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EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 28, 1996

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[English]

The Chairman: Order.

The finance committee is continuing with its reference on taxable Canadian property. We have with us today the group that sort of brought this to the public fore, the Auditor General, Mr. Desautels, accompanied by Mr. Minto and Mr. Elkin.

We are particularly concerned about your report, which indicated that the transactions ruled on may have circumvented the intent of the law regarding the taxation on capital gains and that Revenue Canada may have eroded the tax base by forfeiting a legitimate future claim to millions of dollars in tax revenue. These are very serious charges. We are pleased to have the opportunity to hear from you on them. Thank you.

Mr. Denis Desautels (Auditor General of Canada): Mr. Chairman, I am pleased to be here this afternoon to discuss one of the observations contained in chapter 1 of my May 1996 report. This observation raises serious concerns about the administration of the Income Tax Act. I stress that my main concerns are about how the law was administered by Revenue Canada in the case reported on, not about the law itself.

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I'm encouraged that the Minister of National Revenue has announced initiatives to address our concerns.

I'm pleased that your committee has agreed to review the policy basis for the taxation of capital gains, particularly as it relates to change of residency status.

I'm hopeful that your committee will be able to clear up some of the ambiguities with respect to the law and its intent so the intention of Parliament will continue to be fully reflected in the law and in its administration.

My office's primary role is to serve Parliament. I mention this to emphasize the independent nature of our audits and examinations. We do this work to provide Parliament with objective information, advice, and assurance. Pursuant to the Standing Orders of the House of Commons, our reports are referred to the public accounts committee, but we welcome requests for information from other parliamentary committees, such as this one.

[Translation]

Mr. Chairman, as Parliament's auditor, we focus our audits on the implementation of policies and programs. We do not express opinions on political issues associated with them. Our audits are carried out against existing policy, although from time to time, such as in the case before us today, we may raise issues that impact on policy and related political debate.

As noted in my 1993 Report, the purpose of the advanced rulings service is to promote voluntary compliance, uniformity and self-assessment by providing certainty with respect to the income tax implications of proposed transactions. By removing doubt as to the tax consequences of a particular transaction, advanced rulings provide certainty for taxpayers. We continue to believe that a fair and equitable rulings service remains an important part of the tax administration process.

This audit observation raises three concerns: first, possible circumvention of the intent of the law relating to the taxation of capital gains; second, the lack of documentation and analysis of key decisions; and third, fair and equitable treatment of all taxpayers. I would like to address each of these concerns.

[English]

Let me first turn to the issue of taxable capital property. I would like to refer to page 5 ofMr. Dodge's statement of May 16, 1996 to the Standing Committee on Public Accounts.

The Department of Finance based their view that the act intended that residents of Canada could hold taxable Canadian property by looking at the partnership rules in paragraph 97(2)(c) of the Income Tax Act.

In our view, as noted in paragraph 1.46 of our report, there is overwhelming evidence in the Income Tax Act to support the contrary view, yet this one paragraph relating to partnerships was used to sanction the transactions discussed in our observation. Without getting into the specifics, it's our view that it's not the intent of the law that the shares of the public company in the case discussed in the observation be treated as taxable Canadian property.

The rules Mr. Dodge dealt with can be summarized as follows. If a Canadian resident holds an interest in a partnership, then that interest is usually capital property, which is subject to Canadian capital gains treatment on disposal. Should the individual become a non-resident of Canada, tax would be exigible at the time of departure on any accrued gain on the partnership interest. If, however, the partnership interest is classified as taxable Canadian property when the individual leaves Canada, the partnership interest continues to be subject to Canadian capital gains treatment. However, if the asset mix or content of the partnership changes subsequent to the individual becoming a non-resident, the non-resident individual may no longer be subject to Canadian capital gains treatment because the partnership interest may no longer be taxable Canadian property.

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Mr. Dodge was concerned that if a Canadian resident could not hold taxable Canadian property, he would fall out of the Canadian tax system. Well, this falling out of the Canadian tax system was, and is, recognized in the act under subparagraph 115(1)(b)(v), since the non-resident individual continues to be subject to Canadian tax treatment for 12 months where such asset-mix change takes place.

It seems to us, therefore, that if Canada wanted to have the partnership interest remain subject to Canadian taxation for longer than 12 months, the period under subparagraph 115(1)(b)(v) could be extended. There is in fact a similar provision in subparagraph 115(1)(b)(iv), which deals with shares of a public company. In this subparagraph 5 years is used instead of 12 months.

In summary, subparagraph 115(1)(b)(v) already anticipated a change in the asset mix of a partnership and has a 12-month clause to cover it. The partnership interest could, on disposal, be still subject to Canadian tax even if it were not taxable Canadian property at the time of disposal because of the 12-month provision.

