Public Accounts Committee on March 23rd, 2010

[The Chair, Liberal, Shawn Murphy]

At this point in time, I will call the meeting to order.

I want to welcome everyone here. Bienvenue à tous.

Colleagues, this meeting is called pursuant to the Standing Orders to deal with chapter 3, “Income Tax Legislation”, in the 2009 fall report of the Auditor General of Canada.

The committee is very pleased to have with us, of course, from the Office of the Auditor General of Canada, John Rossetti, the Assistant Auditor General. He's accompanied by Vicki Plant, principal. From the Canada Revenue Agency, we have back before us Linda Lizotte-MacPherson, the commissioner. She's accompanied by the assistant commissioner, Brian McCauley. And from the Department of Finance, we have the deputy minister and accounting officer, Mr. Michael Horgan. He's accompanied by Louise Levonian, senior assistant deputy minister in the tax policy branch; and Brian Ernewein, the general director in the tax policy branch. Again, welcome to everyone.

We're going to ask for opening statements now. We will start with the Office of the Auditor General. Mr. Rossetti, the floor is yours.

[John Rossetti, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chair, thank you for this opportunity to discuss chapter 3 of our 2009 fall report. Joining me at the table is Vicki Plant, the principal responsible for the audit.

In our chapter on income tax legislation, we focused on activities within the Department of Finance and the Canada Revenue Agency that helped to provide or improve legislative clarity to both taxpayers and tax administrators. We looked at how the Department of Finance develops technical amendments for tabling in Parliament.

Technical amendments are changes made to correct anomalies that arose after the original tax measure was passed and to correct consequences that were not intended. These amendments do not introduce new tax policy or change existing tax policy.

In addition, we examined how the Canada Revenue Agency assists the Department of Finance in identifying and developing technical changes that may be needed in legislation, and how the Agency provides taxpayers and its tax auditors with guidance on the application and interpretation of the Income Tax Act. 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 costs 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.

We found that the list of outstanding technical amendments to the Income Tax Act has been growing and that no new income tax technical bill has been passed since 2001. In the past, the government said an annual technical bill of routine housekeeping amendments to the act is desirable. This has not happened.

At the time of our audit, there was a backlog of at least 400 technical amendments. Some of these were included in the proposed legislation that was first tabled in 2002 but has not yet been enacted.

Our chapter illustrated two commonly encountered situations where technical amendments tabled in 2002 were needed. One situation was to avoid double taxation on income when a partner leaves a partnership, and the other was to clarify the taxation of income arising from non-competition agreements.

We recommended that the Department of Finance develop and implement a plan to address the backlog of required technical amendments. We also recommended that the department regularly draft technical amendments and release them to the public so that taxpayers and tax practitioners know what changes will be made and can provide input to the department.

Finally, Mr. Chairman, we looked specifically at the guidance the Canada Revenue Agency provides to taxpayers and its auditors when the interpretation and application of the legislation may be unclear. We did not examine the more general guidance provided by the Agency, such as tax guides, pamphlets, phone service and its website. Rather, we concentrated on more specific guidance that is available through advance income tax rulings, tax interpretations, and interpretation bulletins. In this part of our examination, we had two key findings.

First, we found that income tax advance rulings were valued by taxpayers and tax advisors because these provide them with tax certainty that is essential for complex business transactions to proceed. However, these important rulings were not meeting the Agency's own standards for timeliness. We recommended that the Agency develop more concrete plans to meet its own performance targets.

Second, we found that some of the information in the Agency's income tax interpretation bulletins is no longer current and the public is not always made aware of that fact. Our chapter illustrated this concern by referring to an interpretation bulletin that is providing out-of-date information to taxpayers about scholarship income exemptions. We recommended that the Agency improve the advice it provides to corporate and individual taxpayers about specific paragraphs of these interpretation bulletins that are no longer accurate.

