Public Accounts Committee on Dec. 11th, 2014

[The Chair, NDP, David Christopherson]

I now call to order the 43rd meeting of the Standing Committee on Public Accounts.

Colleagues, before we turn our attention to the matters at hand, we have a couple of minor housekeeping matters.

We've had a request from folks from Trinidad and Tobago who are here on a tour. They're here January 7 and 8, when we're not around. I have already given the okay for the usual kinds of things that might happen. One thing they've asked for, because they're doing a documentary and they have a television crew, is permission to use videos and photographs of this committee of stuff we've done in the past, and other pictures that exist.

Going that far, in terms of approval, I thought I'd bring it to you. It seems pretty straightforward to me, but if there are any questions or comments, I'll entertain them.

Hearing none, then, we'll give approval for that.

I've already given an okay for the routine stuff, but for that part we want to make sure we're okay.

Madam Clerk, does that give you what you need?

[The Clerk of the Committee, Ms. Angela Crandall]

It does. Thank you.

[The Chair, NDP, David Christopherson]

Good. Thank you.

Just as a reminder, our first meeting when we come back will be on Monday, January 26. I commit to colleagues that whatever work I put on there for that day, it won't be a hearing. One thing we try to avoid is coming back from a break and then immediately entering into a public hearing. That won't happen. I suspect that we'll have some draft reports and we can do some draft report writing at that time. That's what I'll be looking to schedule.

Last, just as a notice to colleagues, every time a sitting is completed, as you know, we rotate the times of the committees. We will be moving to Mondays and Wednesdays, 3:30 p.m. to 5:30 p.m. That will be our new home through to when we rise for the summer.

There being no other matters before us, I will turn the committee to our public hearing today on chapter 3, “Aggressive Tax Planning”, of the spring 2014 report of the Auditor General of Canada.

I believe, Madam Clerk, this is the last chapter in that entire report. This is a Conservative choice. It winds up our work there and lets us start to schedule hearings on the latest report we've just received.

I will call on our Auditor General to introduce his delegation, and in due course Mr. Ted Gallivan, the deputy assistant commissioner of the Canada Revenue Agency, to introduce his delegation and give his opening remarks when the time is appropriate.

We now will hear from our Auditor General, Mr. Ferguson.

Sir, you now have the floor.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada]

Mr. Chair, thank you for this opportunity to discuss chapter 3, “Aggressive Tax Planning”. Joining me at the table is Vicki Plant, principal, who was responsible for the audit.

Many taxpayers, including individuals, corporations, and trusts, use tax planning to reduce or eliminate the amount of tax owing. Canadian courts have held that, in general, taxpayers have the right to enter into transactions that will minimize their tax liability. However, that right has been restricted in Canada by statutory anti-avoidance rules, including the general anti-avoidance rule, or GAAR. The GAAR may apply to tax plans that are considered aggressive, which the agency defines as arrangements that push the limits of acceptable tax planning.

In its corporate risk profile, the agency has identified aggressive tax planning as one of the highest risks to its mandate of ensuring that taxpayers meet their compliance obligations. Our audit focused on how the Canada Revenue Agency manages the aggressive tax planning program, which identifies emerging tax avoidance issues, arrangements, and products, and handles cases requiring a remedy for tax avoidance. We also examined how the Department of Finance Canada responds to requests for legislative changes to address the aggressive tax planning issues that the agency identifies.

There are many different ways that a taxpayer can structure an aggressive tax plan. For the purposes of our audit, we selected four examples from the numerous types of plans of which the agency was aware.

We found that the Canada Revenue Agency has an adequate program to detect, correct, and deter non-compliance of certain tax schemes. It has a number of ways to detect aggressive tax plans, such as through risk-based audits, referrals, voluntary disclosures, from informant leads, and from publicly available information, such as on the Internet.

However, the agency has not fully evaluated whether it is able to detect high-risk large business files. Without this evaluation, it cannot be certain that high-risk cases are in fact being identified and selected for follow-up.

The agency has had success in correcting non-compliance both through reassessments and through requesting changes to tax legislation by the Department of Finance. A taxpayer can appeal a reassessment, and the matter may ultimately be decided by a court decision. Of 54 cases litigated since 1988 on the basis of GAAR, the agency was successful in 28. A lost case is regarded by the agency as a learning experience and clarifies how the courts view a particular aggressive tax plan.

The agency uses three main performance indicators: salary utilization, tax earned by audit, and the quality of file assessments. Tax earned by audit is a useful measure of the short-term result of the agency's compliance efforts, since it is a measure of taxes assessed on a non-compliant taxpayer. However, it is not an adequate measure of long-term success. For example, the deterrent effect of the program may result in fewer taxpayers participating in aggressive tax plans.

The agency has taken steps to develop better measures with the large business sector, and we encourage the agency to expand its approach to the aggressive tax planning program.

