Public Accounts Committee on Oct. 26th, 2009

[The Chair, Liberal, Shawn Murphy]

Order, please. I'd like to call the meeting to order and welcome everyone.

Welcome, witnesses.

This meeting is divided in two, like our last meeting. We're going to devote one hour to dealing with chapter 4, “Interest on Advance Deposits from Corporate Taxpayers—Canada Revenue Agency” of the spring 2009 Report of the Auditor General Canada. Then at 4:30 we'll break for one minute and will resume in camera to deal with draft committee reports.

There was originally going to be a motion tabled for debate this afternoon. I understand it's not being moved by the mover at this point in time, so we will devote the full hour to draft committee reports.

[John Weston, Conservative, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

That motion won't be...? Could you repeat that?

[The Chair, Liberal, Shawn Murphy]

I was informed that it's not being proceeded with.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Yes. For the benefit of members, I will not be moving the motion today. I would defer my moving of it to another meeting and will give notice when I intend to move it.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mr. Lee.

The committee is pleased to have a number of witnesses for the first hour. Of course, we have as usual, from the Office of the Auditor General, the Auditor General, Sheila Fraser. She's accompanied today by John Rossetti, assistant Auditor General, and Vicki Plant, a principal.

From the Canada Revenue Agency we have Linda Lizotte-MacPherson. Madam Lizotte-MacPherson was just appointed commissioner about two weeks ago, so I certainly want to congratulate her and wish her all the best in her new duties.

She's accompanied by George Arsenijevic, assistant commissioner, assessment and benefit services branch; and Brian McCauley, assistant commissioner of legislative policy and regulatory affairs.

We have from the Department of Finance Louise Levonian, assistant deputy minister, tax policy branch. She's accompanied by Brian Ernewein, general director, and Gérard Lalonde, director, tax legislation division.

Again, welcome everyone. We have one hour devoted to this. I'm going to proceed to the opening comments from the Auditor General; then we'll go to the Canada Revenue Agency. I understand the Department of Finance does not have opening comments.

I call upon you, Ms. Fraser, to present your opening comments.

[Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

We thank you for this opportunity to discuss chapter 4 of our spring 2009 report.

As you mentioned, I'm joined today by John Rossetti, assistant Auditor General, and Vicki Plant, principal, who are responsible for this audit.

In our report on advance deposits by corporate taxpayers, we estimated that the Canada Revenue Agency incurred $30 million in unnecessary interest costs in each of the three years covered by the audit. This interest was payable to a number of corporations that maintained deposits exceeding in total $4 billion with the agency for each of the three consecutive years that we audited. We reported that these interest costs were unnecessary because the deposits far exceeded any amount of tax owed or likely to be owed by these corporations.

The mechanics for earning this interest are quite straightforward. The interest rate on overpayments is calculated by a formula in the income tax regulations. The calculation begins by taking the average rate for 90-day treasury bills sold during the first month of the previous quarter. That rate is then rounded up to the next whole percentage, and a further two percentage points are added to the rounded figure. The rate ranged from 5% to 7% during the three years covered by our audit. The rate is adjusted quarterly and is now at 3%, obviously because of current economic conditions.

The Canada Revenue Agency's stated practice is to accept advance deposits only where there is a real risk of reassessment. By making such deposits, taxpayers could minimize arrears interest charges on amounts that might later be determined to be owing.

The agency noticed in 1991 that certain corporations were making advance deposits and leaving large balances in their accounts. It questioned whether they were doing this in order to take advantage of the favourable interest rates. We found that, in general, the agency accepted advance deposits without determining to which tax year the amounts related, and whether there was an anticipated reassessment in the works for that tax year. The agency tried a number of times over the years to refund as many of these balances as possible. However, if a corporation chose not to withdraw its balance, the agency accepted this decision. The agency did not inform the Department of Finance of the challenges it was facing.