So it does not appear to us as if paragraph 97(2)(c) was meant to change a fundamental principle on which the act is based. We're not convinced that this paragraph is meant to ensure that taxable Canadian property could be owned by a resident of Canada as well as a non-resident.

[Translation]

Now, Mr. Chairman, we are concerned that the transactions ruled on in 1991 may have circumvented the intent of the law.

The facts are as follows: there were two trusts that were both resident in Canada. We called one Family Trust and we called the other Protective Trust. Family Trust had been in existence for more than 10 years whereas Protective Trust had been in existence for less than 10 years. Family Trust owned the public company shares. Prior to 1991, Family Trust received the public company shares in exchange for private company shares. As a result of this exchange, Revenue Canada concluded that the public company shares were taxable Canadian property. Protective Trust left Canada and took up residence in the United States. Immediately after Protective Trust became a resident of the United States, Family Trust, who remained a resident of Canada, distributed the public company shares to it. Revenue Canada's conclusion that the public company shares were taxable Canadian property to Family Trust meant that the shares could leave Canada on a tax-free basis.

Revenue Canada used a policy letter from the Department of Finance to support its conclusion. The letter states that:

Mr. Dodge, the Deputy Minister of Finance, advised the Standing Committee on Public Accounts on May 16, 1996, that because Canada does not want to forego its ability to tax at the time of emigration and then be barred from taxing by the treaty, it preserves its right to tax former residents for a given period of years after leaving Canada. In the case of the US treaty, a former resident of Canada remains taxable in Canada for 10 years on property held while resident here. As you can see, to ensure that the policy intent was not violated, it was necessary that Protective Trust continue to be subject to Canadian tax for 10 years after it received the public company shares.

However, Protective Trust had not been a resident of Canada for at least 10 years and it did not own the public company shares when it left Canada. As I understand it, either of those facts would allow Protective Trust, who now had the public company shares, to claim exemption from Canadian tax under the Canada-US treaty. As a result, the moment those shares crossed the border they would not continue to be subject to Canadian tax.

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[English]

It seems to us that Revenue Canada used the undertaking and the waiver to get around this problem. It's important to remember that the ruling was conditional on the provision of an undertaking and a waiver. I think this gives them more importance than simply an assurance that the transaction was not contemplated in order to avoid tax.

The undertaking asks Protective Trust to waive its right for ten years to claim exemption from Canadian tax under the Canada-U.S. treaty. However, Revenue Canada's files show that it was aware that the undertaking was not enforceable. Revenue Canada was aware that if Protective Trust did not live up to the undertaking and if it was reassessed, it could claim exemption from Canadian tax under the Canada-U.S. treaty.

To get around this problem, Family Trust provided a limited waiver, but to enforce the waiver Revenue Canada would have to issue a reassessment on the basis that the shares were not taxable Canadian property. The ruling said that they were.

If there are legitimate arguments that the shares were not taxable Canadian property, then those arguments existed when the ruling was given.

Mr. Chairman, you can't have it both ways. If the law is reasonably clear that the shares are taxable Canadian property, then the waiver has no real value. On the other hand, if the law is reasonably clear that the shares are not taxable Canadian property, then the ruling probably never should have been given.

In summary, we cannot see how the undertaking and the waiver can accomplish the policy objective of continuing to have Protective Trust subject to Canadian tax for ten years after it received the public company shares.

In our view the evidence clearly shows that up to December 23, 1991 Revenue Canada found that the transactions it ruled on were, at the very least, questionable.

While the undertaking and the waiver were used to try to get around this problem, they do not change the transactions. They are in effect a side agreement.

This also causes us real concern.

The Income Tax Act is a statute of general application; that is, it's supposed to be applied to everyone fairly and equitably. A side agreement applies only to the parties to the agreement. In our view the effect of this side agreement is to allow the taxpayer to circumvent the intent of the law and to replace the rules of general application contained in the act with a special set of rules to facilitate one transaction for one taxpayer. This side agreement does away with the notion of general application, and we believe that this erodes the very foundation of tax administration in Canada.

It's interesting to note that the version of the 1991 ruling, which was made public on March 21, 1996, makes no mention of the fact that the ruling was given on the condition that the taxpayers provide an undertaking and a waiver. In our view this is a serious omission. It has the effect of sending a message that future rulings of this nature will be given without an undertaking and a waiver.

[Translation]

I would also like to comment on the rule in the Income Tax Act that deems replacement shares to be taxable Canadian property. Some years before the 1991 ruling, Family Trust had received the public company shares in exchange for private company shares. The provision in the Income Tax Act, paragraph 85(1)(i), that characterizes public company shares as taxable Canadian property when they are exchanged for private company shares was intended to prevent a non-resident from avoiding Canadian tax.

