Public Accounts Committee on May 25th, 2015

[The Chair, NDP, David Christopherson]

I now declare this 60th meeting of the Standing Committee on Public Accounts in order.

Colleagues, I have no particular business to bring to you before we start, so unless someone else has an intervention, it is my intention to move directly to the public hearing at hand.

I see none, so we will move forward with the hearing, pursuant to Standing Order 108(3)(g), chapter 3, “Tax-Based Expenditures”, of the spring 2015 report of the Auditor General of Canada. It was sent to us on April 28.

Mr. Ferguson, our Auditor General, is here with us today to kick things off.

To begin with your opening remarks I'll turn the floor over to you, Mr. Ferguson. You now have the floor, sir.

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

Thank you, Mr. Chair, for this opportunity to discuss our 2015 spring report on tax-based expenditures. Joining me at the table is Richard Domingue, principal, who was responsible for the audit.

The federal government can attain its policy objectives either through direct program spending or through tax expenditures. In this audit, we refer to the tax expenditures that could be replaced by direct spending as tax-based expenditures. In support of this point the International Monetary Fund's fiscal transparency code states that:

...because the government policy objectives could be achieved alternatively through a subsidy or other direct outlays, [tax expenditures] are regarded as equivalent to budget expenditure.

Tax-based expenditures account for billions of dollars annually. We looked at how the Department of Finance Canada and the Canada Revenue Agency managed these expenditures. More specifically, we examined whether clear and useful information is reported, whether analyses are performed before the implementation of these expenditures, and whether existing tax measures are monitored and evaluated.

We selected nine tax-based expenditures. We found that the information provided by the Department of Finance Canada on tax-based expenditures does not adequately support Parliamentary oversight. Although these expenditures are similar to direct program spending, less information is provided to Parliament about these expenditures than about direct program spending.

For example, the Tax Expenditures and Evaluations report does not include future cost projections. Reporting practices in some international jurisdictions provided examples where additional details related to tax expenditures are disclosed. The number of beneficiaries, the administrative costs, and links between direct spending programs and these expenditures are sometimes reported in other jurisdictions.

We believe that Parliament needs comprehensive and consolidated information about tax expenditures to better understand total government spending.

We found that the Department of Finance did a good job of analyzing new tax measures before they were implemented. For the measures we selected, the department considered most key elements of its analytical framework, such as a need for government intervention, and efficiency, effectiveness, and equity.

Analysis on potential tax measures are prepared to support decision-making. We found that although the Department of Finance monitored existing tax-based expenditures, it did not systematically evaluate those expenditures to determine whether they achieved the expected results and whether they were performing as intended.

The policy requirement to evaluate direct program spending does not apply to tax-based expenditures. Also, tax expenditures are not included in comprehensive spending reviews such as strategic reviews.

We found examples where the Department of Finance identified issues in relation to certain tax measures before implementing them. Despite those issues, the department had yet to evaluate these tax measures after they were implemented. When the department evaluated tax measures, it did not publish the evaluations. For example, although the department evaluated the children's fitness tax credit, it did not make the information public.

We believe that information needs to be disclosed for parliamentarians to understand what the money spent through the tax system is accomplishing.

We also examined the monitoring of costs and the sharing of information. We found that the Canada Revenue Agency monitored costs to implement new measures and compliance issues. It also shared relevant information with the Department of Finance Canada on an ongoing basis.

The Department of Finance Canada has prepared a detailed action plan to address each of 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]

Very good, thank you, Mr. Auditor General.

Now we go over to the Department of Finance and the senior assistant deputy minister, Mr. Marsland.

I offer you the floor and ask you to introduce your delegation and give us your opening remarks, sir. You now have the floor.

[Andrew Marsland, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair. Good afternoon.

I'm joined here today by Mr. Geoff Trueman, who is general director in the tax policy branch; Maude Lavoie, director of intergovernmental policy and evaluation and research; and Miodrag Jovanovic, the director of the personal income tax division.

