Public Accounts Committee on Nov. 17th, 2020

[The Chair, Conservative, Kelly Block]

Good morning, everyone. I will now call the meeting to order.

Welcome to meeting number six of the Standing Committee on Public Accounts. The committee is meeting in public and is being televised.

Pursuant to Standing Order 108(3)(g), the committee is meeting today to study “Report 3—Taxation of E-Commerce”, of the 2019 spring reports of the Auditor General of Canada.

Today's meeting is taking place in a hybrid format. Pursuant to the House order of September 23, 2020, the proceedings will be made available via the House of Commons website. So you are aware, the website will always show the person speaking rather than the entirety of the committee.

I just want to note how exciting it is to have in the room today four members of Parliament on the committee .

To ensure an orderly meeting, I would like to outline a few rules, as follows.

You may speak in the official language of your choice. Interpretation services are available for this meeting. You have the choice, at the bottom of your screen, of floor, English or French. For those participating via Zoom, before speaking, click on the microphone icon to activate your own mike. When you are done speaking, please put your mike on mute to minimize any interference.

Should members need to request the floor outside of the time that has been given to them by me, they should activate their mike and state that they have a point of order. If a member wishes to intervene on a point of order that has been raised by another member, they should use the “raise hand” function. This will signal to the chair your interest to speak and create a speakers list. In order to do so, you should click on “participants” at the bottom of the screen. When the list pops up, you will see next to your name that you can click “raise hand”. This function creates a list of speakers.

Unless there are exceptional circumstances, the use of headsets with a boom microphone provided by the House of Commons is mandatory for everyone participating remotely who needs to speak. Of course, should any technical challenge arise, please advise me.

I would now like to welcome our witnesses.

Joining us today from the Office of the Auditor General are Auditor General Karen Hogan; Mathieu Lequain, director; and Philippe Le Goff, principal.

From the Canada Revenue Agency, I would like to welcome Commissioner of Revenue and Chief Executive Officer Bob Hamilton, and Ted Gallivan, assistant commissioner, compliance programs branch.

From the Canada Border Services Agency, we have with us John Ossowski, president, and Peter Hill, vice-president, commercial and trade branch.

From the Department of Finance Canada, we have Paul Rochon, deputy minister, and Andrew Marsland, senior assistant deputy minister, tax policy branch.

You will each have five minutes to make your opening statements.

We will begin with you, Ms. Hogan. You have the floor.

[Karen Hogan, Auditor General of Canada, Office of the Auditor General]

Thank you, Madam Chair.

Thank you for this opportunity to discuss our report on the taxation of e-commerce, which was tabled in Parliament on May 7, 2019. Joining me today are Philippe Le Goff, who was the principal responsible for the audit, and Mathieu Lequain, who led the audit team.

As we see every day during this pandemic, the retail landscape in Canada is changing and e-commerce is expanding rapidly. More people are making purchases online. The increase in e-commerce creates challenges for assessing and collecting the goods and services tax, GST, and the harmonized sales tax, HST. This is particularly true for physical products and for digital products and services, such as music and videos, that consumers in Canada purchase from foreign vendors. It is important for the Canadian sales tax system to keep pace with e-commerce and adapt to the challenges and opportunities it presents. This way, the tax base will be protected so that governments can fund vital public services such as social programs. The Government of Canada must ensure that everyone who should remit sale taxes does so, and that the taxes are collected fairly and effectively.

This audit focused on whether the Canada Revenue Agency, the Canada Border Services Agency and the Department of Finance Canada ensured that the sales tax system for e-commerce was neutral and that the sales tax base was protected.

We found that the Canadian sales tax system did not keep pace with the rapidly evolving digital marketplace. We estimated that Canada had forgone $169 million in sales tax revenue on digital products in 2017. In preparation for this hearing, we have updated that information and estimated that the amount was approximately $247 million in 2019, an increase of almost 50% in two years. For digital products and services, the Canadian sales tax system has placed Canadian businesses at an unfair disadvantage in relation to foreign vendors.

The Department of Finance Canada analysis of the sales tax system for e-commerce has shown that there is a risk that the current system could discourage foreign businesses from settling in Canada and encourage Canadian businesses to move their operations to other countries.

