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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Tuesday, May 30, 2000
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call this meeting to order and welcome everyone here this afternoon. As everyone knows, 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 representatives from the following organizations: the Tax Executives Institute, the Toronto Board of Trade, the Canadian Institute of Chartered Accountants.
We'll begin with Mr. Allinotte, chair of the Canadian income tax committee, Tax Executives Institute.
Mr. John Allinotte (Chair, Canadian Income Tax Committee, Tax Executives Institute): Mr. Chairman, Mr. Drew Glennie will make our verbal presentation to open.
The Chair: Welcome, Mr. Glennie.
Mr. J.A. Drew Glennie (General Manager, Tax and Insurance, Shell Canada Ltd.; Tax Executives Institute): Good afternoon. Thank you. It's nice to be here.
Although I'm the general manager of tax and insurance for Shell Canada, I'm here to represent the Tax Executives Institute, hereafter referred to as the TEI. I have about six minutes' worth of comments. As you know, I'm accompanied by John Allinotte, who is the director of corporate taxation for Dofasco Inc. and the chair of TEI's Canadian income tax committee, and by Jeff Rasmussen, who is TEI's tax counsel.
As you mentioned, we're here today to discuss the proposed provisions entitled “Misrepresentation of a Tax Matter by a Third Party”.
So you appreciate just what the TEI represents, TEI is the pre-eminent association of business tax executives across North America and Europe. We have 5,000 professionals. We manage the tax affairs of the leading 2,800 companies in Canada, the United States, and Europe. And we contend daily with the planning and compliance aspects of Canada's business and tax laws.
Canadians make up about 10% of TEI's membership. Our Canadian members belong to chapters in Calgary, Montreal, Toronto, and Vancouver. Our non-Canadian members, including those in Europe, work for companies with substantial activities in Canada, and the comments set forth here reflect the views of the institute as a whole, but more particularly those of the Canadian constituency.
We are concerned with issues of tax policy and administration and we are dedicated to working with government agencies in Ottawa as well as the provinces to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity as well as an atmosphere of mutual trust and confidence between business and government will promote the efficient and equitable operation of the tax system.
Please understand that the TEI represents large companies in every industry in Canada. By and large, these companies are publicly traded on Canada's stock exchanges. As a consequence, we are subject to stringent rules of conduct imposed by the various securities exchanges. We work for large companies. We are not small or fly-by-night types of organizations. We deal in large-dollar transactions.
For example, Shell's annual income tax bill routinely runs in the hundreds of millions of dollars. In addition, we file hundreds of income and excise tax returns. It is not unusual for transactions to have tax consequences in the millions, tens of millions, or even hundreds of millions of tax dollars. Needless to say, I take my professional responsibility to my company and the tax system seriously.
This brings us to the crux of the matter. We as employees of large companies do not feel that personal bankruptcy should be a logical consequence of employment by a large company. Yet that seems to be a possible result of this proposed legislation. This consequence is unique to employees of companies that deal in large dollars. The same consequence does not seem to apply to the lawyers, accountants, or employees of smaller organizations or indeed the third party tax shelter promoters to whom this legislation was originally directed. Frankly, we feel this is entirely misguided and must be corrected.
You have our detailed submissions, which enumerate the many shortcomings in the legislation. In the remaining time I will try to highlight the most significant of these.
The first is that the indifferent standard of culpable conduct is, in TEI's view, unacceptably vague. Whether or not an employee acts with indifference is a very subjective determination that will be made in the first instance by the tax authorities. Only after the employee incurs substantial legal fees and aggravation will the courts provide some measure of guidance on this vague, untested standard. Hence, we urge the committee to eliminate the indifference prong of culpable conduct.
Next, the potential financial consequences, as outlined above, arise because of an apparent lack of a good faith argument that is available to all the other advisers. In addition, the penalties of other advisers are subject to a cap that is not available to corporate employees such as us. This cap is equal to the fees generated or the extra remuneration generated from the transaction.
While corporate employees, our potential liability is 50% of the tax dollars at stake. We consider this to be unconscionable and fail to see why we are singled out for such a large penalty.
Companies are responsible for their employees' actions. If an employee crosses the line in terms of honesty or other inappropriate behaviour, then that employee is subject to appropriate sanction. Such sanction could result in dismissal or in certain cases criminal action before the courts.
Employees who work in tax departments of these corporations are now subject to these sanctions. Indeed, two individuals were recently convicted of tax evasion with consequential significant financial penalties and a jail sentence. With defence mechanisms such as these at the government's disposal, it makes one wonder if this proposed legislation is even required for the preservation of our tax system.
Let's go back to our main issue. Employees of a corporation's tax department are subject to the same rules of conduct and sanctions as are all other employees of that company. Now the government is proposing to add another very significant financial penalty that applies only to corporate employees as a consequence of certain transactions. Personal bankruptcy seems to us to be drastic overkill.
Our position is that this legislation should be directed at those for which it was intended, the tax shelter promoter. It is simply not appropriate for that legislation to apply to corporate employees. Our strong recommendation is that this proposed legislation be withdrawn. If this is not possible, then at least limit our financial exposure to that of any other tax adviser: the incremental fees or remuneration generated as a consequence of the transaction.
That concludes my remarks. I would like to thank you for the opportunity to appear before you today.
The Chair: Thank you very much, Mr. Glennie.
Now we'll hear from the Toronto Board of Trade and Tom Akin, chair of the taxation committee.
Mr. Tom Akin (Chair, Taxation Committee, Toronto Board of Trade): Thank you very much, Mr. Chair, members. We thank you for the opportunity to appear before you today on behalf of the Toronto Board of Trade. The Toronto Board of Trade, as you may know, is the largest board of trade by membership in Canada, with more than 10,000 members.
I chair the tax committee of the board. Mr. Friedlan, who is with me and will be making the majority of the remarks, was involved with the special subcommittee studying the measure we're here to discuss today.
Our members' concerns are fairly closely aligned with those of the TEI, given the commonality of our constituents, but our membership does include both large and small companies as well as many tax advisers, through the professional firms that populate the City of Toronto.
Our concerns here today relate to the proposals contained in Bill C-25 described as “Misrepresentation of a Tax Matter by a Third Party”.
Let me first emphasize that the board supports measures to ensure the integrity of the tax system. However, we believe that the provisions, as drafted, are both far-reaching and vague, with draconian or excessive penalties such that the provisions could seriously infringe upon the right of taxpayers to obtain full and complete tax advice.
We believe proposed section 163.2 of the Income Tax Act and proposed section 285.1 of the Excise Tax Act require further amendment and consultation before implementation to ensure they achieve the intended result, namely, as originally recommended by the Auditor General, to subject to civil penalties those who knowingly make false statements or omissions that could be used for the purpose of evading tax.
In particular, we believe the scope of the legislation should be limited to abusive tax shelters, as the Auditor General initially identified. The definition of culpable conduct should be amended, at minimum, to eliminate the indifferent standard in paragraph (b) of the definition, Finally, penalties that can apply to in-house advisers should be greatly reduced.
Let me turn it over to Mr. Friedlan, who will provide more specifics on our concerns. Thank you.
The Chair: Thank you.
Mr. Phil Friedlan (Taxation Committee, Toronto Board of Trade): Thank you.
In the few minutes I have, there are quite a number of concerns we have with the draft provisions. Again, I will highlight only some of them. As my colleague just stated, the provisions as drafted are excessively broad, and they're not supported by the evidence of abuse by advisers or company employees, other than with respect to set tax shelters perhaps.
They're excessively broad for a number of reasons. First, they can apply to anyone. Second, they can apply in circumstances when a taxpayer who actually made the false statement would not be charged with a penalty, because the new penalties can be applied even it is only a possibility that the recipient of the advice might use it for tax purposes.
With respect to the standard of culpable conduct, it's our understanding that the apparent intention to go to this standard was that it would be at least as high as the gross negligent standard in the existing civil penalties in section 163.2 of the Income Tax Act. The Department of Finance's position is that this culpable conduct standard is conduct that is flagrant in nature. We submit, however, that this standard is in fact now significantly lower than the standard of gross negligence existing in the Income Tax Act. We submit that because of the way culpable conduct is defined, we now have a standard that amounts, at most, to negligence.
