[Recorded by Electronic Apparatus]
Wednesday, June 12, 1996
.1535 
[English]
The Vice-Chairman (Mr. Telegdi): This meeting of public accounts will come to order. We are here to hear witnesses from the Office of the Auditor General and from Revenue Canada.
Mr. Minto.
Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman. I'm happy to discuss chapter 11 of the Auditor General's 1969 May report on combating income tax avoidance.
First, I would like to make some general remarks about tax avoidance and Revenue Canada's program to combat it. Avoidance occurs when a transaction or a set of transactions entered into result in a tax benefit, which is contrary to the object and the spirit of the law and frustrates its purpose. Tax avoidance is different from tax evasion, as it does not involve wilfully concealing income or falsifying expenses. Unlike tax evasion, it does not constitute a criminal offence under the Income Tax Act and does not trigger a special penalty.
Avoidance in Canada is not known. However, examples and exhibits provided in the chapter illustrate how certain corporations and individuals are willing to go beyond legitimate tax planning and how aggressive certain tax specialists can be in promoting tax schemes. The 45% growth in Revenue Canada's tax avoidance reassessments reflects to a certain extent the prevalence of tax avoidance and the serious threat it poses to the tax base.
Tax avoidance transactions are often complex, involve third parties sometimes located offshore, and stretch provisions and interpretations of the law. So detecting such transactions, reassessing them, and sustaining such reassessments before the court requires good technical and audit skills in Revenue Canada's auditors. It also requires strong support from the Departments of Justice and Finance to Revenue Canada in combating tax avoidance.
The Department of Justice is responsible for providing legal services and tax litigation services in the tax court and beyond. The Department of Finance is responsible for providing tax policy input and for amending the act in order to better cope with tax avoidance.
Revenue Canada's program to combat tax avoidance is part of its overall audit program. The 130 tax avoidance specialists located in the department's offices across Canada represent about 3% of the total number of tax auditors employed by Revenue Canada. In 1995-96 the department expects this small group of auditors to produce an additional $365 million from tax avoidance reassessments and interest. The department expects this number to grow to $500 million in subsequent years. Tax avoidance specialists produce about $2.6 million each in tax reassessments.
The responsibility to detect tax avoidance schemes rests primarily with the 5,000 income tax auditors who audit individuals and corporations. When they suspect that a particular transaction is abusive, they can consult with and/or refer the transaction to a tax avoidance specialist. At this point, detailed audit work is usually carried out by the tax avoidance specialist.
I will now return to our main concerns expressed in chapter 11. The first concern is the delays in amending the Income Tax Act when needed. The primary tool for tax avoidance specialists in reassessing avoidance transactions is the tax legislation, so it is important that when problems in the application of the law are noted and brought to the attention of the Department of Finance, corrections to the legislation can be made as soon as possible.
While we recognize that amending the law can be a long process, we noted that delays in legislative changes can result in further revenue losses, inefficient audits, and numerous appeals. We recommended that Revenue Canada consult with the Department of Finance and examine ways to make legislative changes sooner.
Our second concern is that tax avoidance specialists receive little or no feedback in situations concerning the application of the general anti-avoidance rule and the settlement of appeals. We believe the level of knowledge and efficiency of tax avoidance auditors could be improved by increasing this feedback.
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The general anti-avoidance rule was introduced in September 1988 to cope better with the wide variety of abusive schemes and to reduce the need for the traditional specific anti-avoidance provisions in the Income Tax Act. An interdepartmental committee was formed to review and approve each use of the rule. To October 31, 1995, the committee had examined 148 cases that could involve the application of the rule.
We found that tax avoidance auditors in the field do not understand the basis on which the committee has allowed the department to reassess tax avoidance transactions using the general anti-avoidance rule. We believe the committee's decisions need to be better communicated to tax avoidance auditors in order to improve the application of the rule. Since the courts have not yet spoken, the committee remains the sole voice defining the way the rule is applied.
A similar observation was made about decisions of the appeals branch. Many tax avoidance reassessments are contested by taxpayers at the appeals stage. For the four years ended March 31, 1995, the appeals branch disposed of over 500 tax avoidance cases. The tax reassessed was changed or vacated in over 45% of the cases. Because the appeals process can act as a means of audit quality control, feedback to the avoidance auditors and others involved in the file would provide a useful learning experience and improve the efficiency of future audits.
A third concern is the lack of consistency across district offices in covering tax avoidance issues in large corporations. These corporations, particularly those with extensive domestic and foreign operations, represent a high risk for tax avoidance because they have significant opportunities and resources to enter into tax avoidance schemes. We noted that tax auditors made only one referral to tax avoidance specialists.
A fourth concern is that abusive tax shelters put pressure on the tax system. From 1992 to 1994 taxpayers invested close to $5 billion in tax shelters. It is disconcerting to observe that most of the tax shelters that have been audited by Revenue Canada were found to be abusive.
Revenue Canada and the Department of Finance took measures to combat abusive tax shelters in 1994 and 1995. This should contribute to a reduction of future incidents of abusive tax shelters. We believe there are two areas where the government might consider intervening in order to further reduce the extent of abuse in tax shelters.
Canadian law does not contain a penalty for promoting an abusive tax shelter. As a result, promoters of abusive tax shelters bear virtually no risks. By comparison, in the United States, legislation was enacted in 1982 to permit the Internal Revenue Service to reassess penalties against anyone who organizes, promotes, or sells an abusive tax shelter.
Tax shelter promoters encourage investors to request a reduction in their source deductions on a hardship waiver as soon as they purchase the shelter. Such reductions are granted on the basis of undue hardship. This allows investors to finance the cash portion of their purchase through reduced source deductions.
Our concern is that the rationale for granting hardship waivers is unclear, particularly in a context where most of the audited tax shelters are found to be abusive, and where the average tax shelter investment, excluding limited partnerships in mutual funds, is over $158,000. We recommended that Revenue Canada should clarify what constitutes undue hardship, and examine the feasibility of carrying out stronger up-front review procedures before granting hardship waivers to tax shelter investors.
One other recommendation we made in the chapter echoes that of our 1993 report regarding the importance of a comprehensive strategy in defining Revenue Canada's compliance program. You will recall that since our report, the department tabled its compliance strategy with this committee on May 16, 1996. Members of the committee may wish to ask the department to clarify the relationship between areas of risk to the taxpayers and the allocation of resources, especially in relation to the risk of tax avoidance.
The department's written response to our recommendations is included in the chapter. You may wish to ask the department to provide specific information on how they propose to address our concerns and their timetable for doing so.
Combating tax avoidance is essential to promote public trust and confidence in the fairness and integrity of the income tax system. If left unchallenged, tax avoidance will have an effect on attitudes toward voluntary compliance.
Mr. Chairman, my colleagues and I would be pleased to answer any questions you may have.
The Vice-Chairman (Mr. Telegdi): Thank you very much. Mr. Gravelle.
Mr. Pierre Gravelle (Deputy Minister of National Revenue): Mr. Chairman, thank you. I and my colleagues, Mr. Barry Lacombe, assistant deputy minister of verification and enforcement, as well as Mr. Bob Beith, assistant deputy minister of appeals, are pleased to be here this afternoon to address the AG concerns and any questions members of the committee may have.
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Before doing so, perhaps I would be allowed to talk about our tax avoidance program in more general terms and our overall efforts to ensure compliance with our tax laws. I have to underscore that the tax avoidance program referred to in chapter 11 is not managed in isolation. It is, rather, a very key element in Revenue Canada's overall compliance strategy.
[Translation]
I think it is generally recognized that the most effective and efficient way to administer a tax system is through self-assessment and voluntary compliance.
Voluntary compliance is best achieved through a balance of assistance, education and service activities on the one hand, and responsible enforcement on the other.
[English]
Over the past few years we have worked very hard to strengthen our compliance efforts. I would like to outline eight measures taken.
First, we have increased resourcing for enforcement. Taken as a whole, the budget allocation for the enforcement program has increased 13% from 1992-93 to 1994-95, and resourcing will increase another 14% by 1997-98.
Second, we have increased public awareness of enforcement activities by making the outcomes of tax fraud and tax evasion convictions available publicly.
Third, in international transactions the department has introduced a new foreign income reporting requirement; in cooperation with the Department of Finance, the foreign accrual property income rules have been expanded; and we have improved compliance with form T-106 reporting. I will come back to this particular item a little later.
Fourth, we have taken actions to address the issue of tax shelters and tax havens. Under this rubric, resourcing for international audit and verification is being increased by more than 300%. The base for calculating the alternative minimum tax has been extended. New at-risk rules have been introduced to prevent taxpayers from deducting losses greater than the funds they put at risk. Penalties for those who file false or misleading information have been increased from 3% to 25% of the tax shelter cost. Reporting requirements for world income and international transactions have been strengthened through measures such as the new foreign income reporting requirements. I should also note that we are working very closely with our tax treaty partners through forums such as the OECD to foster international cooperation in combating tax havens at the international level.
Fifth, we are combating the underground economy by targeting high non-compliance sectors, these being construction, home renovation, auto sales and repairs, and hospitality, jewellery, and other service sectors, for enhanced audit coverage and of course attention. We're also combating the underground economy by increasing resourcing by adding 800 full-time equivalents to the existing 1,200 to enhance audits of incorporated businesses and self-employed individuals and by working with the provinces. I'm pleased to report to committee members that we now have signed cooperation agreements with all provinces to encourage voluntary compliance, share information, and conduct joint audits to combat the underground economy.
