Finance Committee on May 5th, 2009

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

We're going to move on now with CRA a little bit.

Recently the Auditor General did an audit on your auditing of small and medium-sized business enterprises. In a previous report in 2004 and in 2009, they audited the same thing. It comes down to there being 13 recommendations. She said, “...we considered 6 to be the most important and progress was unsatisfactory on 4 of those 6...”. Often you don't get a chance to rebut, other than you say here that you disagree with their emphasis on the recommendations, so I'm giving you a chance to talk about what she found and why you disagree.

I can go through them one by one, or you can just give us an overview.

[William Baker]

I'll try to be brief.

This was a follow-up report on two previous audits that had been undertaken. In those two previous audits there were actually 21 total recommendations. This follow-up audit focused on 13 recommendations, and they assessed our progress against those 13 recommendations.

At the end of the day, we were judged to have succeeded on seven of the 13 recommendations, but the Auditor General felt that certain ones were more important, which led to the final conclusion.

We did not agree with the final conclusion of the Auditor General for a number of reasons. First of all, the methodology to have seven of 13 be successful, to make progress, but not to be totally successful on the other six, I did not feel yielded that overall conclusion. Also, the Auditor General's scope of the audit in looking at our efforts to combat the underground economy was overly limited in terms of certain of our audit activities. For instance, it did not pick up on all the work we do every year on non-filers, non-registrants, and on the hundreds of millions of dollars of additional taxes recovered because of that.

I simply wanted to point that out to the Auditor General. She was very comfortable with the comment I put in the report, because ultimately we wanted to be able to discuss openly that I felt overall the bottom-line conclusion was not a fair conclusion.

[Mike Wallace, Conservative, Burlington, ON]

So based on her analysis, are you going to do additional things to try to resolve those, or were you on a program to resolve those anyway and just hadn't completed it?

[William Baker]

No, Mr. Chair, we are in the process of providing a detailed response on every one of those recommendations. We're making good progress across the board in all of those, and we'll ultimately be reporting those to the public accounts committee.

[Mike Wallace, Conservative, Burlington, ON]

On another topic, our government has indicated that you went through a strategic review, and among other things, you decided to take back in-house the collections of things such as long-term student debts and so on that had been sent out to the private sector. In the estimates you have a significant reduction in the costs paid out to those third party collection agencies. Can you tell me what the plan is? Are you hiring more people to do that collection, and are you going to collect the same amount of money? We don't see the revenue side on these things; we only see the expense side, and in this case there's an expense reduction.

So what is the balance, and how long before you're up and running on that?

[William Baker]

I have a quick comment, and then I'll ask Mr. Ralston to give you the details.

Clearly, the proposition was there because we were comfortable that we were able to deliver the program results at less cost to government. So the short answer is yes, but with your permission, Mr. Chair, I'll ask Mr. Ralston to give you a few more details.

[James Ralston]

There is an amount offsetting the reduction in the statutory vote for the private collection agencies. There is an increase in our operating vote of around $8.2 million, and that will go to fund increased--

[Mike Wallace, Conservative, Burlington, ON]

How many bodies is that?

[James Ralston]

I can't tell you that off the top of my head. I'm sorry.

[Mike Wallace, Conservative, Burlington, ON]

So if we're reducing our costs to the private sector and we're not just adding workload to people who are already there, we're actually adding numbers of people and their work stations, so there are those overhead costs. Are we working under the assumption that we're going to be able to collect the same amount of money or less? Could you provide us with the number of people that would be? I would appreciate that.

[James Ralston]

Yes.

[Mike Wallace, Conservative, Burlington, ON]

And finally, just very quickly, you talked about enhancing the effectiveness of the SR and ED program. I'm on the industry committee, which is why I'm asking. What do you mean by the effectiveness? What is this additional money going to do to enhance this program?

[William Baker]

We've been doing a number of things to try to continue to enhance the delivery of the scientific research and experimental development tax credit. In the last while, new money has gone into the hiring, for instance, of more scientists, because as you know, in determining whether an expenditure is eligible for the scientific research and experimental development tax credit, there's an element of science necessary to determine if it's eligible science, eligible research, and then of course there's the accounting side of it to determine the proper amount. We've beefed up our scientific capacity.

We've also done a number of things in the last year with additional money to improve the services to small businesses. There are 18,000 businesses that benefit from SR and ED in any given year, for a total tax expenditure of around $4 billion, but there has been a long-standing issue of making sure that in particular new businesses that are not necessarily thinking about taxes are aware of the availability of the program and receive the services they need.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wallace.

We'll go to Mr. McKay.

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

By anyone's standards, the percentage amount of increase that you're asking for in transfer payments is enormous. You're wanting to go from $46 billion to $50.7 billion, which is a lot of money--almost $5 billion, a 10% increase year over year. That's way beyond real GDP, way beyond nominal GDP, and it is, as I say, by anybody's standards, an enormous amount of money in transfers, and it counts for a significant component of the government's budget.

So can you tell me why these amounts, particularly with respect to the fiscal equalization and the Canada health transfer, are such huge jumps year over year? They're enormous given the general rule of thumb, which is that government revenues usually grow at nominal GDP. So somehow or other, this is going to have to be paid for, and either it comes out of other program spending or it comes out of tax revenue. Can you give me the explanation as to why your jump in transfers is bordering on 10%?

[Alfred LeBlanc]

Yes.

The main components include the CST, for which an escalator of 3% was set in budget 2007, and the largest transfer, which is the Canada health transfer. As part of the 10-year 2004-05 agreement to strengthen health care, the cash component of that transfer is growing by 6% a year, legislated out to 2013-14.

Equalization in the main estimates is showing a significant increase. This reflects the formula in place prior to measures announced in November, and passed in the budget implementation bill, to put equalization on a sustainable growth path. The number in the main estimates is higher than the actual amount that will be provided for equalization by roughly $1.8 billion or $1.9 billion.

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

Yes, you look like on your equalization you're jumping by $2.4 billion. What component of the $2.4 billion is legislatively driven and what component is simply a built-in escalator?

[Alfred LeBlanc]

The measures that were put on place in the budget implementation bill have set the equalization program on a sustainable growth path. Basically, it's the three-year average of nominal GDP growth. In 2009-10, I think it's roughly 4.1% or 4.2% growth. It will move in line with that three-year average of GDP growth.

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

But if I'm going 2008-09 to 2009-10, that's way more than 3% or 4%.

[Alfred LeBlanc]

Yes. The actual amount will be about $14 billion once the measures in the budget implementation bill are reflected in the amounts. The amount in the budget itself reflects the measures that were in the budget implementation bill.

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

I'm not sure where you're getting your $14 billion. You're going from $13.6 billion to $16 billion.

[Alfred LeBlanc]

The $16 billion is based on the formula that was in place prior to measures that were announced last November and implemented in the budget--

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

Just so I understand it, if nothing had happened, you would be at $14 billion, but because of the legislative measures, you're at $16 billion.

[Alfred LeBlanc]

No. It's actually the reverse.