Finance Committee on June 12th, 2006

[The Chair, Conservative, Brian Pallister]

Welcome back, committee members. Welcome to our guests today from the Canada Revenue Agency. Thank you for being here.

The orders of the day are, pursuant to Standing Order 108(2) and section 89 of the Canada Revenue Agency Act, statutory review of the act.

We will begin with a presentation, I believe, by Mr. Dorais.

Mr. Dorais, would you like to proceed?

[Michel Dorais, Commissioner, Canada Revenue Agency]

Thank you very much, Mr. Chair.

Let me briefly, for the benefit of the committee, introduce the colleagues who are with me today.

There's Mr. Bill Baker, who has just recently been appointed the deputy commissioner and chief operating officer of the Canada Revenue Agency; Jim Ralston, who the committee knows is the chief financial officer of the agency; Stephen O'Connor, who is assistant commissioner for corporate strategy and business development; and Lysanne Gauvin, who is assistant commissioner for human resources for the agency. We've got other staff in the room to try to answer all the questions of the committee.

With your permission, I have a quick statement. Thank you for inviting us.

The report we've tabled, which I think you have in front of you--it has been distributed--was prepared by the CRA and was first tabled in the committee just a little over a year ago, so we're re-tabling it now.

Six years ago, Parliament launched a major experiment in public sector governance. New legislation created an agency with unique characteristics designed to merge the best of what public and private sector governance had to offer.

Parliament's reason for passing the Canada Customs and Revenue Agency Act in 1999 was to give the Agency the means to persue three key objectives: provide superior service to Canadians; work more efficiently and effectively internally; and develop closer partnerships with the provinces and territories.

What can now be observed is that the CRA has matured into a truly pan-Canadian organization, able to better serve all taxpayers by improving revenue collection and by eliminating unnecessary overlap between jurisdictions. It is also clear that five years is a short time to assess major changes in governance.

Overall, agency management recommended a year ago that members of Parliament take note of the progress outlined in the five-year report and consider allowing this experiment to be pursued and explored fully for at least another five years.

The key characteristics of the agency's governance regime are: a board of management, responsible for human resources, procurement, real estate, and the administration of the agency, and this board is composed, by law, of individuals from the private sector, the majority of whom are nominated by the provinces and territories; the Minister of National Revenue, responsible for program legislation administered by the agency, and with whom our government clients can work at the political level; a commissioner, or chief executive officer, responsible for ensuring day-to-day management of the agency, under the board's guidance; and a strengthened accountability regime arising from the fact that the agency is entrusted with taxpayer money on behalf of many governments in Canada.

Like all departments and agencies, CRA is required to prepare reports on plans and priorities as well as performance reports. However, it must submit two additional documents: a corporate business plan and an annual report. The board of management's input is reflected in our three-year corporate business plan, which details the agency's objectives and strategies to achieve them.

The reliability of CRA's performance is, uniquely, also subject to reviews by the Office of the Auditor General, named in the legislation as the agency's auditor.

To provide some context for committee members, I'd like to highlight a few statistics that describe the agency and its work. We have 43,300 employees. We collect over $305 billion annually on behalf of federal, provincial, territorial, and several first nations governments. We distribute nearly $12 billion worth of benefits and credit payments to more than 11 million eligible Canadians. Finally, we administer 190 programs for 126 clients. We are recognized as a world leader with respect to innovations such as electronic filing and government online.

There is still work to be done in many areas. The transformation ordered by Parliament six years ago is very far-reaching and very complex. It must be done while maintaining the integrity of the federal and provincial tax bases. In areas such as tax compliance, collection, staffing and recourse, real estate, or board of management governance, we're still at work bringing significant improvements.

The organizational changes and accountability mechanisms have enabled us to make significant achievements in regard to all of our priority objectives. As the report has demonstrated, Canadians are now receiving better, faster and higher quality tax and benefit administration.

In the first five years of our mandate from Parliament, we built a strong and mature organization that is a leader in the public service. Our success to date indicates that our model is sound and that we're capable of taking more responsibility from governments.

So on that, Mr. Chairman, I welcome the questions of the committee.

[The Chair, Conservative, Brian Pallister]

Thank you for your presentation, Monsieur Dorais.

We'll begin with Mr. McKay, for seven minutes, sir.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair, and thank you, witnesses.

Mr. Dorais, the Library of Parliament estimates that something in the order of 15% of the economic activity in this country is actually underground, and therefore there are no tax revenues generated--according to their statistics, at least. I think the Auditor General estimated it's something in the order of a $12 billion loss in tax revenue. Those seem to be actually older statistics.

I wonder whether you have within your ability to tell us what you estimate the underground economy to be, what you estimate the tax loss from the underground economy to be. Has the shift from being a department to an agency made any difference in that particular issue?