The Canada Revenue Agency and the Canada Border Services Agency have a role to play in ensuring that all taxes are collected and remitted to the government. We found that the agencies had not done enough work to make sure that this was happening.

As of today, the Canada Revenue Agency does not have the legislative authority to require foreign vendors of physical and digital products sold in Canada to register for, collect, and remit the GST or HST.

In our audit, we found that the agency lacked the authority to implement compliance practices that have been effective in other jurisdictions, such as simplified registration. We also found that the agency had undertaken limited compliance activities to determine if vendors had registered for the GST or HST.

We also looked at how the Canada Border Services Agency managed the collection of taxes on low-value shipments imported through courier companies. We found that the agency could not validate the sales taxes received on these shipments. Its systems and processes were outdated, and it relied on couriers to remit taxes owing. It also did little work in response to warning signs, such as an unexplained increase in the volume of shipments valued under $20—and therefore not subject to tax—or audits showing the undervaluation of a significant number of shipments sent by courier.

We made two recommendations to the Canada Revenue Agency and one to the Canada Border Services Agency. Both agencies agreed with the recommendations. We were pleased to see that the Canada Border Services Agency included specific timelines in its response. The committee may wish to ask both agencies what progress they have made since our audit.

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

Thank you.

[The Chair, Conservative, Kelly Block]

Thank you very much, Ms. Hogan.

We will now go to Bob Hamilton.

[Bob Hamilton, Commissioner of Revenue and Chief Executive Officer, Canada Revenue Agency]

Thank you, Madam Chair.

I will be making my presentation in English but will be pleased to answer your questions in French.

Thank you for the opportunity to appear here to talk about the Auditor General's report on the taxation of e-commerce. I am joined by Ted Gallivan, our assistant commissioner of the compliance branch.

As the Auditor General just said, in the report the AG acknowledged that the CRA had limited legislative authority to implement some best practices we see in other jurisdictions, such as simplified registration or requiring digital platforms for non-residents to register for and collect GST and HST. Within that context, the AG made two recommendations to the agency. We accepted both of them.

First, the Auditor General recommended that within its legislative authority, the CRA expand its compliance activities and leverage available third party data to enhance its ability to detect and deter GST and HST non-compliance in e-commerce. Second, the Auditor General called on the CRA to implement mechanisms to track and report on the number of compliance activities it conducts to manage the risk of non-compliance in e-commerce.

The agency agreed with both recommendations and prepared and advanced a detailed action plan with timelines. Today I would like to report to you on our achievements thus far.

First, the agency designs its compliance activities in alignment with the level of non-compliance and tax dollars at risk. In the past, efforts to address non-compliance, including educating taxpayers of their GST and HST obligations and conducting audits, allowed the agency to ensure that the focus remained on files with the highest risk of non-compliance, while promoting a fair tax system for all Canadians. Within the confines of the legislation, we believe our level of compliance actions in the e-commerce sector were commensurate with the level of risk identified. However, as the Auditor General indicated, e-commerce has grown rapidly over the last few years, and has increased more substantially in specific sectors during the pandemic as a result of non-essential businesses being ordered to close. The agency developed an action plan to monitor and assess the elevated risks on an ongoing basis.

With respect to recommendation one, the agency developed a comprehensive compliance strategy, which will be finalized next month, December 2020, as committed to the Auditor General. The strategy will support the agency's efforts at better detecting and addressing non-compliance for GST and income tax. This work also led to the identification of the platform economy, where platform operators use technology such as the Internet to connect buyers and consumers with sellers and service providers.

More precisely, four categories of platforms have been identified, including the sharing economy, the gig economy, person-to-person sales, and social media influencers. Each category contains unique risks requiring tailored compliance interventions commensurate with the identified risks. Our strategy provides detailed plans to deal with the risk posed by these sectors.

The agency also reviewed actions undertaken by other jurisdictions to address tax challenges in this sector. As a result of this work, compliance risks emerging from the platform economy and e-commerce were identified.

The agency will also expand its compliance actions by better leveraging third party data to identify and address non-compliance. An effective tool in leveraging third party data is the “unnamed persons requirements”, or UPR. This type of requirement is authorized by the courts and enables the CRA to obtain information from an individual or a company about third parties.

