FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, May 29, 2000

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.

As we all know, the order of the day is Bill C-25, an act to amend the Income Tax Act, the Excise Tax Act, and the Budget Implementation Act, 1999.

We have the pleasure to have with us today, from the Certified General Accountants' Association of Canada, Everett Colby, North American Forensics Accountants, Colby & Associates; and Dawn McGeachy, manager, public sector. We also have with us, from the Canadian Association of Insurance and Financial Advisors, Mr. Bill Strain, chair, taxation, Conference for Advanced Life Underwriting; and Ted Ballantyne, director, advanced tax policy, Conference for Advanced Life Underwriting.

Welcome.

As you know, you have five to seven minutes to make your introductory remarks; thereafter we'll engage in a question and answer session. We'll begin with Mr. Colby. Welcome.

Mr. Everett Colby (North American Forensics Accountants, Colby & Associates; Certified General Accountants' Association of Canada): Thank you, Mr. Chairman, members of the committee.

My name is Everett Colby and I'm a certified fraud examiner and a certified general accountant. I own a practice of public accounting with Colby & Associates in the forensic practice with North American Forensic Accountants. With me today is Dawn McGeachy, CGA, manager of the public sector with CGAA Canada. I'd like to thank you for having us appear before the committee today.

Before I detail our concerns, please allow me to put CGAA's activities and interests into perspective for you.

The Certified General Accountants' Association of Canada is a prominent, respected, Canadian, self-regulating professional body. We're responsible for the education, certification, and professional development of over 60,000 certified general accountants and CGA students in every constituency in our country. Our members provide accounting, tax, and related services to individuals, businesses of all sizes, especially small and medium-sized businesses. Others occupy financial, administrative, and policy positions in governments, financial institutions, and not-for-profit organizations. CGAA Canada is charged with ensuring that our members adhere to the highest standard of professional and ethical conduct. As you know, we also regularly appear before parliamentary committees to address public policy issues of concern to our membership and to provide our expertise to policy makers whenever it is appropriate.

Our comments today apply only to the civil penalty provisions of Bill C-25. These proposed new penalties would be applied to a person who knowingly, or in circumstances amounting to culpable conduct, was involved in any manner in making or participating in making a false statement or omission. This includes tax advisers and preparers.

Let me state from the outset that our members are supportive of the government's need to root out tax fraud and evasion; however, we have very serious concerns about how this process is applied and administered.

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Tax professionals who actually know of the deceitful nature of information provided by the taxpayer must face the consequences of that knowledge. However, knowledgeable professional accountants like CGAs often catch a client's misstatements. CGAs also ensure the timely filing of returns while at the same time advising on how to file honestly and ethically. But it must be understood that professionally accepted practices do not require accountants to verify that the information provided by clients during tax engagements is correct and complete.

In Canada—and I emphasize this—tax advisers are already subject to criminal prosecution for intentionally advising or assisting clients in making false or deceptive statements in documents provided to the Canada Customs and Revenue Agency. We must question why the government feels that current sanctions against giving faulty advice are inadequate. I'd also like to emphasize that we must also question why a person who is subject to the new civil penalty can still be subject to the criminal penalties for the same act. These penalties are over and above the disciplinary sanctions that are applied by our professional association.

While we recognize that officials have changed the term “gross negligence” to “culpable conduct”, and that the test based on culpable conduct is more reasonable, this change has resulted in additional concerns. The term, “indifference” in the proposed definition of culpable conduct is open-ended and needs its own definition. If professionals are to be held liable for indifference, then they should at least know what the term means in its legislative context. Officials have also informed us that these provisions are intended to address extreme situations of false tax claims. Although we support this objective, CGAs are of the view that the right of the taxpayer to receive independent advice and legally minimize their taxes must be protected and that the process of applying the legislation may lead to abuse and thus the deterioration of professional relationships.

If accountants must focus on avoiding the risk of these proposed penalties, it will damage the professional relationships with their clients. They will be forced to cross-examine clients on the accuracy of their information. In effect, accountants will become the tax enforcers. This has important implications. If accountants were forced by government regulation to examine and verify all information in statements provided, that is, to do substantial—and I mean substantial—additional due diligence before they compile the financial information, the cost of the required added workload to our clients and your taxpayers would be prohibitively high. Tax preparation fees could significantly increase for most Canadians.

We continue to hear from members that the risk of penalty under this bill could become too great for many professional tax preparers to continue to offer this kind of service to clients. This could either force individuals to prepare their own, often very complex, tax returns or open the door even further to non-professional and sometimes less than scrupulous tax preparers. This would certainly result in more tax returns containing errors, forcing the government's tax processing costs upwards and actually reducing total tax revenues collected.

We are aware that statements made by Minister of National Revenue Martin Cauchon in September 1999 indicated that a penalty would not be assessed against a tax professional until after a head office review had been completed. Under current proposals, an oversight committee would be comprised of individuals from the justice department, the finance department, and the Canada Customs and Revenue Agency. As it now stands, there is no consultation with any experts outside of the public service administration before a charge is made.

We respectfully suggest that a representative from each of the professional accounting bodies in Canada and the legal community also be included on this oversight committee. This would provide for representation from the CGA Association of Canada, the Canadian Institute of Chartered Accountants, and CMA Canada, as well as a representative from the Canadian Bar Association. We feel the delegates from these four bodies would provide meaningful balance and perspective as well as a wealth of knowledge and experience to the committee.

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We are concerned that tax advisers and others who may be subject to these penalties will have no real legal protection from potentially inappropriate behaviour by the Canada Customs and Revenue Agency. The possibility remains that overzealous CCRA auditors could use section 163 as a negotiating tool when reassessing a client. A field auditor may make the case to the tax preparer to allow the reassessment to stand without benefit of an objection or an appeal, while making the threat of applying the civil penalties against the accountant should they fight the reassessment, a purpose for which the section was neither designed nor intended.

I might add that we have already seen three or four of these situations occur where it has been stated that this would have been done had the legislation already been in place. At present there is no provision to police the police to ensure that abuses do not occur.

