HOUSE OF COMMONS CHAMBRE DES COMMUNES OTTAWA, CANADA
REPORT TO THE HOUSE
Monday, October 28, 1996
THIRD REPORT
Pursuant to Standing Order 108(3)(d), your Committee has studied Chapter 1 of the Auditor General's May 1996 Report (Other Audit Observations -- Revenue Canada). The Committee held meetings on this subject with representatives from the Departments of Finance, Revenue Canada and the Office of the Auditor General on May 16 and October 2, 1996.
Introduction
The Standing Committee on Public Accounts thanks the Auditor General for his report and for his willingness to appear before the Committee on several occasions. In particular, the Committee would like to thank the Auditor General for bringing to our attention the issue of Taxable Canadian Property and the decision that was made in December, 1991.
The Committee acknowledges the important work of the Auditor General and expresses appreciation for the productive relationship between the Auditor General and the Committee. The Committee also wishes to thank those who took the time to answer the Committee's questions with regard to Chapter 1 of the May 1996 Auditor General's Report.
The issues raised in Chapter 1 of the May 1996 Auditor General's report concerning the taxation of emigrants were referred to both the Standing Committee on Finance and the Standing Committee on Public Accounts. The Standing Committee on Finance heard from a wide range of witnesses and examined the issues relating both to the process and to the policy related to tax rulings given in 1985 and 1991. The Standing Committee on Finance issued its report in September 1996, with a series of recommendations affecting both the advance rulings process and the policy of the taxation of emigrants.
The Minister of Finance tabled a Notice of Ways and Means Motion on October 2, 1996 which implemented the policy recommendations put forward by the Standing Committee on Finance and tightened Canada's already strict rules for taxpayer migration. The Committee is pleased that the Auditor General expressed satisfaction with the Government's response to the issues raised in his report.
The Standing Committee on Public Accounts notes the Auditor General's remarks with regard to the statement by the Minister of Finance on October 2, 1996:
If I may add my own views on this. I must say that we saw the Minister of Finance's announcement for the first time this afternoon, just before the start of this hearing, so my comments are preliminary comments, and I will need a little more time to review the technical details.
With that qualification, I would nevertheless say that at first glance the response appears to be a fairly thorough response to the concerns that we have raised, and I am pleased by the seriousness with which our concerns have been taken.
It seems as though the changes proposed would definitely clarify the legislation and it also seems that the changes proposed go in the direction that I thought was the basic intent of the law, of the Income Tax Act and of Parliament. In fact, very quickly, I noted some of the technical changes very similar to some of the comments we made during testimony to the Finance Committee. I think from what I've seen so far, the changes seem to respond to the concerns that we've expressed before now.
For its part, the Standing Committee on Public Accounts heard from many of the same witnesses who appeared before the Standing Committee on Finance concerning the 1985 and 1991 rulings. From this testimony, there are several issues that the Standing Committee on Public Accounts would like to highlight in this report.
Documentation:
The Committee is concerned about the lack of documentation of the December 23, 1991 meetings held by officials to discuss this ruling. The Committee believes that rulings outlining the interpretation of tax policy should be well documented, consistent and transparent.
The Committee is pleased that, in May 1996, when the Minister of National Revenue was made aware of this problem she acted immediately to ensure that all tax policy interpretations are properly documented.
Granting of an advance tax ruling:
The Committee also examined whether the advance ruling in 1991 should have been given at all. The Committee notes that in determining whether to give the rulings, Revenue Canada was confronted with ambiguous legislation. The Auditor General, in confirming that the legislation was ambiguous, stated before this Committee: ``This observation highlights significant ambiguities in the Income Tax Act relating to the concept of taxable Canadian property.'' Faced with the ambiguous legislation, Revenue Canada consulted with both the Department of Finance and the Department of Justice. Given that Revenue Canada received advice that a positive ruling would be in accordance with both a proper interpretation of the law and its policy, the Committee believes that Revenue Canada was correct in issuing the advance tax ruling.