I will begin my remarks today with a brief overview of the role of the tax policy branch. I'll then say a few words about the Department of Finance's reporting on tax expenditures and the steps we're taking to address the recent recommendations by the Auditor General to improve our reporting on tax expenditures.

The main responsibility of the Department of Finance with respect to taxation is to support the government in the development of federal tax policy. For the tax policy branch, this involves developing, analyzing, and evaluating potential tax measures or adjustments to existing measures. It also involves drafting legislation and supporting its passage through Parliament.

Our analysis is guided by sound tax policy principles in line with the objectives of ensuring a competitive, efficient, fair, and simple tax system. The analysis, review, and evaluation of either new or existing measures are carried out by highly qualified Finance Canada employees with in-depth knowledge of the Canadian tax system.

The branch's analytical and evaluation work is systematic and thorough. Our analytical framework incorporates several elements. These elements include, for example, a detailed assessment of the need for policy intervention; an assessment of the effectiveness of a measure in meeting its policy objectives; assessment of whether measures meet fundamental policy objectives of efficiency, fairness, and simplicity; consideration of alternative delivery mechanisms; a review of gender or environmental concerns as well as potential provincial or territorial impacts; and assessment of potential fiscal implications.

We also consider administrative, compliance, and legislative concerns, and we consult other departments, stakeholders, and other jurisdictions.

After a measure is implemented, the department monitors the performance of the tax system on an ongoing basis, meets stakeholders, analyzes trends in relevant data, monitors jurisprudence, and consults the Canada Revenue Agency, other departments, agencies and the general public.

When issues are identified, they are carefully reviewed by the department and decision-makers are briefed when appropriate.

Although it may differ in some respects from the rules applicable to direct program spending, the review process for tax expenditures is effective in identifying potential issues with the tax system. It is also effective in leading us to the desired outcome, which is to ensure that the tax system performs as intended.

Allow me to give you a few statistics that illustrate the scope and breadth of the branch's work.

In the course of the four last federal budget exercises, the branch prepared detailed analyses of about 400 different tax proposals, and about 110 of these measures were either implemented or on course of being implemented. The department prepared 1,274 pages of new tax legislation in 2013, and 363 pages in 2014. Since 2006, more than one third of all existing income tax expenditures were either adopted or modified to some extent.

Let me speak now, briefly, about the department's reporting on tax expenditures. The department first reported on federal tax expenditures in 1979 and was one of the first countries to do so. Since then the department has been proactive in providing extensive information on tax expenditures to Canadians in a manner that contributes to transparency and accountability.

Through its annual “Tax Expenditures and Evaluations” report and its companion reference document “Tax Expenditures: Notes to the Estimates/Projections”, the department provides valuable information to the public. This includes information on the objectives and design of federal tax expenditures as well as their actual and projected costs.

Canada is also one of a handful of countries that publish evaluations of tax expenditures on a regular basis. The Organisation for Economic Cooperation and Development and the International Monetary Fund have recognized the high quality of Canada's reporting on tax expenditures.

We're pleased with the Auditor General's finding that the department does a good job of analyzing new tax measures and monitoring existing ones. While the department is of the view that we have a robust approach to the management of tax expenditures, we recognize there is always room for improvement, and it's in this spirit that we welcome the Auditor General's recommendations.

Starting next year the department will be providing two additional years of information as recommended by the Auditor General. Also, as recommended, the department will add information in the companion reference document to better inform readers on government spending programs.

The department is committed to continuously improving the public information available on tax expenditures. We'll make sure that high-quality analyses and evaluations of tax expenditures continue to be performed.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

That's very good. Thank you.

Now over to the Canada Revenue Agency and the director general of the legislative policy directorate, Mr. Dimitrakopoulos.

Sir, you now have the floor.

[Costa Dimitrakopoulos, Director General, Legislative Policy Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Good afternoon, Mr. Chair.

Thank you for the invitation to testify before the committee today.

