Finance Committee on Nov. 18th, 2013

[Ted Cook]

Well—

[Murray Rankin, NDP, Victoria, BC]

—to save $5 million?

[Ted Cook]

It's not about that so much as...all this measure does is return the law to what it was prior to the Craig decision. The Moldowan decision was made by the Supreme Court of Canada in 1971, I think, under the interpretation of section 31 at that time. CRA has administered that since 1971.

Craig was a decision in 2012 which had to do with a high-income professional who lost hundreds of thousands of dollars. All this measure does is seek to return the state of the law to what it was prior to the Craig decision. All it's trying to do is get at the type of tax planning that can occur in situations.... Farmers can take advantage of cash-based accounting. They have certain tax benefits that aren't available to other taxpayers. The concern is that when you mix farming with other sources of income, when you have high-income professionals, they can be used to generate significant losses and significant changes.

Certainly the target of this is not meant to be farmers starting out; it's just to return the state of the law to what it was prior to the Craig decision.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Hsu, you have two questions, and then we'll move on to part 2.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you.

With regard to the phase-out of the accelerated capital cost allowance provisions for the mining sector, in budget 2013 there were some financial estimates going up to 2017-18, but this item won't be phased out until 2020.

[Geoff Trueman]

Right.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

How much will revenues be increased because of this measure in 2021 when the accelerated capital cost allowance has been completely phased out?

[Geoff Trueman]

I'm happy to respond to that for you. I have an answer prepared, so let me refer to that.

It won't be fully phased out until 2021. It becomes more difficult to project the revenue gained that will be realized. The cost of the accelerated allowance will obviously vary considerably from year to year, based on developments at the project, industry, and economy levels. Many factors could certainly change during that period.

Subject to those caveats, the annual revenue gain on a nominal cashflow basis, once the measure is fully phased in, was forecast to be roughly $75 million.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you.

The last question is about the tax rate on credit unions. The last budget implementation bill accidently raised that to 28% instead of 15%. It seems like a pretty big mistake. I'm wondering how this happened. Was there something missing from the work that parliamentarians did, or was there something in the department? How did this happen?

I'm glad it was caught, but maybe we should be figuring out how to improve things.

[Ted Cook]

Just to clarify, it was a drafting error made at the Department of Finance. What it related to is not the rate of tax that would apply to credit unions after the phase-out.

During the phase-out period, 80% of the income would be eligible for the additional deduction.

That extra 20% during the phase-out period—20%, and then 40%, and then 60%—wasn't properly accounted for in a cross-reference in the act. As a result, that income would not have been eligible for the general rate reduction. It would not have been included in full rate taxable income, with the result that this income would have been subject to tax at 28% as opposed to 15%.

Now, once the phase-out period was over, our view is that the system would have returned to the state it should be. Credit unions weren't looking at 28% tax going forward. The economic effect would have been to shorten the phase-out period to somewhere between two or three years as opposed to the five years that was indicated.

In terms of how it happens, when we're drafting we try to make our best evaluation of whether we have things nailed down.

As you probably know, all the measures that are included in this bill were released for consultation in September. The measures that are more complex or would benefit from consultation tend to be put in the second bill and are released for consultation, and this gives practitioners a chance to review the legislation.

I would note that we didn't get any comments on our proposed fix with respect to credit unions. Everyone seems to accept that it works.

We thought that we had it dialed in and ready for BIA 1, but we did not.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hsu.

Thank you for that clarification, Mr. Cook. That is certainly helpful to the committee.

[Ted Cook]

My pleasure.

[The Chair, Conservative, James Rajotte]

Colleagues, I believe that's it for part 1.

Could I get an indication on whether colleagues have questions for part 2?

My understanding is, Monsieur Mercille, you will be staying for part 3. The rest of your colleagues can stay as well.

We will move now to part 2.

I don't think we need a briefing at this point on the Excise Tax Act amendments, so I'm going to move directly to questions. I'll start with Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

I'm going to go to Mr. Mercille.

I recognize that we've touched on this, but I want to understand this zapper thing a little bit more. I'm going to give you my Coles Notes and tell me if I have this right. Somebody has a cash register and they hook this little thing in, and they'll ring something up, and it will just take it off or put it somewhere else, and kind of mess around with things. Okay.

We generate in taxes and excises in a year $220 billion, $240 billion. Is that about right, in our budget?

[Pierre Mercille]

In GST, HST, I believe it's—

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

In all revenues....

[Geoff Trueman]

Up around $200 billion would be close.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

This is something I don't think too many people would think about. It makes sense. Obviously, we're in a technological age so people would start doing those things.

We spent a lot of time in the past talking about tax cheats overseas. I know this is a tough question. I've always been somewhat suspect of the fact, and I've argued this as well, but I haven't found too many people who are really excited about April 30, or whenever the day is when we have to pay our taxes. Most people are a little reluctant to do that, and if possible, will find a way to pay fewer taxes. Of course, when we go beyond that, when we break the letter of the law, it becomes a tax issue and we have to prosecute. Does Revenue Canada have any idea of what percentage may be being cheated at the tax level?

[Geoff Trueman]

I don't want to speak on behalf of the CRA this afternoon, but it's fair to say that the CRA certainly employs its audit resources in a comprehensive manner. You have drawn the distinction between international and domestic activities, for example. The CRA would clearly look at both those parts of the tax system, but I can't give you a specific number in terms of an estimate of either underground economy or tax evasion. CRA does not put out a number on those.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Again, I know you don't represent CRA, but is there a belief that there is more on the offshore, or is there more right here, the enemy within the gates?

[Geoff Trueman]

It would be beyond my scope of competence to comment on that. I don't have the detailed knowledge of where the CRA directs its audit resources at that detailed level.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Let's very quickly go back to the zapper. Is this a port?

[Pierre Mercille]

It can have many forms. It can be a hidden command in the system itself. It can be on a USB key. It can be accessible to a website. It has many forms, but in the end it's the same thing. It's to selectively delete some sales for the purpose of tax evasion.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Is that something you get on the Internet? Is it something you can buy in the back alleys?

[Pierre Mercille]

To my knowledge, some of that software is available on the Internet. Also, sometimes it's a hidden component in some of the software being sold. You may have it and you don't even know unless you have the code to prompt a new screen that allows you to do something of that nature. It's computer science. It can be in many forms, but in the end it does the same thing. The amendment here tries to target such forms of that software.