We were not able to determine how specific requests from the Canada Revenue Agency for legislative changes to block aggressive tax plans were analyzed by Department of Finance staff. The department determined that this information constitutes a cabinet confidence outside the scope of the Auditor General's access entitlements under existing orders in council. For that reason, access to the requested information was not granted by the department. Therefore we could not determine whether the Department of Finance had followed its processes in providing timely analysis of requests from the agency.

We were able to see that most of the requests from the agency in the three years under audit were addressed by the 2011 to 2013 federal budgets.

We are pleased to report that the agency agreed with our recommendations and made several commitments in its response. We received a copy of the action plan the agency submitted to the committee and found it consistent with our recommendations.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Ferguson.

Before I turn the floor over to you, Mr. Gallivan, I just want to compliment you on the timeliness of your action plan. Action plans are very important to the work we do. Those departments that wait until the last second, or worse yet, don't provide one hear from us about that. I have always felt we should give compliments the other way. Not only did you get it in early enough for us, but you got it in early enough that the Auditor General had a chance to look at it and give his comments. That is very helpful and much appreciated.

With that, I turn the floor over to you, Mr. Gallivan.

[Ted Gallivan, Deputy Assistant Commissioner, Compliance Programs Branch, Canada Revenue Agency]

Thank you, Mr. Chair.

This afternoon I am joined by Lisa Anawati, the director general of the international and large business program directorate within the CRA. She has direct responsibility for aggressive tax planning.

We are pleased to have the opportunity to come before committee today to support your consideration of chapter 3 of the OAG 2014 spring report.

Given that my opening remarks are in the binder, I will limit myself to a few key points so that we have more time for questions.

The focus of my remarks will be on the three recommendations made by the OAG.

At the outset, it's important to note that there are a number of legal ways that taxpayers can reduce the amount of taxes they're required to pay. Claiming allowable tax credits and deductions, sheltering investments inside tax-free savings plans, and offsetting business losses against income are just a few examples. In fact, the government encourages Canadians to take advantage of legitimate tax savings wherever they can.

Aggressive tax avoidance occurs when a person takes part in schemes or transactions that are clearly abusive in nature, where their primary purpose is to avoid the payment of required taxes. While these transactions may comply with the letter of the law, they clearly violate the spirit and intent of the law.

The Auditor General's report focuses on aggressive tax planning. They looked at four specific abusive planning arrangements selected for the audit and they confirmed that the CRA has delivered positive results in all four cases. While the Auditor General confirmed that the CRA has the tools required to detect, correct, and deter non-compliance of taxpayers using aggressive tax plans, our objective is to further enhance CRA's approach. The Auditor General made three recommendations to help us do exactly that.

The first one was on risk assessment. The OAG recommended that the CRA test the effectiveness of the national risk assessment model (NRAM)—the formal tool that identifies the most high-risk files. The CRA has developed plans to conduct this testing and we are on track to have ongoing testing of the tool during the 2015-2016 fiscal year.

Second, the OAG made recommendations with regard to training. The OAG recommended that the CRA monitor the training progress of our aggressive tax planning auditors against their learning paths and use this information to identify training gaps. A learning path is a document that sets out the required courses and other training that we expect our auditors to receive. A training framework has already been developed and this full exercise will be completed by March 31.

The third formal recommendation made by the Auditor General touched on performance measures. The Auditor General recommended that the agency re-evaluate its performance measures for its aggressive tax planning program and develop measures and indicators that better reflect program success. There was a focus on an internal measure known as taxed earned by audit, or TEBA. The Auditor General observed that some important results were not being included in TEBA and other desirable outcomes could actually make taxed earned by audit go down.

The CRA has committed to developing a list of relevant performance measures by March 31, 2015. This work is already under way and we have already made an adjustment to our TEBA coding practices so that we can better measure the performance of the aggressive tax planning program. As reflected in the detailed action plan submitted to the committee, the CRA has been active in addressing this chapter and has plans in place to meet all of the commitments made in our management action plan.

In closing, the CRA recognizes the importance of the aggressive tax planning audit program. We have a responsibility to continue to improve this program and we appreciate the recommendations the OAG has made that will help us strengthen it.

Thank you, Mr. Chair. I, too, remain open to questions.

[The Chair, NDP, David Christopherson]

Very good. Thank you.

I note that we have two representatives from the Department of Finance: Brian Ernewein, general director, tax policy branch; and Alexandra MacLean, director, tax legislation, tax policy branch.

You've chosen not to have an opening statement. You're here to provide any answers to questions that are put to you. Is that correct?

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

That's correct, Mr. Chair.

[The Chair, NDP, David Christopherson]

Very good.

Colleagues, unless there is some reason not to, we will now proceed with our questions and answers in the regular rotation.

We'll begin with Mr. Albas. You now have the floor, sir.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Mr. Chair, I appreciate all the people who are here today and the work that they do for our country.