Mr. Chairman, the legal opinion of 13 January 1992 contains an endnote which says, in part:

As you see, Mr. Chairman, in the 1991 ruling, the fundamental objective of paragraph 85(1)(i) was defeated. Rather than being used to prevent a non-resident from avoiding Canadian tax, it was used to allow a resident of Canada to avoid paying Canadian tax.

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I believe we have presented more than ample evidence that the transactions ruled on in 1991 may have circumvented the intent of the law. The waiver and the undertaking were used to try to get around this problem, one paragraph in the Act dealing with partnerships was used to sanction this transaction in the light of overwhelming evidence that the intent of the Act was that only non-residents could hold taxable Canadian property, and the objective of the deeming rule was defeated.

[English]

Now let me turn to our concerns on the lack of documentation. As we point out in the observation, the Department of Finance provided Revenue Canada with advice on whether tax policy intended that residents could hold taxable Canadian property.

The evidence shows that this was far from a straightforward question. Revenue Canada had issued an opinion in 1985 that said the opposite and made a convincing argument supporting its position. The notes of meetings held early in December 1991 showed that Revenue Canada was unsure about the question. The draft legal opinion received in mid-December is non-committal and indicates there are legal arguments on both sides.

The fact that the taxpayer even asked for a ruling suggests that the issue is not clear. And even if it was, why did Revenue Canada take almost two months to come to a decision?

Finally, we note that Revenue Canada received a request for an opinion on this very issue in July 1994 and it did not respond until July 1995, suggesting that it still wasn't clear to Revenue Canada.

So in light of all this, we expected to find documentation and analysis to support the view that residents can hold taxable Canadian property. The analysis we found supported the decision not to rule favourably. There was no analysis supporting the change in position that took place on December 23, 1991, as documented in paragraph 1.49 of our report. The only two documents to support this change were the letter from the Department of Finance and the final version of the legal opinion.

We note that the fundamental difference between the draft legal opinion of December 19, 1991 and the final legal opinion of January 13, 1992 is that the final opinion takes into account the position taken in Finance's letter. After quoting from the letter, the final legal opinion concludes as follows:

Given the importance of the letter from Finance in determining Revenue Canada's final position, we asked to see the analysis supporting the letter. We were advised that the Department of Finance's files do not contain any documentation to support its opinion or the potential fiscal impact of the advice it provided. It's not even clear who in the Department of Finance drew the conclusions in the letter.

We were also advised that Revenue Canada's files do not contain any analysis of the potential impact on other sections of the Income Tax Act or the impact on the fiscal framework as a result of accepting the Department of Finance's advice.

We believe that without a documented, appropriate analysis, public accountability for these types of decisions is compromised. In the case of the 1991 ruling, because of the contradiction between the 1985 ruling and opinion, the inconsistency between the 1991 ruling and a waiver that can only be enforced by arguing against that ruling, and eventually the lack of documentation, we do not understand the basis on which the decisions were made.

As well, we continue to be concerned about the lack of risk analysis in these transactions, which appear to have such a significant impact on the tax base.

[Translation]

Our third concern deals with the fair and equitable treatment of all taxpayers. As we point out in the observation, the 1985 ruling was not in the public domain, whereas the 1985 opinion that gave a different view has been in the public domain for some time. While the 1991 ruling was finally published in March 1996, I am concerned, Mr. Chairman, that because the details of this tax arrangement are now in the public domain there is an increased sense of urgency to rectify the matter. Also, as I noted earlier, the omission of the undertaking and the waiver in the published version may well lead to further erosion of the Canadian tax base.

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With respect to the transaction we examined, the relevant law consists of the Income Tax Act and the Canada-U.S. treaty. However, the use of the waiver and the undertaking influenced the manner in which the law was applied. It is not clear if these would be available to all taxpayers. So there is here an important accountability issue. That issue has to do with whether or not Revenue Canada should be able to make side agreements whose effects might fundamentally differ from those that would be obtained from a strict application of the law and how it should be held accountable for entering into such side agreements.

[English]

Mr. Chairman, in conclusion, the audit observation that has served as a catalyst for our discussion today raises serious concerns about certain aspects of the administration of our tax system and about the interpretation of tax policy relating to the taxation of certain capital gains.

I'm hopeful that your committee will be able to clear up the ambiguities with respect to the law and its intent so that the intention of Parliament continues to be fully reflected in the law and in its administration. I'm also hopeful that the Standing Committee on Public Accounts will review the decision-making process.