Seventh, we have made improvements to our audits. I'm pleased to report that our large business audit strategy is clearly an enhancement to the audit coverage of large corporations. Our audit teams now conduct concurrent audits across different tax programs. As part of our quality assurance efforts the department is introducing a national system to review and monitor the quality and effectiveness of our audit program based on national standards. We are doing this at present and we would look for an opportunity, perhaps sometime next year, to report on the early successes of this new national program.
Finally, we have enhanced risk management. The department has established a specialized compliance research directorate, and risk profiling and analysis have been improved through better access to information, information exchanges with other departments and provincial governments and tax treaty partners, and of course enhanced computer system support. The department has increased risk management expertise by hiring and training audit specialists with expertise across all major industry sectors.
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[Translation]
Taken as a whole, this represents a fairly comprehensive and effective set of tools to identify cases of tax avoidance.
The results are significant: 95% of all revenues are collected without the need for direct enforcement action, and our enforcement activities have resulted in $4.4 billion in additional taxes assessed in 1994-95.
Every taxpayer has the right to arrange his or her financial affairs in a way that takes advantage of tax law to reduce the tax burden. Taxpayers do this through the legitimate sheltering of income, which is specifically provided for in our tax laws.
Abuse of tax avoidance, in contrast, occurs when someone uses illegitimate tax avoidance opportunity to avoid taxes in a way that subverts the intent of the law.
Our tax avoidance strategy begins with a national program an design to detect abuse of tax avoidance schemes quickly and to take appropriate action.
[English]
Perhaps I could note, committee members, for the record, that on December 1, 1994 Finance and Revenue Canada announced legislative and administrative changes to prevent abusive tax shelters. These include, of course, the introduction of the new at-risk rules mentioned earlier, the extension of the base for calculating alternative minimal tax, and increasing the penalty for tax shelter promoters who file false or misleading information.
In 1994 as well, Finance announced legislative changes to define active income more clearly and to make it clear that only countries with whom Canada has a tax treaty can be exempt from the foreign accrual property income rules.
More recently, in March 1996, Finance and Revenue Canada jointly released draft legislation to implement new foreign income reporting requirements. New reporting obligations will require taxpayers with interests in foreign property in excess of $100,000 to report and provide details on such holdings. Taxpayers with foreign affiliates will have to provide additional financial and tax information with respect to each affiliate. Beneficiaries of certain non-resident trusts will also be required to file an information return for the year in which they receive a distribution from the trust, and persons who have transferred or loaned property to a non-resident trust will generally be required to file an annual information return in respect of the trust.
In addition, the system for delivering tax incentives to the film industry has been redesigned to ensure that the benefits of this incentive will go to film producers rather than investors. And in the last budget, of course, the Minister of Finance eliminated the joint exploration company.
[Translation]
And the department is also auditing transfer prices on a regular basis and taking a proactive approach to transfer pricing issues.
As part as our increased commitment to compliance, the department is increasing resourcing in all major areas of tax avoidance:
- resourcing for international audit and verification is increasing from 50 international auditors in 1993 to a planned 159 international auditors by 1998;
- resourcing for tax avoidance is increasing 139 FTEs in 1995-96 to 164 FTEs in 1996-97;
- resourcing for the underground economy initiatives is increasing from 1,200 FTEs to2,000 FTEs, as I mentioned earlier.
.1555
[English]
What is important is that we are getting results. Tax recoveries on international transactions have more than doubled over the last year, from $200 million in 1993-94 to about $500 million in 1994-95.
It's interesting to note that tax shelter sales are down from $2.4 billion in 1994 to $1.9 billion in 1995. Tax shelter take-up rates - that is, the actual sales compared to offerings - have declined from 43% in 1994 to 31% in 1995. Our tax avoidance reassessments have increased 45% over the last four years.
On that note, I think it's important simply to highlight what Mr. Barry Shailer, executive vice-president of the Bank of Bermuda, said, as quoted in The Toronto Star last April:
The tax advantages of moving offshore are limited...Revenue Canada has very effectively dealt with that...if a Canadian comes to us and wants to set up an account for tax advantages, first of all, we will tell them that there are none, and secondly, we'll remind them of their own reporting requirements.
[Translation]
This brings me to the issues that were raised by the Auditor General. I must admit I'm particularly pleased with the following aspects of his report: his support for our new approach to large business audits; the improvements we have made in bringing legislative issues to the attention of the Department of Finance; his view that the department is focussing on the right areas; the recognition of the measures we have taken to prevent abusive tax shelters. We are clearly on the right course.
The department is moving forward with its action plan as mentioned in the Auditor General's report. An accountability framework has been developed and is being finalized in consultation with the department's field auditors.
We are working with the Department of Justice to improve access to legal advice, and improve legal support. We are also determined to strengthen our information flows between the Audit and Appeals functions.
[English]
I think it's worth recalling that our large business audit strategy provides for 100% of Canada's largest corporations with gross annual incomes of more than $200 million to be audited every year. About a third of corporations with revenues of $15 million or more are also audited every year, based on risk assessment criteria. Corporations with gross annual incomes of less than $15 million are also reviewed and audited on a high-risk basis.
Now teams of auditors, which include international tax and tax avoidance specialists, work together to ensure that tax avoidance auditing techniques are applied consistently across the country. We seize the opportunity of every tax audit to look at possibilities of tax avoidance.
I would now like to turn to the issue of the reporting on international transactions and the issue of form T-106. While the Auditor General did not comment on this issue in detail, I would like to seize this opportunity to clarify some misinformation.
There is not, as stated in some media reports, $60 billion in international transactions unreported to Revenue Canada. The international transactions alluded to in recent reports are in fact reported in corporate income tax returns, they are assessed, and they are audited. Any taxes owing on these transactions are being paid. The $60 billion quoted in recent reports is an estimate of the under-reporting of international transactions on the specific additional information return, which is not part of a corporate return, called the T-106.
Those transactions do not represent money that is untaxed or lost to the federal treasury. All$60 billion was accounted for, reported, and taxes owing assessed. But the figure results from a study conducted by the department to assess the quality of reporting on this additional return called the T-106. The study compared this T-106 information with Statistics Canada information and with Revenue Canada's corporate income tax returns.
.1600
The study, based on 1990 data, concluded that for royalties, patents, trademarks, and other tangible property, as well as for services, transactions reported to Statistics Canada or reported in the T2 corporate return, the T-106 information return was consistent. In the case of goods, there was at most a 20% under-reporting in the T-106 when compared with the T2 corporate return.
According to 1994 data from Statistics Canada and our own, the T-106 under-reporting for goods has decreased from 20% to 7.8%. Based on this experience and the reminder we give corporations, we are confident T-106 accuracy levels will continue to improve.
I wish to conclude.
[Translation]
Revenue Canada takes the issue of tax avoidance very seriously. It is a priority for the department and for the government. Ultimately, however, issues like abusive tax avoidance and tax evasion are rooted in the values we hold as a society.
If society tolerates abuse of tax avoidance as a legitimate practice, we will always find people who will try to abuse the system for their own self-interest. As a result, the best way to address these issues is to work with Canadians to make abuse of tax avoidance and tax evasion unacceptable social practices.
[English]
You know, in 1990 it was difficult to find anyone who wanted to talk openly about the underground economy except the Auditor General and Revenue Canada. Five years ago we undertook to raise the public profile of this issue. I can report today that five years later we have cooperation agreements with all the provinces; every industry sector, every industry association is working with us to develop solutions for specific sectors; and the public has responded and voluntary disclosures have doubled.
We are using a similar strategy to combat tax avoidance, and we are very comfortable with the observations and suggestions made by the Auditor General in his report.
We will be pleased to respond to your questions. Thank you.
The Vice-Chairman (Mr. Telegdi): Thank you very much.
Before we get into the speakers, I'd like to remark for the non-Liberal members thatMr. Hopkins, one of our longest-serving members of Parliament, is celebrating his 66th year. As he's a former chairman of this committee, I think it's appropriate that we start off on that note.
Once again, congratulations to you, Mr. Hopkins.
Mr. Hopkins (Renfrew - Nipissing - Pembroke): Thank you. It's been a wonderful 49th.
The Vice-Chairman (Mr. Telegdi): Now going on to the questions, Mr. Silye. Welcome back.
Mr. Silye (Calgary Centre): And many more to come.
Mr. Hopkins: Thank you.
Mr. Silye: This is a very interesting topic, one I've been following quite a bit since 1985 as a businessman in Calgary in the oil and gas sector and trying always to look for the rules that allow me to pay the least amount in taxes. I think I as an individual have the right to avoid paying taxes if it's within the law, and I have the right to interpret those rules, which are becoming more and more difficult to interpret. Hence the need for the Auditor General to recommend quicker legislative changes if they're required, quicker clarifications so that people know what they can or can't do in the clearest possible terms.
I think the Auditor General has some definite positive examples where the legislation has followed very slowly. Even on this family trust thing, where rulings have been given, legislation or clarifications weren't forthcoming for other Canadians.
