Madam Speaker, I am pleased to respond to the motion tabled by the hon. member for Peace River. My hon. colleague the Parliamentary Secretary to the Minister of Finance has provided a clear explanation as to how we will deal with the issue. However I will discuss it further for the benefit of hon. members.
The motion before the House today fails to recognize the fundamental responsibility of government: When a problem is identified it must be corrected as quickly as possible. When it involves taxpayers' money as this problem does, steps must be taken to ensure the money is put to the use for which it was collected.
I will focus my speech on what I believe was an effective and responsible reaction to the accounting problem on the part of the government. Members of the House will recall that on January 29 the Minister of National Revenue announced that CCRA had identified a problem in tax accounting that resulted in overpayments to six provinces under the Tax Collection Agreements.
I cannot emphasize too strongly that the problem does not affect taxes paid by individuals or businesses. As a result of the accounting problem the Government of Canada over a period of more than 25 years overpaid some provincial governments under the Tax Collection Agreements it has with the provinces. The only significantly affected provinces are Alberta, British Columbia, Manitoba and Ontario.
The accounting problem was detected by CCRA staff in the course of working on the modernization and computerization of one of CCRA's accounting processes. The overpayments to the provinces are the result of a problem in accounting for provincial capital gains refunds of mutual fund trusts.
As soon as the agency's internal review indicated that a problem existed the auditor general was immediately contacted. Every effort has been made to ensure as open and transparent an investigation as possible while ensuring no individual taxpayer information is released. We have respected confidentiality. The government took immediate action to ensure the overpayments would not be continued.
As members know, the auditor general has studied the CCRA accounts to confirm the scope of the problem. Her report was received earlier in the week and was promptly made available to the public. In her report the auditor general gave complete assurances that there had been $2.5 billion in overpayments in the period from 1996 to 1999. She gave a partial assurance that over $800 million had been overpaid in the period from 1993 to 1996. In the spirit of accountability and transparency the reports were released to the provinces and the public as soon as they were received. The auditor general also confirmed that the CCRA had made changes to its accounting practices applicable to mutual fund trust capital gains refunds to avoid a similar omission in the future.
Members should realize that the problem was not simple to detect. It arose with respect to the capital gains realized by mutual fund trusts. Mutual funds are a type of collective investment vehicle which allow Canadians a simple way of investing indirectly in a broader range of stocks and bonds in a number of different markets. The funds are essentially approved investments.
The problem happened like this: When a mutual fund sells one of its investments and makes a profit it has a capital gain and must therefore pay a capital gains tax. When the value of the investment is realized by an investor in the trust, for example when an investor sells his or her share in the trust, the investor realizes a capital gain and must pay tax on the capital gain.
However that is two capital gains taxes on the same profit. The basic principle of capital gains is that tax should not be paid twice on the same transaction. Therefore when the investor pays the tax on the capital gains the CCRA refunds to the trust the capital gains it had paid.
The problem arose because the provinces have capital gains taxes that mirror those of the Government of Canada. The CCRA was collecting the entire tax on the capital gain from both the trusts and the investors, including both federal and provincial shares, and paying the provincial share to the provinces. This is where the error occurred. The provincial portion of the capital gains refund for mutual fund trusts was being deducted from federal revenues rather than provincial ones. In short, the provinces ended up getting more tax revenues on the capital gains of mutual fund trusts than they should have, while the Government of Canada ended up getting less than its share.
As members can understand, this was not easy to detect. In her statement of January 29 the Auditor General of Canada said controls and reviews by CCRA and the Department of Finance did not reveal a problem, nor did their audit work. The problem was only discovered when CCRA automated the tax filing process for mutual fund trusts.
Although the problem was detected in the course of computerizing the accounting processes, members should not assume CCRA does not rely extensively on automated systems already. The agency has one of the largest and most sophisticated information technology outfits in all of Canada. Its expertise is recognized worldwide. The CCRA continues to work full time to modernize its processes so it can provide increasingly higher levels of services to Canadians and Canadian businesses. Our tax administration is truly leading edge.
However the CCRA does not work in isolation in its modernization process. It is consulting with large and small businesses and other interested parties in determining the direction its modernization efforts should take over the next 10 years. The process which CCRA calls Future Directions will ensure that, particularly for business, the computer and information systems it develops will be consistent with those being developed by the private sector.
By making every effort to ensure the systems under development will be compatible and client friendly, CCRA is demonstrating its commitment to better client service now and in the future. The Minister of National Revenue and the management of CCRA should be saluted for their openness and transparency in ensuring everyone knew they had found a problem and that they were taking every step possible to resolve the issue.
For that reason I believe our government will be able to maintain the spirit of co-operation and transparency, and to find an appropriate solution to the problems by working with the provincial governments affected.
I cannot support the motion presented by the member today because we need to explore all our options.