Another contentious issue is the wording contained within subsection 163.2(10). It should not refer to a “prescribed percentage”, but should actually state a percentage. The characterization of inappropriate conduct giving rise to penalties should be left to the legislature. If the Department of Finance and the Canada Customs and Revenue Agency are concerned that valuations are beyond acceptable norms, they should define the norms and be prepared to support them.

Further to this, we would like to see included within the legislation an accountability statement to the Canadian public on behalf of CCRA in reference to anyone who is vindicated in court of wrongful conviction of civil penalties. The mere accusation of culpable conduct or negligence could result in enormous legal fees, waste of time in discussions and in court, and potential professional ruin for accountants, regardless of whether or not a charge was substantiated.

How will a professional be able to fully recover the high cost of litigation or receive any monetary compensation for damages suffered? Awards for assessment of costs and sanctions against overzealous officials in order to deter unwarranted court action must be provided as a safeguard.

Because the proposed law does not provide any legal protection from abuses by the Canada Customs and Revenue Agency, will this legislation be applied to relatively minor situations, although the intent is only to apply it to extreme situations? Despite present assurances that this is not the intention, the powers are clearly there in this legislative proposal. Who knows what future policies may be? This deficiency must be addressed.

When this legislation becomes law, will it apply retroactively? If any action were taken under these provisions in the first year to 18 months, it would almost certainly have to apply to tax calculations made before the rules had been changed. Even if that is not the present intent, how can we be sure that retroactive application will not occur with the actual implementation of the bill? Clearly, there is nothing that stipulates that this would not be the case.

Finally, let us all remember that the Canadian tax system is based on voluntary compliance. This system works very well. Revenue Canada has itself demonstrated in its 1997 report, “Compliance: From Vision to Strategy”, that voluntary compliance increased from 85% in 1985 to 97% in 1995. Should we perhaps consider that we might be using a sledgehammer to kill a fly here?

Should we perhaps consider that application of this legislation might damage the positive relationship that Canadians view they now hold with the government? Is this in the public interest? Would our citizens be better served by taxpayers avoiding the services of professionals in their financial and tax planning or reporting simply because they can't afford to pay the cost?

Over the years, a cooperative relationship has developed between the private sector financial professionals and the tax collector. We hope this new legislation will not see that this relationship can no longer exist.

CGA Canada fully agrees that people who knowingly participate in fraudulent tax returns should be penalized. However, we believe the proposed legislation needs refinement before it is introduced.

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CGA Canada is prepared to work with officials to ensure that the implementation of this legislation and the development of guidelines for the administration of the penalty rules do not prevent advisers such as lawyers and accountants from discharging their professional duty of acting in the best interests of clients, subject to compliance with the law and the standards of professional conduct.

Mr. Chairman, on behalf of CGA Canada, I would like to thank you for your time here today, and I would be pleased to answer any questions the committee might have. Thank you.

The Chair: Thank you very much, Mr. Colby.

We will now hear from Mr. Strain. Welcome.

Mr. Bill Strain (Chair, Taxation, Conference for Advanced Life Underwriting (CALU), Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman. With me today is Ted Ballantyne, the director of advanced taxation for the Conference for Advanced Life Underwriting.

CALU, as the organization is known, is a conference of the Canadian Association of Insurance and Financial Advisors, whose 18,000 members offer comprehensive financial advice, products, and services, which include but are not restricted to traditional life and health insurance. CAIFA now welcomes as members all individuals who engage in activities related to the provision of financial services.

CAIFA formed CALU in 1991 to meet the needs of its members who specialize in the advanced applications of life insurance, including such areas as estate planning, business succession planning, employee benefits, and pensions. Many of the clients of CALU are owners of small and medium-sized Canadian businesses.

Together CAIFA and CALU help Canadians achieve financial security. Our members are in regular contact with millions of Canadians, determining their personal, family, and business needs. The nature of our members' contacts with these Canadians shapes to a large extent the comments and recommendations we make to this committee.

We certainly appreciate the opportunity to appear here today to express our views on the proposed civil penalties included in Bill C-25. As with Mr. Colby, our remarks are limited to the civil penalty issue today.

At the outset, let me say that CAIFA and CALU support the proposition that promoters and advisers who promote activities or provide tax-related advice that results in the making of false statements or omissions in tax returns should be held accountable for their actions. We therefore endorse the imposition of civil penalties as a deterrent to promoters of abusive tax shelters and advisers who may counsel abusive tax schemes and filing positions.

However, that's where we part company. CAIFA and CALU believe that the legislation as presently drafted is far too broad and may have many unintended consequences. Our recommendations in these areas are as follows.

In the first place, CAIFA's president, David Thibaudeau, wrote to the Minister of Finance, Mr. Martin, on March 28 with a couple of specific recommendations on the provisions in Bill C-25 relating to the good faith exemption and the lack of a statutory time limit on the imposition of penalties. For your information, we have enclosed copies of our letter and the minister's response to that.

We believe that legislation that imposes significant penalties should be carefully drafted so that it targets only those to whom the penalties are intended to apply. The provisions of Bill C-25, however, cast an extraordinarily large net and could conceivably apply to just about anybody in a wide range of circumstances far beyond the realm of abusive tax shelters.

We've included in our submission here a couple of examples to demonstrate just how far the legislation could go. I'd just like to run through those quickly with you now.

My first example concerns Mary, whose parents retired to Bermuda a couple of years ago. Mary has now had a baby and her parents have come up to spend a lot of time with the family. They've been here for a little over six months. Because they've been in Canada for over six months, Mary's parents are deemed to be resident in Canada and would be required to pay Canadian tax on their worldwide income for the 2000 taxation year. Mary knows this, and has discussed the situation with them. However, Mary's father has told her in no uncertain terms that he has no intention of filing a Canadian tax return for the year 2000 after he goes back to Bermuda.

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The way the legislation is presently drafted, if Mary agrees with her father, or doesn't attempt to dissuade her father from not filing a Canadian return, she could be liable for the imposition of a penalty of up to 50% of the tax that her parents otherwise would have had to pay.

