Mr. Speaker, as I had just begun my speech prior to question period I think it would probably be worthwhile to do a quick summary of the issue.
First, the motion has to do with an overpayment by the federal government to four provinces with consequences to all provinces. The motion reads:
That, after overpaying at least $3.3 billion to several provinces as a result of its own accounting errors, this House calls upon the government to forgive any past revenue overpayments to the provinces since retroactively clawing back these revenues would severely affect the provinces' ability to pay for healthcare, education and social services.
This would have some very interesting ramifications, as members have raised in their debate. I think it bears identifying exactly the nature, because I am not exactly sure that these are accounting errors.
In January 2002 the Canada Customs and Revenue Agency, commonly referred to as CCRA, identified a problem in tax accounting that resulted in overpayment to six provinces under tax collection agreements.
The federal government collects income taxes from individuals on behalf of provinces and remits the money to those provinces following the tax year. The Department of Finance pays the appropriate share of those taxes collected to the provinces based on the records of the CCRA.
The four provinces that are significantly affected are Ontario, Manitoba, British Columbia and Alberta. Those are provinces where mutual fund trusts are primarily based. New Brunswick and Nova Scotia received very minor overpayments.
Mutual fund trusts are a type of collective investment vehicle allowing Canadians a simple way to invest indirectly in a broad range of stocks and bonds in a number of different markets. That is not the issue. Preliminary estimates in January 2002 indicated that a total of $3.3 billion had been overpaid for the 1993 to 1999 income tax years.
The auditor general studied the CCRA accounts to confirm the scope of the problem. I think it was important that the work had been done to ensure that there was an understanding that the problem identified was verifiable. Her report of June 3 gave complete assurance that there had been $2.5 billion in overpayments in the period from 1996 to 1999 and it gave partial assurance that over $800 million was overpaid in the period 1993 to 1996.
CCRA's accounting practices applicable to mutual fund trust capital gains refunds have been revised to avoid a similar omission in the future. So corrective action has been taken with regard to the matter which actually led to this overpayment. The auditor general confirmed that the practices were corrected.
The problem for many years was virtually undetectable. Each year the public accounts of the Government of Canada and all its departments and agencies are audited and they are signed off by auditors that they fairly reflect the financial activity for the period under audit. The Government of Canada relies on those audits and relies on them not only with regard to the activity in a particular department, agency or its own public accounts, but that it has consequences to other matters, such as in the event that equalization payments, for example, could be affected in a ripple effect. If this problem had not occurred, the amount, for instance, that was paid to provinces with regard to equalization payments might also have been different. In fact, that is the case.
The overpayments to the provinces are as a result of a tax accounting omission in the Canada Customs and Revenue Agency reports.
The Department of Finance uses those reports to determine how much tax revenue it should be distributing to the provinces. Mutual fund trusts pay federal and provincial tax on capital gains and under circumstances set out in the income tax legislation they can receive a refund in both federal and provincial portions of this tax paid once investors realize the gains and pay the tax themselves.
Due to a problem in the CCRA the provincial portion of capital gains refunds for mutual fund trusts was being deducted from federal revenues instead of provincial revenues. These processes are audited by the auditor general and they have nothing to do with individual taxpayers. It is a consequence of all the tax collections that are collected on behalf of provinces by the federal government.
In the course of enhancing the computer systems the CCRA identified the problem and upon confirmation reported it to the Department of Finance and the auditor general. As soon as the auditor general confirmed that the problem was real the overpayment was immediately corrected on a going forward basis at least as of the 2000 taxation year. The auditor general was requested to study the CCRA accounting procedures and provide reports and analysis. The auditor general delivered her report on June 3, 2002.
Let us look at the amounts more specifically. There is no question that $3.3 billion is an awful lot of money. This relates to the years 1993 to 1999. The provinces affected were Alberta, British Columbia, Manitoba and Ontario.
In Ontario's case the overpayment was $2.8 billion. That is a vast majority of the amount we are talking about. As a member of parliament from the province of Ontario I obviously have a concern and an interest in seeing that Ontario is kept in good shape and that it gets its fair share. I would never argue that Ontario should get what it is not entitled to.
Manitoba's overpayment was $400 million. It has a smaller population than most provinces however $400 million is a material amount to that province. B.C. was overpaid by $120 million, a little lesser impact, nevertheless governments can do a lot in a province with $120 million. In Alberta's case the overpayment was only $4 million. This gives us an idea of the dimensions. The problem is certainly with Ontario.
The government has identified a problem and taken appropriate action. The auditor general has introduced changes ensuring that this matter would not get exacerbated or there would be further overpayments. Discussions were immediately launched with the provinces to determine how to approach this.
The federal and provincial governments have agreements on a number of matters, not simply tax collection, tax law and other law, but virtually on every aspect of fiscal and social policy across Canada. That relationship is important and cannot be taken in isolation.
The motion before us suggests that correcting this problem would impair, impede or somehow compromise a province's ability to take care of its other responsibilities like health care, education, social services and everything else that provinces deliver to Canadians.
What is the impact? We have a situation where legitimate federal government moneys were inadvertently paid to these provinces. I indicated earlier that there also is a consequential impact on things like equalization payments. Every other province that receives equalization payments has now received an amount which would have been different had the situation been handled correctly in the first place. We have some consequential effects as a result of this overpayment. We must carefully examine the impact on all provinces, not simply the poor provinces to whom overpayments were made.
