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.