Finance Committee on March 27th, 2007

[Pierre Paquette, Bloc, Joliette, QC]

How do you explain, then, the figure of $21 million? You were citing figures that date back to 2005-2006, which range between $11 million and $13 million. That amount is now $21 million.

I would also like you to explain once again why you turn to private collection agencies to collect, for example, student loans?

[James Ralston]

We do an analysis of accounts and determine which ones are appropriate for our own collection force to pursue and which accounts are appropriate to turn over to the private agencies.

Concerning the level of activity, as I said, the $21 million is really a forecast. It may indeed turn out that the level of activity would be somewhat less, as certainly the historical experience has been.

[The Chair, Conservative, Brian Pallister]

Thank you.

The next questioner will be Mr. Wallace.

Sir, you have six minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you for being here today.

I have a few questions. On managing the appeals side, it looks like we're having a bit of a bump in costs. I don't know what the actual volume is in terms of a percentage. Oh, there it is, 14%.

Can you explain whether we are seeing more appeals by taxpayers, or are they just taking longer? Why has that gone up 14%?

[William Baker]

Mr. Chair, I don't have the volume of appeals here. I don't think we're looking at a significant number.

One thing we are finding generally is that the files that are going to the appeals, which is the administrative stage of redress in the agency, are increasingly complicated. The more work we do--and we are going to do even more work in light of the recent budget in the areas of tax shelters, international tax non-compliance and what have you--the more appeals we generate, and they are often more complex appeals to dispose of.

[Mike Wallace, Conservative, Burlington, ON]

Okay, I appreciate that.

Maybe you could explain something, because I basically don't understand it. The contributions in support of the charities regulatory fund is doubling, if I read this correctly, from $1 million to $2 million or whatever that number is...we're basing it in dollars, I think. Can you explain what that is?

[William Baker]

I'll ask my colleague Mr. Ralston to give you more precision than I'm capable of.

Thank you, Mr. Chair.

[James Ralston]

I can't recall exactly, perhaps in 2005-06, but there was a substantial investment in the charities regulatory reform area. One element at that time was a $1 million fund, which was a way to partner with certain charitable organizations, or associations of charities, to provide information about how these charities should comply with the Income Tax Act.

You're seeing that initial $1 million level of funding, which I believe is now being increased to $2 million to perhaps reflect more room for engagement in that kind of activity.

[Mike Wallace, Conservative, Burlington, ON]

So it's based on demand from charities and the requirement to get them into compliance. We need to spend some more money in that area. Is that what you're telling me?

[James Ralston]

Yes. The idea is that we'll get better compliance if the charities understand their obligations better. This is a program that's meant to advance that aim.

[Mike Wallace, Conservative, Burlington, ON]

Right.

On a different topic--and maybe you cannot help me and you could steer me in the right direction--I had a gentleman come to see me with his tax form. I don't have it with me. At his count, it had 25 different percentages in it. Some of them were 15.5%; you multiply it by 15.5%. They weren't even round numbers, they were all decimal points.

He is a senior citizen. He was thinking that the form had become very complicated. He was not happy with the variety of percentages, that it's not even in round numbers and so on.

On reporting compliance, we're up a little, but not a lot. Are we having any difficulties in reporting compliance due to the difficulty of the form?

[William Baker]

Mr. Chair, as for the increase you're seeing in reporting compliance, essentially this is a way of characterizing our audit work, primarily--when people have complied, they have filed, but we have to check their records; they have to check the accounts. This is more representative of an increased level of effort that the agency has been making over the years, supplemented at times by additional budgetary money to increase our audit presence in areas of higher risk.

Again, the examples I'll use are well-understood tax shelters, international tax avoidance, underground economy--those are the areas. And we have been increasing our level of effort in that area over time.

[Mike Wallace, Conservative, Burlington, ON]

Recently you've been in the news about some computer issues. I'll give you a chance to fill us in on where we are with that and how we're doing in terms of accepting electronic filings. The other thing I'd be interested in knowing, if you have the figures, is what percentage of the public submit electronically rather than using paper submissions.

