Evidence of meeting #6 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was account.
A video is available from Parliament.
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Certainly I can give you a brief overview.
I would say to the chair that the official who is the subject matter expert will be up for part 2, so if you want to have—
Conservative
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
If that's okay with the member.
Will I bring him up?
Conservative
Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
There are equivalent amendments with exactly the same wording in both parts 1 and 2.
Conservative
Pierre Mercille Senior Legislative Chief, GST Legislation, Department of Finance
Good afternoon. My name is Pierre Mercille. I'm the senior legislative chief in the sales tax division of the Department of Finance.
The amendment in respect of electronic suppression of sales software is both in part 1, for the Income Tax Act, and in part 2, for the Excise Tax Act. The sales tax division was the lead division in respect of this measure.
Electronic suppression of sales software is commonly known as zappers. It can have basically two forms. It can be a hidden component of the accounting operating system at the point of sale in a cash register. That's usually referred to as phantom-ware, but for simplification we call them zappers. A zapper, per se, is usually something that is not included in the software. It's an addition, or something you can have on a USB key, or it can be on the website. It allows the person who uses that software to selectively delete some of the sales transactions in the records of the system. It can in some cases create a virtual second till. When the auditor comes in, the first thing he will see is the modified, the falsified, record from the business. With more extensive analysis, in some cases the CRA can find there were sales that were deleted using software.
The amendments in both part 1 and part 2 provide administrative monetary penalties for the use, possession, acquisition, manufacture, development, possession for sale...basically all sorts of actions that you can do with this software. There are administrative monetary penalties, and there are also more serious criminal offences that can apply, again, for the same use, possession, acquisition, manufacture, sale, offer for sale.
Basically these amendments are there to combat tax evasion by sending a very strong warning to people that there can be severe consequences for using it. It's also there to deter the development and sale of that software.
Conservative
Randy Hoback Conservative Prince Albert, SK
Okay.
Do you have any idea of the size of this type of corruption, which I'm going to call it for lack of a better word, that is ongoing right now in the Canadian economy?
Senior Legislative Chief, GST Legislation, Department of Finance
The Department of Finance doesn't have these kinds of numbers. It's very difficult to have numbers in that respect because it's basically fraud. Nobody reports the amount that they fraud. There can be cases and numbers being extrapolated, but even the people who write on it don't really agree. Some people have made these numbers public, but I'm not saying whether they are good or not.
The restaurant association estimates that in Canada it could be up to $2.4 billion in sales that are being evaded. The Quebec government has published some numbers—again, I'm not saying if the numbers are good or not because we don't have a position on that—and they see revenues of maybe $400 million a year in Quebec.
Conservative
Randy Hoback Conservative Prince Albert, SK
I see you have this legislation coming into force on January 1, 2014 or upon royal assent, whichever is later.
Conservative
Randy Hoback Conservative Prince Albert, SK
What do you have right now to combat this type of crime?
Senior Legislative Chief, GST Legislation, Department of Finance
Right now there is provision in the legislation for when you do a false statement and things like that. In the more severe cases, maybe fraud and things like that can be invoked under the Criminal Code. These amendments were put in place following a recommendation by OECD. They have a group who studied this and they recommended a specific offence for all the actions I mentioned: use, possession, acquisition, manufacture, development for sale, and sale of the software. Those were their main recommendations to address the problem. Basically, the goal is to say to people that if they use that, or if they sell that, or if they develop that, there will be severe consequences.
Conservative
Senior Legislative Chief, GST Legislation, Department of Finance
Yes, it's actually a request from the Canada Revenue Agency to do that.
You mentioned coming into force. The provision for coming into force was announced in budget 2013 in March. The coming into force was decided to be the later of royal assent or January 1, 2014 to give time for businesses to stop using it and to do voluntary disclosure if they don't want to be caught in the future. Also, it gives time to those stores that may not even know that this exists in their software, because it may be hidden and they don't have the code to make it work. It gives them time to check their system, so at the end they can have peace of mind if the CRA discovered that they would not be subject to the penalties.
