Public Accounts Committee on Feb. 14th, 2013

[Nancy Cheng]

This question would be better posed to the Department of Finance, because you're asking a question about comparison with the budget.

[Andrew Saxton, Conservative, North Vancouver, BC]

Would somebody else like to answer that question?

[Douglas Nevison]

I believe the forecast was roughly in line with the budget projections, reflecting the growth in the economy that we've seen since the recession.

[Andrew Saxton, Conservative, North Vancouver, BC]

This is a very important point, because during this period of time, corporate tax rates have actually gone down in Canada. In fact, I think they are almost at an all-time low. So we have seen a situation in which government revenues have increased at the same time as corporate taxes are declining.

Can you explain this?

[Douglas Nevison]

In general, a number of international organizations, such as the IMF and OECD, would note that lowering corporate tax rates has a positive impact on the economy, largely in the sense that it increases the rate of return to investment and reduces the cost of capital. You expect to see a strong investment response to that.

Obviously, with the recession there's a bit of a cyclical aspect here. But most recently, investment, as one of the components of domestic demand, has been relatively strong. In fact, Canada is the only G-7 country that has now achieved its pre-recession level of business investment during this time period.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you tell us how Canada now stacks up with its corporate tax rate in comparison, for example, with our neighbour to the south?

[Douglas Nevison]

If you look at the marginal effective tax rate on the business side, Canada now has the lowest rate in the G-7.

[Andrew Saxton, Conservative, North Vancouver, BC]

That explains why some companies are actually moving their headquarters back to Canada from the United States as well.

[Douglas Nevison]

It would be expected to be a positive contribution to inflows of business investment, yes.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next question goes back to the Auditor General.

With regard to the financial statements, what can you tell us that will assure Canadians that these figures are indeed accurate?

[Nancy Cheng]

Significant audit effort is being mounted to audit the accounts of the Government of Canada. First and foremost, we do work at the component level; by that, I mean the various parts that make up the whole of the public accounts. This means that we need to have all the plans for major components, such as significant departments and agencies. Then there are also crown corporations and other entities that form part of the public accounts. Again we need to derive audit assurance to be able to come to an overall conclusion that supports a clean audit opinion.

In this particular year it was rather challenging, in the sense that this was the year that many organizations changed their accounting framework, as I have indicated in my opening statement. This means that some organizations were perhaps changing from the old Canadian GAAP—Canadian generally accepted accounting principles—to the public sector standard, the PSAB standard. When they do that, there is not too much that we need to do, because they are aligned with the underlying accounting framework for the Government of Canada. But wherever you have some of the entities that are moving to IFRS, some adjustments are needed.

In fact, when you look at the statements on page 2.5 you will see that there are transitional adjustments. This is near the bottom of the page. There was no budgetary figure for it, but “Transition Adjustment (Note 11)” notes it as $3.3 billion.

So there are significant adjustments that got rolled up, and we needed to come to terms with the Comptroller General's side in terms of how to account for them. Some of these adjustments, because they are incorporated from a pick-up perspective as opposed to a line-by-line consolidation, actually change the investment line indirectly to the accumulated deficit line.

So we put a lot of audit efforts through in order to be able to support this audit opinion. It is the largest financial statement audit within the Office of the Auditor General.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Saxton.

We move over to Mr. Allen, who now has the floor.

[Malcolm Allen, NDP, Welland, ON]

Thank you very much, Chair.

Thank you, all of you, for coming.

Mr. Nevison, I would ask for some help in finding, somewhere in those three lovely big volumes, that piece you found that said that lower tax rates actually made headquarters come here. I know it was a question Mr. Saxton led one to. I'm assuming that this is a subjective conclusion based on some sense. Or is it in the document somewhere? If it is, point it out for me.

[Douglas Nevison]

I don't believe it's in the document itself, but it's a common finding that has been made, as I mentioned, by international organizations, such as the OECD.

[Malcolm Allen, NDP, Welland, ON]

And I don't doubt the conclusion that you've drawn with your expertise. I just happened to be looking at the public accounts today and I couldn't find it. When our folks out there hear these types of questions, they think it's in the public accounts.

But I think, Ms. Cheng, as we would know, this is actually the Public Accounts of Canada, which has had an audit performed on it; it's not actually an economic plan per se. So it really is a numbers thing, something I've done in the past—with smaller organizations, obviously, but I've done this one as well.

I'll go back to Mr. Ralston about the issue of accrual. This is something that comes up here every now and again: the accrual method of accounting, and whether we're headed down that road or not. I know there's a report coming in, I believe, March of this year.

Can you give us a sense of how this is coming along? I recognize that there are some viewpoints here about whether we should or should not go down this road. I recognize that the AG's office has an opinion perhaps sometimes different from that of the other side, at the treasury.

Can you give us a sense of where this is at this moment?

[Jim Ralston]

There are really three things that deserve comment, and there's only one of the three for which the jury is still out.

First, with respect to accrual accounting, it has been in place for over a decade. The summary financial statements of Canada have been prepared this year, as for the past decade, on an accrual basis of accounting. So really there's no difference of opinion on that score.