Just before closing, I'd like to add one final comment about the fiscal impact of the 1991 ruling. In the observation we said:

However, when assets worth over $2 billion with unrealized gains of an unknown amount move out of Canada tax-free, it obviously erodes the tax base.

Thank you, Mr. Chairman. My colleagues and I would be pleased to answer any questions the members of the committee would have.

The Chairman: I want to ask you a brief question of clarification. When you say the transactions that were ruled on circumvented the intent of the law regarding the taxation of capital gains, do you mean the laws contained in the Income Tax Act or the law in the Income Tax Act as modified by the Canada-U.S. tax treaty?

Mr. Desautels: I mean those two statutes, yes.

The Chairman: So it's your contention that what has been violated is the intention of the Income Tax Act as modified by the Canada-U.S. tax treaty.

Mr. Desautels: Mr. Chairman, it's -

The Chairman: The law regarding the capital gains is both of those, isn't it? I'm just trying to understand where you're coming from.

Mr. Desautels: Our starting position, Mr. Chairman, is the law governing the taxation of capital gains as contained in the Income Tax Act.

The Chairman: Okay.

Mr. Desautels: It's the definition of taxable Canadian property as contained in the act.

The Canada-U.S. tax treaty is a secondary piece of legislation, so to speak -

The Chairman: What do you mean by secondary?

Mr. Desautels: Well, it has been arrived at separately from the Income Tax Act and is being modified from time to time, as deemed necessary, but the Income Tax Act -

The Chairman: Just so I understand where you're coming from, if the government were to pass an amendment to the Income Tax Act increasing withholding tax to 40% on dividends, which one would prevail: the Income Tax Act or the Canada-U.S. tax treaty?

Mr. Desautels: I think Canada is a signatory to the Canada-U.S. tax treaty -

The Chairman: Of course it is.

Mr. Desautels: - and therefore it has to honour whatever agreements it has.

The Chairman: So even though you say the tax agreement is of secondary importance, it would prevail over amendments to the Income Tax Act.

Mr. Desautels: What I'm trying to say, Mr. Chairman, is that there were certain -

The Chairman: I'm asking you a very specific question. When you claim that the intent of the law regarding the taxation of capital gains is broken here, is that the law as expressed in the Income Tax Act or the Income Tax Act as modified by the overriding - not secondary - provisions in the Canada-U.S. tax treaty?

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Mr. Desautels: When we talk about the intent of the law, we have to take into account the Canada-U.S. tax treaty.

The Chairman: Okay. So your contention before us is that the intent of the law, i.e. as expressed in the Income Tax Act and modified by the Canada-U.S. tax treaty, has been broken. The intent of the law, as modified by the tax treaty, was that there should have been taxes exactable in Canada.

I'm just trying to find out. I'm not questioning what you're saying; I just want to know what you're saying.

Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, our contention is that the intention of the law we're talking about is stated both in the treaty and in the Income Tax Act.

When people sign those treaties or they make amendments to the act, there is an exercise they go through to make sure they're compatible. We're saying that the intention you've ended up with, the final product, has been violated.

The Chairman: Just so I'm absolutely clear, it's your contention that the law intended to tax capital gains in these circumstances. That law is contained in the Income Tax Act and modified and overridden by the Canada-U.S. tax treaty. What is the provision in the tax treaty that obviates the taxation here?

Mr. Minto: In this particular situation, the important thing is that you were dealing with a trust. The relevant part of the treaty that we're all concerned with here is that if the trust had been resident in Canada for less than ten years and then moved to the U.S., you could not tax that trust. That is the relevant portion of the treaty with which we are concerned. The treaty comes into play -

The Chairman: Is that what the treaty intended? Did the treaty intend that a ten-year rule should apply?

Mr. Minto: The treaty clearly states that if the trust is resident for less than ten years, then you cannot tax it.

The Chairman: So is that the intent of the law as contained in the Canada-U.S. tax treaty?

Mr. Minto: Mr. Chairman, that is the intent of the treaty.

The Chairman: Well, then that's the law, and the treaty overrides the Canadian Income Tax Act.

Mr. Minto: Yes.

The Chairman: So the intent of the law was that it would not be taxed.

Mr. Minto: Except, Mr. Chairman, if I can just come back to that, the reason why the department got a waiver and an undertaking was to get around that. That was the reason the department tackled that problem, or tried to tackle that problem, by getting the waiver and the undertaking.

The Chairman: All I want to know is: what was the intent of the law? Now you've explained to me what you think the law is; it is the Income Tax Act as amended or overridden by the tax treaty. You're saying that the intent of the tax treaty, with its ten-year rule, was to not tax these transactions.