We think this test of culpable conduct, which shows an indifference as to whether this act is complied with, is unduly vague and is an extremely low standard on which penalties can be applied. We also note that the case law dealing with gross negligence penalties generally has been inconsistent and subjective in its application. We submit that the proposed culpable conduct standard is not likely to be applied any differently.
We also note that the legislation contains two penalties; however, the drafting is such that a person could charged with a penalty under both provisions for the same act, the only concession being that you could get hit with the larger penalty. As noted earlier, the amount of the penalties can be excessive, amounting to millions of dollars, since it's based on the amount of tax saved or refund achieved.
Another significant concern is that there are inadequate protections for people in situations of abuse. There is no protection of any kind provided in the legislation for inappropriate or abusive behaviour by the Canada Customs and Revenue Agency. The consequences to an adviser who has been assessed with a civil penalty could be catastrophic, even if the adviser were ultimately successful on appeal. The individual's professional reputation could be seriously damaged, and he or she could face financial ruin.
Remember that currently, under criminal penalties, the government is required to have the information, have the person charged, and have a trial at which they have to prove their case beyond a reasonable doubt. Under the proposed civil penalties, the penalty can be imposed by way of a simple notice. The adviser merely has the option of appealing or paying the penalty. In other words, the obligation to prosecute the matter falls on the person who is charged, rather than the Canada Customs and Revenue Agency.
To sustain a penalty, Revenue Canada merely has to prove its case on a balance of probabilities, which is a much lower standard than the standard that applies in a criminal case. The same adviser could still be charged with a criminal act under the Income Tax Act. Further, the likelihood of recovering damages from the Canada Customs and Revenue Agency in a case of abuse or inappropriate behaviour is not high.
The Department of Finance has claimed it is only after bad apples in the system, so the proposed solution to have excessively broad wording for potential abuse is an internal administrative procedure of the Canada Customs and Revenue Agency. It is our understanding that the agency will conduct a head office review before assessing such a penalty, and will seek guidelines on the administration of the penalty. We don't think administrative procedures are adequate protection for potential abuse. We don't believe administrative guidelines regarding the imposition of excessively broad provisions is a satisfactory solution.
If legislation is designed to deal with murder and is drafted to cover highway speeding, it is inappropriate to then deal with that problem by having an administrative procedure that is only going to charge murderers. This is what we have with this legislation.
I should also note that there are instances of abuses by officials of the agency, and there needs to be a procedure in place to protect people from that. There have been abuses by Revenue Canada in the audit process, where the process has been used to conduct criminal investigations. There have been abuses by Revenue Canada in the collection process, and there have been abuses by Revenue Canada in the litigation process. It's important to remember that in terms of designing a punitive type of system that's being proposed here.
As a final point we note, as my colleague did, that taxpayers are entitled to full and complete tax advice. They are also entitled to arrange their affairs to pay the least amount of taxes the law allows. This right is recognized by the Canada Customs and Revenue Agency itself in its declaration of taxpayer rights. It is our view that these rights will be infringed upon because advisers, fearing the imposition of penalties in an inappropriate manner, will refrain from giving advice that is perfectly legal but may not be acceptable to the revenue authority.
We are very concerned that these excessive powers given to the Canada Customs and Revenue Agency will be used to intimidate taxpayers and their advisers into making settlements and tax disputes they would not otherwise make. If a circumstance arises in which the adviser may be faced with the threat of a penalty, the adviser is placed in a position of conflict. The adviser may be seriously tempted to settle the matter on terms less favourable to his or her client, in order to avoid the imposition of a financial penalty and the consequences thereof. A lawyer, in particular, may be placed in a conflict and may be forced to withdraw in any event. This will result in increased cost to taxpayers in any event.
In our view, this legislation is flawed and should be withdrawn, or at best withdrawn for further consideration and revision.
The Chair: Thank you very much, Mr. Friedlan.
We'll now hear from the Canadian Institute of Chartered Accountants, Mr. Robert Spindler.
Mr. Robert Spindler (Chair, CICA/CBA Joint Taxation Committee, Canadian Institute of Chartered Accountants): Mr. Chairman, members of the committee, on behalf of the Canadian Institute of Chartered Accountants, we'd like to thank you for allowing us to appear and provide input on Bill C-25. My name is Rob Spindler and I am chair of the CICA's taxation committee. With me today is Simon Chester, who is legal counsel to the CICA.
First I would like to provide the committee with a bit of background. The CICA, together with the provincial and territorial institutes, represents a membership of over 65,000 chartered accountants. Members are employed in all sizes of firms in industry and government, and also operate as sole practitioners. They are involved in a wide range of endeavours acting as auditors, tax accountants, business valuators, tax advisers, management consultants, and strategic planners, to name just a few.
The focus of my remarks today will be on the provisions contained in Bill C-25 that introduce civil penalties for misrepresentation of tax matters.
The proposal for civil penalties was first brought to our attention by the 1999 federal budget. The reaction of the profession was swift and strong. We were alarmed by the scope of the proposal and immediately began to work with Finance officials to address these concerns. We have indicated from the outset our belief that civil penalties for tax preparation or tax advice are simply not necessary. While we support penalties for tax advisers who knowingly participate in fraud, outside of the tax shelter area we see no compelling evidence that there is a problem, with respect to tax preparation or advice, that warrants the threat of these penalties. Our major concern continues to be the potential results—the increased compliance costs that could be incurred by taxpayers.
Notwithstanding our serious concerns, we saw that the government, with the weight of the Mintz committee and the Auditor General behind it, was committed to introducing civil penalties, and that the penalties would extend beyond tax shelter activities. We knew there was a growing concern within the accounting profession regarding the proposed provisions. Our legal counsel had looked at the proposals and considered them ill-defined and vague.
We had considerable difficulty appreciating the appropriateness of a penalty that was based on a “should have known” or gross negligence concept. This would have required the adoption of uniform standards for tax return preparers and advisers—a monumental undertaking.
Where negligence is the basis of liability, the question is not what the individual intended, but rather whether they exercised reasonable care. It would have created a conflict of interest because it meant that tax professionals owed a duty of care not to the client or to one's profession, but to Revenue Canada. We made it clear that we would not take on the role of enforcers for the agency. We saw the proposal as too far-reaching and imprecise, in effect regulating virtually all of the legitimate activities of tax professionals. We wanted to see it changed so that the penalties would only apply in situations where advisers had acted intentionally.
Given that the government was intent on bringing in civil penalties, we decided to push for changes to the initial proposal to make it as specific and precise as possible. We focused on how the provisions could be narrowed to target deliberate acts, in effect addressing the intentional misconduct of individuals.
The Supreme Court of Canada has noted a fundamental difference between intentional acts and negligence, and we wanted to see this reflected in the proposal. What resulted was the gross negligence standard being replaced by the standard of culpable conduct. We think that the move to culpable conduct will better focus the penalties on intentional wrongs and not on an accidental failure to meet a standard of care, although concerns remain.
We also worked hard for a good faith defence to be included in the proposal to make it clear that tax professionals can rely on information provided to them by clients. We don't audit information provided by our clients and we can't be expected to undertake massive procedures to verify the information provided by them. The good faith rule, which now extends to all activities other than excluded ones, confirms that it is the taxpayer who is responsible for the veracity of their financial information. There remains, however, a concern for our members in industry, and we would hope that the Department of Finance would be able to legislate changes.
Finally, we fought very hard to have a central review committee put in place. We are simply not prepared to support the possibility of penalties being threatened or imposed by local auditors. In this regard we note that the government has announced its intention that no penalty be levied without having been reviewed by a central committee. We would take far greater comfort if this committee were enshrined in the legislation itself.
In the end, we think it's impossible to write legislation that on its words alone will satisfy all of the concerns of taxpayers, advisers, and the government. We are appreciative of the changes that have been made to the original proposal, but it comes down to how the legislation is interpreted and implemented. It's now time to focus on how to narrow the application of the penalties to those situations in which they are warranted.
