Mr. Speaker, I wish to join the debate on the motion before us today which deals with the consequences of a problem that was recognized by the Canada Customs and Revenue Agency in its accounting processes.
This is an instance of the opposition failing to recognize that the government has done an effective job of recognizing and attempting to correct a problem immediately. Rather than recognizing this fact, the opposition would tie the government's hands as it tries to negotiate a solution with the provinces who I am sure will be willing to come to an agreement on the most appropriate course of action that is most fair to the taxpayer.
Indeed, an error was made and the error should be corrected. It is only fair for the provinces not implicated in the error that we do something about it. Because they do not have the mutual fund activity as these six provinces do, they have in effect been penalized.
As a result of the problem, the Government of Canada, based on the accounts provided by CCRA, overpaid six provinces under the tax collection agreements that it entered into with those provinces. Members of the House must realize that the impact of the accounting problem did not affect all the provinces equally or proportionally because it related to mutual fund trusts. These investment companies are based primarily in the four provinces of Ontario, Manitoba, British Columbia and Alberta.
The issue goes back to the introduction of the capital gains taxes in 1972. The problem for many years was virtually undetectable because mutual fund trusts only became a significant investment vehicle in the early 1990s. The overpayment to the six provinces was a result of a tax accounting omission in CCRA reports used by the Department of Finance to determine how much tax revenue to distribute to the provinces.
In the course of enhancing computer systems used for tax accounting, the CCRA identified a problem that caused it to initiate an indepth review. With some 2,200 separate accounts, CCRA's tax ledger system is complex.
The problem, in brief terms, is as follows. Mutual fund trusts pay federal and provincial income tax on capital gains as their business proceeds. Under circumstances set out in the income tax legislation, mutual fund trusts can receive a refund of both the federal and provincial portions of the tax paid once the investors realize the gains and pay tax themselves where the tax benefit has been transferred from the trust to the taxpayer.
Due to a problem in CCRA accounting processes, which are audited by the auditor general, the provincial portion of the capital gains refund claimed by the mutual fund trusts was not being deducted in the computation of the provincial tax revenues. Instead it was deducted from federal revenues; a mistake.
Very simply, when mutual fund trusts paid provincial income tax on capital gains, the amount of tax paid was added to the payments to the provinces. However when the mutual fund trusts received a refund of provincial taxes paid, or the individual taxpayers made their claims, the amount was not deducted from the payments to the provinces.
As soon as the CCRA's internal review process indicated that the omission of certain data in its reports to the Department of Finance was resulting in overpayments to the provinces, the agency informed the Department of Finance and the auditor general. Remedial measures were put in place as soon as the auditor general confirmed that the problem was real and overpayments relating to mutual fund trusts were stopped.
Detecting the problem was not easy. The Auditor General of Canada herself noted that audit work had focussed on changes in systems and accounts, something that typified the CCRA's management of the process. The system for recording tax revenues relating to capital gains associated with the mutual fund trusts had not changed substantially since its inception in 1972.
Focussing on changes was indeed where the problem came to light. In the course of introducing computer processing to reporting for mutual fund trusts, CCRA discovered a problem. As members know, a great revolution in the application of computers to business and government has taken place over the last 30 years, a sea change in fact.
Members need not be reminded that one does not make dramatic changes to the tax accounting system without being absolutely certain. In their position the CCRA managers and staff were looking at a problem that had not been picked up before by the auditors. The problem was brought to the attention of the CCRA's commissioner in late December. On the very next day he ordered a full internal review to be certain that this was a problem.
When the report of this review was received by CCRA management on January 9 this year, the Department of Finance was informed and the auditor general was asked to review the CCRA findings and confirm that a problem truly existed. As soon as the auditor general confirmed that the problem was real, the CCRA implemented remedial measures. Additional ledger accounts were created for each of the provinces to ensure that provincial shares of capital gains taxes arising from mutual fund trusts were debited when refunds were issued.
As members are aware, people often blame computers and modernization for many of the problems that organizations experience. It is refreshing and heartening to see that an organization that has adopted technology as eagerly and energetically as the Canada Customs and Revenue Agency has benefited from its embrace of technology, not just through better service to Canadians but also by identifying problems that could have continued for much longer.
The House should also be grateful to the Minister of National Revenue and the management of the CCRA for being so upfront when the problem arose. At no time did they seek to avoid responsibility or blame for the problem. When action was required, they acted decisively. The House can be assured that the Government of Canada will demonstrate the same responsible leadership in addressing the consequences of this problem.
We should acknowledge that an error has been made and for the benefit of all taxpayers the error should be corrected and remedial action taken.