The second example we have here concerns Tom. Tom has a home renovation business. A customer has asked Tom to send the invoice for the work done on the customer's home to the customer's private company. The customer has explained to Tom that this would allow him to get a tax deduction for the renovation costs done on his own personal residence. If Tom agrees to that request, Tom could be liable for a penalty of 50% of the tax the company might save from claiming the renovation cost as a deduction for a business expense.

The irony here is that Tom could be exposed to the penalty whether or not the customer's company ever claims the deduction, because the legislation talks about a false statement that an individual could use for the purposes of filing tax.

We also believe that the legislation as presently drafted creates somewhat of a double standard. Advisers such as lawyers and accountants who charge clients on a fee-for-service basis will not be considered to have acted in circumstances amounting to culpable conduct solely because they relied in good faith on information provided to them by their clients or on their clients' behalf. However, this statutory defence of good-faith reliance is not available to advisers engaged in what's referred to in the legislation as “excluded activities”. Excluded activities are defined to include “accepting consideration in respect of the promotion or sale of an arrangement”.

Here again, we set out an example that really addresses the nature of our concerns with this particular provision. I've outlined for you a situation where we have an accountant, a lawyer, and an insurance professional who have been engaged as a team of advisers to develop and implement a comprehensive estate plan for their client. The accountant and the lawyer charge the client fees in the usual fashion, on an hourly basis. The insurance professional, on the other hand, is compensated by commissions earned on the sale of insurance or other financial products that are used in connection with the implementation of that estate plan.

As the legislation is now drafted, the accountant and the lawyer will be entitled to rely in good faith on information provided to them by the client or on behalf of the client by the other advisers. However, because the insurance professional receives commissions, he will be considered to be engaged in excluded activity and will not be permitted that good-faith-reliance defence. The insurance professional therefore will be forced to conduct extensive due diligence on all information that has been provided by the client or by the other advisers on the client's behalf in order to ensure that information doesn't contain any false statement that could expose the insurance individual to penalties.

To our way of thinking, there is no justification for imposing a higher standard of care on a professional adviser simply because that adviser is compensated by commissions earned on the sale of financial products rather than by fees. CAIFA and CALU therefore recommend that Bill C-25 be amended by extending the good-faith-reliance defence to insurance and financial advisers who are engaged in excluded activities.

This situation is particularly troubling for the insurance advisers because of the so-called “reverse onus” with regard to valuation matters. Where we have a valuation of a property or a service that falls outside of a prescribed range, which will be determined by regulation, plus or minus some percentage, and the value of the particular product or service is found to be outside of that range, the valuation is deemed to be a false statement. That shifts the onus from the revenue authorities to the adviser to prove that the valuation was reasonable, that it was made in good faith, and it was not based on unreasonable or misleading assumptions.

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In the circumstances we described in our case involving the lawyer, the accountant, and the insurance professional, if the valuation of the individual's company, for example, happened to fall outside of that range, the insurance person would not have been entitled to the good-faith-reliance test. Consequently, to avoid the imposition of the civil penalty, the insurance person would be saddled with the burden of proving the valuation was reasonable, even though the insurance professional would have had no involvement in the valuation process.

In conclusion, Mr. Chairman, CAIFA and CALU understand and appreciate the underlying principle on which the 1999 federal budget proposals concerning civil penalties are based. However, as I think we have demonstrated in the examples, we firmly believe that the legislation as currently drafted is far too broad and unnecessarily places certain advisers and taxpayers at risk, while allowing accounting professionals and legal professionals protection under that good-faith defence.

The federal government has an obligation to draft legislation in such a way as to ensure that its effects and consequences are as precise as possible and that it's written in such a way as not to extend or allow unintended and unnecessary consequences for those providing much-needed services to Canadian taxpayers and to the taxpayers themselves. The legislation in the current form does not meet this test.

Thank you very much for your attention.

The Chair: Thank you, Mr. Strain.

We'll now proceed to questions and answers. Mr. Forseth.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.

Welcome.

I think what we're discussing is perhaps a matter of balance. I take particular note of this last paragraph, beginning “The federal government has an obligation to draft legislation...”. Obviously you're pointing out that you have a difficult time in absorbing or taking into account the relative balance.

Why would the government want to do this? Is there some real problem we're trying to address? And if you acknowledge that, perhaps you might suggest more specifically, to add substance to that paragraph, how they should try to address that problem. One of the subsets of what I'm hearing is that you're not saying that this whole section should just be deleted. You're talking about some fine-tuning or refinements here. So perhaps you could address that part of the matter of this whole larger issue of balance—that you're I suppose either assuming or whatever that the government's going to proceed in this area, so you're looking for some fine-tuning. Why would the government be getting involved in this area? Perhaps you can address your comments more specifically to what it is we're really trying to get at here.

Mr. Bill Strain: I agree that it's clearly a question of balance. As we said at the outset, we don't object in principle to what the government is attempting to do here. If we go back to the genesis for these provisions, which I believe came from recommendations from the Auditor General and from the public accounts committee and the technical committee on business taxation, all proposed that there should be included in the legislation civil penalties for those who promote abusive tax shelters. But I think what we see here is the government taking those recommendations but then really saying it's kind of tough to draft legislation that specifically targets, so why don't we just pass an omnibus kind of a provision that will let the Canada Customs and Revenue Agency use its administrative powers to go after those they think are really abusing the system.

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Our point here is that we don't believe that's what should be done. What we believe is if there is to be the imposition of penalties, make those penalties very specific to those groups they're intended to apply to.

In this context, for example, it seems to me that the government should be targeting those who are promoting abusive tax shelters or promoting abusive tax schemes as part of their normal business operations. They are individuals or groups who are doing this for compensation, for consideration.

There is no restriction in this legislation to the imposition of penalties only on those who are generating consideration as a result of those activities. For example, as Mr. Colby mentioned, it's the sledgehammer to kill a fly type of approach, and we feel that the legislation should be narrowed so that it clearly focuses only on those who have been targeted.

Mr. Paul Forseth: Yes, Mr. Colby.

Mr. Everett Colby: Mr. Forseth, if I may add a few comments, there are already provisions within the Income Tax Act to go after people for the filing of false statements and the promotion of abusive tax shelters and so forth. There are criminal sanctions in place.