Integrity of officials involved:
In its investigation of this issue, the Committee found no evidence to doubt the integrity of the officials involved in making this advance ruling. The Committee also notes that the Auditor General said in his testimony to the Committee that:
In the dealings that we've had with Revenue Canada, and particularly since I've been Auditor General we've had a lot of dealings with Revenue Canada, I have never had the occasion or the need to ever question the integrity of the senior officials at Revenue Canada.
Recommendations:
1. The Committee recommends that the substantive conclusions of the Standing Committee on Finance as outlined in the appendix of the Third Report of the Standing Committee on Finance be adopted.
2. The Committee believes that the lack of a system to ensure consistency of rulings, the lack of documentation and the failure to publish rulings were problems which existed at the time that the 1985 and 1991 advance tax rulings were given. However, the Committee notes that changes in the advance rulings process have since been made to address both the concerns of the Auditor General and the recommendations of the Standing Committee on Finance.
The Committee recommends that the Minister of National Revenue ensure that the reforms made to the advance rulings process continue in the future to fully adhere to the goals of transparency, consistency and better documentation.
3. The Committee recommends that following the Minister of National Revenue's announcement that in future all tax policy interpretations be properly documented, that the Minister of National Revenue table the procedure which must now be followed in documenting important decisions.
The dissenting opinions of the Bloc Québécois and the Reform Party, as well as the supplementary opinion of Denis Paradis, are appended to this Report.
Pursuant to Standing Order 109, the Committee requests the Government to table a comprehensive response to this Report.
A copy of the relevant Minutes of Proceedings (Issue No. 2 which includes this Report) is tabled.
Respectfully submitted,
MICHEL GUIMOND Chair
Dissenting Opinion - Family Trusts Scandal Bloc Québécois Institutionalisation of a shameless cover-up
Introduction The tabling of this new report by the Liberal majority of the Public Accounts Committee on the family trusts scandal fits in directly with the government's cover-up of a financial and fiscal scandal unprecedented in Canada. The Public Accounts Committee should shed light on all of the obscure events surrounding the decision of December 23, 1991, leaving the technical part on necessary fiscal changes to the Finance Committee.
Following the uncovering of this scandal, many Liberal committee members displayed outrage at the actions of Revenue Canada and the Finance Department. The unruly Liberal MPs quickly fell into step with the government partisanship which is in every way trying to protect very, very highly-placed interests of which the financial implications are now evident.
No lack of integrity? To justify its ineptitude and its lack of courage, the Liberal majority maintains that the Committee found no element for which to cast doubt on the integrity of bureaucrats involved in the making of this premature decision. (Majority Report, p. 5) Liberal MPs are being hypocritical and even naive in pretending to be able to pass judgement on the integrity of the bureaucrats involved. All of the Liberal MPs' actions during the Committee meetings were a shameless attempt to bury the affair by trying to conceal the facts.
How can they really pretend to be shedding light on this entire scandal? First of all, they refused to let the Committee fulfil its mandate. Then, they refused to let the Committee make use of all of its investigative powers. They also refused the Committee the right to hear from all of the bureaucrats involved. And finally, they allowed the Committee no more than two hearings on this scandal. Shedding all of the light? That was certainly the last thing the Liberal MPs had in mind.
However much the latter try to use the Auditor General's statements (Majority Report, p. 5) to back them up, they deliberately omit to point out that the Auditor General clearly specifies that his office has not conducted an inquiry particularly directed at questions of interference or lack of integrity. His office's inquiry was focused on the technical interpretation given to the interpretation request. (Public Accounts Committee, May 8, 1996 and October 2, 1996)
Now, the role of ensuring the integrity of the public service directly belongs to the Public Accounts Committee, as the guardian of governmental accountability. The Committee's Liberal majority clearly abdicated its responsibilities. In effect, the analysis of some testimonies before the Committee show the blind intentions made evident by the Liberal MPs.