I am sure that hon. members will recognize this is a difficult and complex question that cannot be resolved by a simple motion to suggest we forgive it and go on. The federal government has its responsibilities. We have programs, services and obligations on a national basis which also must to be funded and we must think about some of the principles.
I would like to talk about some of the principles that we ought to consider when we are dealing with matters such as this. I suggest materiality has a lot to do with it. In the event we were to have anything which was of an inconsequential amount it would be unlikely that the government would dedicate substantial resources to resolve a problem for which the cost of resolving would be more than the amount involved in the first place.
Materiality is a fairly important issue. I suspect that members would agree that if the amount in question were one dollar this would not be an issue. I am sure that it would be a matter that could be resolved quickly simply by an internal adjustment.
What if it was a million dollars? All of a sudden that becomes a lot of money to a lot of people depending on the circumstances. Would we be prepared to make concessions or eat it? Sometimes businesses refer to it that way. They say that they will eat the loss because it was their mistake. Sometimes it is a good business practice or a good faith gesture to say that we made a mistake.
I would like to give an example of the principle of detrimental reliance. If individuals received a million dollars that they were not entitled to and they went out and invested in a $10 million investment using that money and had no other way to get that last million dollars because if it was taken away they would be in default of their loan and lose their business, then we could rationalize that over the long term with all things considered and it might be appropriate to take the hit and not try to recover it.
We know a dollar will not make us do anything. I am not sure whether a million dollars will make us do anything but it might start us thinking. However what if it was a billion dollars? It becomes a billion dollars in the Government of Canada's public accounts that is not available which otherwise should be available to pay down debt, invest in health care, social programs, or affordable housing and the homelessness issue. I can think of some important priorities that a billion dollars can be applied to. This matter is $3.3 billion. It is a lot of money and a lot of programs could be run with $3.3 billion. It is regrettable.
It is further exacerbated that whenever these things occur there is interest associated with the moneys, the time value of money. The $3.3 billion does not even include all of the interest that could have been earned on that money or saved had that been used to pay down debt for instance. It is not insignificant. The $3.3 billion is not the total amount but the initial amount. I imagine that if we were to do the math it would be closer to $4 billion than $3.3 billion.
The question is: At what level does the government want to change the decision? There are certain circumstances and levels of dollars where we might say we made a mistake and it is not worth the effort to fix it. It gets to a point where we would look at negotiating a settlement because we do not want to spend too much money on it. Then it gets to the point where there are large enough dollars that there has to be some principles. What threshold will we set? I am not sure members have thought about what that threshold should be.
This particular motion has said, notwithstanding anything else with the $3.3 billion, we will not be concerned about the amount the federal government will lose in revenue and it should be forgiven. Therefore, the threshold of at least $3.3 billion is inconsequential to the opposition and it wants the government to let it go to the provinces. I am not there.
In the laws of Canada, where there has been an injustice, there is a principle that the dispute resolution is to put the parties back in the situation they would have been in had the matter been treated properly in the first instance, to the greatest extent possible.
There is no question in this regard that it is totally possible for the moneys to be totally recovered by the federal government, as is its due. But the federal government has broader relationships with the provinces. Some discussions which are going on now are necessary because I do not think there would be any intent on any level of government to try to put another jurisdiction in a situation which would be untenable or would damage its ability to do the work that is essential on behalf of all Canadians regardless of the level of government in which its delivered.
Canadians are somewhat insensitive to the level of government that manages their money. They pay taxes and want assurances they get good value for the dollar. Canadians at large will not lose anything. It is a matter of whether or not the federal government has a responsibility to set a standard or consensus point. There may be a certain level beyond which the government should not be taking the hit for inadvertent accounting errors, albeit made in good faith, but should instead seek a negotiating point.
I am a chartered accountant by profession and have appeared before the former National Revenue Department and the CCRA on tax disputes. The laws of Canada are clear. Once an assessment is received it must be paid first before it is challenged in court.
We recover things on welfare, EI payments, GIS overpayments, OAS overpayments, income tax shortfalls and income tax overpayments. There are all kinds of things but they follow the general principle of law that where there is a mistake we correct the mistake. We correct it with interest where applicable, and sometimes with penalties. No penalties apply here because the provinces who received the overpayment were not involved in the transaction. They relied on receiving those moneys in good faith and maybe to their detriment they have invested or used the money.
I do not think that is the case in Ontario. It involved $2.8 billion. The analysis I saw indicates that the province of Ontario has not even spent all the money that it received from the federal government for new medical equipment et cetera. It put it in bank accounts. I think $500 million went into bank accounts and it forgot all about it. It was just collecting interest.
I do not think there has been a clear demonstration that there will be an impairment in the province of Ontario if there is an orderly repayment, just as the federal tax department would do for individuals who owe them a lot of money. It does not say to them to pay it all right away or it will throw them in jail. An agreement would be reached to have an orderly repayment so that the person continues to earn an income and repays it in an orderly manner. There are principles involved. It is not cut and dry. I do not believe, even as an Ontarian, that forgiving it is the solution.