In discussions I have had—I work in public practice and have discussions with people in the appeals directorate and in other areas of Revenue Canada—the feeling is that it takes them too long to get at the person through criminal proceedings. So the civil proceedings actually help them speed up the process. That, in my opinion, was one of the primary intents in bringing about a civil type of penalty, where they could go after monetary recovery upfront, as opposed to criminal prosecution where they might have to wait until the end of the proceedings to get any kind of monetary result.

Revenue Canada itself—and I highlight this little factor here, in its 1997 report that I mentioned, “Compliance: From Vision to Strategy”—did their own study, and in 1994 a survey of compliance in the Toronto and Ottawa markets showed that out of all the tax preparers and taxpayers, less than 40 tax preparers and less than 12,000 taxpayers, representing less than 1% of all tax returns filed in those cities, were identified as including false statements.

So the emphasis on the false statement and the area where there is some judgment that is going to be displayed on the part of Revenue Canada, outside of the abusive tax structure-type schemes—we're talking about the areas where judgment is going to be exerted by the supposed oversight committee as to what would constitute knowingly being a party to a false statement—is not as big a problem as the out and out fraudulent activities that occur.

That brings us back to that comment of using a sledgehammer to kill a fly. They have drafted a piece of legislation that they would like to see. It's in their best interests to have as wide a sweeping power as they can use at their discretion to enforce penalties that they can extract right away. But if you want to fight it, do you know who you fight it with? The same person who levied the penalty.

Mr. Paul Forseth: I really liked the comment, how do we police the police? So your suggestion is, to provide appropriate balance is—

Mr. Everett Colby: In my report, suggesting that on this oversight committee we have members of the professional accounting association and bar association so they can give insight and perspective and perhaps.... I don't know if this committee is going to sit around and vote on whether we should do it in this situation or not, but presumably they're going to review the facts and make a decision on whether or not this constitutes the type of activity and behaviour that would warrant the penalties.

It would be beneficial, until they've perhaps garnered the judgment in that area, to have this outside influence that may have already been involved in areas such as that, to provide input and perhaps have some sort of a vote on this committee as to whether the penalty should be imposed.

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Mr. Paul Forseth: It's interesting that a lot of the general sentiments you're expressing about the concern for perverse effects I could also apply to the hapless taxpayer himself who has to deal with the CCRA. But I will end my comments there and let....

The Chair: Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Paul, I think you raise a very interesting point around the observation of policing the police, because as you know, I think the legislation that created the CCRA is no longer accountable to Parliament. It is accountable to the Minister of National Revenue.

Mr. Everett Colby: Barely.

Mr. Roger Gallaway: Barely, yes—when he wishes it, by issuing a direction to the agency.

I think you raise very interesting arguments. What you're in effect saying, I think—and, Mr. Strain, you've raised the same sorts of concerns—is that if what I would characterize as an allegation is made by someone at the CCRA against a member of your profession, there is no way out. You have to sit and fight it. One of the basic rules of our justice system is that you can meet and answer the accusations or the allegations being made against you. I take it, then, that one of your concerns—and I think it's a legitimate concern—is that the methodology or the structure being built around this to answer these allegations is, at best, vague and uncertain. Is that correct?

Mr. Everett Colby: To a certain extent, yes.

Mr. Roger Gallaway: Mr. Strain, if I could move to some of the examples you used—because I'm trying to wrap my mind around the first one, which is the case of the daughter—I'm assuming that the daughter is not a tax preparer or a tax expert, or are you making the assumption that she's a member of your association?

Mr. Bill Strain: No, and that's where we think the legislation is really very broad. Let me show you how we have arrived at that conclusion. I'm reading from the legislation and it says “Every person”—it doesn't mean an adviser, necessarily—“who makes, participates in, assents to or acquiesces in the making of a false statement on behalf of another person”. Well, Mary, arguably, has acquiesced in her father failing to file a return. And the CCRA would have the power under this legislation to impose a penalty.

Mr. Roger Gallaway: Okay. I'm certain that people in the minister's department and at CCRA would say that that's a bit of a stretch, that that defies the test of reasonableness.

Mr. Bill Strain: I agree. But what we're giving the legislators, then, is the broadest possible power to apply, in their discretion—

Mr. Roger Gallaway: All right. Let me move on to the second example you use, which is the home renovation, I believe.

Let's assume in that case, the client for the renovator, whom you say has a private company...let's assume the renovator is going in and installing a home office, which, it could be argued, is a necessary part, and that the CCRA then determines, post facto, that it's not an allowable expense, although everybody along the chain of command, if I can put it that way, believed it to be the case....

Perhaps I'll implicate Mr. Colby's group. In good faith everybody believed it was an allowable expense, that putting in this home office would be a business expense. Then CCRA turns around and says “No, sorry, not the case”. Could the home renovator in this case be swept into that web, if that were the case?

Mr. Bill Strain: I think in that instance you're describing, the Revenue authorities would have to demonstrate that the home renovator believed, or that it was reasonable to believe, that charging the company was simply a way of getting a personal expense deducted. If he was putting in a home office and there was reason to believe that the home office may have been a reasonable and deductible business expense, I think the home renovator would have a good defence against that.

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What I was trying to point out here was an obvious situation where the guy was putting in a swimming pool and says “Bill my company” and tells the home renovator “because I can get a tax deduction for it.” The guy who's done the renovation work or put in the swimming pool knows that if he refuses to do that, he's probably not going to get paid for the work he's done, and yet he's exposed to the penalty.

Mr. Roger Gallaway: I think you and I could both agree that at each end of the spectrum there's probably black and white, but it's when we get into the centre—

Mr. Bill Strain: Absolutely.

Mr. Roger Gallaway: —we're now relying upon administrative discretion at CCRA.

Let me move on to the valuation example you've given at paragraph 4. If one of your members engages a certified appraiser—say a CRA, whatever—and that person gives you a number on a property, let's say, for V-day at today's fair market value and for whatever reason it's out to lunch—let's be frank about it, they're way off base—are you suggesting that you, a member of your group, could get caught in that because this person, for whatever reason, was off base?