With respect to the second recommendation, the agency has already started to produce more strategic performance indicators, such as the tax gap estimates. In December 2019 the agency completed an analysis of its tracking and monitoring methodology with respect to the compliance activities it conducts to manage the risk of non-compliance in e-commerce, including the platform economy.

While the agency conducted audits on e-commerce files in the past, these compliance actions were included in regular audit program results and were therefore not tracked and monitored separately. As a result of this analysis, new tracking and monitoring mechanisms and procedures have been developed and are being implemented early in the new year to help with analyzing results from these audits.

In light of these measures included in the action plan, I'm pleased to report that the agency has already achieved a number of its commitments identified in the action plan provided in response to the report. We are well under way to meeting the remaining deliverables.

Thank you, Madam Chair. I'll be happy to answer the questions.

[The Chair, Conservative, Kelly Block]

Thank you very much.

We will now go to Mr. John Ossowski.

[John Ossowski, President, Canada Border Services Agency]

Good morning, Madam Chair and members of the committee.

With me today is the vice-president of the CBSA commercial and trade branch, Peter Hill.

It's my pleasure to appear before the committee today as it is an opportunity to recognize the efforts that have been taken since the spring 2019 report of the Auditor General on the taxation of e-commerce. We appreciate the work that was done by the Auditor General.

In regard to our agency, the audit examined whether CBSA validated and collected the sales tax owed to the Government of Canada on goods imported through the courier low-value shipment program. The audit's overall findings showed some gaps in how CBSA managed the data for the courier low-value shipment program. The agency accepted all recommendations made in the report and quickly established an action plan to address the recommendations.

To date, the CBSA has made significant progress, including the development of an e-commerce strategy focused on balancing compliance with trade facilitation, safety and security, as well as revenue collection; aligning current practices with international agreements and World Customs Organization guidelines; and putting in place effective mechanisms to monitor and assess courier low-value shipment program compliance.

For example, the agency co-chaired, with an industry representative, the WCO working group on e-commerce, which has developed a global cross-border e-commerce framework of standards that will be presented for approval at the WCO council in December. The agency has leveraged that work, as well as collaboration with our Border Five partners, namely the United States, Australia, New Zealand and the United Kingdom, to develop a business case to address implementation of our customs e-commerce strategy.

I'm pleased to report that the CBSA is moving towards full implementation of this international approach and we are on track to review and enhance the means by which goods under the CLVS program are accounted for in order to ensure that taxes, including provincial sales taxes, are fully reflected.

The agency has also started to implement the multi-year CBSA assessment and revenue management system. This initiative will transform the collection of duties and taxes for goods imported into the country. We are also on track for examining options to further automate the CLVS program, including the ability to receive, process and analyze customs data.

The Auditor General recommended that the CBSA develop a strategy on e-commerce focused on trade facilitation, revenue collection, and safety and security. Our e-commerce strategy will enable and transform operations to better respond to the growing volumes of cross-border e-commerce shipment. It will also strengthen the CBSA's risk-assessment capability by leveraging advanced data analytics and technological enhancements, while addressing gaps in the legal and regulatory frameworks to enhance safety and security.

The CBSA is one of the major stakeholders in e-commerce in Canada. We are levelling the playing field for Canadian businesses in relation to those overseas. For example, along with our counterparts, the Canada Revenue Agency and the Department of Finance, we are working to ensure that the sales tax system for e-commerce remains neutral and protects the GST/HST tax base.

I look forward to responding to the questions the committee may have today.

Thank you.

[The Chair, Conservative, Kelly Block]

Thank you very much.

We will now move to Mr. Paul Rochon.

[Paul Rochon, Deputy Minister, Department of Finance]

Thank you.

I'll begin by thanking you for the invitation to appear before the Standing Committee on Public Accounts. I am here with Andrew Marsland, as Madam Chair noted at the outset.

On behalf of the Department of Finance, I want to thank the members of the committee for examining the 2019 Spring Reports of the Auditor General. I also want to say that the department appreciates the work of the Office of the Auditor General as well as the open and frank dialogue that we have with the office.

With regard to Report 3 on the “Taxation of E-Commerce”, the retail landscape in Canada has been changing for a number of years as more people make purchases online, and more businesses embrace online platforms for reaching customers and selling their products or services. This has been particularly true of late as the pandemic—which forced many of us to self-isolate at home—has accelerated this trend.