The implementation of civil penalties is a crucial area, and we are very anxious to learn more about the implementation guidelines and the central review committee. The government is committed to consulting with the profession on the guidelines that will be developed. Now that second reading on Bill C-25 has taken place, these consultations can begin.
We will be at the table to ensure the guidelines are as specific as possible. The government's expectations must be clearly outlined. And we will be seeking the input of our provincial institutes on any draft proposals. Likewise, we urge the government to conduct cross-country consultations as they develop the guidelines.
How the guidelines are communicated is of utmost importance. They must be made public so that everyone understands how the penalties will be administered. It is also crucial that the guidelines be developed and published before the legislation takes effect. And we are asking the government to ensure that the publication of the final implementation guidelines precedes the effective date of the clauses relevant to civil penalties.
As I mentioned, we are also anxious about the workings and composition of the central review committee. We want to see this committee comprised of senior level officials with substantial experience who are centred in Ottawa. Since everything hinges on this committee, we would like to know more about how it will function and wish to be consulted on its design and methods of functioning.
We will also be pushing to have non-government representation on this committee. We believe that such representation is essential to ensure a well-rounded analysis of any particular situation. While taxpayer confidentiality is a sensitive area, there is ample precedent for this type of approach in other areas of tax administration that preserves confidentiality.
We still have concerns about the quantum of civil penalties. We continue to believe that a penalty equal to the taxes owing is far too draconian. It bears no resemblance to the fee the professional receives for his or her services, or for that matter, in TEI's case, for the employment income they gain from their employment.
The taxpayer's penalty under proposed section 163.2 relates to possible gain, the tax to be saved, but the tax professional's gain will never be more than their professional fees, or in the case of an employee, his income.
We propose that the penalties be less severe since there is no proportionality between a professional's possible gain and the professional's exposure under this penalty. In relation to penalties under proposed subsection 163.2(4), we believe the penalty should be capped at $5,000. Such a penalty would still be significant, given that the vast majority of taxpayers who use tax preparation services pay less than $1,000. This capped penalty would also conform to similar penalties in Britain, Australia, and the United States. We do not believe that Canada's tax advisers are so much less professional than their overseas colleagues as to need a vastly tougher sanction.
We have been told that the government expects there to be no more than a dozen potential civil penalty cases arising in any particular year. Despite this assurance, there is still quite considerable fear and concern within the CA profession that this will not be the case. If not applied properly, the penalties could result in a change in the way the profession delivers its services, resulting in increased costs to clients. There must be cautious and judicious use of the new civil penalties.
The government has stated that civil penalties are to be applied only in the most egregious cases. If there is even a slightest suggestion that civil penalties are not being reserved for such instances, that they're being used as a threat, we will make our concerns heard loud and clear in Ottawa.
We don't think it's in anyone's interest to require our profession to institute new and costly procedures that would affect professionals and clients alike when the government has stated that there are very few cases that should attract civil penalties.
We appreciate the opportunity to comment on Bill C-25. We'd be pleased to answer your questions.
The Chair: Thank you, Mr. Spindler.
Now we'll have a ten-minute round, and we'll start with Mr. Forseth.
Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.
I want to look specifically at the bill. I have it in my hand here. I'm turning to page 75 of the bill and I'm looking at proposed paragraph 163.2(1)(b). And paragraph (b) says “shows an indifference as to whether this Act is complied with”. I take it from the presentations today and the presentations we had yesterday that this particular paragraph is a red flag to everyone. So I put it to the presenters here today, and obviously you've thought about this an awful lot, are you recommending that paragraph (b) actually be deleted from the bill, or do you have another wording that you would like to put into that particular proposed section?
Mr. Tom Akin: Mr. Member, if I might deal with that first, we are recommending that proposed paragraph (b) simply be deleted. If you look at the structure of the definition, you'll see the word “or” so that any one of the paragraphs (a), (b), or (c) would seem to be adequate thresholds to get over in order to support a conclusion that this amounts to culpable conduct.
We think the standard in paragraph (b) is so much lower than the standard in paragraph (c), for example, that (c) really becomes meaningless. One can easily envisage how one could meet the standard in (c) yet not meet the standard in (b,) as (b) seems to be clearly a much lower standard. And so in order to give paragraph (c) meaning, one has to delete paragraph (b).
Mr. Paul Forseth: Would anyone else like to join in?
Mr. Robert Spindler: That would go a long way to addressing the concerns of all of the groups represented here.
Mr. Paul Forseth: The other point that really struck me was the amount of penalty. One suggested, I think, if I heard you correctly, a cap of $1,000 per offence. The other one was a cap of $5,000, and you related it to some international comparisons. Can you go into that particular aspect further and say how this bill is really out of sync and perhaps puts Canada at a disadvantage on the penalty aspect?
Mr. Robert Spindler: We provided this information earlier to members of the Department of Finance, a comparison of penalties in the United Kingdom, Australia, and the United States, which are probably fairly good reference points. In comparable situations in the United Kingdom, for example, the penalty is capped at £3,000, which translates to roughly $7,300. In Australia the cap is $3,000, which translates to about $2,900 Canadian. In the United States the penalty is $1,000, which translates roughly to $1,500, or maybe more, based on today's exchange rates. So we do seem to be pretty far out of sync.
With respect to advisers, the context has to be their potential for gain, the reference point being their fees, not the taxes that are being saved. So the fees could be hundreds of dollars and the taxes saved could be millions of dollars. In the context of members in industry and TEI's concerns, it's an individual salary versus the tens of millions or hundreds of millions in taxes involved with his corporate employer. So things seem to be pretty far out of sync, and the cap would go a long way to addressing those concerns.
Mr. Paul Forseth: Does anyone else want to add on that particular point?
Mr. Drew Glennie: I would just reiterate our feeling that this legislation as it applies to corporate employees is inappropriate. It seems to us they've drafted legislation, and the net is much wider than what the original intention was or should have been.
I'm not convinced I'd like to lay my salary on the line as a penalty—
Mr. Robert Spindler: I'm sorry. I wasn't suggesting that, Drew.
Mr. Drew Glennie: Okay.
The difficulty we have with corporations is, the way the legislation is drafted now, the penalty on us seems to be a percentage of the tax, and that's it. As I say, because we work for large companies, we deal in large dollars. To look at a personal-type financial penalty in millions or tens of millions of dollars is simply absurd. That's our view.
Mr. Paul Forseth: Okay. I will pass to my colleague now.
The Chair: Mr. Akin, do you want to add something?
Mr. Tom Akin: Yes, Mr. Chairman, I'd like to embellish upon or support Mr. Glennie's point.
I had a rather interesting conversation with an in-house tax manager at a client this morning, who was expressing great concern about the scope of these provisions and the consequence of the penalty. The long and the short of his position was that the probability of a penalty wasn't the biggest concern; it was the consequence of a penalty of this magnitude. The analogy he gave me was, with respect to our own homes, the odds of our homes burning down are pretty small, but the consequence is rather severe. So what do we do? We all buy insurance. He said the consequence of this kind of penalty here is just not worth the job.
So a lot of our clients, the in-house people, are seriously considering their career paths, quite frankly, because of this potential, the size of the exposure. The consequence is so huge, and apparently there's difficulty trying to get insurance to cover this kind of issue. It just seems to be totally out of line with what we're trying to accomplish.
Mr. Paul Forseth: Okay, thank you.
The Chair: Mr. Cullen.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.
Thank you, gentlemen, for your presentations.
I'd like to pick up on a couple of points. Mr. Glennie, you and the other groups have provided your ideas on, if the department were to limit penalties, what the shape of that might look like. You've provided the department with some ideas on how to cap penalties. Is that correct?
Mr. Drew Glennie: Yes.
Some witnesses: Yes.
Mr. Roy Cullen: Good. You make a reasonable argument.
In the corporate world, say in the tax department of a large corporation, I'm just curious about where you think the responsibility lies. Let's say you have a director of taxation and a VP finance. There's a lot of discussion, and at some point the VP finance comes to the director of tax and says “Look, this is how we're going to do it”, and it amounts to a fraudulent return or tax evasion. What responsibility does the tax professional have, if any, in a case such as that, in your opinion?