I'm here today to answer questions relating to the CRA's work with the Department of Finance on tax-based expenditures, as examined in the Auditor General's report released on April 28, 2015. The CRA is pleased to note that no points of concern were raised by the Auditor General with our administration of tax-based expenditures and that there were no recommendations specific to the Canada Revenue Agency.

By way of background, the Canada Revenue Agency is responsible for administering Canada's tax laws, including the Income Tax Act and the Excise Tax Act. We undertake a wide range of activities to assess and process tax returns, information returns, and payments for individuals and businesses. Additionally, we are also responsible for ensuring compliance with tax laws, which we do through a variety of means, including risk assessment, third party data matching, verification, and audits.

The Canada Revenue Agency works with the Tax Policy Branch within the Department of Finance to provide administrative considerations on tax changes in two ways. First, when the legislation is being developed we provide analysis around administrative, compliance, enforceability, and costing matters. Second, once legislation has been implemented, we assess on an ongoing basis the administration of tax measures to identify any unforeseen consequences or issues in the practical application of the legislative measure.

An ongoing dialogue helps ensure that the Department of Finance is in a position to fully consider potential compliance issues and implementation costs of tax-based expenditures. To support this, the Canada Revenue Agency examines a number of operational aspects, including impacts on our internal operations, provincial or territorial tax administrations and, where possible, the number of taxpayers affected.

In addition to the information provided to support Department of Finance analysis, the Canada Revenue Agency's analysis also allows us to identify issues important to our effective administration of the tax change, including changes to our information technology systems, the expected number of inquiries the change will generate, and necessary changes to our publications.

After tax measures have been implemented, the Canada Revenue Agency provides the Department of Finance with further comments and analysis on issues such as compliance or additional costs related to the tax measure.

In closing, I would like to reiterate that the Canada Revenue Agency works closely with the Department of Finance to assist the administrative aspects of new tax-based expenditures. I'm happy to take questions on this process.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

That's very good. Thank you.

Now to begin our rotation of questions and comments, Mr. Falk.

You, sir, now have the floor.

[Ted Falk, Conservative, Provencher, MB]

Thank you, Mr. Chairman, and thank you, Mr. Auditor General, and also all the officials for joining us at committee here today. I always enjoy reading your reports.

Mr. Ferguson, I'd like to start off with questions for you. I'd first like to say that our government is very pleased that the Auditor General concluded that our government has appropriate practices to analyze proposed tax expenditures, monitor existing ones, and share information with the Canada Revenue Agency.

In your report you stated that Finance Canada does a good job of analyzing new tax measures and monitoring existing ones. Can you elaborate on your findings and how the government is providing transparency and accountability?

[Michael Ferguson]

We were looking at a couple of different aspects in the audit. We were looking at what the Department of Finance does before a tax measure is put in place, and then we were also looking at what it does once a tax measure has been implemented.

As for what it does before a tax measure is put in place, we cover that starting in paragraph 3.34, which is where we say the following:

...when analyzing tax-based expenditures before they were implemented, the Department of Finance Canada considered most key elements of its analytical framework, such as the need for government intervention, and efficiency, effectiveness, and equity.

Throughout that section we do say, for example, in paragraph 3.42, that:

We found that the Department analyzed the issues related to policy need, efficiency, effectiveness, equity, and forgone revenues for most of the selected tax measures. However, the Department did not consider spending alternatives for the tax measures we examined.

Overall, in the area of looking at measures before they're implemented, we felt that the department was doing a good job of analyzing them and doing most of the things that were in its framework. We did say, in paragraph 3.42, however, that we found in some cases that it hadn't considered spending alternatives for the tax measures we examined.

[Ted Falk, Conservative, Provencher, MB]

That would be after their implementation.

[Michael Ferguson]

No, this is all part of the pre-implementation of measures. In paragraph 3.42 we say that “We found that he department analyzed the issues related to policy need, efficiency, effectiveness”, meaning all of those considerations before a measure was implemented. However, one thing it was not always considering was whether a spending alternative would be an option instead of the tax measure itself.