Inconsistencies, inexactitudes, lapses and differing versions More than a dozen inconsistencies, inexactitudes, lapses and differing versions have arisen throughout testimonies, notably by the Revenue deputy minister, a key player in the December 23, 1991 decision. In refusing to note one single example, the Liberal MPs have succeeded in institutionalising this scandal by placing at the government's service the sole parliamentary committee responsible for overseeing the machinery of government's accountability. Here are some examples of the Liberal majority's lack of courage and willpower:
Firstly, a briefing note written on Sunday, December 22, 1991 by a Revenue Canada employee, on his own initiative, rendered an unfavourable decision with respect to the taxpayer. In commenting on this famous note, the Deputy Minister of Revenue let on that this briefing note was only a routine procedure in the event that an unfavourable decision was rendered. (Public Accounts Committee, October 2, 1996) It turns out that this was the first time that the Auditor General, for whom this note had great importance, had heard this explanation from Revenue Canada, on that same day, during the Committee meeting. (Public Accounts Committee, October 2, 1996) Yet, Revenue Canada and the Auditor General had been working together on this issue for months. The Liberals made no mention of this in their report. Next, Revenue Canada usually refuses to render advance income tax rulings on past transactions. Now, the Auditor General clearly revealed that Revenue Canada's decision dealt with past transactions. Even at the Committee's last meeting, the differences between Revenue Canada and the Auditor General persisted. Once again, no mention in the Liberals' report. As well, the Deputy Minister of Revenue acknowledged that fiscal effects of the advance income tax ruling had not been evaluated. So Revenue Canada permitted the transfer of more than $2 billion to the United States without any tax being paid, and without assessing the possible impact of such an important decision on Canada's tax base. The Liberals refuse to include these serious lapses in their report. Furthermore, during the last meeting the Deputy Minister of Revenue swore that the waiver signed by the taxpayer had no legal value, that he could not accurately trace the family trusts in the U.S.. All of these serious lapses and acts place the Canadian tax base in peril. The Liberal majority closes its eyes and still makes no mention of them in its report. Finally, on May 16, 1996, the Deputy Minister of Revenue indicated to the Public Accounts Committee that throughout the month of December 1991 he was aware of a debate over the advance income tax ruling of December 23, 1991. However, in his October 2, 1996 testimony before the same committee, the deputy minister indicated to us that he was only informed on December 20, 1991. Coincidentally, the version given on October 2, 1996 corresponded much better with the justification of the famous briefing note of December 22, 1991, which was tabled in committee that same day. Once again, the Liberals deliberately omitted this important detail in their report.
The only thing that is beginning to enlighten Canadians about the family trusts scandal is not what is not found in the Liberal MPs' report, but rather what has been intentionally omitted.
Government manipulation Numerous other examples make the list of inconsistencies, inexactitudes, lapses and differing versions even longer. From the outset of the Committee's work, the Liberal majority, blatantly manipulated by the government, prevented the Public Accounts Committee from shedding light on the entire family trusts scandal.
The majority report is the crowning achievement in this blatant effort by the government to bury this scandal and to silence the truth in order to protect themselves. The government is trying in every possible way to prevent Canadians from knowing the whole truth about these fiscal and financial manoeuvres which have probably cost the Canadian tax system billions of dollars.
The Bloc Québécois MPs also question the attitude of the Deputy Minister of Finance, David Dodge, who in verbally attacking the Auditor General during the Committee's last meeting, overstepped all rules of respect. His unacceptable and disrespectful behaviour demonstrates the government's arrogance towards one of our parliamentary system's most important institutions.
Recommendation It is shameful and, unfortunately for the government, it is far from over. That is why with this dissenting opinion we, the Members of the Bloc Québécois, make the following recommendation:
That a special commission of inquiry be set up, independant of the government, with the mandate to shed light on all of the events surrounding the December 23, 1991 decision and the subsequent use of this tax loophole by other rich Canadian families.