Mr. Drew Glennie: Well, I can only speak for myself and I think for TEI as a whole. We just don't deal in fraudulent activities. We by and large are not involved in tax evasion. We abide by the law. We work within the legislation.
I think the Department of Finance in a way has that sort of model in mind, i.e., somebody coming down from the top and imposing a standard on an individual that simply would not be acceptable.
Mr. Roy Cullen: Well, in the case of a company such as Shell or Dofasco, I presume that is a reasonable assumption you're making. That wouldn't happen, I hope. But all companies aren't like Shell or Dofasco.
Let me pursue another line of questioning about the notion that the civil liabilities for tax professionals should be limited to tax shelters. I think that's what I heard people saying. Maybe I'm just a little naive, but it seems to me many cases of tax fraud or tax evasion could conceivably happen outside tax shelter arrangements. Are you arguing that doesn't exist outside tax shelter arrangements?
Mr. Drew Glennie: No, I'm not arguing that at all. In fact in my comments I referred to two individuals who were recently convicted of tax evasion and subjected to very significant financial penalties and a jail term. That's under the existing law. This is simply another level of penalty on top of that.
We're all subject to those rules now. What this legislation is doing is throwing a very significant financial penalty or potential financial penalty on activities that are way out here.
Mr. Robert Spindler: Mr. Cullen, as I understand it, one of the origins for this penalty was that the Auditor General and the Mintz committee reviewed abuse of tax shelters and suggested there needed to be expanded penalties to control those abuses. This legislation goes far beyond that and extends to the day-to-day.
I suppose it's really a question. As an organization, the CICA, the TEI, and the Board of Trade, I think, are unaware of any widespread abuse or of any widespread problem. There are isolated incidents of tax evasion involving professional advisers and return preparers, but it's not an epidemic. There's not a particular problem out there. And there are existing provisions. There are criminal sanctions that can be brought.
What we've been told by the Department of Finance is they find it too difficult, too burdensome, too cumbersome, to proceed under criminal sanctions. Too much information is required; their standards that need to be met are too high. One has to look at that and suggest that's probably quite appropriate. If you're going to threaten someone with tax evasion, you'd better have the right information.
So as tax advisers and tax preparers, we're a little concerned when the government introduces these civil penalties and says “Well, I don't want to have to be bothered with actually gathering all that information or actually meeting those standards. I want to have a simple procedure where I can just walk in and assert the penalty whether I'm right or wrong.” That suggests a bit of a threat. So we would like to see legislation that controls that and limits it and precisely defines it.
We are concerned about being threatened with the penalties. We're concerned, because we don't see large-scale abuse. We don't even see small-scale abuse. We see some old evidence where in a very limited market, less than 1% of the tax filers were involved in questionable activities. Less than 1% seems pretty small.
Mr. Roy Cullen: I don't know where that data comes from, but I suppose you could use the flip side of the argument and say if tax evasion and fraudulent tax activity are very minimal, then no one has to be that concerned.
Mr. Robert Spindler: Well, I think that's exactly the point.
Mr. Roy Cullen: Well, “no one” meaning the tax professionals as well.
Let me come back to this. In the bill, proposed section 163.2 defines culpable conduct. To the Board of Trade, I went through your written brief, and I couldn't pick up.... I apologize, but you were talking about culpable conduct versus gross negligence, and I'm not sure if you're on the same page with the CICA. Maybe we can come back to that in a moment.
“culpable conduct” means conduct, whether an act or a failure to
(a) is tantamount to intentional conduct;
(b) shows an indifference as to whether this Act is complied with; or
(c) shows a wilful, reckless or wanton disregard of the law.
Of course, we all know that there could be some grey in there. There's grey in life generally. Would you disagree with those principles, that if we could establish that those elements exist, that's something the federal government and the tax department should be concerned about?
Mr. Phil Friedlan: I would say that (a) and (c) are indications of a high standard that's not being met. Our position is that (b) is in fact an extremely low standard. There's some question as to whether it even meets the standard of negligence. I think this definition is derived from particular tax cases. I think the way this thing has been structured, they've actually lowered the standard below the gross negligence standard, which is the standard for taxpayers who commit misrepresentations in the civil sense. If you were to look at some of the cases on the use of the term “indifference”, I think you would conclude that the standard is quite low in some cases and that you could say the standard is really negligence.
Mr. Roy Cullen: Let me give you an example, and any of you could comment.
Say someone comes into the office of a tax preparer or has a regular tax adviser who prepares the income tax return, and, as often is the case, the person comes in with a shoe box and maybe a trial balance or something. The tax preparer looks at it and says “Oh my gosh, last year the income was 80% higher. The expenses were 100% lower. I don't see any receipts or vouchers to support it. I'm wondering why the income is so low this year.” The person replies, “I don't know. Who cares? Just fill it out.”
Given that scenario, do you think that person would have any responsibility to say, “Hold it, I'm going to fill out the tax return. I want to see some vouchers. You need at least to explain to me why revenues are down 80%.” Do you think this would capture that? If you do, do you think it's appropriate or inappropriate that it would?
Mr. Robert Spindler: Let me turn it around, and we'll play with the question a little bit. Do you think it should capture it?
Mr. Roy Cullen: Pardon?
Mr. Robert Spindler: Do you think this provision should?
The Chair: The reason you're sitting there is because you answer the questions.
Mr. Roy Cullen: We ask the questions.
The Chair: We invited you here. If you want him to answer the questions, you invite him.
Some hon. members: Oh, oh!
Mr. Paul Forseth: I never get any answers from them, either.
Mr. Roy Cullen: The question might be out of order, but I'd be prepared to—
The Chair: I'm worried about your answer.
Mr. Robert Spindler: Remember, this penalty can apply to anybody.
Mr. Roy Cullen: And obviously me.
Mr. Robert Spindler: I think the point you raise is that there's a tremendous amount of greyness, and what one person might see as abusive, another might not.
The concern of the profession is to protect ourselves against any assertion of penalties. Remember, just merely having an assertion of the penalty could cost us our careers. That could end our career right there. It puts us in conflict with our client. We would probably have to resign from the account. Our reputations would be severely damaged. It might be that five years later we're successful in court and it's very clear that there's no penalty.
So there are very high stakes. “Beauty is in the eye of the beholder” is another way of expressing it.
We're concerned that in order to protect ourselves, we would have to engage in rigorous audits of information. We would be co-opted into the ranks of Revenue Canada. All the information we get, we could not take at face value. That's why we've pressed for the good faith reliance exemption, that we should be allowed to take information on-board and at face value, as long it's not obviously wrong, and process that information without actually conducting an audit. How strong and reliable the good faith reliance is, we'll find out.
As to how that reflects on TEI and the members in industry, who don't have the good faith reliance I have, there are some real legitimate concerns there. Let's say that Drew is given a piece of information and told to process it through the tax return, and that piece of information comes from a related company or a subsidiary or something and he doesn't audit it. Is he exposed to the penalties? Possibly.
Mr. Roy Cullen: Unless things have changed, you can get an audited statement, a statement without audit, or a review statement.
I think the concern has to do with how it would be applied. When we talked about the civil burden and someone just walking in and saying, “You've done something wrong, so you're on the hook”, I think you oversimplify it in the sense that there are measures of control within what's proposed. Ultimately it comes down—
Mr. Robert Spindler: I'm sorry, but that's not the case. We had asked to have the review committee actually put into the legislation as a protective measure to make sure it would stay there and survive as the years come and go. But there's nothing to protect against—
Mr. Roy Cullen: No. But I was referring to, as I understand it, that before any action like this could be taken, it couldn't be done in a regional tax office but would be brought—
Mr. Robert Spindler: That doesn't appear anywhere in the legislation. We asked to have that put in. It would go a long way toward helping people's concerns to actually say in the legislation that before any penalty is asserted, it has to go through a review committee. Right now it's just a commitment that the government will do this.