Finally, with respect to the GST, the argument is that there is a correlation, that a consumption tax actually drives up an underground economy. It's anticipated, of course, that on July 1 the GST will come down; the consumption tax will come down. Have you any studies to possibly support the notion that the underground economy will become above ground by virtue of the reduction in the GST in particular?

[Michel Dorais]

I'll defer to some of my expert colleagues for the last part, about the consumption tax and its possible effect on the underground economy.

The question the member asks relating to the tax gap is an issue that has been discussed a long time in the agency: how much is not collected, and how much is hidden somewhere in there?

Years ago, purposely, the agency and previously the revenue department decided not to invest major money in trying to estimate the tax gap. The reason for that is very simple: you have almost as many theories as you have people who study this area. People figured that you could sink an enormous amount of money into it and come up with a number that just about anybody could challenge.

We know it exists, and I think we accept the fact that it is a major problem. Our strategies have always been to go sector by sector and take initiatives to get at various aspects of the underground economy. Some of the activities we've taken in the construction industry are an example of that. The minister has just asked us to review that very carefully in view of seeing if we can expand that to a broader concept of the underground economy in the larger sector. We're looking into that.

So I think we've developed a constant pressure on the underground economy, and we are making gains every year, but we have not conducted huge studies to determine what that amount could be. I think we can accept that the estimates that have been made--I can't remember exactly which ones they are--vary from about 4% to 15%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Do you challenge the Library of Parliament's figures?

[Michel Dorais]

No, I have no information to challenge those.

[John McKay, Liberal, Scarborough—Guildwood, ON]

If we go with the assumption that it's correct, then how would the Auditor General arrive at the notion that $12 billion is lost revenue on an annual basis?

[Michel Dorais]

Jim, can you help me on this? I'm not familiar with the methodology she used.

[William Baker, Deputy Commissioner and Chief Operating Officer, Canada Revenue Agency]

With permission, Mr. Chair, we'd ask John Kowalski, the acting deputy assistant commissioner of compliance programs, with responsibility for the underground economy, to answer this question.

[John Kowalski, Deputy Assistant Commissioner, Compliance Programs Branch, Canada Revenue Agency]

My understanding is that in conducting her 1999 report on the underground economy, the Auditor General reviewed all of the studies over about a 17-year time span. In reviewing all those studies, she found the estimates, as the commissioner mentioned, ranging anywhere from around 3% to around 20%. It was determined that these estimates varied widely because of the different definitions of the underground economy, the different methodologies they used, and the different underlying assumptions they employed in doing their studies.

In their review, they estimated that a reasonable range--and these are the words, if I remember correctly, from the report itself--was 4.2% to 4.5%, which you correctly noted was about $12 billion. About $7 billion of that was federal and about $5 billion was provincial. They also noted that this was similar to a Statistics Canada study that was done just prior to that, which I believe had come up with an estimate of about 4.2%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it's a bit of a “pin the tail on the donkey” exercise. Well, there's no real point in pursuing that.

What about the GST? What's the issue on GST?

[Michel Dorais]

Do you know, John, if there's any study that establishes a correlation between the various GST rates and the underground economy?

[John Kowalski]

There are certainly different theories and conjectures about the relationship between GST and the underground economy. Many academics have noted that in their belief the underground economy increased at the point in time when the GST was introduced. I don't know of anything definitive that would establish a causal relationship between one and the other.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Do you know whether any of the studies reveal a kind of sweet point, the point where the marginal efficiency of the tax actually diminishes? Is it at 3%? Or is it where it was, at 7%? Are there any studies on that?

[John Kowalski]

We follow the academic studies quite closely, because we're quite interested in them, but I'm not aware of anything of that nature that identifies a sweet spot like that.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I think there was an $18 billion estimate for accumulated debt. Just for clarification on that point, how much, on an annual basis...? Your revenues, grossed up, are about $300 billion, including the money you collect for the provinces. How much of that disappears, such that you just will not collect?

[Michel Dorais]

Every year we make an estimate for the doubtful accounts. That estimate is an estimate, and it's based on the various categories of taxpayers and the experience of previous years. I think the number is $4.5 million that we declared would be unrecoverable. That's an estimate.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Is that $4.5 billion or million?

[Michel Dorais]

Billion.

[The Chair, Conservative, Brian Pallister]

I'm sorry, Mr. McKay, your time is up.

It's $4.5 billion. What was the amount last year?

[Michel Dorais]

It was about the same.

[The Chair, Conservative, Brian Pallister]

And the year before?

[Michel Dorais]

It's about constant.

[The Chair, Conservative, Brian Pallister]

Okay.

Nous continuons, avec M. Loubier.