Mr. Bill Strain: That is what the legislation seems to provide. Basically, it says in here that where a valuation turns out to be—let's say the safe harbour percentage is 20%—plus or minus 20%, so the real estate appraisal value is twice what is ultimately determined to be the fair market value, there's a presumption then that the statement was false and amounted to culpable conduct on the part of those who participated in the plan—the valuator, the accountant, the lawyer, the insurance person involved in that plan. It's then up to those individuals to come back and show that the valuation was in good faith and was reasonable in the circumstances. If they can't demonstrate that, then the penalty applies.

Mr. Roger Gallaway: That gets into this whole realm of...in particular with respect to real estate. Many of us have read examples regarding the Ontario Realty Corporation, where property—and I'm certain they come back to that with a truckload of appraisals—sold for x dollars and a month later is selling for xx dollars. Who is right and who is wrong, I don't know, especially in a volatile and what is referred to as a “hot” market.

The city of Ottawa is an example right now. In certain parts, out in Gloucester and other areas, the municipality can't keep up with the infrastructure. What do you do in those cases? Where are you?

Mr. Bill Strain: I frankly don't know, and I think that's the problem with this approach. It is to say that, by definition, if you're off the number that's finally adjudicated by a certain percentage, all of a sudden it's deemed to be wrong, it's deemed to be a false statement, and the onus is then back on the advisers to suggest otherwise.

You mentioned real estate. You talked about the dot-com phenomenon in private companies now. Valuations can be off by extreme amounts. I think the issue should go to the Revenue authorities having to demonstrate that there was an intent to mislead, there was an intent to be false, there was an intent to be fraudulent in order to—

Mr. Roger Gallaway: If you're talking about intent, then you are now entering into the realm of criminal law as opposed to civil penalties.

Mr. Everett Colby: Mr. Gallaway, that's what these rules are doing. It is allowing them to apply criminal procedures in a swifter manner, so you should have those same elements of intent.

Mr. Roger Gallaway: I thank you for getting that on the record, Mr. Colby.

Mr. Colby, in the last paragraph of your submission, you have made a recommendation or observation that surprises me in one sense because you offer to work with CCRA to draw regulations to ensure the legislation is neither administratively frustrated nor abused to the detriment of professional relationships. Yet one of the disturbing trends in government today, I think, is what I call legislation by press release and regulation. That is to say, Parliament is giving away its prerogative, its normal powers and rights, to agencies. So Parliament gave power away, if I can put it in its rawest sense, to the Canada Customs and Revenue Agency and Parliament does not retain the right to make regulation—that rests with the cabinet or the governor in council. Yet you're offering to go down that road to draft regulations around this legislation.

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As you know, regulations come and go. They could change. They're not subject to the scrutiny of Parliament. They come and go with the winds of ministers and cabinets. I don't want to make it sound arbitrary, but there are profound shifts in philosophies and in trends, particularly in tax collection. So let me ask you: why would you want to get into the regulatory process? Why wouldn't you recommend a more profound change in the legislation as opposed to a shift at the regulatory level?

Mr. Everett Colby: Quite honestly, with the ability of CCRA to remove itself from the purview of this fine government, we want to get in there to protect ourselves in any way we can, knowing that there may be limited ability to modify this legislation in ways in which we would actually prefer it to be modified. So if we can't get everything we want, we would like to at least get something. This goes toward having us on that oversight committee, where we're at least one of the representatives.

I would like to bring it full circle to a comment you made earlier in which you talked about fairness and about CCRA now, for all intents and purposes, being independent. I would be happy, over dinner one day, to discuss my concerns over that with you, but when we talk about fair and impartial, as the revenue and taxing authority should be, I have a concern of being assessed a penalty by them and then having to object to it before the same person.

Some of the questions you asked Mr. Strain, the auditor and the breadth of scope.... A specific example I am aware of was a tax return preparer in a small town in northern Ontario who had been preparing the tax returns of the same client for the last 10 years. The company this person worked for provided a taxable automobile benefit. In this particular year, 1998, the company, for whatever reason, neglected to include the benefit on the gentleman's T-4. The auditor came in, reassessed the taxpayer, and told the preparer “You're lucky this section isn't in place, because you should have known that the company made a mistake and not allowed him to file. Therefore I'm going to assess you a minimum $1,000 penalty. Even though you charged him $40 to do his tax return and you have no vested interest in the extra refund he may have received, it's....”

This legislation is going to be coming to the oversight committee from people out in the field, because they will be the ones with the firsthand knowledge—

Mr. Roger Gallaway: Excuse me. I don't mean to interrupt, but are you suggesting to me that if you have an individual say to you, “Prepare my tax return and, oh, by the way, here's my T-4 slip and there's a taxable benefit that would be a car or car allowance, and traditionally it's been there but in this particular year it's not”, that the CCRA would impute that knowledge to the tax preparer or require that the tax preparer show that the question was put to the client, “Why is it different this year”? In other words, you cannot rely on a T-4 slip.

Mr. Everett Colby: That's what we are led to believe at this point. The way the legislation is worded, yes. That's why we are here making these presentations. We have no objections to the CCRA or the federal government imposing penalties on people who should be penalized—the fraudulent tax promotion schemes, people counselling tax evasion, and so forth. I'm sorry to say—and thankfully none of you are members of CCRA—that they are not an organization that I have come to trust blindly for the last 10 years, and this legislation that is going to go into place, in one form or another, is giving them a very big stick.

• 1630

The Chair: Is there anyone you trust blindly, sir?

Mr. Everett Colby: My wife.

Some hon. members: Oh, oh!

Mr. Everett Colby: And my MP.

The Chair: I just wanted to put it on the record.

Mr. Everett Colby: Now I'll have to tell her where to go to read that.

The Chair: Mr. Gallaway.

Mr. Roger Gallaway: In the other observation you made, you said that what you refer to as “overzealous CCRA auditors” could “use section 163 as a negotiating tool when reassessing a client”.

Do you really think they would do that?

Voices: Oh, oh!

Mr. Everett Colby: Do you want me to answer that?