We've asked to meet with Revenue Canada and the Department of Finance to talk about the composition of the committee and the guidelines. We haven't yet been invited to those meetings. Our concern grows as this legislation comes closer and closer to being enacted. We still don't have a committee, we still don't have guidelines, and we still don't know what the rules are.
Mr. Roy Cullen: Is that the sort of thing you'd expect to see in legislation?
Mr. Robert Spindler: With something as unusual as this and with something that is capable of being abused, we're all pretty conscious of the potential for abuse. Databases are a subject of some discussion. This is a law that is capable of being....
Think about it. An individual auditor walks in and says “You know what, Mr. Accountant? There's $100,000 of tax owing here. Your fee for this was $1,000. How do you feel about a $50,000 penalty, unless we settle this issue now?”
Mr. Roy Cullen: I don't have the data in terms of statistics, but all you have to do is wander around Canada and do things to figure out that there's a lot of income that's under-reported, such as for GST. Of course, if it's unreported for GST, it's unreported for income tax purposes. That's costing everybody around this table.
Mr. Robert Spindler: But that's my point. I think this rule affects the honest taxpayer and the honest adviser. The people who are cheating on taxes and evading taxes now and who face criminal charges and can go to jail, that affects me. I'm not going to take any risk of being sent to jail. The guy who today is doing what you've described and who faces jail, do you really think he's going to be put off by a monetary penalty? If he's conducting himself in that fashion, if he's living outside of the grid and outside of the system, do you think this is going to draw him into the system, that he's actually going to say “Oh gosh, I think I'm going to come in. I've been a tax cheat for years, and I think I'll come into the system.” I don't think that's going to change anything. I think the risk is that it affects my behaviour and increases the cost of compliance.
Unless some of the changes, such as the indifference change, and the review committee are brought into the legislation, we're just going to distort the system and push people out.
Mr. Roy Cullen: I'll use under-reporting of income, but it could easily be over-reporting of expenses. A lot of these people who are doing it are going to respected CA and CGA firms and tax advisers.
Mr. Robert Spindler: I don't think the tax advisers are aware of that. I'm not sure whether you're suggesting they should start auditing those people.
Mr. Roy Cullen: Not start auditing, but in cases where.... To me, there seems to be some sense of responsibility for tax preparers to at least ask the odd question and say, for example, “Where are the vouchers? Why am I preparing this without any expense vouchers?”
Mr. Robert Spindler: Well, I think—
Mr. John Allinotte: If I may, Robert, I'll take you back into my previous life, when I was in public practice.
Mr. Cullen, I hope you weren't suggesting that members of the CA profession particularly would in any way participate with anyone who is deliberately evading the reporting of income or overstatement of expenses. It may have been a while since you read the professional conduct rules that the institute has. None of the CA profession participates in it.
I agree that under-reporting of income and over-reporting of expenses does go on in this country. As Mr. Spindler has indicated, these rules are not going to stop those people from doing that.
Mr. Robert Spindler: I think, Mr. Cullen, what we're really concerned about is that if we're given receipts for expenses, we're retained just to process them. We're not retained to do an audit. We're not paid to do an audit. We're just asked to process them through a tax return—for example, a personal tax return or a small-business return.
Are we now obliged to audit that information and ask if that's really a business expense or a personal one? That's really Revenue Canada's job. A person has presented us that information and said these are their business expenses. Frankly, we're hopeful that the good-faith reliance ruling introduced here protects us by saying we can accept that information as long as it's not false on its face. We can accept that information and process it.
Just let me go back a step. You mentioned there is widespread abuse, widespread under-reporting of income and over-reporting of expenses. I was not that aware that there was, and frankly, in discussions with the Department of Finance, they did not give us examples of widespread abuse. We all know there's an underground economy of tax evaders of some size, but this provision was not intended to deal with them. So if you do have additional information, that would be helpful.
Mr. Roy Cullen: Certainly the underground economy is well known, but again I think what.... I don't think this act is requiring people to tax advise or do audits. It's maybe asking them to say, you know, “Why have your sales revenues gone down 100%?” or “Why are you asking me to fill out this tax return claiming these expenses when there's no evidence those expenses were incurred?”
Mr. Robert Spindler: No, but what about where you do get the evidence? Why do I have to ask for explanations for why income has gone up or down if the person just gives me that information and says that is their income?
Revenue Canada has its auditors, and they can raise those questions. I'm not being paid by Revenue Canada to audit the person's information. If I'm given information and it's not false on its face, I process the information. Hopefully, the good faith reliance does apply. The Department of Finance has told us they don't want this provision to apply in that circumstance, so I'm hopeful that's an accurate reflection.
Mr. Tom Akin: Just picking up on your example, Mr. Cullen, what if you do ask the questions, and you get answers that you have no way of verifying? They could be plausible, or they may not be.
The person says, “Well, I was ill for half the year.” Okay, that could be.
One of the examples given in the papers is that someone has an employment income of $30,000 or $35,000 and claims $24,000 as a charitable donation. They have the receipt, and so on. Okay, that looks a little out of the ordinary. The person may have come into a large inheritance, for example. You ask that question, and they say “Oh well, I inherited some money.” What are you supposed to do, go further? Am I supposed to say “Well, from whom, and can you provide proof of that?” These are all questions that are even more obvious to Revenue Canada than to a lot of the tax advisers, because they have a large staff, they administer the filing of tax returns, and it's up to them to go out and actually verify the accuracy of the return.
Mr. Roy Cullen: Well, I'll tell you what I would do—what I have done. As a CA in public practice, if I were given a tax return to do and I thought it smelled, I wouldn't put my name to it, period. Maybe all of these gentlemen here would do the same, but I'm not sure that....
Mr. Robert Spindler: I think we're all in agreement on that. I think we're happy that the good faith reliance for advisers and whatnot works. I think there's still an issue for TEI in that perspective.
We're getting away from the main point, which was the indifference issue and the review committee. Let me just weave the review committee back in a little bit.
Mr. Cullen, you said if you saw a tax return that smelled, you wouldn't be associated with it. Let's rewind the tape. It's April 30, the client comes in at the last minute, and you race through and do his filing. Three years later Revenue Canada comes in and charges you with a civil penalty for the tax that was involved, because you didn't notice that there was a change in the income from last year, and there was some unreported income or a spike in the expenses. You were racing to get the return out the door. I don't know if you've ever had that experience, when you processed things and didn't have a chance to—
Mr. Roy Cullen: Everyone waits till the end, I know. I wouldn't want to overstate this. I mean, if you're looking at expenses and trends in sales and revenues, that's more of a review. I'm talking about the totally obvious thing, and when you ask a question they say “Don't worry about it. You know, I'm just playing the usual game, ho, ho, ho.” What are you supposed to do then?
Mr. Robert Spindler: Well, that's actually...and the point I was hoping to get to is that we're comfortable with the obvious ones. I think we're all comfortable with that. It's the less-than-obvious ones, and that's where you need the review committee. It's the situation where it's not clear. Who's going to decide that? A local field auditor who has limited experience? The review committee? And who's on the review committee?
From our perspective, we'd like to see representation from outside Revenue Canada. We'd like to see representation from various professional bodies, where you have somebody's career at stake, when you have their livelihood at stake, so that somebody sits down and looks at it.
We're not talking about the black and white cases, where it's clear that it stank, and if the person didn't know, they came so close to knowing that they really should be nailed. We're talking about the grey areas, the lesser...the standards, and the concerns we've shared about what indifference means and how much checking you have to do.
The review committee is really the only way to effectively deal with that. I think the only way to assure taxpayers and their advisers is to actually have that enshrined in the legislation and make the guidelines public to get some participation in that process.
Nobody is trying to protect tax cheaters. We're trying to protect the honest taxpayers and keep the costs of compliance down. It's in all our collective interests to catch and make life as difficult as possible for tax cheaters. That's not what we're talking about.
Mr. Tom Akin: Just to embellish further on the point that Mr. Spindler makes, it would be our position that the really obvious examples would be covered by proposed paragraphs 163.2(1)(a) and (c) dealing with culpable conduct, but the less obvious grey ones could possibly be covered by proposed paragraph 163.2(1)(b), and that's why we submit that in addition to relying upon the committee, proposed paragraph (b) should not be part of the legislation.