Mr. Chairman, where the Department of Finance has identified the need for technical amendments to the Income Tax Act, it's important that the amendments be set forth in proposed legislation in a timely fashion. Your committee may wish to ask the deputy minister of finance how the department plans to address the current backlog of required technical amendments and to explain the department's strategy for keeping the Income Tax Act up to date in the future.

Mr. Chairman, that concludes my opening statement and we would be pleased to answer your committee's questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Rossetti.

We're going to now hear from commissioner Linda Lizotte-MacPherson from the Canada Revenue Agency.

Go ahead, Ms. MacPherson.

[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 the recommendations contained in chapter 3 of the Auditor General's November 2009 report. The chapter is entitled “Income Tax Legislation”.

As you will be aware, the audit involved both the Department of Finance and the CRA, and I am before you today to discuss the actions of the CRA.

I may also draw on the expertise of my senior official, Mr. Brian McCauley, assistant commissioner of the legislative policy and regulatory affairs branch, who is with me here.

Both my remarks today and our action plan in both official languages were provided to the Committee in advance. I will therefore keep my remarks brief.

The CRA agrees with the Auditor General's recommendations for enhancing its tools and processes, not only to better equip taxpayers and tax practitioners to comply with the Income Tax Act, but also to further develop the CRA's ability to administer the act and to analyze and validate related technical issues.

The Auditor General's first recommendation is that the CRA should create an electronic database to assist in validating, analyzing, and prioritizing technical issues that should be referred to the Department of Finance.

Because of its excellent working relationship with the Department of Finance, the CRA communicates regularly with finance officials, bringing to their attention technical issues that warrant referral.

That said, we had considered developing a database and system to improve our management of technical issues.

The observations and suggestions made during the audit process provided us with the final impetus to move forward with such a system. Consequently, we were able to move quickly, and the new electronic file management system was in place in December 2009. While we will continue to refine the system in the coming months, it is already proving its value.

Of course, systems solutions are not the complete answer to improving our analysis and management of technical issues.

As an agency, we've identified the review of our legislative recommendation process as one of our key priorities. A working group is in place, consultations within the CRA are complete, and consultations with the Department of Finance will take place later this spring.

I expect the full review to be finalized by the end of this year.

Secondly, noting the value of the CRA's advance income tax rulings service to tax practitioners and their clients, the Auditor General recommends that the CRA develop more concrete plans to meet its own target times for these rulings.

The CRA is committed to providing timely, accurate and transparent information to taxpayers.

Every year, the CRA's income tax rulings directorate provides approximately 250 advance income tax rulings, 1,200 technical interpretations to practitioners, and 1,000 technical interpretations to our auditors, and responds to over 15,000 telephone inquiries from tax practitioners, taxpayers, and CRA auditors.

We are confident that our advance income tax rulings service is appreciated, as it gives tax practitioners certainty about a client's proposed business transaction.

In response to the Auditor General's recommendations, the agency is formally evaluating turnaround times and trends with respect to these rulings. We need to ensure that our service standards adequately reflect the time that we require to make a decision, given the increased complexity of the cases and their importance both to the taxpayer involved and to government. We expect that our study will be completed this year.

Finally, the Auditor General reviewed our income tax interpretation bulletins and concluded that the CRA should revise the paragraphs that contain information that is no longer accurate.

Since the introduction of these bulletins in the early 1970s, the agency has significantly expanded both the quantity of technical guidance we provide and the means by which we make it available. Today, we provide more information to more users in a more timely fashion than we could have ever contemplated back in 1970.

Just consider the accessibility and transparency that the thousands of pages of information available on our website now provide to Canadians. None of this information was so readily available and easily accessible in the 1970s. Of course, we also provide up-to-date technical information in a variety of other mediums, including pamphlets, guides, tax return packages, technical opinions, and conference responses.

As we indicate in our response to the Auditor General's recommendations, we want to take the time to consult practitioners and other users as to the value and the utility of income tax interpretation bulletins. Their input will help us determine whether there are more efficient ways in which we could deliver the same quality of information to them.