I'll start with the Auditor General.

Auditor General, you may remember at the May 7, 2014, meeting when you appeared, I did ask you a number of questions in regard to this particular report. I want to go back again to paragraph 3.58. You provided a description of the process used for legislative changes, a template used in budget briefings and information about budget measures announced by the department and some analysis. On that day you did say that they were compliant in giving what they could, or at least what they felt they could that wouldn't compromise cabinet confidentiality.

Is that still your opinion today, sir?

[Michael Ferguson]

We asked them for a certain number of documents and for information. They provided us some of the information, as described in paragraph 3.58. There was other information that the department said was cabinet confidence information. Of course, I have no way of verifying that, because obviously we didn't see the information, but certainly I do believe that the department went through its process to determine what it could provide us and determined that some of the information was cabinet confidence.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

For someone looking at the chart that you've provided, they can directly see the recommendations made that were followed up on, whether legislative or otherwise. Is that correct?

[Michael Ferguson]

Sorry; you referred to a chart...?

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

There's a chart attached that actually points out all the documentation, or at least the....

[Michael Ferguson]

It's exhibit 3.1, perhaps.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

The chart basically outlines what was asked for in terms of the list of items, so that you could say this is what was suggested and this is what has been done. You pointed out that there was a direct correlation between those two. Is that correct?

[Michael Ferguson]

I think you're referring to exhibit 3.1, just after paragraph 3.10.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Yes.

[Michael Ferguson]

That identifies the four types of aggressive tax plans we looked at. It indicates what has happened in each of those cases. It's not a chart looking at what we asked for. It's a chart saying that we were looking at these items that CRA had identified as potential issues, and then what happened to them since. It identifies that in three of the cases, there were federal budget measures put in place to try to deal with the issues. In the other case, the courts had ruled that CRA's approach was appropriate, and therefore no further legislation was considered necessary at that point in time.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Okay. Thank you very much.

You may remember, Mr. Chair, that in the same public hearing I asked the Auditor General about the fact that CRA had established a training plan for aggressive tax planning for their auditors, and had put in place performance measures to evaluate the aggressive tax planning results. The Auditor General agreed in terms of the training, but said that CRA needed to do a better job of making sure they knew whether or not auditors were following through on the training.

This question is for the CRA. What is your response to the recommendations of the Auditor General in regard to training and following through with auditors? How has that changed?

[Lisa Anawati, Director General, International and Large Business Directorate, Compliance Programs Branch, Canada Revenue Agency]

Mr. Chair, at the CRA, we do have a very robust training program, and we acknowledge that we can monitor it. Typically we have individual learning plans and courses that are developed by our headquarters functions. The delivery of the courses is done by our regional offices and the monitoring is done by the regional offices. However, as noted in the Auditor General's report, while that is an effective use of our training resources, better monitoring could actually improve it.

We have already started the process of developing a monitoring framework that will include looking at and comparing the courses that were delivered against the individual auditors' learning plans. It also includes an evaluation of the courses themselves and how they're delivered. In fact we will be taking that recommendation beyond the aggressive tax planning program to the rest of our international and large business courses.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

That's very reassuring.

What other steps have you taken to ensure that the auditors you have at CRA have the tools, the training, and the feedback systems to protect the integrity of our tax system?

[Ted Gallivan]

I think the first thing to lead off with is that while we have documented training paths and we have documented training courses, we've figured out that we have to answer three key questions. First, is the training that's supposed to be offered actually offered? Second, are the auditors actually taking the training? Third, what is the assessment of the result of that training? In other words, is the learning being ingrained in the performance?

The key to all of that is our quality assurance regime. The Auditor General pointed out that we needed to be more detailed in documenting all of this and making a tighter link between our quality assurance regime, the quality of the audits, and the training. If there was a gap in the quality of the audit work, then we needed to push that back into the training, not just fix the issue with that one file, but fix it across the suite of files we do.

As a final point, aggressive tax planning is a specialty area. The 460 full-time equivalents who work in this area are specialists. They work on this type of file. That level of specialization is another thing we do to make sure that we have the right people working on the right file.

[The Chair, NDP, David Christopherson]

Thank you.

Time has expired. We will move along to Mr. Allen.

You now have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you to the folks for being here.

Mr. Ferguson, in response to a question from my colleague, you talked about documents you didn't receive, and whether they were cabinet documents or some other form the department decided couldn't be released, since you were not sure, you just took their word for it. There doesn't seem to be a process.

From your perspective, is there a way or a process for both parties to be assured? I mean you, not us, by the way. I'm not talking about the opposition but about you, as the Auditor General of Canada, and the department. I wonder if there's a way to assure each other that indeed it should be kept in confidence, and you would simply say, “Well, that's right. You keep that one. We don't look at that one.” Is there a way to do that, sir?