[Ted Falk, Conservative, Provencher, MB]

That's good, thank you.

The OECD has called Canada's tax measurement methodology “very thoroughly documented” and said that Canada's approach to tax expenditures evaluation “has an apparently successful track record of publication of reviews in some detail”. It called these reviews “impressive research products”.

In comparison to other countries, how does Canada fare when it comes to reporting tax expenditures?

[Michael Ferguson]

The only reference we made in comparison to other jurisdictions was in paragraph 3.29, and this was in terms of the type of information that is made public by other jurisdictions. In paragraph 3.29, we refer to Australia, France, and Pennsylvania, and the types of things they include. For example:

...a short description of the tax measure, a discussion of its purpose or objective, the future cost of each tax expenditure, the number of beneficiaries, the administrative costs, and the reliability of the estimation method, as well as references to direct spending programs.

I think if you look at Finance Canada's report on tax expenditures, you will see that there is a lot of information contained in there. However, when we compared it to reports that were produced in other jurisdictions, we felt there was room for Finance Canada to improve its reporting on its tax expenditures.

[Ted Falk, Conservative, Provencher, MB]

Okay, thank you.

Mr. Marsland, could you elaborate a little bit on other jurisdictions and how they provide their cost projections in direct program spending as Canada does?

[Andrew Marsland]

I will begin by saying that every country makes its own choices with respect to this. Some countries provide additional data that Canada does not provide at the moment, and some don't provide some of the data that Canada provides.

I think there is a variety of approaches, but I think the starting point really has to be how you define a tax expenditure. An important thing from Canada's perspective is that we.... Essentially, a tax expenditure is a deviation from the benchmark tax system, so how you define the benchmark tax system is very important for how you define the scope of expenditures on which you report. We take a very broad approach in Canada, which means that we report on a very wide selection of tax expenditures, and I think the OECD, in particular, has noted the breadth of the number of tax expenditures that we report.

I think it's fair to say that there are examples in other countries or other jurisdictions of data points that are provided—for example, more projections of revenues—but none of the jurisdictions provide all of those. What I'm saying is that they make particular choices.

We welcome the Auditor General's recommendation to provide more cost projections, and we've committed to providing an additional two years, where appropriate.

I think the challenge in that respect is the ability to project forward on tax expenditures. Some tax expenditures are related, for example, to business cycles or the market, and it's quite difficult and could be misleading to provide too long a projection of costs going forward. But we will try to provide as much as possible.

[The Chair, NDP, David Christopherson]

That's very good. Thank you.

The time has expired, and we'll now move to Mr. Allen.

You now have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Thank you to our guests.

Mr. Marsland, the Auditor General walked us through a number of things in paragraphs 3.41 and 3.42. It seems that his paragraph 3.41 lines up with the text of your opening statements on page 2, where you refer to “a detailed assessment” and an “assessment of the effectiveness of a measure”. It seems that the Auditor General's points in paragraph 3.41 mirror yours, except that in paragraph 3.42 he says that the department didn't consider spending alternatives for the tax measures they examined—albeit took a look at some, but not all.

Can you tell me why you wouldn't have looked at other alternatives beyond just the tax expenditure?

[Andrew Marsland]

Part of our analytical framework is to look at alternatives to tax expenditures where appropriate. There are cases where it would not be appropriate, for example, where a tax expenditure relates to the accurate measurement of income for tax purposes. Quite clearly a direct spending program would not apply there.

I can't comment on the specific gaps there because I'm not really aware of what those gaps are. But as a matter of practice, our analytical framework does—

[Malcolm Allen, NDP, Welland, ON]

I understand that, but I'm looking at the specific ones that the Auditor General looked at. Either you do know or you don't know.