We thank the Auditor General for her report and its recommendations. We are confident that our action plan will help to ensure that the CRA has well-managed processes in place to identify and develop technical amendments and to provide taxpayers and practitioners with timely and accurate information.

Thank you again, Mr. Chairman, for providing the opportunity to present our action plan to the Committee.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Lizotte-MacPherson.

I will point out that we all have the action plan presented by the Canada Revenue Agency, which will be posted on the website of the Standing Committee on Public Accounts.

Finally, we'll hear from the deputy minister and accounting officer of the Department of Finance, Mr. Michael Horgan.

Mr. Horgan.

[Michael Horgan, Deputy Minister, Department of Finance]

Thank you, Mr. Chair. Thank you for the opportunity to present the Department of Finance's plan to address the recommendations contained in chapter 3 of the Auditor General's November 2009 report, entitled “Income Tax Legislation”. This audit involved both the Department of Finance and the Canada Revenue Agency, and I'm before you to discuss the actions of the Department of Finance.

I may also draw on the expertise of my senior officials, Louise Levonian, assistant deputy minister of tax policy, and Brian Ernewein, general director of the tax policy branch, who are here with me today. I will keep my remarks brief, as both the remarks today and the action plan were provided to the committee in advance in both official languages.

With respect to the Auditor General's first recommendation,

Chapter 3 of the Auditor General's Fall 2009 Report examined the processes by which the Department of Finance develops legislative amendments to correct technical issues in the Income Tax Act.

The report considered whether the Department has well managed processes in place to comprehensively record, track, and prioritize legislative issues, and whether it uses these processes to identify areas for potential technical amendments.

The Auditor General found that departmental officials are well-informed about the issues but that the Department relies too heavily on people-dependent processes, and does not make effective use of its available electronic tools.

The Auditor General's first recommendation to the Department of Finance was that the department should use an integrated and consistent process for recording, tracking, and prioritizing all technical issues for possible legislative amendment.

The Department agreed with the Auditor General's recommendation and has taken the following actions in response:

The Department has prepared a consolidated inventory of outstanding comfort letters and outstanding technical changes and has updated its existing electronic database to include all outstanding technical amendments, including all outstanding comfort letters.

The Department has commenced a project to acquire a new electronic database for tracking technical amendments, and has been working to define its database needs and canvas the various software options. The main criteria for choosing a new database will be the ease with which it can be used and updated, and its ability to comprehensively record and track legislative issues.

It is expected that the new database will be chosen and put in place during the 2010-2011 fiscal year. The Department expects that all existing data will be transferred to the new database and that the new database will be consistently used and updated by the appropriate tax policy officers by March 31, 2011.

Finally, a system of organizing the prioritization of outstanding technical changes is being formalized to ensure that items are dealt with in an appropriate and timely manner. The criteria in determining the priority of a particular change include the amount of revenue, if any, involved; the number of taxpayers affected and the impact on them; and whether issues are created with respect to the administration of the tax system.

The Auditor General's report also notes that while it is not solely within the Department of Finance's control, the list of outstanding technical income tax amendments has been growing. The Auditor General's second recommendation contained two parts. In the first part, the Auditor General recommended that the department should develop and implement a plan to address the current backlog of needed technical amendments.

The department agreed with the Auditor General's recommendation and has taken action in response. First, the department recognizes the importance of providing certainty for taxpayers and has, on a number of occasions, prepared bills with technical amendments. The department will continue to work toward ensuring that necessary technical amendments are put forward for consideration on a timely basis. Second, the department is in the process of preparing legislation for the next technical bill. Measures identified in comfort letters by tax legislation staff and CRA officials are being reviewed and prioritized for release in a forthcoming technical bill.

Finally, further smaller packages of technical amendments are being prepared or planned. The expectation is that by releasing such smaller packages on a regular basis, the process can be much more manageable and efficient.

Moving on to the second part of the Auditor General's second recommendation, the report notes that in the past the department has released packages of proposed technical amendments to the public for comment. As such, the Auditor General recommended that the department develop and release draft technical amendments, including those arising from comfort letters, on a regular basis for comments so that taxpayers and tax practitioners know what changes will be made and can provide input to the department.

