Finance Committee on March 5th, 2013

[The Chair, Conservative, James Rajotte]

You have one minute.

[Shawn Porter]

Often those prophylactic measures are integrity measures. They don't raise revenue, but they prevent an erosion of the tax base that would arise absent the measure.

[Murray Rankin, NDP, Victoria, BC]

I understand. Thank you, sir.

[The Chair, Conservative, James Rajotte]

One minute left.

Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair, and thank you, Mr. Rankin, for sharing your time.

Mr. Chair, I'd like to give notice of the following motion:

That the Standing Committee on Finance

a) undertake a study to examine rising household debt in Canada, including, but not limited to: the root causes of rising household debt, the nature of household debt in Canada, and the social and economic impacts of high household debt levels;

b) that the Committee make recommendations to the Government of Canada to address rising household debt levels;

and c) that the Committee report its findings to the House of Commons.

[The Chair, Conservative, James Rajotte]

Thank you. We will accept that as a notice of motion.

Mr. Rankin, you have four seconds left.

[Murray Rankin, NDP, Victoria, BC]

Sir, may I give a notice of motion as well?

[The Chair, Conservative, James Rajotte]

Okay. I will accept a notice of your motion. Make your motion very quickly, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you.

That the Canada Revenue Agency provide the Standing Committee on Finance with information pertaining to estimating the Canadian Federal Tax Gap, including but not limited to:

a) data or information regarding the difference between reported and assessed employment, dividend, and interest income for an anonymous random sample of T1 and T2 tax filers;

b) any estimates held by the CRA regarding “collectability” of resulting reassessments and the rates of “non-detection” of incorrect returns through audit;

c) any other information held by the CRA pertaining to the preparation of a Tax Gap estimate and;

d) that this information is shared with parliamentarians and the Parliamentary Budget Office so that an attempt to estimate the Tax Gap can be made through other means as the CRA does not prepare Tax Gap estimates.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll accept that as a notice of motion.

Are there any other notices of motion by members?

Okay. Thank you, colleagues.

I want to thank you very much, Minister Menzies, for your appearance here today, for your presentation, and for responding to our questions. I want to thank your officials as well. Thank you for that information.

I would add, as your chair, with any friendly persuasive powers that I have, that if we could get this bill to committee.... As members on both sides have pointed out, it is still being debated at second reading in the House. I would like to have this bill at committee as soon as possible so that when we get to clause-by-clause, we will actually be able to deal with the clauses of the bill in this committee. I hope members on both sides will take that back to their parties.

Minister, thank you so much for being with us.

Colleagues, we will suspend for two minutes while we bring our next witnesses forward.

Thank you.

I call this meeting back to order. Thank you, colleagues. I will ask you to find your seats, please.

We're very pleased to have with us three witnesses to discuss Bill C-48, the technical tax bill that we were discussing previously with Minister Menzies. We have the Canadian Institute of Chartered Accountants with us here today, the Canadian Tax Foundation, and the Office of the Auditor General of Canada.

I understand each of you has opening remarks. We will start with the Canadian Institute of Chartered Accountants for your five-minute opening presentation.

[Gabe Hayos, Vice-President, Taxation, Canadian Institute of Chartered Accountants]

Thank you very much.

Good morning. My name is Gabe Hayos, vice-president of taxation for the Canadian Institute of Chartered Accountants. On behalf of Canada's 82,000 chartered accountants, thank you for the opportunity to appear before this committee. In my role as vice-president of taxation, I oversee the activities of CICA tax committees, including the CBA-CICA joint committee on taxation, which is a joint committee of chartered accountants and tax lawyers, the CICA tax policy committee, and the CICA commodity tax committee.

Prior to joining the CICA in 2011 as its first vice-president of tax, I was a partner with KPMG, with a primary focus on international tax and mergers and acquisitions. I'm also a past governor of the Canadian Tax Foundation.