The next element is preparing the federal budget on an accrual basis. That too is done and has been done for a number of years. Those two documents are aligned in terms of accounting principles.

The outstanding issue effectively would apply to something such as main estimates. That is whether appropriations also ought to be prepared on an accrual basis, and indeed there are differences of opinion.

That question has been examined recently by a parliamentary committee, and as you point out, a report is expected of us by the end of March. We expect to provide our conclusion based on the studies that have been done.

[Malcolm Allen, NDP, Welland, ON]

Thank you for the overview, because it's helpful for folks to know what we're really talking about. Sometimes this stuff gets a little “inside baseball”, if you will, when it comes to how we do these things.

I'll take it from what you said that a report is probably going to be finished by March and will be available once it is released. Is that fair to say, that it looks as though it's going to get done? Is that the objective, basically?

[Jim Ralston]

We've committed to provide our response to the committee by the end of March, and I understand we will meet that deadline.

[Malcolm Allen, NDP, Welland, ON]

That's wonderful. I'm not trying to pin you down, Mr. Ralston, to saying “you're going to get it right at 12 o'clock on the 31st”. This is just to get a sense of how we're marching along.

Ms. Cheng, in the report itself we still, it seems, have some questions that linger out there about how the defence department is able to charge, or to have a sense about how much equipment it has and the value—those sorts of things, to use lay terms, if you will.

Do you still have concerns around that? Do you see any progress? Do you see a sense of where they're headed, or should there be more progress made? Or is the progress satisfactory, in the sense that we are headed on a path whereon we really understand what we have as an inventory?

It's one place in which we probably have the largest financial inventory of any department in this government—not in “this government”, but in “the government”, period.

[Nancy Cheng]

Thank you, Mr. Chair.

Yes, indeed, the inventory at National Defence accounts for most of what we own as a government as a whole; I believe it's about $6 billion out of $7 billion.

The issue is inventory as well as what they called asset-pooled items, which are like repairable spare parts. The problem that we find year after year is that when we do inventory counts, including these asset-pooled items, we continue to find lots of differences.

So we're not able to reconcile what actually shows up in the books with what we can actually count. There are ins and outs that way. There are also parts, which perhaps are larger components, that are a work in progress, concerning which you're going to have to start to think about tangible capital assets and whether they're being captured properly.

I think there are issues that they need to work on. There are a number of things that they seem to be embarking on that will improve the situation, including having a better inventory count policy, including having a resource management system that starts to pull various parts together. Part of the problem is that it's such a big entity; they have lots of subsystems and what have you. The more you have there, the more reconciliation it calls for, and they don't all come together in the end. There are a number of things that are under way, but like any large department, it's taking a while.

Let's not forget that, as Mr. Ralston pointed out, the government adopted accrual accounting in 2003; we're now in 2013. So we're highlighting the fact that we really need to put more focus on it and make sure we don't fall back, and we need to make sure that these initiatives are carried out so that we can improve the reporting on inventory, on the asset-pooled items, and on tangible capital assets.

[The Chair, NDP, David Christopherson]

Thank you very much. Time has expired.

Now we go over to Mr. Kramp.

You now have the floor, sir.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Chair.

I'd like to thank Mr. Allen for mentioning those little words “accrual accounting”. It's been a hobby horse of mine for a few years, so thank you so kindly for broaching the subject.

And Mr. Ralston, thank you so kindly as well for giving a very clear and concise realization of where we are.

Also, I understand quite well, Ms. Cheng, that this has been an issue of concern for the Auditor General's office for a number of years. It seems it is actively being addressed right now.

Ms. Cheng, I have a question. There were a couple of significant transactions related to the transfers between the federal and provincial governments, namely the harmonized sales tax, of course, the transfers from B.C. of $1.6 billion and then transfers to the federal government, and the transfers from the federal government of $2.2 billion to the Province of Quebec. I'm not concerned with the numbers—we understand what those are—but I'd like to know how the large transfers are reported. Were they accurately and appropriately disclosed?

[Nancy Cheng]

Thank you, Mr. Chair.

The information that the member was referring to can be found on page 2.15. In note 3(vi), you see the two significant transactions that have been referred to. Both of them have to do with the HST.

In the case of B.C., we'd signed an agreement with them to assist them in the harmonization process. Then the decision was to not continue with that track, and therefore there was an amount recoverable. We needed to have assurance that the amount indeed would be coming back. There was agreement that essentially the money would be sent back in five installments, I believe.

One installment has been received, and there are four more to come. Because the amount is clearly accepted as an economic benefit that Canada can draw from in the future, we're able to recognize that full amount in the current year, so that $1.6 billion is recognized as a receivable.

The other one is in relation to Quebec. It's also relating to sales tax harmonization, but it's helping them to modify and amend their processes. The agreement requires that the federal government provide $2.2 billion to the Province of Quebec. As it says right here, the payment will start with the implementation in January of 2013.

It is an accrual that we recognize in the books of the Government of Canada, with the payment to come as the payment will pay out. So it's recognized as a payable.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much for the clarification on that.

I know this is not in your purview at this particular point, but just from your conversations amongst professionals, are you aware of whether or not the province has accounted and/or reported this in a manner that would be complementary to the direction you've just stated?