As I indicated earlier, further packages of technical amendments are being prepared. In the context of this recommendation, the department did indicate that it would consider whether there would be circumstances where it would be appropriate to bring forward subsequent draft technical amendments when a previous technical bill is still pending before Parliament. The concern in this regard is the need to protect against confusion and complexity that could arise from having multiple bills that amend the same provisions before Parliament at the same time.

In conclusion, we would like to thank the Auditor General for her report and its recommendations. We are confident that our action plan will ensure the department has processes in place to comprehensively record, track, and prioritize all technical issues for possible legislative amendment and that we have put in place a plan to address the list of outstanding technical income tax amendments.

Thank you again, Mr. Chair, for providing the opportunity to present our plan to the committee.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Horgan.

We're now going to go to the first round, which will be seven minutes. Leading off will be Mr. Lee.

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

Thank you, Mr. Chairman, and thank you to the witnesses for appearing today.

From my point of view, the thing that jumped off the page was the large backlog of proposed technical amendments. It's been almost ten years since the department got some technical amendments passed, so I don't really understand why that evolved. But it's nice that it's been recognized and it's nice that there's a good relationship between CRA and the finance department. That's wonderful, but I'm not sure anybody's listening. It's a good relationship: CRA talks, the finance department listens, but doesn't do anything.

I'm very surprised that one of the solutions is to go out and develop a new database. When I was in high school I used to go out and get some new paper and get a new binder and make lists and stuff like that. So keep your receipts and don't go over budget.

I'm going to ask a question of the finance department or perhaps of one of the individuals who accompanied Mr. Horgan. Have you ever heard of the Miscellaneous Statute Law Amendment Act?

[Michael Horgan]

Yes.

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

Good.

I was checking last night, and the last time there was a Miscellaneous Statute Law Amendment Act was in 2001. That's a process whereby all these little technical amendments can be bundled together by the justice department from all kinds of statutes.

Back in 2001 I think there were some 65 separate technical amendments made to all manner of statutes in this one statute. It's non-controversial. You put them all in one bill and you ship them off to the justice committee. They get passed. If there are any problems, they get yanked from the bill.

So I'm curious why that process wouldn't have been used by the finance department to accomplish at least a few hundred, just knock off the first 100 or 200 of these technical amendments. Wasn't it possible to do that? Why wasn't it done? The process already exists. We're not reinventing the wheel here, we're just.... Could somebody answer that?

[Brian Ernewein, General Director, Tax Policy Branch, Department of Finance]

Thank you for the question. It's very helpful.

We have heard of the Miscellaneous Statute Law Amendment Act, but I'm highly doubtful that it would have application in this circumstance. As I understand it, that provision deals with purely technical changes, such as the name of a changed department or the title of a minister. You can make amendments under that act to update the title or the reference. You can correct punctuation. You can do things of that nature.

The amendments under discussion here are certainly technical amendments, but they're substantive technical amendments. They affect people's tax liability. Given the nature of comfort letters, they're generally to remove a tax liability in a circumstance where it's not consistent with a policy that would apply.

It's my view that you wouldn't be able to use the statute you're referring to to make the changes of this nature.

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

Okay, here are the four criteria for a miscellaneous statute law amendment: must not be controversial; must not involve the spending of public funds; must not prejudicially affect the rights of persons; must not create a new offence or subject a new class of persons to an existing offence. That gives a lot of leeway, and yes, substantive changes can be made.

Anyway, I'm not going to go on. The concept has been offered; it's been out there. I'm just curious why this stuff has sat around. This committee itself did have a backlog; I think we had seven files sitting here a couple of weeks ago. These things can happen in government, especially when you have surprise—

[The Chair, Liberal, Shawn Murphy]

Not since 2001.

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

Okay. But, you know, things like surprise prorogations tend to delay things. You get backlogs.

Anyway, I'll turn to my colleague, Monsieur Dion, if there's time.