Mr. Minto: Mr. Chairman, if I can just step back a little bit, the intention of the law in Canada is that capital gains are paid on the basis of residency, and when you dispose of -

The Chairman: What do you mean ``in Canada''? Is it under the Income Tax Act or not?

Mr. Minto: The structure of the Canadian Income Tax Act -

The Chairman: Oh, it's the act itself not modified now by the treaty?

Mr. Minto: No, sir. Let me just talk about the act first.

The Chairman: Okay.

Mr. Minto: Let me just say that the structure here is simply this. Canadian residents will pay capital gains tax when they dispose of capital property, when they die - there's a deemed disposition - or when they leave the country - there is also a deemed disposition. Then there are certain exceptions provided.

The Chairman: We understand that.

Mr. Minto: The certain exceptions are in part derived to make the act compatible with the treaty and in part for other good reasons.

That's where the treaty comes into play -

The Chairman: Just a second. These provisions were not put in the act prior to the treaty being in effect. These provisions were put in the act back in 1970 or 1971, before the treaty had any provisions dealing with capital gains.

Mr. Minto: You are asking me not about a specific -

The Chairman: No, I'm going on what you said. You said these exceptions were put in the act to make them compatible with the treaty. I'm saying to you that you have your facts totally wrong; the act came before the treaty.

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Mr. Minto: I was just trying to point out the fact that the act and the treaty are not incompatible and people go through the exercise to match the two up, and I was trying to provide you with an example of where this was done.

The Chairman: I don't understand that.

[Translation]

Thank you very much. We shall move on to questions. I am completely lost.

Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): Welcome, Mr. Desautels, Mr. Minto and Mr. Elkin to the Standing Committee on Finance.

What can be clearly seen from your report, when you refer to certain sections of the Income Tax Act, and this is clear to me when I read them, is that a Canadian cannot own taxable Canadian property. Thus, a Canadian cannot own taxable Canadian property within a trust and therefore cannot enjoy the kind of preferential treatment granted on December 31, 1991. Is that the case?

This morning I put the question to the Deputy Minister of Finance and the Deputy Minister of Revenue. I asked them on what they had based their decision and what was the tax rule that could justify their claim that a Canadian resident could have taxable Canadian assets in his trust fund and transfer $2 billion's worth of such assets to the United States without paying any capital gains tax. The Deputy Ministers made absolutely no reference to paragraph 97(2)(c) which you mentioned although they had done so when appearing before the Standing Committee on Public Accounts. They mention section 48 but without specifying what its contents were, in spite of my repeated request.

I would like you to enlighten us on two aspects. First of all, can you define the notion of taxable Canadian property? Why does the Income Tax Act hold, both in spirit and in the letter of certain sections which you mention in your report, that Canadian residents cannot have taxable Canadian property? Secondly, can you explain to us why this morning, Mr. Dodge or Mr. Farber referred to section 48 without giving any explanation of its purpose?

I have other questions, Mr. Chairman.

[English]

Mr. Barry Elkin (Principal, Audit Operation, Office of the Auditor General of Canada): I think the member was asking a question in connection with taxable Canadian property.

First, I don't think there's a particular provision in the Income Tax Act or the treaty that you can go to that says clearly that a particular asset is taxable Canadian property. You basically have to look at a number of provisions to come to the conclusion.

I can tell you how Revenue Canada came to the conclusion.

Revenue Canada came to the conclusion because there was previously an exchange of private company shares for public company shares. There was a deeming rule - I think it's under paragraph 85(1)(i) - that deemed those shares to be taxable Canadian property of the Canadian trust. If you accept that argument, that they're taxable Canadian property to the Canadian resident trust, when the Canadian resident trust distributes those shares to the trust that moved out of the country, that's now in the U.S., those shares can move on a tax-free basis on the assumption that through the treaty Canada has maintained its right to tax them.

The problem was that, if you take a look at Revenue Canada's response to us and at the legal opinion, everybody concluded, based on those provisions, that it was taxable Canadian property of the Canadian resident trust. You have to remember that it went from the Canadian resident trust to an offshore trust, and in my view it doesn't maintain its characteristic in the offshore trust. Because it's Canadian taxable property to the Canadian trust, it doesn't maintain its characteristic as taxable Canadian property to the offshore trust.

The other issue is that if you want to maintain the intent of the policy the Department of Finance states, they were prepared to defer tax - not tax when the property left Canada - on the understanding that, in conjunction with the Canada-U.S. treaty, they could maintain their right to tax it at a later date. Well, they couldn't maintain their right to tax it at a later date, so that policy objective was basically defeated.