If you don't know, that's fair because it's a pretty specific question and I don't expect you, Mr. Marsland, to have every document in front of you. I appreciate the fact you may not know exactly why it didn't happen, but you may want to tell the committee at some point in the future why it didn't. It may well fit inside those parameters. That's fair.

The Auditor General also talked about the department “not systematically evaluat[ing] these expenditures to determine whether they achieved the expected results and whether they were performing as intended”. If I look at page 2 of the text of your opening remarks, sir, you say, “After a measure is implemented, the Department monitors the performance of the tax system on an ongoing basis...”.

The tax system is very broad, I understand, but he said that you didn't evaluate a certain number of these programs and you seem to be alluding on page 2 that you in fact do. Was this just a question of oversight or was this a question of what we're getting to this one or what exactly happened? The Auditor General was clear that you didn't. You're suggesting that you do.

It would be helpful to know whether.... Obviously it didn't get done because you're not refuting it. The issue is, why wasn't it done if that was your intention, because you said you'd do it. And if you didn't do it, as the Auditor General said, then why didn't you?

And, sir, when I say “you”, I don't mean you personally, of course.

[Andrew Marsland]

I understand.

I believe the Auditor General selected eight tax-based expenditures and concluded that we evaluated four of them and didn't evaluate the other four.

I guess our position is that, in effect, we did evaluate seven of those measures and we provided information in relation to those measures in terms of how we did it. I think where we differ is whether or not there is a single document that evaluates that as opposed to whether we looked at all of the components over a period of time that would go into an evaluation.

I believe the measures that the report indicated that we didn't evaluate included the mineral exploration tax credit for flow-through shares. We provided documents, and again I stress—not a single document or evaluation, but documents that went to an evaluation, including an evaluation we published on flow-through shares, which explicitly accounted for the mineral exploration tax credit. The two measures are very closely related in that the mineral exploration tax credit builds on the flow-through share regime. That evaluation dealt with that.

[Malcolm Allen, NDP, Welland, ON]

I'm going to run out of time.

You know what it's like at this committee, the taskmaster over here has a big gavel.

I hate to cut you or anybody off, but the bottom line is that it is time-limited around here.

I get all that. I appreciate that, sir. You're saying it's in other places.

The other point that the Auditor General makes is about reporting to Parliament. At the end of the day, you folks in the department work extremely hard to try to figure these things out that are requested of you. We have to approve them or not. We don't know what we've approved because we don't really understand the long-term implications necessarily, because there's no reporting back to us in any official way in a report. The Auditor General in his report is saying that there is no tabled report that talks about tax expenditures going forward.

I know you agreed with that. Why wouldn't we have done it in the past?

[Andrew Marsland]

Is this in terms of projections going forward of the cost of these expenditures?

In fact, we used to do more projections and we found that there were some problems with the data and the methodology going forward. As I alluded to earlier, sometimes it's difficult to estimate with a degree of assurance what the cost is. What we commit to do is to add another two years. There will be circumstances where it's simply not possible and we will explain in detail why it's not possible, or we'll explain the weaknesses in the projections going forward. As I say, some tax expenditures—

[Malcolm Allen, NDP, Welland, ON]

Mr. Marsland, really, it's just about the information coming forward, not about how good it is, right?

[The Chair, NDP, David Christopherson]

Thank you. The time has expired.

We're moving along, over to Mr. Albas.

You have the floor, sir.

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

Thank you, Mr. Chair.

I just want to thank all of our witnesses here today for the work you do through your quite different roles.

I'd like to go back to where Mr. Falk left off, Mr. Chair, specifically where he talked about the international community and how we rank. Sometimes comparative analysis is helpful in pointing out the bigger picture, although I do understand Mr. Marsland's point that while some countries may have specific measures in place, maybe they have a much different comprehensive system compared to ours.

The Inter-American Center of Tax Administrations described Canada's tax expenditure reports as containing “the greatest possible amount of information”. Given the information Canada already provides, Mr. Marsland, would you say that we have an appropriate proactive process in place to analyze new tax expenditures and to monitor the existing ones?