Madam Chair, as you know, the Department of Finance provides policy advice to ministers with a view to ensuring that the tax system is fair, efficient and competitive. As the report notes, the department has monitored the e-commerce sector with a focus on what the rapid growth in e-commerce means for our tax systems.

We've done extensive work in this area and will continue to do so. In particular, we continue to work closely with the OECD and other countries on examining approaches to ensuring that tax systems continue to work effectively as the digital economy gains in importance in all of our economies.

In closing, I want to thank the Auditor General for underscoring the importance of e-commerce to our tax system and for this report, and I'd be happy to answer any questions that you might have.

Thank you.

[The Chair, Conservative, Kelly Block]

Thank you very much.

Before we move to our rounds of questioning, I did neglect to advise our members that we would be taking the last 15 minutes to deal with some committee business, just so you have that in mind.

We will now move to our first round of questioning, which is our six-minute round. We will start with Mr. Lawrence.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much, Madam Chair.

I'd like to start by thanking all the witnesses for taking the time to be here today. I really appreciate it. I know that you're all very busy, especially given the pandemic.

My first question will be addressing primarily the CRA and perhaps the auditor and the CBSA as well, but primarily the CRA. The auditor's report highlights the fact that most Canadians are not self-reporting the HST and GST on digital purchases. I believe the number was 548. I want to meet those 548, first of all, because those might be the most honest Canadians we have.

It suggests that the digital giants should be the ones reporting and remitting on behalf of Canadians, as is done in many other places in the world. However, there appears to be an underlying belief or an assumption that it will be the digital giants that will be forced to pay this money and that Canadians will get their fair share from these digital giants. There's no evidence presented in the report or elsewhere that says this money will actually come from international corporations and not the pockets of Canadians.

Indeed, in 2018, the Prime Minister went so far as to say this:

The reality is that taxpayers will be the ones to pay those taxes. We, on this side of the House, [that's the Liberals, not us] promised not to raise taxes for taxpayers who are already paying enough for their digital subscriptions and Internet.

I'd like to raise this for both the auditor and the CRA. Do you agree or disagree with the statement from our Prime Minister?

[Bob Hamilton]

I can jump in first, if that's okay.

[The Chair, Conservative, Kelly Block]

Please do.

[Bob Hamilton]

Thank you for the opportunity, Chair.

On the question of getting large suppliers to register in Canada to collect and remit the tax, that's not something that's in the legislative framework now, so what we are doing in the absence of that is working to encourage people to know what they are supposed to do and to educate about the obligations under the tax act. In some other world, where other jurisdictions do this, were we to force the foreign supplier to register and remit, we would come up against the issue you've raised.

What I would say in the area of sales taxes is that economists can debate how they get shifted or not shifted, whether they're passed along in the price or whether they're absorbed by the provider. It's a bit of a theoretical question right now, given that we don't have such a regime, and then probably, obviously, market conditions will dictate the extent to which taxes are passed along versus absorbed.

From our perspective at the CRA what we are interested in doing is looking at the current legislative framework and finding a way to make the system work in a way that's fair, and, as you can see in the comments provided by the Auditor General, as this grows in importance, just making sure that we are paying adequate attention to it and monitoring and tracking. Those are a couple of the key recommendations that have been put to us, and we've made good progress on those and we're almost there.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much for that.

So there is no one at this committee who has evidence that the Netflix tax or the digital giant tax will actually come from those international giants and not from Canadian taxpayers. During a pandemic, if we were to change the legislation to allow for the taxation of international digital giants, we don't know whether that would come from the pockets of Canadians or from digital giants. Is that correct?

[Paul Rochon]

Madam Chair, could I perhaps comment in general terms on the question?

We normally expect, in competitive markets.... The situation we're discussing here is that the tax actually applies, but it's just not being administered. In highly competitive markets, one would expect the application of the tax to be absorbed in the margins of corporations. In other circumstances, where the corporation has the ability to adjust prices, you'd normally expect the tax to be passed on. You'd need to really look at specific circumstances.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

My apologies, time is short.

If at least a portion of that or part of that tax on the digital giants is passed on to consumers, do the wealthy pay more for their Netflix subscriptions than does the middle class or even those who are economically challenged?

I would ask that of the deputy finance minister, if he would be so kind.