I'd like to note at the outset that we appreciate the opportunity to work closely with Finance Canada with respect to current tax laws and regulations, as well as on future legislative initiatives. Indeed the CBA-CICA joint committee on taxation has commented over the years on most of the elements of Bill C-48, including the foreign affiliate rules, the non-resident trust rules, and the specified investment flow-through entity rule, just to name a few.

Bill C-48 marks the end of a very long road, one with many twists and turns over the years. The last technical bill on income tax received royal assent in 2001, as you've all heard. Mr. Chairman, I think it is fair to say that we greet the technical tax amendments act of 2012 with a sense of relief. We support Bill C-48. The CICA understands how important it is for taxpayers to have greater certainty and a clearer understanding of Canada's federal income tax system.

Also, as you've heard many people refer to the Auditor General, we will as well. As former Auditor General Sheila Fraser observed in her 2009 report on income tax legislation:

For taxpayers, the negative effects of uncertainty may include

—higher costs of obtaining professional advice to comply with tax law;

—less efficiency in doing business transactions; ...

—greater cynicism about the fairness of the tax system; and

—increased willingness to use aggressive tax plans.

Bill C-48 helps improve clarity and certainty, and it mitigates the negative effects of uncertainty identified by the Auditor General.

It is a simple truth, however, that striving for clarity and certainty never ends. The CICA supports the policy of technical tax legislation being tabled for review and adoption by Parliament on a regular basis, so that we do not accumulate unpassed legislation for a number of years and thus exacerbate the problem of tax complexity and uncertainty.

In closing, as we think about the future, the CICA sees an ongoing need to address the issue of tax simplification. We suggest a two-part approach.

First, create an office of tax simplification, similar to the model that was adopted by the U.K. in 2010. This office would focus on simplifying particularly complex and vexing parts of our current system.

Second, establish an expert panel or even a royal commission on tax reform to conduct a full-scale examination of our tax system and recommend how we can ensure that tax laws are certain, predictable, and fair, so that taxpayers can order their affairs intelligently.

We believe these twin initiatives would send a strong signal of the government's commitment to clarity and certainty in our tax system and would be well received.

Thank you for your time. I would be pleased to respond to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from the Canadian Tax Foundation, please.

[Larry F. Chapman, Executive Director and Chief Executive Officer, Canadian Tax Foundation]

Good morning. Bon matin. I'm going to stop there with my French language skills, because they're limited.

Thanks for the invitation to appear before this committee today.

My name is Larry Chapman and I am the executive director of the Canadian Tax Foundation.

Before joining the foundation in 2008, I was national managing tax partner at PricewaterhouseCoopers. Before that I was a senior tax executive at a large multinational consumer products company based outside of Canada.

The foundation was established in 1945 as an independent tax research organization under the joint sponsorship of my friends at the Canadian Institute of Chartered Accountants and the Canadian Bar Association. The foundation provides a unique forum for our members to work together for the betterment of the Canadian tax system and the tax profession in general.

We have in excess of 10,000 members who are drawn from the legal and accounting professions, industry, academia, and the Government of Canada, including the Canada Revenue Agency, the judiciary, and the Departments of Finance and Justice.

The foundation has long been respected—and I will muster all the modesty I can—by government policy makers and administrators for its objectivity, its focus on current tax issues, its concern for the improvement of the Canadian tax system, and its significant contribution to tax and fiscal policy debates in the country. I say this because we get confused with the Canadian Taxpayers Federation on a regular basis.

The Canadian Tax Foundation is not an organization—I repeat not an organization—that lobbies governments on behalf of our members. Given the diversity of our membership, it would be impossible to reasonably represent a collective viewpoint. In contrast, we take pride in providing forums where all well-reasoned and well-supported views on all sides of an issue can be expressed. Our primary concern is the promotion of policies and practices that improve the equity and efficiency of the Canadian tax system.

More than 80% of the government's revenue is collected under the Income Tax Act and the Excise Tax Act. Like a home or a car, these two statutes need to be repaired and maintained in order to properly serve their purpose. We live in a rapidly changing world, and this legislation must respond dynamically to changes in commercial transactions. Can you imagine how much work would be required if you made no repairs to your home or your car for more than 10 years? That is what has happened with these two statutes. The last bill addressing technical amendments was passed in 2001.