Tax avoidance does reduce the tax base. What are loopholes for one government were incentives for a prior government, and you're always playing this game. So within the context of wanting equality in tax compliance - and I commend the efforts of both the Auditor General and Revenue Canada in encouraging Canadians to pay their taxes - when they see other Canadians getting away with illegally not paying taxes, then it does undermine the whole effort.
.1605
This underground economy, we all know, is a very serious factor. We don't know the size of it. We know it's there. We all know people who participate in it. Yet we wonder why. We think it's because of high taxation, but we argue that the government needs the money because taxes are really nothing more than the dues you have to pay to belong to this wonderful privileged society we have. We have to pay for it.
With that preamble, and with the fact that I think everybody has the right to pay the least amount of tax possible, I have a couple of serious objections to what's going on.
About the underground economy, one of the ways I see Revenue Canada is trying to go after tax avoidance is either by changing the legislation or by going after it retroactively. I have a serious problem with this retroactivity, because I think that infringes on the rights of the individual to pay the least amount of tax when through advice from tax lawyers and accountants they were told they could do this. When it was an incentive, then a government changes the Income Tax Act... This government has done this very nicely, and quite often. They haven't increased personal taxes but they have broadened the base. They have extracted more taxes out of individuals and corporations, and excise taxes through legislative changes. Then what they've done is made it retroactive.
An example I'd like you to address, Mr. Gravelle, is the offshore exemptions. Many employees, trusting the employer, trusting the rules in place, the legislation in place, go to work offshore. They're allowed to have 75% of their salary exempted. This government closed that loophole, and then what did they do? They said hey, you're also going to owe us for those other two years you were there, before. That's not right. They've done that. So I'd like you to answer on retroactivity.
The other issue I have is this. In the underground economy we know smuggling is prevalent. You target those high non-compliance sectors. We recognize that. You mentioned jewellery. Well, it's not only cash transactions. Where does a lot of the jewellery come in? Where does a lot of the product come in?
GST fraud is prevalent as well. You know where it's prevalent. One of the reports I have seen was written by a forensic auditor, who did a review and an interview with a lot of Revenue Canada auditors. I have a copy of his report. You might be aware of it. I forget his name right now.
This gentleman indicated that on reserves, such as Akwesasne, where we stopped smuggling of cigarettes because we took the profit out of it, which was good... Now you're slowly adding some taxes back on that, but that's fine; that's the government's prerogative. But the smuggling hasn't been taken out of liquor, for instance. The difference is our tax is 83%, the U.S. one is 40%. There are high profits in liquor. You can smuggle a lot of liquor, and a lot of it is coming through there, so the reports say. Yet nobody goes onto the reserve. You can say it's provincial jurisdiction and you can cop out on it, but federally we know something is happening and liquor is being distributed.
People are going onto reserves and buying goods and services such as gasoline and groceries and not paying the GST. Non-natives are going on reserves. They're being served. I've had this stuff mailed to me, receipts and stuff. I haven't made a big issue out of it, but I feel since we're talking about tax avoidance -
The Vice-Chairman (Mr. Telegdi): Mr. Silye, you've been going for five and a half minutes.
Mr. Silye: I'm not Yvan Loubier. He usually goes for twenty minutes.
The Vice-Chairman (Mr. Telegdi): You should leave some time for an answer.
Mr. Silye: I appreciate that, Mr. Chairman, but with the Bloc not here I feel I want to get these three issues out of my -
The Vice-Chairman (Mr. Telegdi): You do have another turn.
Mr. Silye: They are important to Canadians. I can do it one question at a time or I can just do this and let him answer the three.
The Vice-Chairman (Mr. Telegdi): I'm just saying it's ten minutes and then it cuts off. It goes over there and then it comes back to you again.
Mr. Silye: Okay. I have five minutes. I forgot about the ten-minute rule. Thank you,Mr. Chairman, for reminding me.
So there is the application of the auditors, where you have these people, where they are going, and whether they are actually applying the audit anti-avoidance to everybody fairly across the country.
The deployment of auditors: perhaps you could tell us, if 150 in the tax avoidance program generates $365 million, how much you expect the 800 you're going to hire for the underground economy to generate.
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I think that's about all I have. I beg your indulgence for the long preamble.
Mr. Barry Lacombe (Assistant Deputy Minister, Verification, Enforcement and Compliance Research Branch, Department of Revenue): Let me try to respond, Mr. Silye, to your questions. I'll try to take them in order.
First of all, dealing with the issue of retroactivity, as you've identified, the issue of tax avoidance is a very complex issue. It depends upon the nature of various transactions and the relationship to the object and intent of the act. That's one of the reasons GAR was put in place, and it was in part because of a fairness concern. If one moved solely with legislative provisions, those who had come in before the legislation had been changed would have been in an advantageous position. So GAR provides the department with a tool so that we can deal with these issues as we see them.
Coming back to your issue of fairness, one of the reasons we're moving ahead with our new approach to large business audit is that we're actually doing the audits in both current and real time so that we can identify these kinds of transactions earlier and apply the rules on a consistent basis.
In terms of your specific example about the overseas employment tax credit, as I understand it there was absolutely no change in the law or the rules governing that. That is a tax credit available to employees of Canadian-resident corporations for work overseas. The purpose behind it, as you know, is to enable Canadian-resident firms to compete with other firms. So there's been no change in the rules there. The critical thing is whether it is or isn't a Canadian-resident firm. Sometimes you find that on the surface, what may appear to be Canadian-resident firms are not, in fact. They are firms in another country.
On the matter of the underground economy and your comments about liquor and on-reserves, let me say there that in addition to the underground economy initiative, the department has the anti-smuggling initiative. The anti-smuggling and underground economy initiatives work in tandem. As Mr. Gravelle said, they work in tandem not just within Revenue Canada but also with the provinces, with the RCMP and so on. So this is very much on our radar screen in terms of smuggling.
In terms of on-reserves and GST, our approach is really quite straightforward. An on-reserve business is no different from any other business. If it's doing more than $30,000 worth of sales, it should be registered for the GST. Basically what we do is make sure, when we identify these businesses, they are registered for the GST. Once we've done that, of course we undertake audit activity based on risk. We do a lot of audit activity.
I'm not quite sure which article you're referring to, but if it's the one I think it is, the firm extended an apology to the department on the particular thrust of that article - if we're talking about the same article - because we basically do things on the basis of risk, where we think taxes are at risk. We then move with our various measures, be it audit or verification, to do that.
In terms of liquor, let me also say that liquor is in part one of the areas we've identified in the underground economy, because of the hospitality sector. That's a very useful area where cooperation with the provinces enables us to do some matching work so that we begin to take a look at the relationship between sales from provincial liquor boards and sales in restaurants - and if you notice a gap, it's coming from somewhere. So we're doing a lot of these kinds of things.
Obviously there are more things we probably could be doing, but we do a lot. As Mr. Gravelle said, we work with virtually every industry association to try to deal with it, because at the end of the day, as you've suggested, we want a level playing field for the honest businesses. That's the driving force behind our initiatives.
I don't know if I've missed anything.
Mr. Silye: The deployment of auditors.
Mr. Lacombe: Okay. Let me try to do it this way. In terms of income tax, we have about3,000 business auditors, as we call them. As Mr. Gravelle pointed out, we do 100% audit coverage of all the large corporations with gross revenues of over $200 million a year. We audit about 33% of those over $15 million, and then about 5% to 6% of those under $15 million, although through our underground economy initiative we've strengthened our audit coverage rates there. So that is how they're deployed.
In terms of special skills they can draw on, all our business auditors can draw on tax avoidance skills. They get trained by our tax avoidance specialists in the local offices. We expect them to identify tax avoidance schemes, and if they need help, to bring them to the attention of the specialists.
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In some instances, once a precedent has been set you don't need to bring it to the attention of the specialists. That's why the Auditor General's recommendation that we make sure information is provided quickly to our auditors is a very important one, and one with which we readily agree.
I'll tell you roughly where our resources are allocated.
The Vice-Chairman (Mr. Telegdi): Can you wrap it up, please?
Mr. Lacombe: Sure.
We have about 3,300 business auditors focused on income tax. We have about 1,600 focused on the GST. We have 477 reviewing scientific research and experimental development claims. We have 164 in tax avoidance. We have 549 people identifying non-filers and non-registrants. We have180 doing international audits.
That's a rough breakdown. In allocating our resources we make a judgment based on where we think the risks are.
I'm sorry for taking so long, Mr. Chairman.
Mr. Silye: It was my fault.
The Vice-Chairman (Mr. Telegdi): Mr. Assad.
[Translation]
Mr. Assad (Gatineau - La Lièvre): Naturally, this subject is of great interest to us. It's a rather complex subject, but when you can discuss it in clear terms, it becomes less complicated. A lot of ordinary people don't like to venture into discussion about tax collection or the Income Tax Act because they think that you almost need a degree in economics to figure out exactly what these issues involve.
Today, we've got the report of the Auditor General and that of the Deputy Minister of Revenue Canada, which were both very clear and very interesting. I would like to draw your attention to a point that is not at all mysterious and that is that the perception of the tax system is extremely bad. I'm sure that you know this as well as I do, as do all my colleagues who have to meet with the public. It's almost second nature to us to meet the public.