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They tried to put this transaction in the same light as a transaction to an individual who left with these shares. An individual who left with these shares would make an election, and under that election they would be deemed to be taxable Canadian property. That individual would give Canada security. Through the Canada-U.S. treaty and through the Income Tax Act, Canada would have the right to tax those shares under certain circumstances. That right could fall by the wayside given a number of years.

So they tried to take this same position and force it into another position. To get to that other position, you needed the side agreement, the waiver, and the undertaking.

[Translation]

Mr. Loubier: In other words, officials from the Department of Finance and Revenue Canada have interpreted according to their own rule the way of administering this principle of taxable Canadian property as opposed to that contained in family trusts.

You are telling me that because of the tax convention between Canada and the United States, there was a travesty not only of the spirit but also of the letter of specific provisions of the Income Tax Act that would not normally have allowed such assets of Canadian residents to be considered as taxable Canadian property and thus transferable to the United States without a capital gains tax. Is that what you are telling me, Mr. Elkin?

[English]

Mr. Elkin: First of all, we don't really understand the basis on which the decision was made. As we've pointed out, there's a lack of documentation. I can only tell you how we see the transaction and why, in our view, certain things were done. Without having documentation as to why somebody came to this conclusion, I can't tell you what....

[Translation]

Mr. Loubier: Did you ask for documentation, and were you told that there wasn't any or did they refuse to provide it to you?

[English]

Mr. Elkin: No. Basically there was no documentation. There was no documentation supporting Finance's policy letter. There was no documentation supporting the change from the decision not to rule to the point in time when they made a decision to rule.

The only documentation was that after the fact, on January 13, 1992, they had a legal opinion. The legal opinion referred to the Finance policy letter. We went back to Finance and asked what supported the policy letter and we couldn't get any answers. It wasn't even clear who came to that conclusion at Finance.

[Translation]

Mr. Loubier: How can you explain the fact that a notice had been issued in 1985 stipulating that Canadian assets in trusts or elsewhere should not be considered taxable Canadian property and that a few years later a notice was issued reversing this decision?

I put the question this morning to Mr. Gravelle, Deputy Minister of Revenue Canada. He gave me an answer and in spite of my repeated request, I was unable to obtain any further clarification. There was a technical error in the 1985 notice. Were you given any reason other than the fact that a technical error had crept into the 1985 notice? I'd be interested in knowing what these reasons were.

[English]

Mr. Minto: Mr. Chairman, I draw the member's attention to paragraph 1.36 of our report, where it says we attempted to review the analysis supporting this opinion. We were told that it was perhaps technically not correct and we asked how they got to that conclusion.

We were informed that the file contains only the request for the opinion and the opinion itself. There is nothing in the file to support the reasoning behind the opinion. Without that, we could not conclude whether it was technically correct or incorrect or what section had been considered that said they were not applicable. We really cannot tell you.

[Translation]

Mr. Loubier: I'd like to address another question to Mr. Minto or Mr. Desautels. I want to emphasize how urgent the situation is, as you did in your report, Mr. Desautels, since the advance ruling handed down in December 1991 may have applied to other cases in which assets have been transferred to the United States or elsewhere.

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Since no one from either Revenue Canada or the Department of Finance deigned to answer my question at the meetings of the Standing Committee on Public Accounts, I ask once again this morning whether the 1991 ruling may have constituted a precedent for other cases of capital flight abroad.

Mr. Dodge said it was difficult to answer my question. I then put the question to Mr. Gravelle who acknowledged that, without a new advance ruling being issued on another case, a precedent could have been created in 1991 and further capital flight may have occurred since that date.

Since there seems to be unanimity in recognizing the urgency of the matter, with the exception of the Department of National Revenue, I'd like to ask you, Mr. Desautels, to indicate what concrete steps we can take to bring about the suspension of this ruling and have Revenue Canada send out an interpretation notice stipulating that future cases cannot be interpreted under the 1991 advance ruling since this ruling is under study and a very close analysis is required.

Would it be possible to obtain such a suspension and, if so, what would the different stages be?

Mr. Desautels: There's no easy answer to that question. I continue to maintain that it is an urgent matter. Since a first advance ruling was now made public in 1996, there are other taxpayers aware of the methods used for this transaction and they may proceed to carry out one of their own without asking for an advance ruling. They will just go ahead. The only way we can find out whether other taxpayers have taken advantage of this approach is if Revenue Canada decided to deal with such transactions in its audit or assessment.

Mr. Loubier: But Mr. Desautels, the government now has the duty to attempt to staunch the flow by suspending the application of this decision to other cases.

Do you share this view?

Mr. Desautels: That may be.

I think that Revenue Canada does have a number of way of sending out a clear message that the situation is being reviewed and the law may be changed. I hasten to add, as I said in my opening statement, that in July 1995 Revenue Canada issued in response to another taxpayer an opinion rather than an advance ruling to the effect that the taxpayer could go ahead with such a transaction.