[The Chair, Liberal, Shawn Murphy]

Two and a half minutes.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

Will I have another opportunity to speak longer? Will you add the two minutes and a half to that?

[The Chair, Liberal, Shawn Murphy]

I don't normally, but we can in this situation, Mr. Dion, if that's what you wish. That's two minutes exactly.

Madam Faille, you have five minutes.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Thank you, Mr. Chairman. Welcome to the Committee.

I would like to put a question to you. The last time that a bill was tabled, it was studied by the Standing Committee on Finance, in 2007. Certain measures targeted, among other things, tax deferral and tax avoidance using foreign investment entities and non-resident trusts.

The bill moved through all stages in the House of Commons, but after its referral to the Senate, it died on the Order Paper. Statements had been made. The fact that these measures were postponed from one budget to the next despite the fact that announcements had been made had a deterrent effect on corporations. Is that still the case?

When a witness from the Department of Finance came before the Committee to discuss this matter, it was stated that this was a source of 90 billion dollars in potential income that the government was missing out on. What is the situation today?

I am trying to determine the impact of non-passage of the bill. It could be quite considerable.

[Brian Ernewein]

Thank you for the question.

I'd like to speak to two points. One is just very briefly the history of the technical bill that included these provisions. The bill was actually introduced in the Parliament that included the year 2006—I've forgotten which number that is—as Bill C-33, and did receive third reading by the House of Commons, but then Parliament prorogued. In the next Parliament it was reintroduced as Bill C-10, that is, both the technical amendments package as well as the foreign investment entity and non-resident trust provisions. That bill proceeded to committee stage in the Senate, but did not pass before the House prorogued for the subsequent election.

The provisions relating to foreign investment entities and non-resident trusts were the subject of commentary by a panel struck by the government. It was an international panel chaired by Mr. Peter Godsoe. Their suggestion was that the proposals be reviewed to ensure they strike the right balance between revenue protection and fairness. Indeed, the government did do that.

In the March 4 budget there was a revised proposal issued by the government, which proposed to take the existing rules relating to foreign investment entities instead of the foreign investment entity rules put forward in Bill C-33 and tighten them somewhat, but essentially cleave more closely to the current rules.

In relation to non-resident trusts, the budget proposes to go forward with those proposals but with a number of material changes, to try to make sure they're targeted as best as possible. There is a specific proposal in the budget, which is to be the subject of consultation.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Is the justification the fact that the effect has been so popular and such a deterrent that the measures previously proposed are no longer necessary?

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

I might try to answer the question. Normally, when a bill is put before Parliament, the CRA administers it as long as that has not become law. For the time being, what was contained in Bill C-10 continues to apply.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Very well. My next question relates to another matter.

In a report produced by PricewaterhouseCoopers Canada and entitled “Canada's Tax Regime: Complexity and Competitiveness in Difficult Times“, mention is made of the number of days required, on average, by a corporation to produce an income tax return. It is the case that it is 1,696 days, which places Canada behind several other countries in the world.

Have you ever thought of the impact on individuals and corporations of the fact that you have not implemented the Act and that coordination between the Canada Revenue Agency and the Department of Finance is insufficient?

I saw the action plan and, as my colleague stated earlier, you are going to set up a lovely database. You have identified the information, but in what way is the plan that you are proposing this year going to deliver results? Do you have a bill ready to be tabled in the House?

[Louise Levonian]

The changes made to Bill C-10 do not yet have force of law. We are in the process of preparing a series of changes. We have also done the complete inventory of the remaining technical amendments. We are preparing a smaller group of changes as well. We wish to try and make this public so as to, once again, gather comments.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Has there been a consolidation of the Canada Revenue Agency's list and of yours? Do you have the same priorities? Could you at least share with us the 30 top priorities on the list? And, if not, could you provide us with a document outlining these 30 top priorities?

[Louise Levonian]

Concerning the way in which the CRA and the Department of Finance work together, I would tell you that when there are technical amendments, the CRA notifies us of them, and these are then integrated into our database.