People do not have a clear perception of the issue. The reality is that they pay taxes. Without being able to put their finger on it, they know that there is abuse. They know that the wealthy in our society and big corporations have ways of avoiding taxes. I don't think I'm making any big revelations here.
If you stop nine people out of ten on the street and ask them if our tax system is fair to everyone, etc, they will be insulted. They will ask you if you think they're crazy, because it's obvious that the tax system is absolutely unfair and unjust.
In a democratic society like ours, it is not normal that the public has this kind of perception. It is not healthy. If the system is bad, obviously our role is to correct it and this is urgent. Clearly, we are not going to correct this by snapping our fingers. We're aware of the complexity of the issue, and there are people who are very skilful in these matters.
If people have a bad perception of the system, it's up to us, with time, to demonstrate that it is fair and equitable. Unfortunately, that's not the case. With the event that the Auditor General drew to our attention a few weeks ago, a 1991 decision that was taken concerning 2 billion dollars - I don't know all the details - I hope that we will get to the bottom of this. This matter has been of grave concern to a lot of people.
I don't want to make a long preamble, because I do have questions to ask. The incident of a few weeks ago is a very bad one. I'm sure that my colleagues have had the same feedback I've had. The message was very bad. It was: "If you want to cheat the government, go ahead". That's the message people perceive and that's very bad. The message is that if you can afford to get a clever guy, an accountant who knows how to circumvent the law, you just go ahead. That's not normal.
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In the context of the economic crisis we are experiencing, it's essential to count on everyone's co-operation.
I've dealt with public servants in the Department of National Revenue, and my experience has shown me that they were very efficient; that's undeniable. Of course, they know they need resources, because there are many experts out there whose honesty leaves something to be desired. A great deal of vigilance and skill is needed to detect the methods that they use.
Lastly, there is one thing I've had on my mind for a long time now and that I would like to express.
[English]
The Vice-Chairman (Mr. Telegdi): I'll call Mr. Assad, please.
[Translation]
Mr. Assad: I'm expressing what people are telling us. This can't be ignored; we can't say they are wrong. They expect at least some effort from us in order to correct the situation; that's extremely important.
Mr. Chairman, in his conclusions, the Deputy Minister of Revenue stated:
- As a result, the best way to address these issues is to work with Canadians to make abusive tax
avoidance and tax evasion unacceptable social practices.
If we can prove that from a legal standpoint, abuse has been deliberately committed, shouldn't we provide for a prison sentence? In some way, shouldn't we be saying, "Look, the law is clear. You've deliberately avoided tax. A prison sentence is necessary. There will be neither trial nor fine. Prison awaits you". That's what they do in other countries, as a matter of fact.
Mr. Gravelle: I'm very sensitive to Mr. Assad and Mr. Silye's concerns since the statements that you all hear when you meet with your constituents are the same as those I hear when I meet Canadians throughout the country.
In some ways, we have to walk a very fine line in order to maintain some balance, as Mr. Silye said earlier: we have to give Canadians the right to organize their finances so as to pay as little tax as possible, provided it's legal, and at the same time use extremely effective enforcement measures to counter abusive avoidance and tax evasion.
In the final analysis, this is a question of social attitude. Why do people refuse to pay taxes or commit tax evasion? For some, it's because they just don't like paying taxes, period. For others, it's because they don't agree with this social structure. For some, it's a form of social protest. Or it is simply because they have no social morality. They don't want to say they're good citizens and will pay their taxes.
Even if the Auditor General and our department had repeated for five years that there was tax avoidance and tax evasion, we wouldn't have gotten very far if people had not been receptive to this concern.
But the winds have changed. Canadian men and women now come to our district offices or write to us anonymously asking us to investigate such and such a situation. That is a form of social awakening.
People want fairness. They want everybody treated the same way. Nobody wants to have a tax burden that's heavier than someone else's.
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Secondly, upon request from their members, associations and corporations representing plumbers, general contractors or other tradespeople are now coming to us to say that they want to be good corporate citizens and pay their taxes, but that some of their competitors refuse to pay taxes, thus creating an additional burden and unfair competition. We want to work with you so that you can reestablish fairness, they say.
Thirdly, over the past few years, we have tried to education inform, and raise awareness among the public. That's why we made our findings of tax evasion more public and more accessible.Mr. Assad, these findings do not lead only to monetary penalties, but in serious cases of tax evasion, there is a provision for prison sentences.
[English]
Mr. Silye: In the response to retroactivity on the overseas account, you indicated there's no change in the law. I agree. I think everybody understands the law. But the complaint was from the individual taxpayer. The conflict - and this is why they hate Revenue Canada - is that you're punishing the individual taxpayer when, on the tax form that they filed and the company filed on their behalf, they indicated that they were a Canadian-held control company. Why is there no assessment on the corporation or the corporation is not being made to pay retroactively some of those taxes? In that way, there would have been some more fairness and balance on that, instead of just going after the individual, who has no choice.
On the point made by Mr. Assad about general income tax and why there's dislike of Revenue Canada auditors or Revenue Canada, there's unfairness in the tax system from a legislative point of view, but that's a political thing. The other unfairness is when, for instance, the Liberal government broadened the tax base on disability allowance in the last budget or the budget before and they said that what was allowed before as a disability allowance was x and where they found after an audit - or maybe they didn't change it - that this person didn't qualify or that the disabled person wasn't quite as disabled as the tax filer claimed, what they did that was perhaps one step too punitive: ``We'll audit you for this year. You owe us $2,000, but we're going to go back the last two or three years and not allow that, and we want you to pay us back that, too.'' These are lower-income people; the money's gone, they've spent it. It's undue hardship. That kind of story gets out and hurts your reputation.
Mr. Gravelle: This is quite true. But we are not reassessing two or three years back. The minister announced - and I think he wrote to all members of Parliament recently - to the effect that in such situations we would assess for only the current year.
That is not the only answer to the problem. This disability tax credit, as we all know, is fenced with all sorts of rules and imprecision in the law. It is subjected to some assessment by practitioners and physicians. We are now working very closely with medical practitioners to make sure that they understand the criteria. They have helped us improve the form, the application. We are also giving taxpayers adequate information so they can ascertain whether or not they're entitled to the disability tax credit. But the severity of the reassessment beyond one year no longer exists.
Mr. Silye: What about the employer's responsibility on the overseas tax credit?
Mr. Lacombe: Unfortunately, Mr. Silye, the responsibility does lie with the employee, because it was employee-earned income. So at the end of the day the employee is responsible for the taxes on their income.
Mr. Gravelle: Again, on this, it's not good enough simply to say that the onus is on the employee. Mr. Lacombe and his people now have embarked on a fairly extensive consultation process with employers to alert them too and to make sure that they provide adequate information to their employees.
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Mr. Silye: Thank you, Mr. Chairman.
The Vice-Chairman (Mr. Telegdi): Mr. Iftody.
Mr. Iftody (Provencher): Mr. Chairman, I'll show you how to do a very short preamble.
I have two questions. One I'd like to pose to the people from the Auditor General's office with respect to large companies.
You expressed a concern about large companies and tax avoidance. Would your concerns involve, for example, some of the big six banks in Canada? That's my first question.
My second question is to the Deputy Minister of Revenue, and it concerns the underground economy. I'd like you to give the committee some estimate, just an estimate, of how much revenue is lost in that underground economy and also what portion of the GST is lost, or what portion of that aggregate number involves GST.
Then the third part of that question is, in your studied and professional opinion, sir, would you think the government's proposal to harmonize the provincial taxes and the GST would in some way minimize the opportunities to avoid paying tax in those circumstances?
So I'll start with my first question to the people from the Auditor General's office. Thank you.
Mr. Minto: I'll attempt to answer that question.
During the course of this particular audit we did not get into the level of detail of sectors of the economy. Our understanding and our thinking are largely from departmental documents and the department's risk assessments. The department had itself identified the areas of high risk; I refer you to paragraph 11.24.
I also refer you to exhibit 11.4, where we show the kinds of challenges the Department of National Revenue faces with offshore arrangements. If you notice, there is an example from the banking companies in there.
Mr. Iftody: Thank you.
Mr. Lacombe: Let me try to respond to your question about the size of the underground economy and GST loss, and Mr. Gravelle will pick up the harmonization point for you.
In terms of the size of the underground economy, as you know, there are a number of estimates about how large or how small it is. These range from 3% to 5% of gross domestic product through to 20% of gross domestic product. If it were 3% of gross domestic product, it would be in the order of about $21 billion in aggregate. If it were 5%, it would be about $30 billion or so. GDP is about$700 billion.
From our perspective these are interesting numbers. We don't really estimate the size of it. We're more interested in specific sectors where we know underground economic activity is large, and we want to address it. That's why, as Mr. Gravelle said in his opening statement, we've targeted seven sectors: the construction industry, home renovation, auto sales and repair, hospitality and the like.
In terms of GST loss, that's a tough question. You could probably make some estimate, if you wanted to, from what you think the aggregate size is relative to gross domestic product and then move from there. I would like to make two points to you.
The first point is if you track GST revenues relative to the growth in personal expenditures in the economy, or relative to the growth in retail sales, they track very nicely. So there has not been this fall-off, if you will, where the GST revenues have gone like that while approximate measures of the tax base have continue to grow. They track and continue to track quite well.