Could I make one other—
The Chair: Maybe we'll just get to Mr. Allinotte, and then we'll go back to Tom.
Mr. John Allinotte: I would just make one point for the committee, as a tax adviser. We're talking about people walking in with falsified returns and whether you do them or not.
In our situation at Dofasco, we spend something close to half a billion dollars a year on our Canadian operation on capital expenditures. We just went through one of our annual audits. We're constantly under review by Revenue Canada. We found we had inadvertently expensed a $10 million item that should have been capitalized. There was a note on the file, because when we reviewed the expenditures, one of our people had noted that we should be taking a look at this because we weren't sure it should be expensed. Well, within 18 months of filing the return we had Revenue Canada in doing the audit, and we never got back to check it. Under the rules today, as the signer of the tax return, that could be found to be indifferent, and it would have cost me $3.5 million in penalty.
Mr. Roy Cullen: No, I'm sympathetic to the argument on the penalties. I'm sympathetic to all the arguments. We're here to listen.
The Chair: We also amend bills in this committee. Sometimes we also amend bills. That's why you're here.
Mr. Phil Friedlan: I just want to make the point that it shouldn't be forgotten that some of these acts would be caught under criminal sanctions. How easy should it be made for the tax authority to impose penalties on people who are advising, whether internally or externally?
I mean, let's remember that the process they're proposing in order to impose civil penalties really amounts to just sending a notice to the person who's penalized. The process, as I said earlier, is then engaged. Really, the onus shifts to the adviser or the employee to fight the department, and the standard is only the balance of probabilities.
Now, the balance of probabilities as compared with beyond reasonable doubt is a lot lower standard. Couple this with this low test, which, if you look at some of the cases, might not even meet the level of negligence, and this is going beyond anything that's been identified as an abuse in the system.
The Mintz committee did a report and had someone do a study of underground activity. There was certainly no mention there of third-party abuses. There was certainly evidence there of under-reporting of income, but as far as we can see what's being proposed here would not get at that.
The Chair: Anyone else?
Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.
I have a couple of questions. You cited a few examples. I think any profession should have competence, and any professional—for instance, medical—where there's misconduct or negligence should take responsibility. You cited the example of the $10 million oversight.
I would just throw this out to you. Every professional has pride in terms of maintaining high standards. I hear you, and I can sympathize with you—you don't want to bear high penalties and all that—but to me there has to be a balance.
I have an accountant, and I expect them to deliver to the highest standards. If I miss some information, I expect my accountant—and I do have a good accountant—to ask me where my other slip is. I have to tell him, yes, I forgot. I'm a very small individual, and it's very simple, but I do process my basic....
At any rate, do you take pride; do you want to do the best? We're not trying to penalize the professional. I think it's the reverse. We expect the professional to deliver to the highest standards of service.
Mr. Drew Glennie: Can I answer that from a large corporation's point of view inasmuch as John mentioned the issue with Dofasco?
We have roughly 3,500 employees in operations across the country, and we do make mistakes. We try very hard, from a tax point of view, to ensure that we report properly, but by gosh there are people out there, and mistakes are made. What we have found over time is that the mistakes go both ways. John had the example where they happened to expense something that should have been capitalized. Well, sometimes we'll capitalize something that should have been expensed, and so on and so forth.
By and large, what we have found is that these even out over time. The problem with John's example is that we're going to get penalized with the one side but we're not going to get any pats on the back or any financial boost from the offsets.
That's not to say we're not professional. We're out there doing our darndest to ensure that—
Ms. Sophia Leung: But I'm just saying, if a mistake occurs, who should be responsible?
Mr. John Allinotte: Who should be responsible?
Ms. Sophia Leung: Yes, the professional.
Mr. Drew Glennie: Well, the corporation.
Mr. Robert Spindler: To what extent would you want them...? I'm just trying to understand here.
To take John's example, if there was a mistake made and $10 million of tax was issued, and let's say....
John, I don't know what your income is, but—
Mr. John Allinotte: It's not that high.
Voices: Oh, oh!
Mr. Robert Spindler: Should he be subject to a $10 million penalty? Or if I'm the person preparing the tax return—
Ms. Sophia Leung: No, we're trying to set a certain penalty standard.
Mr. Robert Spindler: But if it's just a mistake, an honest mistake, as opposed to.... I think there's an important distinction to be made between an honest error, a mistake, and intentionally acting.
There's been no indication, I hope, from the Department of Finance that this provision was intended to apply to mistakes. They've always said they want to catch situations where somebody knowingly cheats on taxes or in circumstances where they virtually know but can't quite prove that they actually did know, where they turn a blind eye and say “Okay, I know what you're about to tell me, but don't tell me; otherwise, I won't be able to do this.” That's who they're trying to get at. They're not trying to get at mistakes and they're not trying to raise professional standards. Remember, it's—
The Chair: In Mr. Allinotte's case, though, they would probably rule that it was an honest mistake. They wouldn't be asking you for $3.5 million.
Mr. Robert Spindler: It would be interesting to see in the guidelines whether they say that.
The Chair: No, I'm just saying—
Mr. Robert Spindler: We'd like to hear that from the review committee. If we don't get the review committee, then it's an individual auditor. If he's negotiating with John and says “By the way, we have all these issues on the board; how would you like to be faced with a $5 million penalty unless you settle on this now?”
The Chair: If you're reasonable, as we all are, what do you think the chances are that this would happen, that he would pay $3.5 million?
Mr. Robert Spindler: Well, hopefully then you, you, and you would be the auditors. But I think in our experience, and I think as some of the fellows here related, Revenue Canada does have a bit of a history of being a little less than friendly in the use of its powers.
The Chair: Fair enough.
Now, you excluded Mr. Pillitteri when you said “you, you, and you”. Was there any reason for that?
Voices: Oh, oh!
Mr. Robert Spindler: Well, I didn't like this standard of perfectionism here. I thought all of a sudden there's no way I could live up to this standard.
The Chair: I want you to know that he's a very sensitive man.
Voices: Oh, oh!
The Chair: Mr. Pillitteri.
Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.
You know, the questions have been quite eloquent, but they're almost all out of my league. It's been about the corporation, about big money, about how to avoid taxation and all of that. I'm a small businessman, and I think somehow you gentlemen should be somewhat in agreement with the government in trying to bring in some penalty.
Let me give you a scenario here. As a small businessman at one time, I used to have maybe an employee. I used to be an employee myself at the same time, and filing taxes—
The Chair: Careful, Gary.
Mr. Gary Pillitteri: Oh, yes, I'm very careful.
Voices: Oh, oh!
The Chair: But you needed the grapes, so....
Voices: Oh, oh!
Mr. Roy Cullen: The grapes of wrath.
The Chair: We feel your pain, Gary. Go ahead.
Mr. Gary Pillitteri: One goes along and wants to file his taxes. Of course, some people might think after sitting here seven years on the finance committee I should be an expert on filing taxes. I still get my accountant to file taxes, because I still don't know how to file taxes.
As an individual, a small businessman, who's very busy...and the example is the shoebox. I used to do that for my dad all the time, and then even for myself, and bring it to the accountant. Everything I can think of I still put in there for the accountant, the tax preparer, to file that income tax.
You know, gentlemen, sometimes it is erroneous to think a person would save money by going to a person who is not qualified, because in trying to save money in preparing that tax return, he's not actually doing a proper job for him or for her.
Many a time I myself have found that I had tax preparers who were not doing their job properly, not working on my behalf. There are lots of individuals out there who hang out a shield, who are tax preparers or tax consultants who are not capable of doing those returns.
Isn't this legislation somehow trying to protect that innocent one who is trying to go out there and find someone to file a tax return for him? Is it actually trying to save those individuals who are not doing a proper job? Do you think this legislation might drive some of those people to take those shields down that show they are tax preparers? That's one part of the question.