So there are other cases that have been commenced since then.

Mr. Loubier: I'd like to put one last question to Mr. Desautels.

In the $2 billion case we are dealing with, the trustees or their representatives knew as of December 31st 1991 that such interpretations of the Income Tax Act could be made and they were aware of the existence of an advance ruling in favour of such transfer without the payment of tax.

Can it be said that because of the way in which this matter was dealt with, since December 1991, a number of people have learned of the advance ruling and were thus put in a position where they could have used this knowledge to the benefit of other holders of family trusts or holders of capital?

In other words, could the tax lawyers representing the extremely rich canadian family that transferred this sum of $2 billion to the United States have made use of the knowledge they acquired in this matter to sell this expertise elsewhere, to other trustee?

Mr. Desautels: That is possible.

This is one of the criticism that we made. The fact that the ruling was not made public before 1996 creates a certain unfairness among taxpayers. In 1993 we suggested in another report that Revenue Canada publish all advance rulings within a certain time frame to be fair to all taxpayers.

So it can be said that there was some unfairness in this particular case since the 1985 edition was never published and the 1991 edition was only published in 1996.

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The Chairman: Thank you, Mr. Loubier.

[English]

Mr. Grubel, please.

Mr. Grubel (Capilano - Howe Sound): I would like to start off by thanking Mr. Desautels and his team for bringing this very interesting and potentially explosive case to the attention of Parliament.

I just would like to get a statement off my chest as an economist. This is just another indication of a contention I would be prepared to defend, namely that capital gains taxation is really not a very good idea. Germany doesn't have one and it's doing very well, thank you very much. I think the income distribution can be taken care of in some other way. It's also an inefficient and in other ways inequitable system of taxation. But given that we have it, I suppose we have to deal with it.

I presume you brought this up and we are here in order to prevent further abuses of the intention of the law in the future. It is for this reason that we are trying to understand what went wrong. That's why we're going into all those details that are so difficult to grasp for non-lawyers.

If I now ask these questions or summarize what for me is at issue, please forgive me if I'm naive, but I'd like to ask whether you see that it is directly relevant statutes that were wrong, bureaucratic and legal judgments made that were wrong, or irregularities in the bureaucratic and legal judgments that might be questionable on ethical standards. Or is it all of those?

Question two is can we in any way reverse the 1993 transaction? Is that an option for us? Or do we have the authority, not this committee but generally - the Department of Finance - to discipline officials, or even reprimand the political bosses of those bureaucracies, in the context of this episode?

Finally, I'd like to see whether, after you have thought about it for as long as you have.... If I put you in charge of making changes either in the statute or in the procedures that would prevent this in the future, what would you do? Have you thought about what the trade-offs are, whenever they come out, which Mr. Dodge was discussing this morning and which are so close to my own heart as an economist, such that if we close one loophole by changing a statute, there will be consequences on the other side?

I'm sorry to have loaded all these questions together like that, but they all flow logically from each other, obviously.

The Chairman: You have an hour and a half to answer.

Mr. Grubel: I'm sorry, Mr. Chairman.

Mr. Desautels: Mr. Chairman, let me try to deal with this as quickly as I can.

First of all, let me say - and it relates in part, I think, to some of your concerns about the intent of the law - we're not being totally dogmatic on this and saying the law says this and you did that. I think we're saying there are very different interpretations among officials about the intent of the law here and we have in fact stated that the rulings may have circumvented the intent of the law. We're not saying that with absolute certainty. It will depend on whether we succeed in clarifying what the intent of the law really is in this whole question.

The Chairman: Excuse me. I quote: ``the transactions ruled on...may have circumvented the intent of the law''.

Mr. Desautels: Yes, ``may have circumvented''.

The Chairman: Okay.

Mr. Desautels: Mr. Chairman, ``may have circumvented'', and I insist on that word.

But to get back to the question -

Mr. Grubel: For my own clarification - Mr. Loubier also took the chance to do this kind of thing - I understood this morning we have the objective that on the one hand we have said we want to tax capital gains by Canadians. At the same time, as a country we also have the objective of facilitating capital inflow and capital outflow.

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In fact, as a result of having a greater amount of capital inflow we gain a great deal from assuring capital mobility and the mobility of people that comes along with it.

In the context of trying to assure this capital mobility - which on balance is in our favour - we have to make certain rules that I understand may on occasion be in conflict with the first objective of taxing everyone who has made capital gains so that we can continue having this mobility. I think this is what Mr. Peterson was saying.