Mr. Gravelle: The question of harmonization is critical. Time and time again, when we were - and we continue to be - in close relationship with the Canadian Federation of Independent Business, the Retail Council of Canada and so on, they would always bring up the question of harmonization.
Why harmonization? Because it reduces the complexity and cost of compliance. It would mean you would have only one tax. It would mean you could have a single administration. The more complex a tax is, the less people are willing to eagerly comply, if you will. That is the big issue.
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In many respects, a lot of our efforts over the last few years, which have been acknowledged by the Auditor General, have been done to simplify the administration of our tax laws to whatever extent possible - although they're still very complex - and also to facilitate access of taxpayers to Revenue Canada and vice versa.
But there's no doubt that the harmonization would have a very beneficial impact. As a matter of fact, there was a recent CICA study on sales tax harmonization that proceeded on the basis of very extensive consultation coast to coast. It concluded that if we had sales tax harmonization, an integrated national sales tax across the board in Canada, there would be savings in excess of$700 million for the business community.
The Vice-Chairman (Mr. Telegdi): Mr. Minto.
Mr. Minto: It's just been brought to my attention that in exhibit 11.5 we have an example for debt swaps that involve financial institutions. It's very clearly a sophisticated transaction, but that's the kind of thing you were asking about.
Mr. Iftody: I appreciate the comments with respect to the savings in administration and so on. I guess what I'm trying to get a handle on, in terms of questions from constituents and from Canadians generally, I suppose, is the Government of Canada's initiative to harmonize the taxes.
Is one of the attractive features of this proposal for all of us perhaps that we can tell Canadians that here's some way we can reduce the unpaid tax in the underground economy, through simplification and so on? You haven't quite given me any firm percentages or anything. Can you dig into that a little bit more?
I appreciate the fact that you've said if we make it less complex, psychologically there's going to be a greater compliance. I buy that. Can you be a little more specific in terms of how that might be operationalized? If we come back to the table in three or four years, and we're looking at a harmonized tax, at what it's done and what it hasn't done, is this something we could reasonably anticipate?
Mr. Gravelle: When past governments were dealing with the introduction of the goods and services tax, after it was implemented we received a lot of advice from other countries with experience in VATs and goods and services taxes, particularly from New Zealand. New Zealand could never understand why Canada chose to introduce a tax with exceptions and exemptions rather than have an across-the-board goods and services tax covering all commodities, all purchases and so on.
The argument we were getting from the then Minister of Finance of New Zealand when he came to Canada was that if you apply it to all commodities without any exceptions, there's a good possibility that you can reduce the rate quite substantially. And by reducing the rate, you make it probably less offensive for people to comply with the tax.
This implies some very difficult political choices. And I think I have to recognize today that the whole debate about further harmonization between the GST and provincial sales taxes has to do with the very difficult political choices that provincial governments have to make in terms of perhaps expanding their base.
Mr. Iftody: Thank you.
The Vice-Chairman (Mr. Telegdi): The chair is having a little difficulty getting compliance on the time.
Mr. Iftody: I apologize.
The Vice-Chairman (Mr. Telegdi): Mr. Hubbard.
Mr. Hubbard (Miramichi): Thanks, Mr. Chairman, and I'll try to keep this fairly brief.
First of all, in terms of what Mr. Assad said, I agree. There is that perception and I think we have expressed that before. Many people are avoiding tax, and I know... I want to compliment you too, because I do see some improvements in the last few years. You are trying to get to some of these situations.
The Income Tax Act is a very thick book that hasn't been drastically revised for about twenty years. In terms of the finance department drafting the legislation, you don't set the rules, you only follow them. Do you think the Income Tax Act should be revised and redone to make it a little bit easier for the average Canadian to understand, for the average Canadian to be able to adjust his thinking in terms of what we call a fair and just taxation system?
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Mr. Gravelle: Mr. Chairman, in the name of fair and just taxation, over the years governments chose to use the tax system and the tax regime to attain a whole series of social and economic objectives. This has added a lot of complexity to the tax law.
Prior to 1971, the tax law of Canada had probably less than 20 pages, and today it is about that thick, which includes regulations. Every time you add a tax incentive to support a social or an economic objective, which is very laudable in itself, you have to put a fence because you want to make sure that particular incentive will have the impact hoped for. This adds complexity.
On the issue of tax simplification - and Mr. Hopkins will know this, having been exposed to numerous discussions and parliamentary committees over the years - there have been all sorts of attempts made to simplify the tax. There were some subcommittees of the committee of finance of the House of Commons that attempted to come up with some consensus around tax simplification. They have met with limited success because it is difficult to get a consensus in terms of the elimination of a particular incentive when it has been in place for many years.
Mr. Hubbard: With the Income Tax Act we have research and development, we have scientific research, and we have all these special provisions. With the large corporations, we also have conglomerations and mergers. A company that's making money can buy a company that has a lot of credits in its background. I think what Verity International did some years ago might be an example of this. They had such a great boon of wealth behind them in terms of tax credits that they were able to...
The banks, too, have used methods of writing off profits in terms of bringing in machines which are quite simple but which they were able to get credits for under the act, which saved them millions of dollars and cost our government millions of dollars. I know that's been closed.
Are these areas that we as a government have to be concerned about in order to close some of those loopholes and to make sure that the perception is that there aren't groups taking advantage of our tax system? Specifically maybe you could answer the question in terms of this idea of mergers and the acquisition of tax credits and how it's affected our system of revenue.
Mr. Lacombe: It's awfully difficult to talk about that in the absence of specific facts. As you know, under the tax system there has been a move to allow corporate groups and so on. When corporate groups occur, we very much take a look at the nature of those transactions to make sure that appropriate taxes are paid. It is complex. It depends upon the particular transaction or series of transactions. What we want to do is make sure the losses are applied appropriately.
As you know, in terms of such activities internationally, the importation of losses through the acquisition of foreign affiliates is no longer allowed. We previously closed those kinds of loopholes, so to speak. It's a very difficult area because it really depends on the nature of specific transactions.
Mr. Hubbard: Do you feel that with this there are a lot of these so-called credits still outstanding? Is there a moratorium on them?
Mr. Lacombe: You mean SR&ED tax credits?
Mr. Hubbard: Yes.
Mr. Lacombe: In terms of the SR&ED tax credits, there is a period of time over which a corporation can make use of the credits. We are currently doing an evaluation of that program jointly with the Department of Finance. My sense is that by and large that program, given the way it's administered and given the way it's targeted, has been a very useful program in facilitating scientific research and experimental development in Canada. It's worked to improve the competitiveness of Canadian businesses that have made use of the program. It's also been very effective in facilitating scientific research and experimental development for smaller firms.
In terms of the cost of administering that kind of program, it costs less than 0.7% of the value of the tax credits. That includes all the audit costs, all the costs of paper and so on that firms have to keep. So in terms of the SR&ED program, where there are abuses or where claims are inappropriate and don't meet the basic criteria of the program, we basically review those claims and make sure they're not accepted if they don't meet the criteria. But I don't think there's a lot of abuse of those claims.
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Mr. Hubbard: Finally, just this past week when I was home I saw in the paper that investing something like $9,000 a taxpayer could get tax credits for nearly $15,000. We're talking about tax avoidance. This is one they had in the provincial paper. Do these kinds of situations occur?
Mr. Lacombe: One would have to see the specifics.
Let me tell you what the general rule is, and this is something Mr. Gravelle alluded to in his opening comments.
On December 1, 1994, the Minister of National Revenue and the Minister of Finance announced changes to the at-risk rules. You used to be able to invest $100,000 in a tax shelter and put $1,000 down and the rest would be through some form of future promissory note. You can no longer do that; that is just not possible. The only thing that's allowable now is the $1,000.
By definition, any tax shelter has a specific purpose to it and it's structured by and large so that the cost of buying the tax shelter is less than the deductions that one would be allowed to have. That's basically what the definition of a tax shelter is.
Mr. Gravelle has alluded to what we've done to address tax shelters. Tax shelter sales this past year were $1.9 billion, down from $2.4 billion. My guess - this is better than a guess - is that about $1.5 billion of that $1.9 billion were film tax shelters and joint exploration corporations. We have moved with our colleagues in Finance to move those off the books.
Joint exploration corporations were treated in the last federal budget, so they are no longer available for tax shelter purposes. As you know, the film tax shelters had that extra year through 1995, but now they're closed and replaced by the film tax credit so that the assistance can be targeted directly to Canadian films for film-making, which is the intended rationale for the program.
I'd have to look at the specifics of the case, but I don't think so. If something looks too good to be true, it probably is, as the old statement says.
The Vice-Chairman (Mr. Telegdi): On the research tax credits, in my riding, Waterloo, I get a lot of complaints that you folks don't have the manpower to administer the program efficiently enough. So it's timely decision-making that causes me concern, in the sense that many companies in Canada operate on both sides of the border.
Let's make sure that we encourage research right in this country and we don't do anything to be chasing it off to someplace else. We get precious little research done as it is.
Is there a way in which you can be more efficient?
Mr. Lacombe: Let me deal with that, Mr. Chairman. That's an excellent question, and this is an issue we've been dealing with.