Mr. Robert Spindler: No, our concern is that the risk is actually the opposite. The threat of the penalties will cause CAs and CGAs, for that matter, to increase the level of work they perform and therefore increase the cost, because obviously we're not running a charity. We need to get paid for the work we do. That would increase the cost of running your business. You would be tempted to say, “Rather than going to this guy, who is going to charge me an extra $5,000 or $10,000, I'll just go to this guy down the street, who'll do it for $1,000.” It turns out that perhaps he's not as qualified, but he's cheaper.
One of our concerns is that it could force people into the hands of less-qualified preparers, with actually the exact opposite results.
Mr. Gary Pillitteri: Mr. Spindler, let me tell you I've already begun that route. I'm on the route where I'd rather pay more, but I know he's going to do a good job.
Mr. Robert Spindler: And then we'll find out the name of your accountant and tell him your bill for next year is going up by $10,000.
Mr. Gary Pillitteri: I don't care.
Mr. Robert Spindler: If you're not price sensitive, we like you.
Mr. Gary Pillitteri: With the amount of tax he's going to be saving me, it's worth it.
Mr. Phil Friedlan: Could I just make a point here? You're suggesting that less-qualified people will be somehow driven out of the business because they're going to be subject to—
Mr. Gary Pillitteri: I'm asking you a question. Do you think that would be possible?
Mr. Phil Friedlan: No. I was just going to make the point that the standard the courts have imposed on less-qualified people has actually been lower than that on the qualified people. So, if anything, it's less likely they will get hurt by these penalties.
Mr. Robert Spindler: Which would actually push more people to that area...it would be actually counter-productive. Rather than increasing the level of compliance, you'd be reducing it. I think that's fairly far down the line of speculation as to what might happen.
If the government takes on board the concerns that have been raised here today and addresses those concerns in the legislation, then life will unfold as it should and as people want. The tax cheats will have a rougher ride. The legislation will be effective.
If the changes we've asked for don't come about, then the risks are increased costs of compliance and an increased burden on the taxpayer. Your tax preparation bill goes up for your business.
Mr. Tom Akin: If I could just reiterate for everybody here, all of us here today support totally measures that are designed to penalize any adviser who knowingly, deliberately assists in defrauding the revenue department. There's just no doubt about that. Our concern is that these provisions are not limited to that circumstance, but go far beyond into circumstances that they have no business putting people under a threat of a civil penalty.
The Chair: Mr. Pillitteri.
Mr. Gary Pillitteri: Mr. Chairman, I'll go at it a different way.
In preparing a return, of course the one who signs that return is still always more responsible. And if I've never, in any way, in filing my taxes, or once I know, or a tax preparer has told me, a way to avoid taxation, a way to prepare them to avoid it...? Why are you so much afraid that this responsibility will fall on your shoulders? You're automatically taking...that the fault is only to the person who is filing that tax.
Mr. Robert Spindler: Sir, I'm not sure I understand the question. The legislation is targeted not just at the taxpayer but at the tax return preparer, the tax adviser, and everybody associated in any way with the tax return. It's obviously the department's intent to go beyond the taxpayer to everyone who's been involved.
That's the reason we're concerned. It's not restricted to the taxpayers; there's the possibility of being charged with a penalty beyond a criminal charge, but now a civil charge, where the burden of proof is much lower. It comes into a question of an implication of did I do enough, did I gather enough information, did I do enough work? Who's to be the judge of that?
I'm not sure whether I'm addressing your question or not.
Mr. Gary Pillitteri: Thank you.
The Chair: Mr. Cullen, and then we'll go to Mr. Forseth.
Mr. Roy Cullen: At the risk of getting Mr. Allinotte angry at me, I want to make it crystal clear that the way he raised that example of the $10 million capital versus expense, etc., I'm totally convinced it was an honest mistake. Let's make that clear. If I had read that in a little excerpt and I hadn't met with you today and looked you in the eye, I would have thought.... We all know that part of moving capital into expense is a process that all tax advisers go through. What is the proper definition? Of course you want to be able, within reasonable grounds that people are playing the game fairly, to stretch the envelope and treat what could be interpreted as capital as expense.
If I read your story and the fact that it had been flagged and you'd meant to go back, I would have felt that there was a certain onus on your department then to come forward and explain why that happened. First, of course, you're in the big league and that's a lot of dough. Secondly, knowing there's always that tendency to try to maximize on expense and capitalize less, it seems to me—and you can correct me if I'm wrong, as I'm not a lawyer—if you're looking at a civil burden, then it would create more of a responsibility on you to come out.
Look, I'm prepared to accept that it's an honest mistake, but can you tell me that it fails to meet this test—in other words, that it's tantamount to intentional or an indifference or wilful or reckless? It seems to me in the case you've cited—and again, I'm not talking about the specifics, but a case like that—as a government, we'd be perfectly within our rights to ask you to tell us more about why that happened. It's a lot of money.
Mr. John Allinotte: Tell you why it happened?
Mr. Roy Cullen: How it happened? I'm not asking you to tell me why today about that particular one.
Mr. John Allinotte: I'll take you the rest of the way.
The note in the file was based on a conversation with a summer student who worked in our construction program at Dofasco who had been assigned to the audit group for reviewing expenditures. The audit clerk, the summer student who was working for us at Dofasco, had called the tax department and explained the nature of the expenditure to another summer student who was working in the corporate tax department. That student told the student in audit that in fact it should have been capitalized relative to the description of the engineering drawings they were talking about. Neither one of them was qualified.
This happened in August-September of the filing year. A note was put into the file, and when we came through the year-end our tax people who were responsible for preparing the return read the note. They went back. The summer students were gone. They no longer were employed by Dofasco. They'd gone back to university, and we'd helped to contribute $10,000 or $12,000 to their education. But anyway, they were back at university.
We went out to talk to the engineers, and someplace along the line in the conversations about the drawings they referred to, they said no, it was a blast furnace reline project, of which part is expense and part is capital. They said no, the expenditure was expense. So we prepared our year-end financial statements, did our tax revision, and went ahead with it.
In the rush of filing our.... Unlike my friend at Shell, with 100-plus returns in June, we were filing something close to 65 returns. We filed. We're always subject to audit. Our professional credentials are such that each and every year we get Revenue Canada in to audit what we have done. As part of that process, we go back and review again what we have done after the fact.
We in fact picked it up ourselves before the auditors came in, identified it on the reassessment, and gave them the adjustment. It was identified in-house; it wasn't identified by Revenue Canada. But under those circumstances, because the note was in the file and because I knew the note was in the file, and I knew that when I signed the return, the rules say I was indifferent to the return being filed, consequently I could be subject to the penalty.
I would want to test that in a court of law, because I'm not sure. I'm not a lawyer either. I'm just a plain old tax accountant.
Just to go back to the quality of the work, unlike Drew, I have 7,500 employees, and this transaction, as I said, was $10 million of a $500 million expenditure program in a twelve-month period. Do you know how many cheques we wrote and how many expenses and capital we had to classify? A conservative estimate would be 25,000 transactions. One mistake. Even a good doctor loses one patient a year.
Mr. Robert Spindler: Mr. Cullen, to me it raises an interesting point, and it goes to the composition of this review committee. I think what you were asking is, doesn't Revenue Canada have the right to ask and get more information to determine whether or not a penalty should be applied? Our response is, yes, a lot of information should be gathered before there's any suggestion of application of a penalty. And we think it would be extremely important to have outside representation, people from outside Revenue Canada, on that committee, to add a real-world context, so that there's an introduction of the realities of conducting business.
It's not a perfect world. It does take time to gather information. Mistakes can happen. You do employ summer students. It's not a question of just pressing a button and making things work. That's one of the reasons we're pressing for representation on the committee outside Revenue.
Mr. Phil Friedlan: Can I just make a point here? The policy intention is not to deal with negligence or mistakes. It's supposed to deal with egregious or outrageous behaviour. It's supposed to get the bad apples. The problem with this legislation is it's not limited to that. With this kind of mistake, they're going to have to pay the tax and the interest owing if it was late. It's a question of whether or not a penalty, and a severe penalty, should be applied. That's the big issue.
Mr. Roy Cullen: I thought of that example because in another case you could have a situation where someone was deliberately moving capital into expense and maybe making a note on the file but never getting back to it. I'm citing it as an example.