[William Baker]

Mr. Chair, with permission, I'll answer your second question first; that's easier. We estimate that about 52% file electronically, and that would be from the home through NetFile or through a tax preparer, through electronic filing, and other filing options that have been around for awhile, including Telefile.

I can tell you, Mr. Chair and members of the committee, that we fully restored our operations since experiencing the difficulty we had about three weeks ago, and all manner of filing tax returns is back to normal, whether it's by paper, electronically, through tax preparers, or otherwise.

Cheques started going out last week for people who may have been impacted initially by the delay, either cheques in the mail or direct deposit. We're still doing minor amounts of catch-up, but for all intents and purposes, we're back to normal.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

We'll continue with Mr. Christopherson now. Six minutes, Mr. Christopherson.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you very much, Mr. Chair. Thank you all again, good to see you again, as good as it can be for you to see one of your critics.

I wanted to pick up on your last point, the e-filing. Since we've got this opportunity and it's timely, can you tell us quickly what happened and what the assurances are that it's not going to happen again? It really did cause...I don't need to tell you that people were not impressed, and certainly my office was going crazy.

So perhaps you could give us a quick “what happened”. What assurance do we have that private information was kept, that it won't happen again? What steps have you taken?

[William Baker]

Thank you, Mr. Chair.

This was a serious matter, there's no doubt about it. It did inconvenience Canadians and it prevented us from providing the quality and timeliness of service we aspire to provide and we take the matter very seriously.

The problem started on a weekend, March 4, when we were undertaking a relatively routine procedure, which is putting what we call a patch on our software. We do hundreds of these throughout the year. With the complexity of databases and information, you've got to keep updating and maintaining the system.

This one particular software patch, which was provided by an external supplier, had some improper code built into it, and that problem effectively created a situation where the connections between the databases was not occurring as it should. It was installed on Sunday. We detected the problem on Monday and we immediately took measures to contain the situation, which was to essentially freeze our application, so we wouldn't make the matter any worse.

I can assure the chair and members that at no point was any of the data corrupted by a virus or a hacker, so integrity wasn't an issue. We did have to go back through our records, though, and recover some of the data that was affected by this.

The specific problem that caused this outage has been fixed. We are in the process now, Mr. Chair, of conducting a more thorough post-mortem to see if there's anything different we could do before or during to try to ensure continuity of service.

Having said that, at the end of the day I think the most important thing we can do when presented with a situation like that is not make matters worse. The integrity of our databases is paramount.

The tax system affects 25 million Canadians. That's the number of returns we receive, and as you know, that database is relied on for the issuance of benefit cheques, and so on. So keeping that healthy was the most important consideration.

Will it ever happen again? This particular problem I don't think will ever happen again. Will there be other situations that cause us to have to shut down for a period of time? It's very possible. We're going to do whatever we can to mitigate those situations.

[David Christopherson, NDP, Hamilton Centre, ON]

I appreciate that. I appreciate that you understand how Canadians feel—how jarring it is, not just the inconvenience but also how worrisome it is that their information.... So thank you for answering that.

I want to go back to an issue we've talked about before. I know it's something the chair is apparently interested in, as I think he made comments on this the last time I raised it. I'm referring to the Auditor General's report of last month. What I'm looking for, or what my question will culminate in, is where in the estimates are the actions you've committed to take? The issue is international auditors' expertise in the Toronto offices, and I read from the Auditor General's report:

In our 2002 audit

—so not in this audit, but five years ago—

we expressed concern about the lack of adequately trained and experienced international auditors to undertake the complex audits of the international transactions of the largest corporations that involve transfer pricing and foreign affiliate issues. Our specific concern was that the audit approach and coverage across the country might be inconsistent, because of the relative inexperience of the international auditors in the four TSOs in the greater Toronto area (GTA). At that time, over one third of the international auditors in two of the GTA offices had less than one year of experience.

In 2002, we also pointed out that 40 percent of the large corporations that file foreign information returns reside in the GTA. We believed this indicated that significant international tax risk existed in these TSOs....

