Public Accounts Committee on Oct. 26th, 2009

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you, Chair.

And thank you all for your attendance today.

Commissioner, I want to follow up. Twice now you have commented that it was determined there was insufficient evidence to suggest that the corporations were doing anything other than what the policy was there for, which is to provide for them to put some money aside in the expectation....

You said it twice, and yet on page 8, in paragraph 4.21, the Auditor General says:

By 1991, the Agency recognized that some corporations might maintain excess funds on deposit to profit from advantageous short-term interest rates. In an internal memorandum, the Agency stated, “We are not comfortable with a practice which in effect could allow taxpayers to use their Revenue Canada accounts as an ‘investment account’....”

Now, help me square the circle here. You said they didn't find any evidence, and we have a quote here from 1991 saying that since then, 18 years ago, the agency has been aware of potential abuse.

[Linda Lizotte-MacPherson]

Mr. Chair, that is precisely the reason the Canada Revenue Agency put in place the administrative framework. The CRA's understanding is that corporate taxpayers are making advance deposits as protective measures to mitigate against the accumulation of non-deductible arrears interest; however, in light of the concerns that were raised by the Auditor General, the CRA has further enhanced its administrative process to ensure that the need for advance deposits is validated.

[David Christopherson, NDP, Hamilton Centre, ON]

So do I understand that you think the Auditor General is wrong, but you're doing this out of the political necessities and niceties required?

Basically, I'm hearing you say that it wasn't a problem then and is not a problem now.

[Brian McCauley, Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

George may want to jump in.

There were some steps taken in 1991, and I think that's the reference—

[David Christopherson, NDP, Hamilton Centre, ON]

They didn't work very well, did they?

[Brian McCauley]

Well, it's a matter of perspective, but maybe George can speak about what happened in 1991.

[David Christopherson, NDP, Hamilton Centre, ON]

No, sir, it's not a matter of perspective; it's a matter of the auditor's analysis.

[George Arsenijevic, Assistant Commissioner, Assessment and Benefit Services Branch, Canada Revenue Agency]

Back in 1999, when this policy first came into place, it was new. There were processes and procedures that were put in place.

CRA is a large organization. There are people with different interpretations of what we have in place.

Since the findings of the AG's report, we have accepted those findings and are now in the process of strengthening the review procedures we currently have in place so that we'll be able to detect any instances when—

[David Christopherson, NDP, Hamilton Centre, ON]

Okay, but I have to tell you that this sounds different from what the commissioner said. The commissioner was pretty much saying that the policies are okay, that they don't think this is a problem but are responding to the Auditor General. But you're saying it's wrong.

I'm not clear that the agency is in agreement, as opposed to just going along because they have to.

[Linda Lizotte-MacPherson]

I think, Mr. Chair, there are always opportunities to improve any process, and by following the recommendations of the Auditor General, we have enhanced the framework to minimize the risk of any unnecessary deposits being held.

[David Christopherson, NDP, Hamilton Centre, ON]

What do you mean by “enhanced”, please, Commissioner? Exactly what does that mean? You had a process in the past and you're beefing it up.

Also, if I can, because I have very limited time, you say you beefed up the procedure, but the procedures are pretty much the same. At the end of the day, it's still the call of the agency, but they didn't use the power they had before. If the corporations pushed, they caved. I want to know what's going to change if they push now. I hear you're going to ask for information, but at the end of the day, if they still give a push back and say they want to leave it there, there's no appeal body. I'm not seeing that it goes somewhere, to a higher authority. What's to prevent us from ending exactly where we are now?

[Linda Lizotte-MacPherson]

Under the enhanced framework, the review process undertaken by the Canada Revenue Agency will include validation. It will also include additional due diligence. We'll validate with the organization whether there is a legitimate risk of--

[David Christopherson, NDP, Hamilton Centre, ON]

I'm sorry, Commissioner, but are you saying that wasn't done before?

[Linda Lizotte-MacPherson]

In the past, as I said, the policy in place was that we relied on the taxpaying corporation to determine whether they felt there was a risk and that the deposit should be maintained.

We did confirm with them on an annual basis, as part of our annual review, whether they still felt the deposit was required. Through our enhanced process, we are now going to be doing some further consultations with them directly and doing additional due diligence as part of that process.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you.

Auditor General, what are your thoughts on what we have heard so far?

[Sheila Fraser]

Well, Chair, in the report we note that there was a lack of guidelines, policy, and procedures. It was not clear to personnel in the agency what they should do with these deposits if they were over an amount that could reasonably be expected in an assessment. I'm presuming that with this action plan there will be clearer guidance provided to staff.

[The Chair, Liberal, Shawn Murphy]

Thank you.

Go ahead, Mr. Saxton, for five minutes.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

My first question is along the same lines as my colleague Mr. Lee, because that's precisely the question I had. Coming from a banking background, I'm interested in how interest rates are calculated.

This is a question for Finance. Is it correct that it is a statutory rate?

[Louise Levonian]

Whatever the 90-day T-bill rate is, it's rounded up, and then we add two percentage points to it to provide the interest rate that's paid to the taxpayer.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay, so the formula is statutory.

[Louise Levonian]

Yes, it is, as per the law.

[Andrew Saxton, Conservative, North Vancouver, BC]

It is as per statute, and the reasoning behind it is that it takes into consideration the cost of borrowing to the taxpayer having to put those funds up. That's what you mentioned earlier. Is that correct?

[Louise Levonian]

It's one of the considerations in determining what the rate should be. It's not just the government's borrowing rate, but, potentially, what the taxpayer's borrowing rate is. Of course, that's difficult to assess, because different taxpayers have different risk profiles and will borrow at different rates. It's just one of the considerations that's taken into account when determining what the appropriate rate should be.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right, but the assumption is that the taxpayer would likely have to borrow the funds to then deposit them with you. Is that correct?

[Louise Levonian]

No, it's not necessarily that we assume that. It's just one rate that you would take into account. Another rate that you might take into account is the return a corporation could earn on those dollars had they been able to retain those dollars.

It's just not black and white. You're trying to balance fairness to the taxpayer against fairness to all taxpayers. To come up with a reasonable amount of interest that should be paid to a taxpayer, we wouldn't take into account just what the government's borrowing rate is, but a number of different borrowing rates.