Right now, the way it's written, in terms of a criminal burden of proof—I'm not a lawyer; you could correct me—the department would have to, even if they had a suspicion.... In your case it was an honest mistake, but in another company it might not be. The burden of proof to get at that issue would be quite burdensome. It seems to me there should be an obligation for that person to explain convincingly why that item suddenly found itself as an expense rather than as a capital item.
Mr. Tom Akin: At the risk of disagreeing with Rob, on this example you've just given as altered, we would agree with you: there should be an onus to explain and there perhaps could be a possible threat of penalty. But our position is that you're covered off on that by paragraphs (a) and (c). You don't need paragraph (b).
Mr. Roy Cullen: Well, yes and no, I guess. I'll use the example of this particular circumstance, let's say, where it was flagged, but someone said “Oh, we're busy. It's kind of convenient that it's expense. I'm not going to worry too much about it.” Isn't that kind of an indifference? It's maybe not intentional conduct. Maybe you could argue it's wilful, reckless, or wanton disregard, but it's sort of, “Mañana, we'll have a look at it.”
Mr. Tom Akin: But don't forget the words of paragraph (a), “tantamount to”.
Mr. Robert Spindler: But let's go back to the government's original stated intention, which was this is supposed to apply to situations where the person knowingly cheats on their taxes or is so close to knowing. They had no intention of going after mistakes. They were going after people who were saying “I want to cheat on my taxes.”
That's why we're concerned about the indifference thing. That gets into an interpretive issue. How much research do you have to do so that you can prove you weren't indifferent? How many court cases do you have to read? How many articles do you have to read to prove you weren't indifferent to a point of interpretation?
That's why the indifference one is dangerous. The wilful, wanton, and reckless we all understand and can all relate to, and the ease with which Revenue Canada can assert those is sufficient in the legislation. It's that one issue of interpretation on indifference.
On the other side, the balancing of it and controlling the actions of Revenue Canada, is the review committee. If you get those two things functioning, you'll have a reasonable system.
Mr. Roy Cullen: But isn't the indifference clause more geared to...? Sometimes you can do certain things or you can omit to do certain things, and you can cut and slice it any way you want, but sometimes one is as bad as the other. I can run into someone on the highway or I can go and have eighty drinks and get into my car and say “Who cares? I want to get home tonight. I'm tired.” So if you say “Who cares? Someone else can worry about that. I'm not—”
Mr. Robert Spindler: Or you didn't audit that piece of information or you didn't read that court case, or you selected one court case over another in a matter of interpretation. I hope you're not suggesting a taxpayer is not entitled to his day in court in advancing an argument or advancing even a newer novel argument.
Mr. Roy Cullen: No, no, absolutely not.
Mr. Phil Friedlan: The other thing is, with the indifference test, you're actually making a lower standard than what you have for taxpayers for civil penalties in that scenario.
The Chair: Mr. Forseth.
Mr. Paul Forseth: Here we've been talking about the big league. Why don't we turn this around and go to the little league or to no league at all?
Perhaps some of you do voluntary community service in the local community for free, or perhaps some of your colleagues who are retired from the profession continue to go down to the local storefront seniors bureau, which is a non-profit society, and help out many seniors during tax time. I know I have such a place in my community. Or some volunteers who are not qualified at all go to the local care facility and help people fill out a tax form.
Some of those individuals may or may not have some assets. They get confused. They one year may be fairly lucid in what they're doing, but the next year they're not able to give clear instructions or they forget what accounts they have and all the rest of it.
You're talking partly about the big chill, and the big chill about the delivery of service. You talked about perhaps reconsidering career, I heard that in this room today, perhaps even getting out of the business and all the rest of it. Well, what about at the other end? Do you have any experience or advice as to what the so-called big chill will do at the volunteer level, where most people are just filing a return that has OAS, CPP, but they may have some other little nuance of a pension from another country, or some other little thing related to a divorce or something?
Perhaps you could help us in that regard.
The Chair: That's a very interesting perspective.
Mr. Phil Friedlan: I'll speak to that.
I think the answer is that since being assessed a penalty is not dependent on getting a fee, people will probably be more reluctant to get involved in these things because of fear of being faced with a minimum $1,000 penalty because they may have been indifferent to this issue that you raise. I think it's a low standard.
So, yes, I think it doesn't just have an impact on big business, it has an impact on everyone. It has an impact on small businesses as well, who are faced with increased compliance costs. It has an impact for practitioners who are having to deal with clients who ask why they have to pay more. Well, it's because we're being imposed with higher standards, higher standards than even our professional bodies are imposing on us. So I think you're absolutely correct.
Mr. John Allinotte: I may add that an example of that was when they introduced the liabilities on directors for withholding tax. Many members of the profession used to participate in some of these charitable boards. A lot of us have bowed away from it because of the stringent requirements that are necessary for us to fulfil our directorships. For the charitable organizations that couldn't put the controls in to assure us that all the withholdings had been remitted properly and we could personally be held liable, we walked away from those organizations. Similarly, we would in preparing tax returns.
Mr. Paul Forseth: I do know that the functioning of Revenue Canada in my riding is very dependent in my city on the free service that's provided by the seniors bureau. It's a non-profit society, and they get tables in the local mall and whatnot. They process several hundred returns and hundreds of hours of volunteer time is given, sometimes by qualified people but most often by very unqualified people, because they're simply trying to help people to even read the documents and do the simplest of short form returns.
I'm wondering, based on the tremendous amount of experience that I see down at the table, that perhaps that whole service would collapse because of the big chill, because of what is anticipated here, and then all of a sudden Revenue Canada will be faced with what they may have to do. They're going to have to start hiring people or doing something because the seniors bureau can't get any money from Revenue Canada to do its job.
Mr. Robert Spindler: I would hope this legislation wouldn't affect acts of charity. But I think your point is very well taken, that it serves to very precisely highlight the lack of precision in the legislation. The mere suggestion that somebody preparing a tax return out of charity could be exposed to a penalty is ludicrous. We'd all agree, I think, that it's absolutely insane, it's silly. But it does serve to point out how imprecise, how broad the legislation is. So I think it's an excellent point to make.
The Chair: Mr. Chester.
Mr. Simon G. Chester (Legal Counsel, Canadian Institute of Chartered Accountants): My point has been made.
The Chair: Mr. Pillitteri, final question.
Mr. Gary Pillitteri: Thank you, Mr. Chairman.
Gentlemen, having had my tax prepared many times and in many different ways, I would have to confess that I've been at both ends, and I do understand. The examiner sometimes, or most of the time.... Under the Income Tax Act, you're guilty until you're found innocent. It's almost a vice versa within the criminal law, but I find that specifically in the agricultural component, the agricultural sector, it's one of the worst mismatches I've ever seen in my life. We do understand sometimes capitalization of equipment and so on, but I'll tell you, I've been on both sides of it and I feel for you in this legislation.
I've been on both sides of it, where I've planted an acre of grapes and it has been accepted as an expense. At the same time, I've had other auditors saying that planting an acre of grapes is capitalization, that you have to capitalize within seven years. I've been on both sides of it. I do understand the plight that you're going through. The best part is that each has their own interpretation...and trying to move them from that position.
I wanted to share that with you. Yes, I do understand your plight and I hope we could come up with some changes to this, because it's not really cut and dried.
I was not in any way trying to be facetious before, but I think also that on the part of the consumer there's some protection out there, because there are a lot of bad apples out there not doing a proper job. The individual who does care for his business, an honest businessman, doesn't mind going toward that higher cost. I think going to the lower cost is the one who really is trying to look for problems himself.
Having made that comment, I wanted to share with you that I've been on both sides and I understand your views.
Mr. Robert Spindler: Thank you.
Mr. Tom Akin: Thank you.
The Chair: That was well put, Mr. Pillitteri. As always, he is very biased. He always talks about bad apples, never bad grapes.
Some Voices: Oh, oh!
The Chair: On behalf of the committee, I'd like to thank you very much. You certainly gave us a lot to think about.
The meeting is adjourned.