Conclusion Without an impartial and independant inquiry into all Liberal government partisanship, this scandal will never be brought to light. And if the government has nothing to hide, no one to protect and
nothing to reproach itself as it pretends, what is preventing it from setting up such a commission of inquiry which would certainly clear it of any blame. At least, that's what the government has been repeatedly telling us for six months!
Michel Guimond, M.P.Yves Rocheleau, M.P.Pierre de Savoye, M.P.
Reform Party Dissenting Opinion to the Standing Committee on Public Accounts
October 24, 1996
Respectfully submitted by:
Jim Silye, M.P.John Williams, M.P.
The Reform Party of Canada files this dissenting minority report with reluctance. It was hoped that after the review and questioning of witnesses on Chapter 1 of the May 1996 Auditor General's Report, Committee members would reach a consensus and file a unanimous report. Unfortunately, all three parties drew different conclusions.
The Auditor General raised the issues of emigrant taxation of taxable Canadian property when exiting Canada and the advance tax ruling process in his audit of May 1996.
The majority report is fair in its comments concerning the steps taken by the Department of Finance to clarify the existing ambiguous tax legislation on emigrant taxation and closing the loopholes on the taxation of Canadian property upon the departure of a taxpayer from Canada.
However, when it came to critiquing what happened in 1991, the majority report fails or neglects certain facts and, thereby, draws very different conclusions than ours.
Under the section, Documentation, the report expresses concern about the lack of documentation but does not explain why. The paper trail in Revenue Canada was clear and ample, up to, but not including, the meetings of December 23, 1991, the day the final decision was rendered. No notes were made of several meetings that took place that day.
This final decision was a reversal of all the opinions documented prior to December 23, 1991, which clearly showed that Revenue Canada was opposed to a ruling in the taxpayer's favour.
Memoranda of December 18, 1991, and December 20, 1991, written by senior officials to the Deputy Minister of National Revenue advised him that the Department was unable to rule favourably. In fact, even the Revenue Canada Rulings Review Committee on December 12, 1991, decided that a favourable ruling should not be provided.
Due to the lack of minutes for the December 23, 1991, meetings where Finance and Justice apparently were able to resolve the policy issue and the legal issues, there is no evidence of contrary arguments considered and there is no bridging of the recommendations reached up to that date to provide an unfavourable ruling with other analysis and documentation. The Auditor General had serious concerns that the tax ruling on the transaction may have circumvented the intent of the law.
Furthermore, the evidence shows that to put the transaction ``on side'', Revenue Canada issued the favourable ruling upon the condition that the taxpayer provide a waiver and an undertaking not to invoke the tax treaty between Canada and the United States. This clearly shows that revenue Canada up to December 23, 1991, was correct in believing that the transactions intended to circumvent the law's intent. But what happened on December 23, 1991???
The Auditor General also raised the question: in light of the fact that the taxpayer had already completed part of the transaction, did the department officials violate policy on advance income tax rulings? Once a transaction is completed, Revenue Canada cannot give an advance ruling - because what's done is done.
The majority report tries to absolve department officials on the grounds of ambiguous legislation. Department officials claim that they were looking at proposed transactions. However, department officials admitted that an agreement was made with the taxpayer to bring the transaction ``on side'', in other words, re-working the transaction supported by a waiver and an undertaking by the taxpayer. This side agreement to the ruling only goes to prove that, in fact, the transaction had been completed and, therefore, it appears that an advance tax ruling was inappropriate and in violation of department policy, and should not have been given.
This ruling was a mistake on the part of department officials and unfair to subsequent taxpayers, particularly in light of the fact that the tax ruling was not made public for many years. Consequently, other taxpayers were denied knowledge of the department's actions and the benefit available to those who received the ruling. When the ruling was published, the requirement of the waiver and undertaking was withheld.
In our criticism of the department's handling of this incident, we are in no way imputing motive or questioning the integrity of the officials involved nor of any impropriety on the part of any official in making this ruling, but we do believe they erred in their final decision and that the decision-making process was flawed.