In our audit, we recommended that the agency inform the Department of Finance about the issues related to advance deposits, so the department can assess whether a change is needed to the legislation. We also recommended that the agency develop and apply a robust administrative policy for managing advance deposits. The agency agreed with our recommendations.

We are aware that the Minister of National Revenue wrote to the Minister of Finance on July 7, 2009, to encourage officials in the Department of Finance to review the issues related to advance deposits. The committee may wish to ask the department about the outcome of these discussions and may also wish to ask how the agency has strengthened its own internal administrative practices in response to our recommendations.

Mr. Chair, this concludes my opening statement. We would be pleased to answer any questions that committee members may have.

Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you, Ms. Fraser.

We're now going to turn to Madam Lizotte-MacPherson for the opening comments from the Canada Revenue Agency.

[Linda Lizotte-MacPherson, Commissioner, Canada Revenue Agency]

Thank you, Mr. Chair, for the opportunity to present the Canada Revenue Agency's action plan to address chapter 4 of the Office of the Auditor General’s spring report. The chapter is entitled “Interest on Advance Deposits by Corporate Taxpayers”.

I'm beginning my third week as commissioner of the CRA, so I may draw on the expertise of my senior officials, Mr. George Arsenijevic, assistant commissioner of the assessment and benefit services branch, and Mr. Brian McCauley, assistant commissioner of the legislative policy and regulatory affairs branch.

As you are aware, the CRA agrees with the Auditor General's recommendations. The Minister of National Revenue has made it clear that the CRA's action plan must ensure that when corporate taxpayers make advance deposits, they do so in a manner that is consistent with the purpose of the Income Tax Act. The CRA administers advance deposits in accordance with the law and in the spirit of promoting voluntary tax compliance and self-assessment, the principle on which the Canadian tax system is built.

Companies make advance deposits to ensure that they will not be subject to arrears interest charges on tax obligations identified as part of a reassessment. These interest charges are not tax deductible.

It is also important to note that reassessments, and the consequent tax and interest liabilities that they can create, are a common occurrence under Canada’s corporate tax system. In fact, many reassessments deal with multiple years and have significant financial consequences.

Reassessments of a corporate tax return can happen for a variety of reasons. For example, a corporation could request a loss carryback to a prior year or it could request a reassessment as a result of a tax ruling or an appeal.

To give you a sense of the scale of our reassessment activities, from April 2008 to March 2009 we processed $4.6 billion in debit reassessments on corporate taxpayer accounts. To date, and in a manner consistent with Canada’s self-assessment system, corporate taxpayers have made their own determinations about the risk of reassessment and their own decisions about whether to make an advance deposit.

That being said, we agree with the Auditor General that it is prudent to strengthen our challenge function, and by so doing help ensure that companies place monies on deposit only because they have a reasonable expectation of a future liability.

As a result, we've developed an administrative framework and an action plan to strengthen and improve our management of advance deposits. In short, we've updated our internal tools and procedures so that our experts are better able to ensure that advance deposits are made for bona fide reasons, we have revised our corporate instalment guide to make sure the intent of the advance deposits provision is clear to corporations, and we've scheduled a more robust review of all large-dollar advance deposits to determine the likelihood of required account adjustments and/or to issue refunds.

Significant changes to our administrative procedures will prompt further dialogue with businesses to ensure that advance deposits are justified. When a large advance deposit is not earmarked for a specific taxation year, corporate taxpayers will be contacted in order to get this information. Then the CRA will evaluate any perceived risks to determine that a reasonable amount is being placed on deposit. If our conclusions differ significantly from those of the corporate taxpayers, additional information will be requested. If no information is provided or if we conclude that the amount on deposit is not justified, we will issue a refund. As per the Auditor General’s recommendation, we will also provide any information that is of interest and use to our colleagues at the Department of Finance.

We thank the Auditor General for her report, and we are confident that our action plan will result in the consistent application of the administrative practices I have described.

Our response to the Auditor General’s recommendations will strengthen our administration of advance deposits in a manner that is not only respectful of the Income Tax Act, but also recognizes the legitimate interests of Canadian businesses.