Mr. Roger Gallaway: Yes, that's a question to you.

Mr. Everett Colby: I can best answer it by an example that happened to me. I had an auditor in Ottawa who was actually auditing a home renovation contractor. This gentleman lived in a very nice home, a home that most of us would think was beyond his means. It had been a gift from a wealthy relative. The auditor didn't check that, and he reassessed the man on the basis of a gut feeling that this guy must be doing work and not reporting the money.

When this was all over and done with, he said, and I quote it to you, “If I'm right and that penalty is in place, I would have assessed you because you had to know, knowing this guy lives in that house, that he wasn't reporting all of his money.”

So if you take the flip side of that coin, here's a client who comes to me—I happen to practise in the area of appeals and objections, so not every client is a client that I've known for a while—because the auditor has reassessed them. Remember that auditors are judged on their success rate on these audits, so there's no question that they're a little overzealous.

So he says to me, “Well, I'll tell you what. I won't assess you a penalty—because I think I could—if you don't object to this person's reassessment.” Now, what am I going to do? I stand to be sued by the client if I don't act in their best interests or I stand to be civilly penalized by the auditor if I do act in my client's best interests. What choice do I make? Either way I'm acting almost unethically. I put my reputation, my designation, everything I've ever worked for, on the line because of this.

Mr. Roger Gallaway: My final question is this, then. The criminal penalties have existed for donkey's years, for a long time. What are we looking at in terms of the scope of this problem? Can you give us some information on how many charges laid each year fall under the purview of either your association or CALU?

Mr. Everett Colby: Do you mean in terms of criminal charges?

Mr. Roger Gallaway: Yes, criminal, under the present regime.

Mr. Everett Colby: The only thing I have an actual statistic for is, as I quoted earlier, that less than 40 tax preparers were in any way found to have provided false statements on the tax returns.

Mr. Roger Gallaway: At the criminal level.

Mr. Everett Colby: Well, I would interpret the false statements, which are typically along fraudulent lines, to include “at the criminal level”.

My knowledge and discussions that I have had with auditors that I do trust—but not blindly—is that their real main focus here was a lot of these abusive tax shelters, where we now see the clients having lost all their money because the guy took the money and put it in other projects or whatever. They have a very legitimate intent with what they want to do, because under the criminal sanctions they have to wait before they can try to freeze the guy's money.

Under the civil sanctions, they can get Mareva or other injunctions to freeze the money. I understand that; I agree with it. It is not the vast majority, I assure you, of tax professionals or insurance underwriters or financial planners.... Or, as is aptly pointed out, every other individual, including yourself, is covered by this legislation. There is no limit.

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So literally, the daughter is just as liable as me as a tax preparer if CCRA, in their infinite wisdom, decide this is something she should have known and should have prevented. Who's to stop them from just wielding this power without any recourse?

Mr. Roger Gallaway: My final question, then, is, you have made a recommendation or there's been some suggestion—I don't know who made the recommendation—that there be a head office review of each of these...?

Mr. Everett Colby: No. It's our understanding that CCRA, because of the concerns that have been raised over the administrative application of this penalty, has said they're not going to, at this time, just allow our auditors to assess the penalty. They're going to have a central oversight committee to which application will be made by the auditor for the assessment of that.

We would like representation on that committee, for the reasons I outlined above. Although we did not put it in our brief, we'd like to see that as a permanent committee. There's nothing to say they're going to keep that for longer than three or four years. And then what happens? We have permanent—

Mr. Roger Gallaway: I don't answer questions here, okay?

Voices: Oh, oh!

The Chair: You don't have another final, final, final question?

Mr. Roger Gallaway: No. That was a final, final one.

The Chair: Mr. Forseth.

Mr. Paul Forseth: Maybe we can talk about the whole issue of due process. When we get into the situation of someone who gets pretty upset about a penalty that is imposed, where does that person go to get conflict resolution? How is this thing ameliorated and worked out? Perhaps you can comment on that.

Also, I'm just wondering, certainly looking at the relevant clauses, one of the fine points you talked about here was the permanence of the committee.... As organizations, you do have resources. Have you sought some independent legal advice about some specific wording that would perhaps, in a legislative drafting context, actually have been the kind of wording that you would have been prepared to live with?

Sometimes we can keep going round and round, and you can say, well, this isn't good enough, that isn't good enough.... But you short-circuit the whole process by getting some independent advice and actually being able to say that this is the paragraph you prefer and this is what you could live with. Have you done any of that?

Mr. Everett Colby: To answer your questions in order, when a civil penalty under this section is levied, it becomes a tax assessment, just like a normal reassessment. Therefore, your first place to go argue it is the appeals directorate of the same organization that levied the penalty. If you are unhappy with the result at the appeal stage, your next stage is the Tax Court of Canada, which would mean you would then at least be getting into a somewhat more impartial judicial process.

So you must first go through the appeal stage, just like you would any other tax assessment. Then you have Tax Court, then the Federal Court of Appeal, and then, who knows? Maybe this will be tested all the way up to the Supreme Court in some circumstance, but this would be the general route.

As for the wording, we have, in certain circumstances, such as for the word “indifference” under “culpable conduct”, asked that there be a more legal definition of this term so that we can better gauge what it is we're going to be responsible for. We have not, at this point, gotten a legal opinion regarding the oversight committee because this is something we have been “told” is going to be put in place; it is not in legislation that this committee is going to be in place and is going to act that way. This was more of a conciliation, like, “Okay, we'll do this just because you have these types of concerns.”

If that is something that we could make a suggestion to have legislated, then I would ask that you allow us whatever amount of time—a few days, maybe—to submit in writing to you proposed wording to make that committee permanent, with representatives of ourselves and the other professions that I mentioned as members. We'd be happy to do that.

Mr. Paul Forseth: Certainly if that's going to be done, it would have to be done very quickly.

Mr. Everett Colby: I understand.

Mr. Paul Forseth: You described how a person gets into a process of disagreeing with the penalty imposed. Do you have a suggestion for another way or for some additional intermediary step? Or is that basically okay?