Bill C-48, the Technical Tax Amendments Act, 2012, the so-called tech bill, is a massive piece of legislation. I actually brought a copy with me. I needed a briefcase with wheels to get it here. It’s a massive piece of legislation, but it represents 10 years of repairs and maintenance in updating the Income Tax Act and the Excise Tax Act. Its passage is important to all Canadians. You heard that in the earlier presentation. I want to emphasize it again. Its passage is very important to all Canadians.

We’ve all referenced the Auditor General’s 2009 report. I think one of the interesting things in the report that Vicki and her colleagues did is that this bill, in various forms, has been before the House on nine separate occasions. The Auditor General recommended passing technical amendments on a more timely basis. I think they implied that it should be annually, but certainly more timely would be useful.

The Standing Committee on Public Accounts, in its April 2012 report, recognized the joint responsibility of Parliament and the Department of Finance to pass technical amendments legislation on a timely basis. If I have time, Mr. Chairman, I'll quote from that briefly:

Parliament needs to share responsibility for ensuring that technical amendments are passed in a timely manner after they are introduced. The Department's responsibility is to put the government in a position to be able to table technical bills; after that, it is up to Parliament to ensure that they are passed.

There are a number of reasons why it has taken this long to bring the legislation in Bill C-48 before Parliament. We've heard about that in the prior sessions. Delays in the passage of tax legislation leave taxpayers and their advisers in a no man's land of uncertainty. My message for the Standing Committee on Finance is that you should encourage passage of this legislation, and in the future you should welcome and encourage the timely submission of technical legislation to update and improve these important statutes. This is an issue on which taxpayers, parliamentarians, and the Department of Finance can work together for the benefit of all Canadians.

Thank you. I’d be pleased to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Ms. Plant from the Office of the Auditor General of Canada, please.

[Vicki Plant, Principal, Office of the Auditor General of Canada]

Mr. Chair, thank you for this opportunity to join this panel to discuss chapter 3 of our 2009 fall report in relation to Bill C-48, which is before you now.

In our chapter on income tax legislation, we focused on activities within the Department of Finance Canada and the Canada Revenue Agency that helped to provide or improve legislative clarity for both taxpayers and tax administrators. We have not audited this subject since our 2009 chapter, so we have no view on specific measures in Bill C-48.

During our audit, we reviewed the way the Department of Finance develops technical amendments to be tabled in Parliament. These amendments are aimed at correcting discrepancies identified after the implementation of initial tax measures and getting rid of some unintended consequences. They are not aimed at bringing in new tax policies or amending an existing policy.

In addition, we reviewed how the Canada Revenue Agency helps the Department of Finance determine which technical amendments to make to the act and how they should be formulated. We also reviewed how the agency provided its tax auditors and taxpayers directives on the enforcement and interpretation of the Income Tax Act.

Our system of income taxation depends on taxpayers self-assessing their tax obligation based on a clear understanding of the law. Legislative clarity is important if taxpayers are to easily self-assess and correctly calculate their taxes. When the intent of the legislation is not clearly conveyed by the words, taxpayers may face higher cost to obtain professional advice, may be more willing to use aggressive tax plans, and may need to re-file a tax return at additional cost.

Uncertainty about how the tax law should be interpreted can also affect the efficiency of tax administration. For example, there are higher costs for the agency to provide additional guidance and interpretation to taxpayers and tax auditors. There are also increased administrative costs for the agency to obtain waivers from taxpayers to extend the limitation period for audit reassessments until the uncertainty is resolved. It may even result in lost tax revenues.

In 2009, we found that the list of outstanding technical amendments to the Income Tax Act had been growing and that no income tax technical bill had been passed since 2001. At the time of our audit, there was a backlog of at least 400 technical amendments. Some of these were included in proposed legislation that was first tabled in 2002 but was not enacted.