Updated procedures, stricter requirements, and a more robust review process will enable us to better demonstrate that we are managing advance deposits from corporate taxpayers with due regard for economy.

Mr. Arsenijevic, Mr. McCauley, and I are happy to respond to the committee's questions.

Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Madame Lizotte-MacPherson.

We're going to start with five-minute rounds, just to see how far we get.

Mr. Lee, you have five minutes.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Thank you.

Thank you for your presentations. I'll skip the Auditor General. She has a report in front of us. She spoke to it in her remarks. It's not out of disrespect; I just want to get right to the nub of the issue, which appears to have been missed by the witnesses from CRA—totally missed, and I'm really surprised.

I appreciate that you have only been in your job three weeks, but your colleagues have been there a lot longer. The issue is not deposits for overpayment risk. Of course, there will be deposits; there can be $25 billion in deposits. The question is how much interest CRA pays on those deposits. Apparently, you've syphoned out about $30 million in each of the last three fiscal years that didn't have to be paid, because the amount of interest you're paying exceeds what's being paid out on the street, exceeds what these corporations could get if they placed the money on deposit somewhere, and exceeds the amount of money you would have to pay in interest to borrow the money.

So the taxpayer is getting really skinned here, and I don't understand whether you can figure out whose money you're putzing out the back door. You haven't addressed the interest rate that CRA pays on the deposits, and I want you to do that. I want to know why you haven't altered the interest rate.

And answer this question while you're answering the big one. You're not bound by a statutory rate of interest here. I understand that CRA voluntarily began to pay interest on these deposits; that's outlined in the Auditor General's report. Please get to the issue of why you're paying 5% to 7% interest on overpayment risk advance deposits. Please just tell me that.

[Louise Levonian, Assistant Deputy Minister, Tax Policy Branch, Department of Finance]

I think that's a question for the Department of Finance.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

It's not a question for CRA?

[Louise Levonian]

Are you questioning the rate of interest that's paid?

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

I want to know who's on first base. I want to know why we spent $30 million more than we had to on interest payments in the last three years. If it's Finance, let's hear from Finance.

[Louise Levonian]

Let me try to explain what the rate is. I think the question intermingles the CRA's and our part, which is a matter of policy as to what the rate is set at.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

In fairness to the witnesses, that's the only question. If you were paying 1% or nothing, this wouldn't be an issue in front of us today. But 5% to 7% is being paid and shouldn't be, and I want to know why it's being paid.

[Louise Levonian]

I can explain the rate of interest.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

You can try.

[Louise Levonian]

I'll do my best.

The rate that's set is a matter of policy that's determined by the Minister of Finance and cabinet as a whole. The rate, in essence, should be set to encourage taxpayers to pay their taxes; there's no question about that. That protects the taxpayer from interest charges that are actually non-deductible for the taxpayer. And if it turns out that taxes have been overpaid, then you can imagine that—

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

I have to interrupt. I only have five minutes. We know why corporations make advance deposits. If there's anybody around the table in doubt, they can ask another question about it. You don't have to explain why they do it.

You have to explain why the government is paying 5% to 7% interest on the advance deposits. I can't get that out on the street. Why is the government paying it, when it's not statutorily bound to pay it in the first place?

[Louise Levonian]

It is statutorily bound.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Explain why, please, and explain why it's 5% to 7%.

[Louise Levonian]

Okay. That's what I was trying to do.

What you're trying to do is balance the rate that's paid against.... You're trying to be fair to the taxpayer, and at the same time you're trying to be fair to taxpayers' dollars in total. When deposits are put at CRA, and those payments really shouldn't have been put on deposit, not because of any fault of the taxpayer--

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

You're doing it again. Ms. Levonian, I'm sorry, I'm not getting an answer. I need to know why the rate is set at 5% to 7%.

[The Chair, Liberal, Shawn Murphy]

Could you let the witness continue her answer?