Mr. Everett Colby: Well, if you were to agree with the viability of having members of the profession, or at least—and no offence against the insurance advisers—the profession that right now appears to be the most affected, let us say, being part of the oversight committee on the imposition of the penalty, then perhaps there should be a special carve-out of appeals officers that is a committee-based appeal process, much like the fairness committee, except that other members of the profession or the general public could also be members of that committee, so that there is a more impartial, first-step objection ability where it's not the person levying the penalty who is making the decision on whether it's valid.

• 1640

Mr. Paul Forseth: Yes. I certainly agree with the general concept to drive these things to the lower informal level, because of course going to the Tax Court of Canada is just.... Basically people would just say it's game over.

A voice: Yes.

Mr. Paul Forseth: Yes.

The Chair: Do you have any more questions?

Mr. Paul Forseth: It just left me.

The Chair: It left you? Is it coming back?

Mr. Paul Forseth: I just would say indeed maybe you could take up the whole issue of alternate drafting. Maybe you don't have to do a formal legal purchase, but perhaps look at the exact wording of the clauses and come up with a preferred wording, especially if you can get agreement amongst yourselves, on behalf of the association, saying this is the agreement you can at least live with.

I do want to just make sure, on the record, that you are basically in agreement with the concept, the principle, of the government going in this direction, this so-called half-measure or administrative procedure. I've heard from you today that you're somewhat in agreement with the concept but that you really are very concerned about the fine-tuning.

Mr. Everett Colby: Sir, we are in absolute agreement that those who commit fraud or are involved with fraudulent activities involving tax measures should be penalized. Our own disciplinary committee will probably act even more swiftly at ousting these people from the profession. But the breadth and scope of this legislation can be applied without any regard for these other factors, so that it's going to go beyond just that. If that is the intent, then let's narrow the scope. If they want the breadth, then give us some safeguards to ensure the intent behind this legislation is what is actually carried out with the legislation.

Thank you.

Mr. Paul Forseth: So then is it really necessary for the government to be going into this whole room, or should they just forget the idea?

Mr. Everett Colby: Absolutely you should go into the room, sir, because if we just leave it up to CCRA to do this and it just goes through and gets voted on, whose best interest are they looking out for?

Mr. Paul Forseth: But what I was saying was maybe the whole provision should not even be put into legislation. The government is moving forward into this area, expanding powers of CCRA. But you're somewhat accepting the government's move in that regard as maybe the inevitable. Maybe you should be screaming loudly that the government shouldn't be going there in the first place.

Mr. Everett Colby: We tried that. Not only us, but the lawyers, insurance, and most industries, when this was first tabled, were absolutely up in arms against this. But it quickly became apparent that in one form or another this legislation was going to proceed. So we have adjusted our positions and tried as best we can to let our positions be known on how we can live with this.

If you want to scrap this, I'm in full support, absolutely.

Mr. Bill Strain: As are we.

Voices: Oh, oh!

Mr. Bill Strain: We get back to the point that we don't object in principle to the imposition of civil penalties on those who would promote abuse of tax schemes and shelters. But when you look at the wording that has come through in Bill C-25, it is so much broader than even the minister's description of it in the budget in 1999 as to be really putting a much, much bigger weapon in the hands of the CCRA than was, at least to my mind, ever intended.

When you go back and look at the reports from the Auditor General, the public accounts committee, and the technical committee on business taxation, you'll see they described a very narrow approach for civil penalties on those who promote abuse of tax shelters.

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Our strongest recommendation is narrow the scope and really identify those to whom the penalties are intended to apply. Then the administrative process within CCRA to draft guidelines on how the administrative process should work is fine, and we would also like a seat at that table to discuss how that should be done. But the first task is to get the focus narrowed to where it really is intended to apply.

The Chair: I don't think we'll be scrapping anything, so I don't want you to go home and get a wrong impression or start feeling too good, but we will certainly try to make amendments to improve this piece of legislation.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

I'm sorry for coming in late. I did not even hear the presentation, but I do have some experience being a businessman for most of my life. I just wonder sometimes if we shouldn't totally eliminate the audits. It should be all on one's presentation of good faith.

But on the other hand, I have helped many individuals prepare tax returns, and I also remember from years back saying if everyone in Canada were audited, every individual who prepared tax returns or any taxpayer, surely we would find a fault in every taxpayer, because like it or not, everybody's trying to avoid in some way paying taxes. This was a common thing. As you progressed more in business, you'd try to get someone more legitimate, someone with more understanding of the act. But always the onus and the responsibility were on whoever signed that piece of paper.

Tell me, if that perception from before continues, how do we eliminate or weed out that old mentality that everyone is not really able to prepare a tax return that is fundamentally right or just? I think the perception was aided by individuals promoting fraud within the tax file. How can we, within the legislation, if there are no checks and balances, try to eliminate some of this?

Mr. Everett Colby: Mr. Pillitteri, it's a pleasure to see you once again. I was here before you in the money-laundering legislation and in the fraud area.

There are already sanctions present in the Income Tax Act to, as you say, try to inhibit, although we'll never be able to fully weed out those who want to cheat. They will never go away. We cannot possibly enact a piece of legislation that is going to stop that.

One can only hope that if we make the Income Tax Act easier to comply with, more people will comply. If you look back at people who talk about hiding this and hiding that, it gets bigger as the Income Tax Act becomes more complex. Maybe we should be looking at a simple tax, with one line: “What did you earn? Send it in.”

Voices: Oh, oh!

Mr. Everett Colby: I have no hopes of doing that, because my profession disappears, but when you talk about honesty in the system....

I'm not sure if you had come in yet, but I mentioned earlier to the esteemed committee members that in 1994 Revenue Canada did a survey of compliance. Remember, we're a voluntary compliance system. The 1997 report put out by Revenue Canada called Compliance: From Vision to Strategy showed that in 1994 Revenue Canada in Toronto and in Ottawa showed that only 40 tax preparers and fewer than 12,000 taxpayers had false statements on their tax returns. Theoretically that's a negligible percentage when you consider the millions of taxpayers who are in just those two cities. So I would hazard to say to you that people are so fearful of Revenue Canada already that they are voluntarily complying more.