First let me explain. September 13, 1994 was a big day for us. That was the day when all the prior-year claims had to be lodged with Revenue Canada. These go back to 1986, 1987, 1988. On that day, more or less, we received 15,000 claims. This is in addition to the normal, say, 4,000 to 5,000 claims that we get every year.
We allocated additional resources to do that workload. This year we're allocating more resources to do that workload. We're changing. We're putting in more fast-track methods so we can better manage the risks in this area, because we want to stick with our stated target of turning claims for refundable investment tax credits around within 120 days.
I can tell you that as we chart this - and we do so almost on a daily basis - that curve is now coming down. So you should start to see improvements in claims. The reason for that is the additional resources that we've put into the program, plus we've taken a sizeable bite out of those 15,000 claims that came in on September 13, 1994.
We're doing everything we can to get that right. We share your view about the importance of this program, particularly for smaller firms who may face cashflow problems. We're always very sensitive to that.
The Vice-Chairman (Mr. Telegdi): Have you got a circular on that?
Mr. Lacombe: We can send you some information on that, absolutely.
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Mr. Gravelle: This SR&ED program is one of the tax credits that has been supported very enthusiastically by small business involved in research. A couple of years ago, after the problem with the old SRTC, the rules were changed, and we now have the new SR&ED tax credit program. Revenue Canada at the time became extremely sensitive to any tax leakage. We undertook to do a very systematic review of each and every scientific tax credit claim. That resulted in an incredible backlog, and as a result we had very vocal representations that we change our approach. This is a success story of working with industry associations.
We worked diligently with the SR&ED community. They helped us develop information seminars for SR&ED companies so that we could tell them about the tax credit program - how it works, what the criteria are. They helped us develop pamphlets, brochures, and forms that are readable not only by managers of small firms but also the R and D performers in the small firms, so that we could bridge the gap between the two. They also helped us identify criteria for those SR&ED performers who have a good track record, so that we could even accelerate the turnaround of a claim by more than 120 days.
This is where we're at at the moment and it's working extremely well. We get good response from the SR&ED community. We have our own people doing business seminars around the country yearly and we piggyback onto that other business seminars about GST administration, setting up a corporate entity, and so on and so forth. All this is paying dividends.
The Vice-Chairman (Mr. Telegdi): We'd all like some information on that in our offices.
Mr. Crawford.
Mr. Crawford (Kent): Thank you, Mr. Chairman.
There are so many things to ask - where to start? I'll carry on from Mr. Silye when he was talking about disability, because I've had a lot of disability claims in my area that you have gone back on, and they're not recognized now, seven years later. Several doctors reported seven years ago that someone was disabled, almost a vegetable, and now you're going after them and saying ``We want the money back''. That's one.
I think there is a big underground economy. I'm only going to deal with the small levels. In our area, if you walk into a home where there isn't a Texas mickey, then there isn't any liquor in the house. When was the last time you were on a reservation to do an audit?
Wage protection is a provincial matter. There are several industries in my area where in 1990-91 the people worked one, two, three days a week just to keep the company open. In 1991 the company went bankrupt and in 1993 the provincial government finally gave the employees up to a $5,000 guaranteed wage. Then in late 1995-96 you come along and you want it back. They haven't done a day's work, and most of them worked making under $7,000 and $8,000 a year, just trying to keep food on the table. Our federal department is now saying they want this money back. It's the province that gave it to them and now these people aren't working; they're on welfare. What will they do?
That's enough to get you started. And I hope you'll be back many days so we can continue. I want little horror stories.
Mr. Lacombe: With regard to disability, as we said earlier, going back seven years would be a bit of a surprise, because as Mr. Gravelle said, we go back a year. On any audit our normal reassessing is one plus one - the current year plus one back. If there are specific examples there, Mr. Crawford, maybe you could let us know and we could take a look at them.
In terms of the underground economy and smuggling, yes, it goes on. You've specifically referred to liquor. What we're trying to do through the underground economy initiative and the anti-smuggling initiative is deal with this. You've asked when we've last been on reserve to do an audit. I can think of a number of reserves where we're actually involved in doing audits right now. As I've indicated earlier, if we think there's a problem and risk, we will proceed and do the audit.
In addition to that, I didn't quite understand your question about someone receiving assistance from the province and then Revenue Canada coming back and saying they have to pay tax on that, particularly if the amounts, as you mentioned, were $7,000 or $8,000 a year. Again, one would have to take a look at the specific example. But given that amount of money, I would be surprised, given the circumstances that you mentioned, that there would be any taxable income there.
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Let me come back here to another point. I think it's important, as Mr. Gravelle has said andMr. Assad has said, that the public have confidence and faith in the fairness of the system, and there's some evidence that the corner's being changed a little bit there. Some recent polling data: The KPMG poll kind of indicated that people were becoming more and more uneasy with evasion; fewer Canadians were saying they would evade taxes, and so on.
In terms of individuals, the number of people who file returns with us roughly approximates the total population over the age of 15. When we take a look at relationships between income reported to us and income reported to Stats Canada, for income and employment they are basically the same. For self-employment income, since 1991, the relationship between income reported to Stats Canada and income reported to Revenue Canada has been going like this, which means that more and more people are reporting self-employment. We're working at self-employment income, taking a number of other measures to deal with self-employment. In some sense there's a series of measures that need to come together and be understood. I don't think many Canadians understand what we've just talked about on tax shelters and the fact that they're going down and that these things aren't working as well as they used to work.
We try to do everything we can to ensure that fairness, and that's why we've allocated the resources in the way in which we do. It's not just the revenue recoveries that are important, it's the fairness and the perceived fairness of the tax system, and doing what we can to ensure that it's seen that way.
The Vice-Chairman (Mr. Telegdi): Mr. Hopkins.
Mr. Hopkins: Mr. Gravelle, one thing I've learned over the years is that an MP is so busy looking after everybody else's problems that he doesn't look after his own. I sent you the biggest donation this year that I've ever sent to you in my life and it broke my heart.
Mr. Gravelle: Thank you. Thank you, Mr. Hopkins, on behalf of Canada.
Mr. Hopkins: The other thing is, I donated one day's pay to the Minister of Finance, you'll recall, Mr. Chairman, when one of my constituents sent in his day's pay, and I matched it with one of mine and presented it to the finance minister, and I couldn't even deduct that. There's no provision in the Income Tax Act to deduct a donation of one day's pay. I'd like you to take note of that, because I think if someone's going to be that generous, it should be looked after.
You made a statement a while ago about the GST and the administration of it, with charging 7% on certain items, leaving others out, giving rebates, and so on. What is the actual administration cost of handling all that?
Mr. Gravelle: I would have to give you exact numbers, which I don't have with me.
Mr. Hopkins: Okay. You must have some other figures, too, because you said that if you charged tax right across the board, it would be cheaper to administer. I remember that; we went through all those debates. For a family of four with an income of $30,000, if you had an across-the-board GST of say 3%, what would that actually add to the cost of living for that family? Do you have any figures on that?
Mr. Gravelle: Oh, I think we could get you some figures on that, indeed.
Mr. Hopkins: Okay.
School boards get rebates. I can give you a very good example - The separate school board in Renfrew County. If you removed the rebates, I think it would mean probably $360,000 less, and they're a small board. It would mean about $360,000 less for them, and the taxpayers would have to turn around and make up the difference, so it's a big thing. But in order to do this you have the added administration cost of giving these rebates back to school boards, so you're into the administration factor again.
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I'd like to get some information on those stats, if you have them. While you're doing it, instead of just using 3% why don't you use also 4% across the board and see what that comes out at?
Mr. Gravelle: Okay.
Mr. Hopkins: In your comments today you made a statement that really caught my attention, that ``In 1991 it was difficult to find anyone who wanted to talk about the underground economy, except Revenue Canada.'' I find that hard to believe. I can recall a lot of discussions about the underground economy and the number of tax dollars we were losing on it. Where was the problem?
Mr. Gravelle: By using those words I meant there wasn't a clear recognition by all that this was an urgent thing. Of course, there were people talking about the underground economy, but the kind of consensus we have today did not exist in 1990. There has been a sea change in social attitudes vis-à-vis the underground economy. I find this quite reassuring. It's making our life a little easier, believe me.
Mr. Hopkins: You said in many ways there are parallels between where we are on tax avoidance today and where we were on the underground economy five years ago. Would you enlarge on that?
Mr. Gravelle: I think the strategies we developed over five years, working with other people who were interested and preoccupied by the underground economy, is also happening on the issue of abusive tax avoidance and tax evasion. People now want to work with us to address that as well.
Mr. Hopkins: When you're talking about tax avoidance of, say, five years ago, how much of that tax avoidance was tied up in, say, smuggling as opposed to other everyday business factors?
Mr. Gravelle: I think five years ago, on the issue of smuggling, it was very high. The economic incentive to smuggle in tobacco products and liquor was great. We managed to make a dent in the smuggling of tobacco products because the government chose to lower taxes and therefore reduce the economic incentive. We witnessed, Mr. Hopkins, that the problem of tobacco smuggling abated substantially in those provinces that matched a tax reduction on the initiative of the federal government.
