PACC Committee Report
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HOUSE OF COMMONS
Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its
The Standing Committee on Public Accounts has considered Chapter 7 of the December 2001 Report of the Auditor General of Canada (Canada Customs and Revenue Agency—International Tax Administration: Non-residents Subject to Canadian Income Tax), and has agreed to table the following report.
INTRODUCTION AND BACKGROUND
Every year, the Canada Customs and Revenue Agency (CCRA/the Agency) processes the withholding tax and tax returns of over 1.7 million non-residents who have earned income from Canada. Non-residents pay Canadian income tax on the income earned in Canada from a variety of employment and investment activities and from other taxable sources. Under the Income Tax Act, people who pay such income to non‑residents are legally obliged to withhold on account of taxes and non-residents may be obliged to file an income tax return. The Act and bilateral tax treaties between Canada and other countries define how much tax the payers of income must withhold. Under certain circumstances, CCRA may provide approval that the withholding tax be reduced or eliminated.
The Agency also provides a wide range of services in international tax administration, including the processing and auditing of non-residents’ tax returns; assisting non-residents to meet their income tax obligations and helping them understand and comply with the relevant tax laws and regulations. In 2000-01, the Agency reported that over 1.7 million non-residents received more than $42 billion in various forms of Canadian income and have paid about $3 billion in income tax. The Agency’s non‑resident enforcement activities have identified another $350 million in tax.
The audit report identified gaps in the Agency’s international tax administration activities, most notably in its risk assessment and compliance activities. The Agency’s compliance activities in the non-resident tax regime are not guided by a formal risk assessment or a comprehensive compliance strategy and there are weaknesses in the non-resident enforcement activities, particularly in the verification of capital gains tax owed by emigrants and in the administration of high-income non-residents who did not file tax returns. Furthermore, it was observed that certain bilateral tax treaties, most notably the Canada-Barbados Income Tax Agreement, were providing opportunities for aggressive tax planning that challenged the Agency’s enforcement capability and could cause significant unintended reductions to the tax base.
The Public Accounts Committee was very concerned upon learning about the shortcomings of the Agency’s international tax administration and decided to convene on 12 March 2002 to hear testimony on this matter. Representing the Office of the Auditor General of Canada were Mr. Shahid Minto (Assistant Auditor General) and Mr. Barry Elkin (Principal). Mr. William Baker (Assistant Commissioner, Compliance Programs Branch) and Ms. Jeanne Flemming (Director General, International Tax Directorate, Compliance Programs Branch) were present for the Canada Customs and Revenue Agency.
OBSERVATIONS AND RECOMMENDATIONS
The Committee focused almost exclusively on CCRA’s compliance activities, most notably with the Canada-Barbados Income Tax Agreement and the inconsistencies in non-resident tax administration.
The Committee was very concerned about various tax avoidance schemes involving the tax treaties with other countries, particularly with the Canada-Barbados Income Tax Agreement. Usually, Canada signs tax treaties with other countries to avoid double taxation. Under the Canada-Barbados tax agreement, a resident of Barbados can claim a Canadian tax exemption on a capital gain that would otherwise be subject to Canadian tax. However, given that Barbados does not tax capital gains, those persons participating in the treaty can avoid paying any taxes altogether on the disposition of assets. The audit identified a number of schemes that resulted in the avoidance of tax liability on the disposition of shares of Canadian companies. In some of the schemes, the ownership of the private Canadian company was held by an offshore trust or owned by a company residing in a tax-haven country. According to the audit report, the Agency has identified 53 examples of a scheme that has moved over $800 million in capital gains to Barbados from Canada. CCRA is currently examining this scheme to determine if it can be successfully challenged.
The Committee asked how the Agency addressed issues related to tax avoidance schemes and through what means it could enforce tax legislation, challenge these tax havens, and collect tax due. According to the witnesses, the Agency largely relies on domestic and foreign information sources to identify and keep track of offshore schemes. Canada has already taken the initiative by setting up a seven-country working group to collect and share information and develop practical tools to spot and monitor tax havens. Canada, through CCRA, is working with existing treaty provisions to share information, conduct research, and identify best practices in dealing with offshore tax havens.
Notwithstanding existing tax treaties, CCRA attempts to challenge these arrangements through tax-avoidance provisions of the Income Tax Act, and tries to reassess and collect as much tax as possible. The Agency has set up a project specific to the Canada-Barbados Income Tax Treaty that includes a number of these tax avoidance schemes. CCRA has yet to reach the reassessment stage for that particular treaty but it has already reassessed taxes for a number of other offshore trusts. Given the complexities involving tax avoidance schemes and international tax treaties, the assessment and collection of non-resident tax owed remains nonetheless problematic. The Agency recognizes these difficulties regarding the assessment and collection of these taxes. One challenge is to establish the right legislative framework and the right level of withholding rate as well as to create a mechanism that places the assessment burden on the taxpayer as opposed to placing it on the tax administration. The challenge is even greater for the collection of taxes. The Agency has already established a formal tax‑haven working group and a study group on tax collection.
