudible - Editor].
The Chairman: I'm sure Mr. Loubier is delighted to have your assistance, because I'm sure he feels he needs it, Mr. Tremblay.
There's no doubt about it, Revenue Canada is responsible for its rulings. When it does get unequivocal advice from Justice and from Finance on what the law is, my concern is whether or not it is the responsible thing to do to follow up on that advice. This is the best interpretation of what the law is supposed to say at the time, what the intent of the law is. Do they have any other alternative but to follow it? You're obviously saying yes. This is why we should maybe work out guidelines on when they should go further.
Mr. Elkin: Sir, regardless of the advice that Revenue sees, if it smells - and we use this term in tax situations - like an avoidance transaction, Revenue has the option to decline to rule.
In Mr. Beith's testimony the other day he said they needed a waiver to mitigate the problem of a bump up. He acknowledged that a potential bump up would be offensive. Certainly the fact that the waiver was taken acknowledges the fact that something could happen down the road or that something was not right.
The Chairman: Mr. Elkin, you just said that any time there's an attempt at tax avoidance, Revenue has to go further. Do you know of any instances in which a taxpayer has sought an advance ruling that was to increase their taxes rather than avoid them?
Mr. Elkin: Sir, I can't believe a taxpayer would do that.
The Chairman: Okay, good. I can't either.
So we're still left with the position that in every tax ruling Revenue maybe has to go further than consulting their experts and to consult other experts in government.
Mr. Elkin: I didn't say that, sir. I said that when you had a situation, which up untilDecember 23 -
The Chairman: I'm sorry, Mr. Elkin, you said where there's a tax avoidance situation -
Mr. Tremblay: And they did.
.1055
Mr. Elkin: They have the choice of not ruling. They have that choice.
The Chairman: Sure, and I think in conclusion that if every ruling is subject to being attacked publicly in the way this ruling has been, it's going to be very difficult to ask our public officials, who you have said acted without being under influence, to to make public rulings, which you yourselves have indicated are a very important part of our ambiguous tax system. Anyway, that's my summary of it. But I'll leave it to Mr. Desautels.
Mr. Minto: Mr. Chairman, just for the record, sir, that is an enormous stretch in logic. I think, sir, when we first looked at the rulings, we made one recommendation. We said accountability and public confidence would be increased by making them public. The department didn't agree, but now they have.
The Chairman: Good.
Mr. Minto: By going through this process, the ruling process will come out much stronger.
The Chairman: I hope so.
Mr. Elkin: Sir, I would like to raise the issue that first of all I have the highest regard for my colleagues at Revenue Canada's advance ruling service.
I would also like to bring to your attention what happens in the U.S. As a matter of fact, I was at the IRS when we were doing the audit of the advance-ruling process. I can't remember the gentleman's name, but he was a senior counsel in the rulings division who we happened to be speaking with. I asked him what happens when they publish a letter ruling - because they publish all their rulings - and they find out it was an error. These things happen.
He said that just a short while ago a colleague of his who practices tax in the Washington, D.C., area had phoned him and suggested he look at a particular ruling. His colleague suggested the IRS must have been crazy when they issued the ruling. His comment to me was that he will go back to his office and at a period of time he will look at the ruling. If the ruling is incorrect and didn't make sense, they will publicly announce: please, other people, don't rely on the ruling. That's it.
The Chairman: Sure, and if the Auditor General, or his counterpart in the United States, were to find himself or herself in the same position, I would assume that type of retraction would be forthcoming as well.
I have a problem. We have this room for only two more minutes. I have four....
[Translation]
Excuse me, Mr. Tremblay.
[English]
Ms Whelan: I have a point of order, Mr. Chairman.
[Translation]
The Chairman: Has Mr. Tremblay finished laughing?
I'd like to once again call on...
[English]
Ms Whelan: I have a point of order, Mr. Chairman.
The Chairman: Yes, Ms Whelan.
Ms Whelan: I was just going to suggest, in light of the time that has been used for other issues this morning by the Bloc, that maybe we should call the Auditor General's office back so we can continue with the questions.
The Chairman: I had anticipated this, Ms Whelan, and the clerk tells me that if it were convenient for members and witnesses, we have a room this afternoon from 3:30 until five. I have five members who've indicated to me they want to ask questions. I intend to ensure all members get as much time as they want to ask questions.
So I leave it to members. First of all, would you wish to meet this afternoon? Secondly, would the witnesses be available this afternoon from 3:30 to five? The witnesses have indicated they would be available.
Mr. Williams.
Mr. Williams: Thank you, Mr. Chairman. I've been listening to the discussion this morning and I'm not exactly sure we have made a great deal of progress. I think we have to break this issue down into, as far as the committee members are concerned....
The Chairman: Since we have one minute, could I suggest we have a steering committee meeting right after this outside this room to suggest how we proceed in the future?
Mr. Williams: That was my recommendation, Mr. Chairman, that we decide a logical progression of how we're going to handle this issue.
The Chairman: Mr. Loubier.
[Translation]
Mr. Loubier: Mr. Chairman, if we have to listen to you all afternoon, we'll refuse to take part in the committee's business. We're going nowhere. We have all the elements of the Auditor General's explanation. What is left to do is hold a real commission of inquiry on both cases, that of 1985 and that of 1991. It's the process and officials' accountability which are in question. I repeat, Mr. Chairman, are you trying to protect your friends in the Liberal Party? Are you trying to protect your sponsors? Do you have things you want to hide from the public?
.1100
It's not normal that you refuse to hold a real inquiry on the case which resulted in a transfer of $2 billion worth of assets to the United States without a cent in taxes being paid.
[English]
The Chairman: Mr. Loubier, you're stooping to the level of...[Inaudible - Editor].
The meeting is adjourned until this afternoon at 3:30.