We still have a very high economic incentive for liquor smuggling. It is an issue for governments to consider whether at some point in time there should not be a similar strategy for liquor. I know the Brewers Association of Canada - more particularly, the Association of Canadian Distillers - are strongly advocating that we lower liquor taxes to remove the incentive. This is something that could be considered.
Mr. Hopkins: Do you have any idea of the tax money you're taking in today on tobacco compared with what you were taking in when smuggling was a very serious issue?
Mr. Gravelle: I can give you a dollar figure. I will come back to that and share the information with the committee.
Legitimate sales have increased substantially in terms of tobacco products. By that I mean companies themselves are reporting more legitimate sales and less smuggling. As well, the export of tobacco products coming back into Canada for smuggling purposes has decreased quite substantially as a result of that. So they go in tandem.
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Mr. Hopkins: Do you have a dollar figure?
Mr. Gravelle: I will get you a dollar figure. I don't have it with me.
Mr. Hopkins: Okay.
The Vice-Chairman (Mr. Telegdi): Mr. Grose.
Mr. Grose (Oshawa): Having come from running a medium-size business for 35 years in my real life, let me assure you that you're deluded in thinking that things have improved since 1991. For 25 years I watched people become more sophisticated in their avoidance of tax. I watched the percentage climb of people calling me to provide the service I was in business to provide - I I closed down the business in December 1995 - to the point where I would say 50% of my callers were asking ``How much for cash?'' That climbed from what was a very low amount 20 years ago.
People are becoming more sophisticated and more cynical about the whole thing. Let me assure you, it cuts right across everyone - policemen, clergymen, government employees. It is an accepted fact. You're not hearing about it because people are cuter about it than they were, and small companies are cuter about it. In my dealings with other companies where I subcontracted stuff, it was the same thing but not as obvious. People have become more used to it.
I'm not criticizing you for your attitude here, but this is not the real world. Out there in the real world, believe me, it's going on. They're doing it better than they used to.
I think when you see increasing tax figures you should take a look at... Where you get your benchmark on how much the economy is improving, I don't know. I think you're being deluded by the figures and attitudes you see here that you don't see out there on the street.
Sorry to tell you that.
Mr. Lacombe: I don't disagree with your comments at all. In fact, I think they're exceedingly wise. The only thing I would like to point out is that when you take a look at what's been happening...
Let me give you some numbers, because there is a balance here. I agree that people are getting more sophisticated. I agree that it may not be as visible as it was before as people become more sophisticated. But in terms of tax filers, people who file tax returns with Revenue Canada, that's gone up from about 76% to 94% or 95%. At least we can identify those people now.
In terms of our ability to detect people who don't file income tax returns or don't report fully all the income they earn, we've been in a position to strengthen our ability to detect that. We've done this by matching information from a series of sources and so on. So we've become more sophisticated as well.
I don't want to put a happy face on this, but I'm trying to put a balanced face on it. If you take a look at a series of numbers, the period between 1989 and 1992, you'll see a lot of things that suggest that this was a significant period of underground economy expansion, under-reporting of income and so on. I don't want to paint a happy picture, because we still have significant problems, which is why we're doing what we're doing. But I think the growth of it, the pace of it, is not as great as it was in the 1989-92 time period. I think a lot of things suggest that to be the case.
But I think your advice is wise. We're not being complacent about this at all. Don't misinterpret my comments.
Mr. Grose: That possibly is what I was trying to get you to say, that the problem is there and you still have to be vigilant.
Mr. Lacombe: Absolutely.
Mr. Grose: In my own read, I think it's increasing. I could be wrong. But believe me, it is not going away.
I think one thing you must remember - and you probably are quite aware of this - is that in a transaction, for instance, a transaction I was offered, I don't charge the tax and I also don't report the income on the money I get. So now you have two people who are cheating on their taxes. And it goes on from there. Especially if you're getting into a subcontracting situation, it just grows and grows and grows.
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But as long as you are still vigilant and don't think this is going away and we don't have to watch things any more, then fair enough.
Mr. Gravelle: Mr. Telegdi, I would be the last one even to attempt to think we can cry victory over the underground economy effort.
I'm very concerned about perceptions as well. It's not only perceptions as described byMr. Assad. It's also the attitudes of people in society. There's only so much we can do as a revenue administration. Of course we have some very powerful tools in our hands. We have some new legislative tools to match information, to have direct access to information returns from financial institutions, and so on. Some of these are fairly intrusive. We have power of seizure and so on. But even if we had more power, this would not necessarily cure the fundamental problem of attitudes and perceptions. Those are social attitudes, and we have to find new strategies for dealing with those. Some of it, of course, is beyond our own reach.
The Vice-Chairman (Mr. Telegdi): We have some non-filing that might be on the marginal end of somebody trying to maintain any kind of a living. They may have a business that would never operate if they had to file all the forms and what have you. Then you have the other end of the spectrum, companies that are avoiding millions and millions.
This Auditor General's report was rather good when you looked at it and the topics it looked at. One of the chapters they looked at and suggested we probably should deal with deals with penitentiaries. It deals with penitentiaries where we have many marginal people, for the most part - that's what they represent - spending time in custody at great expense.
When I look at the number of people who actually went to jail through court action on this issue, I notice in 1994-95 it was 8, in 1993-94 it was 14, in 1992-93 it was 8, in 1991-92 it was 11. I don't know the individual cases, but I hope they're the Harold Ballard types. Ballard was a cause célèbre for being able to evade tax, to cheat, and to thumb his nose at the public. We're looking at the Young Offenders Act, and in any sizeable municipality we have more young offenders going to jail for stealing food than we have in the annual numbers. I guess if in some place incarceration is a deterrent, it happens to be to the person with middle-class values, or our values, in the sense that the last place where we want to end up is in jail, whereas in many cases with the young offenders jail is not appropriate, in the sense that they just don't relate to the threat. They don't see it as being as onerous as we would. So I wonder if in the obvious cases of tax evasion we should not be making sure more of those folks are in jail, because we know for those folks it's going to work. I'm talking about the ones who are doing it in the hundreds of thousands of dollars. I think a message has to be sent out.
Somebody's avoidance means somebody else's burden. Collectively, if you look at the underground economy, we're talking about...what? The estimate is from $20 billion to $140 billion. If it's $140 billion, it means we'd have no deficit and we would be on our way to paying off the debt. We would be funding all sorts of programs we've been cutting. So it's very critical that we take a look at that.
This is a fascinating chapter in the report, and I really think the committee should be spending some more time on it, because beyond the educational value for ourselves, I think we have to start debating whether it's appropriate that we have only eight people go to jail. Who are those eight people who went to jail for 1994-95? I hope those people are substantial evaders and not somebody very small-time. I guess maybe I can find that out.
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Mr. Assad.
Mr. Assad: What Mr. Grose mentioned is the feedback I get. I think it's quite widespread.
On a lighter note, Len here said that he gave a substantial contribution.
It reminds me that John Diefenbaker, when he was in office as Prime Minister, said that he received a letter with a cheque for two hundred and some dollars. This gentleman said that in the previous year he hadn't paid all his income tax, and he was aware of it. He said that he was losing sleep, and he felt that this would help the problem. He added that if in six months or so his sleep patterns were not improved, he'd send the balance of what he owed.
Mr. Hopkins: The only night I didn't sleep was the night after I wrote the cheque.
Mr. Assad: Can we expect the Auditor General's office to continue their surveillance as they have done in the last months on these issues? It has been extremely informative, and I would like to see the Auditor General's office come before this committee on a periodic basis, maybe a few times a year, and bring us up to date on
[Translation]
the deficiencies of our tax system. A few weeks earlier the Auditor General shed light on the events of December 23, 1991. Can we expect very clear responses to this by the fall?
Secondly, I agree with you, Mr. Gravelle, that this is mainly a question of attitude and perception. Even is we posted policemen at every street corner, we could not prevent certain people from having bad intentions. An in-depth reform of the tax system is necessary. There is nothing perfect in this world, but if we could bring about some reforms so that the system is perceived as fair and equitable, I'm convinced that there would be a change in attitude and perception.
[English]
I'm convinced also that if reform was brought and our citizens would realize that the system is as equitable and as fair as human nature can provide, then the social stigma of tax evasion could become so significant that it could be a very effective deterrent. There's no doubt of that.
Finally, I would like to know from the Auditor General's office if we can expect more information concerning the events of the last few weeks, the follow-up on the $2 billion that was transferred to the United States.
Mr. Minto: Let me deal quickly with the last question first. I understand that the finance committee is meeting even as we speak to discuss some of these affairs. I understand that the public accounts committee proposes to go back and look at the matter in September. I did not come today prepared to talk about that particular issue. At the next session in September, if you want, we will have a full discussion. That is not a problem.
To go back to your first question, since Mr. Desautels became the Auditor General, one of his major priorities has been the tax system. I have personally been responsible for all the audits in Revenue Canada for the last seven years. We have done many audits. Our relationship and our working with the department has been first class, professional, very businesslike. We have not always agreed, but we have frequently agreed, and in most places we have resolved our differences.
We intend to continue these audits. I can tell you now, for example, that this fall we will be reporting on our audit of large businesses, which our team is doing right now. We have an audit of excise taxes ongoing - and I was fascinated by the discussion of tobacco and liquor smuggling that happened today. We have an audit going on on the child tax credit and the GST credit, right now, and this fall we will be reporting back to you on those audits. We have a floor plan for the next four or five years to continue our audits of the revenue system.