We have our own codes of ethics that we must live by as professionals, and each professional association has these standards already in place. I'm already judged by my peers if I do something wrong.

• 1650

I could literally lose everything for a $300 tax return. Why would I do it? I'll just stop doing the tax returns. So now the people are going to do them themselves. Do you think that's going to make them stop putting false information if that's what they want to do? No, it won't.

To answer your question succinctly, we're never going to get rid of or be able to prevent those who want to defraud the government. This penalty is not going to do it.

The Chair: Do you think it's a deterrent?

Mr. Everett Colby: If I can make it analogous to the foreign reporting rules that were put in place a few years ago, it's going to make honest people more honest. If somebody doesn't want to report, do you really think this is suddenly going to make them do it? Maybe so. If theoretically we want to have faith in people, okay, but I see it first-hand, and those who want to commit tax evasion or operate fraudulent tax schemes are going to find other ways to do it. That's what's going to happen.

The Chair: But my question was, do you think this is a deterrent?

Mr. Everett Colby: No, I don't. I think what it's going to be is a monetary penalty against good, honest, hardworking financial planners, accountants, lawyers, and tax advisers, who are no longer going to want to do the work for fear of the penalty. Tax promoters are still going to be out there doing it, just in a different form.

The Chair: Mr. Pillitteri.

Mr. Gary Pillitteri: Mr. Colby, I do understand that someone in a profession for $30 is not going to aid someone in falsifying how to fill out an income tax form. But when we get into higher ranges in tax savings, it's also known and said that sometimes it depends on the individual you hire in preparing your tax and that it's worth how much he is legitimately saving. Don't you think it is a deterrent for someone who has to think about what he is charging and that he could also be liable? Don't you think that is a deterrent?

Do you honestly believe that as a government, as a piece of legislation, that's trying to go to that innocent...? I realize that most of the time in investigating a tax return and so on, we always look at the legitimacy of saying, this is not a fraud in any case. I think this was sort of something that was missed. Are you trying to say that by the legislation the interpretation of Revenue Canada income tax people is going to change that concept? Do you think it is the intent of the penalty that will change the interpretation, or do you think they're going to look at it with a screen and say, everyone who has made a mistake is automatically guilty?

Mr. Everett Colby: I would like to believe that the stated intention of this legislation is what it would be limited to. However, because of my past experiences with Revenue Canada, the experiences of my colleagues who I have spoken with, with Revenue Canada, other bits of legislation that were supposed to be limited, such as GAAR, the general anti-avoidance rule, the foreign reporting rules, and all these special little fixes to try to be preventive measures, which haven't worked, I don't have the faith in Revenue Canada—and certainly not now that they are more independent of the government—that that is how it will be applied. The wording of this as it stands does not restrict them to that intention. If it did, I'm sure all of us at this table would have a lot less to say, because we don't have a problem with the intent of what they're trying to weed out. I just don't think this is the right way to go about doing it.

Modify the criminal statute contained under the act that allows them to freeze the money upfront. I don't think you were here when it was mentioned that they already have provisions to go after these people, but they can't get reimbursement of the money, which is the only way you're going to affect fraudsters upfront. They have to go through a criminal procedure. Let them get the freezing orders on the funds upfront under the criminal sanctions. Then you don't inadvertently put in place legislation that could be misused.

• 1655

I'm not saying for sure it's going to be. But we're all going to leave this room today. Ten years from now this legislation is still going to be here, and who knows where we're all going to be? This is going to stay.

Mr. Gary Pillitteri: I have one final question, Mr. Chairman. Is the change in your mind because of the previous act or because it was in the hands of an agency, as it is known today?

Mr. Everett Colby: No. I just don't like the legislation the way it's written, no matter who is going to be carrying it out.

Mr. Gary Pillitteri: Thank you.

Mr. Everett Colby: You're welcome.

Mr. Paul Forseth: I'd just like to make an observation. That's why we have a Charter of Rights and Freedoms. That charter is there to limit the traditional behaviour of governments and bureaucracies against individuals. You've made the perfect case as to why we need an equivalent taxpayer bill of rights, which is something we have been promoting, to bring the bureaucracies within the realm of serving who they're supposed to serve. Who is serving whom is the issue, and the matter of balance.

That's all.

The Chair: Thank you, Mr. Forseth.

Mr. Gallaway.

Mr. Roger Gallaway: I have a final comment, following on what Mr. Forseth has said. It's fine to make the argument about the charter. However, the charter is not traditionally used in civil matters. The burden of proof in civil matters, as you know, is much less than it is in criminal matters. So it becomes less apparent as to where the line is as to culpability.

I'd like to know if you think there will be an evolution, if I can call it that—or perhaps it's more like a devolution—in your business whereby people will seek your advice and you may in fact give them a pro forma tax return and do the addition or whatever and charge them a fee for that service, and then your name never appears on it. In other words, you do everything except put your stamp on the tax return, wherever that line is, and as a result, you never come close to that tax return. Do you think that's a possibility in your profession?

Mr. Everett Colby: If I understand your question correctly, you're asking me if there is the possibility of my getting penalized under that.

Mr. Roger Gallaway: It's a way of avoiding this whole net.

Mr. Everett Colby: No, I don't. We have heard today from my esteemed colleagues about the insurance planners falling under the financial planning. One of the largest areas of my own practice is tax planning, which unfortunately is going to fall under this provision of planning. Therefore, I don't have the good-faith-reliance exclusion.

Let us say that today I give advice to this supposed client in a tax plan that is for all intents and purposes in compliance with the act or on the safe side of the grey area, which often many of these tax statutes are. Let's say that two years from now the act changes and what I had advised as being all right is no longer all right. If that taxpayer, who may not even be a client of mine any more, relies on that advice and follows that position, as this is worded I can be penalized, and that's pretty scary.

The Chair: Are there any further questions?

Mr. Roger Gallaway: No. Thanks.

The Chair: On behalf of the committee, I would like to thank you. You've certainly given us a lot to think about. We certainly want to make some amendments to this bill, and some of the points you raised are things we'll reflect on. Once again, thank you.

This meeting is adjourned.