Following our audit, we recommended that the Department of Finance develop and implement a plan to clear the backlog in terms of required technical amendments. We also recommended that the department develop and publish draft technical amendments regularly so that taxpayers and tax experts can find out what kind of changes will be made and provide feedback on them.

Mr. Chair, when the Department of Finance determines that some changes have to be made to the Income Tax Act, it is important that legislative changes be tabled in the House of Commons promptly. If the proposed legislative amendments are not tabled regularly, they accumulate and turn into a raft of amendments that taxpayers, tax experts and parliamentarians have trouble processing.

Creating a package of technical changes is a start. In the past, the government said that an annual technical bill of routine housekeeping amendments to the act was desirable. Your committee may wish to ask Finance Canada how the department plans to keep the Income Tax Act up to date in the future.

Mr. Chair, that concludes my opening statement. I would pleased to answer your committee's questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions with Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Thank you to all of you for attending today.

I'd like to focus in on comfort letters a little bit, if I could.

Just to put it in context, apparently there were some 250 comfort letters included or addressed in Bill C-48, some of them dating back to 1998, that are now included. I guess I'd ask, if I could, Mr. Hayos or Mr. Chapman, is this comfort letter process working for practitioners? Is it user-friendly?

[Gabe Hayos]

The first comment is that I think it is useful for taxpayers and tax advisers to know the Department of Finance's position, so in that sense I think it is working very well, and it's very much appreciated. Clearly, what isn't working well is if a comfort letter gets issued at one time and it takes an undue period of time to get passed; Then you have the issue we've described of uncertainty. So there's good in it, but it needs to be addressed on a timely basis.

[Larry F. Chapman]

Mr. Rankin, I'll probably just comment on the good, because I agree with what Gabe said.

One of the strengths of the Canadian system and in the Department of Finance—I'd like to congratulate them—is that they are open to meet with taxpayers who find that the act does not work the way it was intended to work or the way everybody expected it to. The comfort letter process is a very important process for making the system function better. It's something that certainly the tax community values.

[Murray Rankin, NDP, Victoria, BC]

Ms. Plant, I wonder if you could comment, from your perspective, on how effective you think the comfort letter process is.

[Vicki Plant]

We certainly found in our report in 2009, after interviewing 54 practitioners, that the comfort letters were definitely an important part of the process. They keep the tax system working. Until the legislation is passed, it at least allows taxpayers to go ahead and do the transactions they were planning, and they can be assured, provided the legislation is eventually passed, that the tax result is the desirable one.

[Murray Rankin, NDP, Victoria, BC]

This is a question, if I may, for Mr. Hayos, and I'd invite others to comment. It's not from your organization; it's from the CGA. Denis St-Pierre, chair of the tax and fiscal policy advisory group said last year in testimony:

Second, we strongly feel that implementing a sunset provision would ensure that tax amendments are legislated, which ultimately will eliminate the ever-growing backlog of unlegislated tax measures once and for all. With this provision, if a tax policy change is announced and not incorporated into legislation within a reasonable amount of time, the measure would lapse.

It goes on to say, “This would bring greater clarity...”, and so forth.

Would your organization support a sunset provision, as he proposed?

[Gabe Hayos]

Just to be right up front, I'd say no. Certainly, we support what's been stated before, and you've heard time and time again that regular passing of technical amendments is important. But you have to realize that there are different circumstances, and to put undue pressure on something to just pass it or not have it passed might in fact cause greater delays or problems. We see the issue of sunset clauses in the U.S. and some of their debates.

What has to happen here is just regular passing of the legislation. Sometimes there are unusual circumstances that require greater consideration, but certainly regular passage is what we think is appropriate, not a forced sunset clause.

[Murray Rankin, NDP, Victoria, BC]

Do either of the other witnesses have any comments?

[Larry F. Chapman]

I'd echo Gabe's comments. A one-size-fits-all rule doesn't necessarily work well. I think it's important that the legislation be passed on a timely basis, and as I said in my opening remarks, it's a shared responsibility between Parliament and the Department of Finance to make sure that happens. The sunset clause might be a blunt instrument, which might not serve either Parliament or the taxpayers well in the long run.