This means the Auditor General is concerned that money that ought to be coming into Canada from these large foreign corporations is not going to find its way here. This is big money.

This concern came out in the 2002 audit; it came out in this audit too.

I've had assurances from you in previous questioning. I'd like you to show me in the estimates where is the commitment to do something about this.

[William Baker]

Mr. Chair, there are a couple of elements in terms of response.

The budget that was just brought down on March 19 included, as I'm sure you're aware, some specific tax policy measures to address international taxation. They relate to the withholding of interest. There the whole issue of interest deductibility, which was an area where profits could be shifted offshore. As well, there were exchange of information agreements.

There was also in the budget—and perhaps not as prominent as other things—some additional money identified for the Canada Revenue Agency to increase its compliance activities, in particular in the area of international taxation. The total amount identified in the budget was $50 million, beginning in the next fiscal year, for 2008-09. A good portion of that will be put toward increasing our level of effort on international taxation, because it's a growth area, frankly. More and more businesses are engaging in international transactions, and we have to try to stay on top of these.

Back to the situation in Toronto, I have a point of clarification. The observation of the Auditor General that people working in international taxation in the Toronto area had less than two years' experience--I believe those were her words--was about people who had less than two years' experience in the international taxation area. These are very seasoned auditors. It's not uncommon not to have a lot of years of experience in international taxation, because you only get to do international tax audits after you're a fairly mature and seasoned expert auditor.

With the additional money, we'll be able to increase our level of effort. In light of the Auditor General's report, and as indicated in our response to the report, we're also looking at opportunities to beef up the training and development of our auditors to fill that gap.

As I said on March 1, Mr. Chair, and I'll say it again, it will always be a challenge for the CRA to attract and maintain auditors at that level in the Greater Toronto Area because of the economic demands and competition we get from the private sector.

[David Christopherson, NDP, Hamilton Centre, ON]

Penny wise and pound foolish—

[The Chair, Conservative, Brian Pallister]

Mr. Christopherson, your time is up.

We'll continue now with Mr. Pacetti, for five minutes, sir.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

I have a quick question, Mr. Baker. I want to go back to the point my colleague raised regarding the computer glitches. You've done a great job from a public relations point of view in terms of recovering. We don't see it in the news anymore; we saw it for the 10 days while we had the trouble. But we're still in the middle of tax season, so we haven't seen anything.

Why were only certain aspects of the processing affected, such as e-filing or electronic filing—and I think there was another electronic aspect, Internet filing, or something like that—and not whole department that shut down? Why was it only the individuals and not the corporate section?

[William Baker]

It's true, Mr. Chair, that it only affected tax processing of individuals, because the corporate tax systems and the GST systems are on separate systems or platforms. There's a limited amount of connectivity between the different systems, and those systems were not affected.

What became public was the difficulty people had in submitting electronically filed tax returns, but in fact, the problem affected our ability to process any kind of tax return, whether paper or electronic. So for that period of time, we were unable to do the normal keying in of paper returns, nor were our computers able to accept and process electronically filed returns.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand that the software Revenue Canada uses is complex, but did this have anything to do with these Mickey Mouse deductions that the government decided to store last year, such as the credit for public transit, or textbooks, and the.... ?

It's a valid question. We have a tuition fee tax credit that's going to generate perhaps $15 for people, and transit taxes. This is just more information that's being accumulated in the software. All these changes are items that affect the tax return and the processing of tax returns.

Does that affect how Revenue Canada's system works?

[William Baker]

Mr. Chair, it is true that as tax changes are made, we have to make sure we can adequately incorporate them into our processing systems.

This particular problem had nothing to do with any specific tax measure. If I may explain, Mr. Chair, what we do once a year is essentially shut down our IT systems to program any new budgetary measures and any new tax rules into the system. That was done, I believe, in late January.

This particular problem was very specific to the functioning of the databases themselves, regardless of the tax measures they were designed to implement. So in this particular case, there was no—