Mr. Shahid Minto commented that while it was important for CCRA to apply continuous pressure to address the complex issues involving the taxation of non‑residents, such efforts required time and expertise, both scarce resources that could be dedicated to deal with other important priorities. Mr. Minto suggested that maybe the best approach would be to modify the tax treaties themselves. Mr. William Baker informed the Committee that the Government of Canada was currently renegotiating income tax treaties ― including the Canada-Barbados Income Tax Treaty ― with 23 nations, but that the process and its outcome will still require a considerable amount of time.
The Committee acknowledges the complexities of the issues regarding international tax agreements and makes the following recommendations:
RECOMMENDATION No. 1
That the Canada Customs and Revenue Agency include in its report on plans and priorities a section on relevant international tax treaty issues, incorporating the number of treaties currently under negotiation, detailing the relevant issues and challenges, and, if possible, provide an estimation on the amount of un-assessed non-resident income and that the Agency begin to report for the fiscal year ending 31 March 2003.
RECOMMENDATION No. 2
That the Canada Customs and Revenue Agency include in its departmental performance report to Parliament a section on relevant international tax treaty issues, incorporating the number of completed treaty negotiations with a discussion on resolved and outstanding treaty issues that will require further negotiation, and provide the total amount of non-resident income tax collected together with the total un-assessed non-resident income. That the Agency begin to report for the fiscal year ending 31 March 2003.
The Committee was also seriously concerned about observed inconsistencies in the administration of the non-resident tax. Given any set of facts, a taxpayer should expect the same treatment from all tax offices across Canada. Consistency in treatment of taxpayers requires that the central administration effectively communicate tax policies and regulations to field offices. However, the audit noted several inconsistencies in some operational and reassessment practices. Committee members talked of a “seeming unevenness” in the administration of the non-resident tax and enquired whether the Agency was taking any corrective actions. Mr. William Baker told the Committee that the Agency was doing its best to ensure a consistent application of tax laws, but given the number of tax offices with many tax officers working in different tax specialities, subtle differences in the administration of income taxes may arise as a result of decisions based on varying interpretations of tax legislation and tax policy. Mr. Baker added that the Agency is very sensitive to the public’s perception about tax fairness and, through active performance measurement and monitoring programs, it is always seeking to ensure the consistent application of the Income Tax Act.
More specifically, the audit report noted that in some cases, the Agency had not estimated, identified or collected the Canadian income tax that some non-residents may owe beyond the amounts already withheld at source for services provided in Canada. The Office of the Auditor General recommended that the Agency take more consistent actions when it identifies cases of non-residents who have not complied with tax-filing requirements. The Agency agreed with the recommendation and indicated that, at the time the audit was completed, it was in the process of reviewing non-resident compliance in terms of policy, procedure, systems and legislation in order to enhance the compliance and enforcement efforts with regards to non-residents. The Committee was interested in the current status of the review. Ms. Jeanne Flemming informed the Committee that the review was certainly ready and an action plan had been developed. This leads the Committee to make the following recommendation:
RECOMMENDATION No. 3
That the Canada Customs and Revenue Agency table to the Standing Committee on Public Accounts a report on its review of non-resident compliance, together with its action plan and implementation timetable. That the Agency be requested to table the report, action plan and implementation timetable no later than 31 December 2002.
The Committee is very concerned about the issues raised in the report about the Canada Customs and Revenue Agency’s international tax administration. Particularly worrisome are some of the inconsistencies observed in non-resident tax administration and some aggressive tax avoidance practices being used through bilateral tax treaties with Canada.
The Committee believes that the consistent application of the Income Tax Act is in the vital interest of the Agency, for Canadian taxpayers and non-resident taxpayers. The general public’s perception about the fairness and consistency in the administration of the income tax will have a direct impact on the Agency’s credibility and that will influence its ability in assessing and collecting taxes. If taxpayers believe that tax legislation is being intelligently interpreted and consistently applied, the Agency’s ability to assess and collect income taxes will be further enhanced.
The Committee acknowledges the Agency’s commitment to tax fairness and commends its diligence in trying to resolve the outstanding issues related to compliance and enforcement activities of the income tax regime for non-residents. It expects the Agency to follow through with its current initiatives in addressing the identified gaps in the management and administration of the tax regime for non-residents and report the progress of these initiatives in a timely manner to Parliament.
Pursuant to Standing Order 109, your Committee requests that the government table a comprehensive response to this report.
A copy of the relevant Minutes of Proceedings (Meetings Nos. 43 and 56) is tabled.
JOHN WILLIAMS, M.P.