[Paul Rochon]

I actually don't have data per se on the incidence of Netflix consumption by income. We have various aspects of our tax to try to deal with progressivity, notably the progressivity of our income taxes, as you know well.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Yes. Sales taxes are generally regressive in nature and have a greater impact on those with lower incomes. If in fact we impose a tax or change the legislation for direct remittance of this, it would disproportionately affect the lower and middle classes. Is that not correct?

[The Chair, Conservative, Kelly Block]

Please give a very short answer, Mr. Rochon.

[Paul Rochon]

Yes. I need to look at that specifically. Of course, we have the GST low-income credit to deal specifically with that issue of the incidence of the GST on low-income Canadians.

[The Chair, Conservative, Kelly Block]

Thank you very much.

We will now move to Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Chair.

Welcome, everyone. It's great to be here on Parliament Hill.

My first question is more of a congratulatory statement to Auditor General Karen Hogan.

I believe this is the first report that we are discussing under your tenure as AG. I wanted to get some feedback on how you and the team are doing with regard to the other reports that will be coming to us, in terms of preparation and your resources, how staffing is and just how the general morale is in the AG office in terms of dealing with COVID-19.

[Karen Hogan]

Thank you very much.

As you mentioned, it is the first time that I have appeared before the committee to discuss a report. Unfortunately, the report was one that I was not involved in. It was planned, completed and tabled by my predecessor, the interim Auditor General Sylvain Ricard, but I'm very pleased to be here to discuss it.

With respect to the other reports that we are working on, we are still on track after the last conversation that I had with all of you a few weeks ago. Obviously we're continuing to see some pressure that puts pressure on timelines, given the capacity of those that we audit and our ability to access information remotely. Right now, however, we're still on target for the early new year to be able to start tabling some work about COVID. Some of the audits that we had postponed, which should have been tabled this month, will be tabled in March 2021 as well.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you very much, Auditor General. Again, welcome this morning.

We know how important e-commerce is to the Canadian economy, even more so to Canadian consumers. I looked this morning at the October spending statistics for Mastercard that I receive on a monthly basis, and they estimate that about 21% of all retail sales in Canada were generated by e-commerce. I anticipate that during the Christmas period, the holiday period, you'll see an even greater uptick in terms of e-commerce spending, particularly in light of the situation at this unique time we're in, in this country and the world's history.

I do wish to reference Commissioner Hamilton in terms of the Canada Revenue Agency's detailed action plan.

Thank you for the work over at the CRA over the last several months with regard to COVID and ensuring that all Canadians receive their benefits and credits and also for the extraordinary assistance that was provided in the work between yourselves and the Department of Finance.

With regard to the estimated losses in the GST on foreign digital products and services sold, relative to the actual GST/HST tax gap, I am curious to see how the agency is developing a dedicated compliance strategy to better detect and address non-compliance with GST/HST. If you could elaborate on that, that would be great.

Thank you.

[Bob Hamilton]

First, in reference to the tax gap, it is true that, more generally, we do studies that try to measure the tax gap, which is the gap between the taxes that would be paid if everything worked perfectly and the taxes that we actually collect. Obviously, it's a difficult calculation, but we do it, and we have a methodology that's well respected. Our estimate of the GST tax gap, which was done a few years ago, was, if I remember correctly, approaching $5 billion. In the context of the Auditor General's estimates, we're in the $200 million-plus; $250 million, I believe, is the updated number.

I make that point just because when we talk about compliance and ensuring a fair tax system, we at the CRA need to do a good risk-based assessment of where we need to focus our energies. It's germane in this topic because of the growth of this, as you've identified. We need to make sure that our risk assessments and our approaches are up to date and that they aren't reflecting a world that was in place 10 years ago but today's world.

That's been part one of our action plan: to really do a bunch of studies, engaging within the agency and looking internationally at what people are doing, to make sure that we understand how this area is growing and what would be our best compliance strategies. When it comes to compliance, we have a mix of things that we can do. We can educate people. We can nudge them. If we have the legislative authority, we can have enforcement actions. We've just been doing a lot of work to make sure that we have a better assessment of what the risks are and what we can do about them.

As I mentioned earlier—I won't elaborate—we are also looking at monitoring and tracking our activities here, pulling them apart from the broader compliance activities that we engage in.