We believe that Revenue Canada, in consultation with the Department of Finance and the Department of Justice, should have informed the taxpayer that the ruling requested was not possible because the disposing trust had not been a resident of Canada for ten years prior to the disposition; therefore, the capital gains were taxable when the asset was transferred to another country.
We believe that Revenue Canada should not have ruled favourably in this case due to the fact that an undertaking and a waiver were required and made a condition of the ruling. Revenue officials knew the waiver was not enforceable. The side agreement is a contingent liability for future advance rulings because future taxpayers may demand the same arrangements based on precedent.
The real issue is the integrity and fairness of the tax system and, in this instance, department officials responsible for the final decision should be criticized for the following:
1)the lack of documentation or minutes of the final meeting of December 23, 1991, to bridge all the discussions and opinions that led to the final ruling;
2)the need for a side agreement to legitimize and/or qualify the asset in the trust as taxable Canadian property which in hindsight gives the appearance of retroactivity;
3)the failure to publish for the public the advance tax ruling in a timely fashion, and;
4)when it was published, the failure to mention that it had been made on condition that the taxpayer provide an undertaking and a waiver.
These factors are enough to raise concern that a special agreement between Revenue Canada and a taxpayer may allow department officials to inadvertently weaken the tax base and violate the basic principle that the right to tax or not to tax rests with Parliament.
In conclusion, we do not agree that the Auditor General's concerns have been fully addressed. The Government has clarified the legislation and removed the ambiguities through a Ways and Means Motion in the House of Commons, despite the Government's reluctance to examine what happened in 1991.
Ultimately, we must thank the Auditor General for drawing this matter to Parliament's attention - otherwise this clarification of the treatment of taxable Canadian property leaving the country may never have happened.
SUPPLEMENTARY OPINION TO THE REPORT OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS
I fully concur in the Committee's report, and I would like to begin this supplementary opinion by congratulating the Minister of Finance on having taken the necessary steps to clarify the tax rules governing transfers of assets and property outside Canada.
It is important to note that the events (the advance ruling) that were the subject of review by the Auditor General occurred on and about December 23, 1991, when the previous government, the Conservative government, was in power.
I have frequently praised the quality of the Auditor General's work, and the report of the Committee underlines its excellence, but I think it is important to reiterate our congratulations.
Both the individual and the Office he represents deserve our respect and consideration as the elected represent of the people.
The integrity of our tax system is vitally important, and in that regard I must pay tribute to Revenue Canada's open approach. In its taxpayer information circular entitled ``Revenue Canada - The Rulings Directorate Service'', the Department says,
``The Office of the Auditor General of Canada regularly examines the Directorate's work including the advance rulings and technical interpretations that it issues.''
The role of the Public Accounts Committee as I see it is, among other things, to give Canadian taxpayers the opportunity to have their elected representatives review the financial administration and management of the various government departments and agencies. The Committee is a forum where senior officials and managers have to account for their stewardship of public funds.
The matter we have dealt with here concerns taxation of capital gains when a taxpayer decides to leave Canada and live elsewhere.
In this case, the vehicle used to transfer assets was a family trust, but it could have been something else. It is not the vehicle we should focus on but the taxation of Canadian capital gains in the event of emigration.
The present case does however highlight two points that merit analysis in light of the ordinary taxpayer's perception:
1.- The government has an obligation to continue to be open and transparent in all its dealings; in this regard I want to congratulate all my colleagues on the Public Accounts Committee.
2.- The popular perception is that the gap between the richest and the poorest in our society must be reduced.
In the present case, the use of a family trust as the transfer vehicle tends to accentuate rather than minimize the gap, even though legally family trusts are open to anyone.
In conclusion, in addition to supporting the conclusions of the majority report, I hope that the government and the Department of Finance will put forward a genuine proposal for reform of Canada's tax system, both as it affects individuals, organizations and corporations and from a technical standpoint.
Respectfully submitted,
Denis Paradis MP for Brome--Missisquoi and Vice Chair of the Public Accounts Committee
5
2