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If I can add one word, we've had a lot of discussion about the social side of things and about values and I have to completely agree with my colleagues in Revenue Canada. The thing to keep in mind is that tax evasion is not a victimless crime. Somebody else has to pay the tax that one person does not pay, because the government needs the revenue.
I appreciate your emphasis on the kinds of penalties. Maybe one day we will have a chapter or we will have a discussion on the kinds of penalties that are imposed by the tax system vis-à-vis other things in society. But surely there is a social contract between the state and the citizens: you pay your taxes and we will provide these services. If one party does not keep up with his part of the contract, things start to fall apart.
Mr. Assad: Just briefly, would you say the revenue department is understaffed for dealing with the kind of criminal activity we have out there in tax avoidance?
Mr. Minto: Mr. Chairman, I think that's really a question for the deputy ministers. Resource allocation is squarely in their...
Mr. Assad: Do you need more resources?
Mr. Gravelle: Monsieur Assad, I think we have the resources the Government of Canada can afford to give us at the moment.
I think we've been privileged to be able to achieve two things. One was to make our contribution to deficit reduction - because we were not exempt from that - without impacting on revenue generation or on service to taxpayers. We've been able to do that because of some very substantial application of technology, because of productivity gains, and because of basic business streamlining within the department and in our relationship with taxpayers.
Secondly, the Government of Canada has given us additional resources, even in the last budget, so that we can buttress our enforcement activities. That is very meaningful. We received 800 additional FTEs for enforcement. In addition, this government gave us $45 million to support our anti-smuggling initiative and there have been some substantial breakthroughs in that regard.
How much is enough? It's a question of affordability at the end of the day.
I can assure you, as exemplified in this report of the Auditor General, when you look at exhibit 11.4 or exhibit 11.5, where we have identified all sorts of areas and very complex schemes of tax avoidance and so on, this is an illustration that your revenue administration is extremely vigilant, because we identified all of these examples and cases through our enforcement activities.
In addition, we have to work smarter. Mr. Grose said some people are getting very cute at it and very good at it. And I agree with you. That's why now we have to do things differently and do them smarter, and that's why, in Barry Lacombe's area, we have established what was not generally accepted in tax administrations around the world many years ago. We have established a compliance research group so that we can start looking at trends, at risk analysis, at what's happening in the economy, at what drives the underground economy and at what drives societal attitudes and how we can better adapt our strategies as a result of that. We hope that with this we will be able to become even more vigilant.
The Vice-Chairman (Mr. Telegdi): You're talking about allocation of resources and how much the government can afford. You have 150 people allocated to tax avoidance programs, and according to the figures each one of these people brings in $2.6 million in revenue. It seems to me that is more than paying for itself.
How much would you need to expand it? Can you project what kind of recovery they would have? Where would it make any more sense to have those auditors out there? It seems to me that you have money and you're generating revenues. How does that tie in to not having enough resources?
It's a pay-off for us to have the right resources if we are going to get the revenues.
Mr. Lacombe: Let me come at that in a couple of ways, Mr. Chairman. First of all, it's very hard to estimate the declining marginal revenue as you add additional resources. We simply track it and get a sense of what's happening.
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In the case of resources like tax avoidance auditors, a lot of the cases that go to them may be referrals and very complex cases, first-time cases. We get a lot of tax avoidance reassessments also done through our regular business auditors. So what we track is the degree to which our tax avoidance auditors, or our international auditors for that matter, have the time to be able to provide training, advice, direction, if you will, to our regular business auditors, plus pick up those significant tax avoidance cases that are identified through our regular business audit. We basically ask what's the demand for this kind of service. In that sense we can do it, because our business auditors are identifying these schemes, and then we can make an estimate of how many tax avoidance auditors we need.
Mr. Gravelle: You say, Mr. Telegdi, if the return is so high for tax avoidance specialists, why don't you have 200 or 250 of them. This is a very valid question.
I take two things away from our exchange this afternoon, which has been extremely beneficial. One is that the committee has a concern about the level of penalties for tax evasion, and we are going to look at and consider that.
The second thing is you are telling us to please continue to be vigilant. We have tried to. In our deficit reduction exercise, the bulk of the $300 million coming out of the revenue administration over four years is essentially administrative overhead. We've tried to cut corners, to simplify, in order not to have an impact on revenue generation enforcement and of course service to taxpayers.
We take away from this afternoon's discussion that we need to continue to put a lot of emphasis on good, creative, intelligent enforcement, and we need to protect that base. I assure you that we will be mindful of the need to have proper balance in the enforcement program, as you suggest. I don't have a magic formula to tell you whether it should be 200 or 225. I think it's a question of judgment at the end of the day. But we will be mindful of that.
Mr. Assad: Mr. Chairman, Mr. Gravelle spoke of the messages he took today. I think there's another. What the Auditor General brought to light some time ago has done a tremendous amount of damage to the ministries of revenue and finance, because the perception out there was terrible. That is a message. That has to be cleaned up, and that has to be understood. I believe there's tremendous effort, but if that issue is not clarified... Believe me, the damage to that has been very extensive. Thank you.
The Vice-Chairman (Mr. Telegdi): I think it's important that the system be perceived to be fair, beyond being fair. There's no question that we'll be dealing with that issue once again.
I would like to thank you, and I'm sure we're going to have to have you back in the near future. Thank you very much.
Members of the committee, we have a housekeeping item to take care of. I was informed that this morning notices went out to our offices to have another meeting tomorrow at 11 a.m. It's unfortunate, because today we had for the first time in a long time a very useful discussion in this committee on a topic relevant to Canadians, but I'm not going to be able to be at the meeting tomorrow. I'm checking the rules. You require 48 hours' notice for the meeting anyway. I find it unfortunate that this is the situation. So at this point in time I want to give notice that our Tuesday meeting is on, and so is our Wednesday meeting.
I personally think we should probably take more of a look at the chapter we're working on and try to see what we can wrap up in terms of our work from this past session.
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Mr. Grose: I assume that in your capacity as chairman you are notifying us that there will be no meeting tomorrow.
The Vice-Chairman (Mr. Telegdi): Well, in my capacity as the chairman, at this point in time I'm notifying you that 48 hours' notice was not given. I am going to so inform the whip. My expectations are that we will not be here.
But let me express a bit of regret, because I think the topic we dealt with today is an important one and is one we should deal with again.
The other topic that has been an issue of contention is now being dealt with by a committee that can best respond to the timely nature of it, and it's going to be coming back to this committee in the fall.
We had on our side a full complement of members, and because I was told that nobody would be coming from the opposition, I was pleased to see Mr. Silye here for a brief period. I understand that he had to go off someplace. But I think it's categorically unfair to ask the committee members, particularly the government side, when we had seven people here on the committee sitting through a meeting, to come back with something like 24 hours' notice, or less, to deal with a topic that we have already dealt with and we have said we will resume hearings on in the first business in the fall. I think it's important to state that on the record, because I assume there will not be a meeting tomorrow because there will be no quorum tomorrow.
Mr. Hopkins: Mr. Chairman, we're already on the record with a motion duly passed on the first meeting in the fall, are we not?
The Vice-Chairman (Mr. Telegdi): We certainly are. At the first meeting in the fall we're going to be dealing with the topic of tax shelters.
It's important to note again that when we started dealing with that issue, the tax shelter issue, we were told that it was important that the legislation be changed on it, if legislative change was needed.
There was the push from the Bloc, the official opposition, that this issue should take place at the finance committee. The finance committee has taken up the issue and is meeting on it extensively. In terms of the demand for action, that committee is able to do it. We look at things in retrospect and recommend for the future, but it's the finance committee that deals with that legislation, and that is taking place. It will be coming back to this committee, but in the meantime we have to deal with some chapters, because we have the May report.
Outside of family trust, this is the first issue we have actually dealt with as a chapter. It's not very good production on our part as a committee if we can't deal with more than two chapters in a report.
So I look forward to coming back next Tuesday and Wednesday and trying to deal with wrapping up some of the issues before us.
Mr. Clerk, should we set a definite agenda for Tuesday and Wednesday, if we want to accomplish anything?
The Clerk of the Committee: You can't set anything right now in the absence of a quorum, Mr. Chairman.
I will suggest that I will inform the chairman tomorrow morning that he should call a subcommittee meeting either tomorrow or very early next week.
Mr. Hubbard: DND are subject to remarks in the Auditor General's report, including the APC situation where we have soldiers overseas with equipment that's not up to standard. In fact, it is endangering their lives. I'd like to see that discussed in the very near future, for at least one occasion.
Mr. Grose: Why? We've ordered new APCs.
Mr. Hubbard: We have a major problem in upgrading the ones that are there and also in getting provisions for -
Mr. Grose: Yes, but they'll be upgrading...go back to the reserves. The new ones will go to the regulars as soon as they're made.
Mr. Hubbard: That's not the intent.
Maybe Len could tell you more. He has a military camp right near by. It's something to which we should look for some answers.
The Vice-Chairman (Mr. Telegdi): We'll take note of that. We also have the note about the penitentiaries.
This meeting stands adjourned.