Conservative
Randy Hoback Conservative Prince Albert, SK
You'll do some advertising or notification to make business owners aware of that.
Senior Legislative Chief, GST Legislation, Department of Finance
This is a responsibility. In addition to the budget announcement and the news release when these measures were announced by the Department of Finance in September, the CRA is responsible for communicating the message that if you have this software you should get rid of it and not use it.
Conservative
NDP
Peggy Nash NDP Parkdale—High Park, ON
Thank you, and welcome to the officials. There are dozens of you in the room today, and that means we're examining another omnibus budget implementation act. Welcome back and I'm sorry we are in such a time crunch dealing with so many different topics. I'm sure that Canadians watching the proceedings will be confused as we jump from topic to topic over the course of this meeting.
I want to ask a question in part 1 about credit unions. In budget 2013 there was a surprise tax hike on credit unions that will see their taxes increase from 11% to 15%. This will cost them, I'm told, over $200 million over the next five years. I know that this was dealt with in the Budget Implementation Act in the spring. At that time, we asked about the rationale for making this change. We didn't really get much in the way of answers that recognized the distinct nature of credit unions as opposed to Canada's large banks. Since that time I've had the opportunity to meet with many more credit unions, not only the ones in my own community, but also many across the country. They have told me what this will mean. Because of this tax hike on credit unions, there are many community investments they will not be able to make, and there are a number of community projects they will not be able to fund as they have in the past.
This may be a difficult question for officials and more appropriately asked to the minister or parliamentary secretary, but given that you are here today, I ask you, have there been subsequent impact studies on this change?
I also want to ask a further question about the elements addressed in this BIA.
General Director (Analysis), Tax Policy Branch, Department of Finance
Thank you, Ms. Nash. I'm happy to take that question.
For us the measure is really about the neutrality in the tax system. Credit unions had access to the small business rate on a basis that was not consistent with other small businesses in Canada. Credit unions prior to the proposed measure in budget 2013 were able to shelter income beyond the $500,000 small business limit and without reference to the taxable capital limit that all other small businesses must respect. In that context the measure is about neutrality. It puts credit unions on the same footing as all other small businesses. Many credit unions will be unaffected by this measure. Those that are small, that are below the taxable capital threshold, will by and large be able to shelter their income up to $500,000 and will be unaffected. The measure has its primary impact on those larger credit unions that have taxable capital beyond that limit and have income in excess of $500,000.
The small business deduction came into being in the early 1970s in a form that was very different, and it's changed over the years with the introduction of an annual limit and a taxable capital threshold. We've also seen the narrowing of the differential between the general corporate income tax rate and the small business tax rate. All those factors argue in favour of promoting a more neutral tax system as has been the government's stated objective to put the corporate tax system on a more neutral and equitable basis across different types of businesses. That's the fundamental policy rationale for the change to credit unions.
I can also tell you that since the announcement in the budget we have had discussions with the credit unions and have met with them. We've been able to discuss these issues with them on occasion.
November 18th, 2013 / 4:15 p.m.
Conservative
NDP
Peggy Nash NDP Parkdale—High Park, ON
Were there consultations with the credit unions prior to making this change? Has there been any study of the impact in terms of community disengagement, that is, in terms of funds that will now not be flowing to small and large communities across the country as a result of this change and corresponding provincial tax hikes as well, which will have a huge impact on credit unions?
General Director (Analysis), Tax Policy Branch, Department of Finance
To take those in turn, certainly on a neutrality enhancing measure such as this it would be uncommon to consult with industry ahead of time. There were no consultations with the credit union industry ahead of time. In terms of community involvement, that would be something credit unions would certainly be better placed to comment on than myself.
With respect to whether or not a province offers an initial deduction to a credit union, provinces still have the latitude to make that choice on their own. Currently in Canada it's about fifty-fifty. Some provinces offer an additional deduction and other provinces do not.
