PACP Committee Report

GOVERNMENT RESPONSE TO

THE TWELTH REPORT OF

THE STANDING COMMITTEE

ON PUBLIC ACCOUNTS:

“CHAPTER 3, “INCOME TAX LEGISLATION,” OF THE FALL 2009

REPORT OF THE AUDITOR GENERAL

OF CANADA.”

August 2010

In her Fall 2009 report, the Auditor General (AG) released the findings of an audit of the processes by which the Department of Finance (the Department) develops legislative amendments to correct technical issues in the Income Tax Act (the Act).  This audit also examined how the Canada Revenue Agency (the CRA) provides taxpayers and its auditors with guidance on the application and interpretation of the Act, and how it assists the Department in identifying and developing technical changes that may be required in the legislation.

The Fall 2009 report concluded that some aspects of maintaining clarity of the Act are not being well managed, which creates difficulties for taxpayers and administrative complications for the CRA.  This finding is based on the fact that there is a growing backlog of needed technical amendments.  The report also concluded that the Department has weaknesses in its process for recording and monitoring legislative issues.

In regards to the CRA, the report noted that, while the CRA does collect information from its own operations about technical issues in tax legislation, the way the CRA collected, analyzed and communicated the issues requiring amendments to the Department was deficient.  The report also pointed out that the CRA is not providing advance income tax rulings in a timely manner, nor is it keeping information in interpretation bulletins up to date.

The AG made five recommendations:  

(1)   The Department should “use an integrated and consistent process for recording, tracking, and prioritizing all technical issues for possible legislative amendment.”;

(2)   The Department should “develop and implement a plan to address the current backlog of needed technical amendments,” and that the Department should “regularly develop and release draft technical amendments, including those that arise from comfort letters, so that taxpayers and tax practitioners know what changes will be made and can provide input to the Department.”;

(3)   The CRA “should create an electronic database to help validate, analyze, and prioritize identified technical issues that should be referred to the Department of Finance Canada and to track how they are addressed.”;

(4)   The CRA “should develop more concrete plans to meet its own target times for issuing advance income tax rulings, given the significance of the rulings to proposed business transactions.”; and

(5)   The CRA “should improve the information it provides to users about specific paragraphs in Income Tax Interpretation Bulletins that are no longer accurate, so that they can more readily comply with the Income Tax Act.”

The report of the Standing Committee on Public Accounts made four recommendations related to the AG’s report.

RECOMMENDATION 1

That the Department of Finance Canada facilitate the elimination of the backlog by ensuring that bills making technical amendments to the Income Tax Act only relate to technical tax matters.

The Government recognizes the importance of providing certainty for taxpayers by passing necessary technical income tax amendments and has on several occasions introduced bills with technical amendments.  As the Committee’s report noted “… a bill making technical amendments to the Income Tax Act has been introduced several times since 2002 but has not been passed. […] it is up to Parliament to ensure that they are passed.”

Often it is difficult to gain agreement on what is strictly a technical amendment.  For instance, some technical amendments that reaffirm longstanding policy positions, close loopholes arising from judicial decisions or take into account transactions that were not contemplated at the time the legislation was drafted may not be viewed by some stakeholders as purely technical amendments. 

The Government will continue to work towards ensuring that necessary technical amendments are put forward for consideration on a regular and timely basis.

RECOMMENDATION 2

That the Department of Finance Canada not wait until technical amendments bills are passed by Parliament before releasing further proposed amendments to the Income Tax Act for comment.

Historically, the Department has followed a practice of awaiting Parliament’s consideration and adoption of one technical bill before proceeding to release for public comment another package.

In the past this procedure has minimized potential confusion for taxpayers and their advisors (for example, by having different amendments to the same section of the Income Tax Act before Parliament and released in draft form for comment). 

Nonetheless, the Government recognizes that the current practice of seeking to defer the release of a new package of draft technical amendments may raise different issues relating to taxpayer uncertainty. The Government agrees to consider whether there are circumstances where it would be appropriate to bring forward for consideration a subsequent draft technical amendments package, notwithstanding the fact that the previous technical bill had not yet been adopted by Parliament.   

RECOMMENDATION 3 

That once the current backlog of technical amendments is passed, the Department of Finance Canada should prepare annual technical amendments bills for consideration by Parliament.

The Government is in the process of preparing legislation for the next technical bill. 

The Government will continue to work towards ensuring that necessary technical amendments are put forward for consideration on a regular and timely basis.

RECOMMENDATION 4  

That the Canada Revenue Agency provide by 31 March 2011 a progress report to the Public Accounts Committee on actions taken to address the recommendations contained in Chapter 3 of the Auditor General’s November 2009 Report.

The Government agrees with the importance of the issues, directed to the CRA, that were raised by the AG.  The CRA will be providing by 31 March 2011 a progress report to the Public Accounts Committee on actions taken to address the recommendations contained in Chapter 3 of the AG’s November 2009 report.