The intent of the law, then, that you are referring to and that you are unhappy about is that it does not tax Canadian residents to the full amount, in light of the fact that as a country we also have a very strong interest in seeing international capital mobility maintained.

Is the fact that the country really has the two objectives - fair taxation and international capital mobility being maintained - playing any role in your analysis?

Mr. Desautels: I think you are raising a different dimension to the issue, and this has happened before on other discussions we've had on tax legislation. If your objective is to facilitate mobility of capital, I think that normally you'd expect it to be reflected in the very articles you find in the tax act, if you make a link between your taxation policies and allowing or facilitating movement of capital.

We assume that the tax act reflects the various intentions that parliamentarians may have had at the time they enacted that legislation. In our work we really focus on the uniform and fair application of the tax act as it reads. We don't take the view that we have to be more flexible or shut our eyes on this in order to accomplish another objective.

Personally, I don't think we can administer the tax act in that fashion. I think we have to take the act for what it says and take for granted that it reflects the wishes of parliamentarians.

If I may, I'll come back to your other question. You were wondering if the law is wrong.

I think a number of people have agreed with us, including, I think, people within Revenue Canada, that there are ambiguities in the legislation. Otherwise, if there had been no ambiguities and everything was clear-cut, it would not have been such a difficult decision for Revenue Canada to make and it would not have had to involve all the people it involved at the time. I think the evidence seems to indicate that maybe there is ambiguity in the legislation and that the ambiguity could be diminished in some fashion.

You talked about bureaucratic judgment in your questions. That's not as clear-cut a question to answer as some of your other questions were, but we think Revenue Canada could either rule the other way or could refuse to give an advance ruling on this one. It could in fact allow the taxpayer to do whatever the taxpayer chooses to do, eventually catching the transactions through the assessment and auditing processes. In our view, alternative decisions could have been made here and judgment did enter very much into the equation on this one.

You talked about ethical standards. As I said, on other occasions we've never made this an issue, and in fact, as I said, on other occasions we've done a lot of work in Revenue Canada over the years, particularly since I've been Auditor General. We've never had occasion to question the integrity of the senior officials at Revenue Canada.

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In terms of reversal of the decision, as you mentioned, I think Mr. Loubier asked a question along those lines as well. I stand to be corrected, because I'm not a lawyer, but I think an advance ruling has to be respected. If it's given, it's given.

Probably, though, other alternatives are available, if in fact the government should decide that there are alternative ways to handle this in the future.

Those were your main questions, I believe.

Mr. Grubel: Where do we go from here? Do you have any tips for us? Having studied so intensively, you have a great advantage over us. Also, we would like to have advice like that, independent from the Department of Finance and Revenue Canada.

Mr. Desautels: Mr. Minto can give you a bit of an indication, maybe, of what might be considered.

Mr. Minto: The member has asked, ``Where do we go from here?'' I presume he's not talking about these transactions particularly, but about generally where we go from here.

Mr. Grubel: Looking to the future, to prevent what you objected to from taking place again.

Mr. Minto: We did a chapter on advance rulings a couple of years ago and we found that the process is generally sound. We found that the people who get rulings appreciate the process, and we found the people who work there to be fairly competent and dedicated.

What we're looking at here are two transactions, not the whole rulings process.

Mr. Grubel: Okay. Now with respect to those two transactions -

Mr. Minto: Let me be very clear on that. It's not the whole rulings process that we're condemning and we are not saying, do not get advance rulings. It's a sound, appreciated process.

I think some accountability issues have been raised here on these particular transactions. AsMr. Desautels said in the opening statement, our main concerns are with the administration of certain sections of the act, not with major changes to the law. Any rash or any major work on the rulings process really is not warranted.

We could probably put in some measures. I understand the minister has made some announcements about the improvement to the documentation that she wants in the department. I understand some of those things have happened. I understand the department has put in some electronic databases now, which would flag very quickly contradictory opinions and rulings. I think these are the kinds of things that would help the process.

Mr. Grubel: But you were talking about bureaucratic processes. You must have had something in mind. Bureaucratic decisions, guidelines - I don't know how you put it. I appreciate all your wonderful suggestions about process so it can't happen again, but now that it has happened, can you put your finger on something that happened in the past that we must look out for so it won't happen again?

The Chairman: Thank you, Mr. Grubel.

Mr. Grubel: Thank you.

The Chairman: Ms Whelan, please.

Ms Whelan (Essex - Windsor): I want to clarify something, because the way I'm looking at this two different situations seem to exist. If an individual or corporation moves property out, for it to be taxable Canadian property they have to move out - correct? They have to become a non-resident?

Mr. Minto: Yes.

Ms Whelan: A trust has a special exemption, in the sense that it can move property out. The trust itself does not have to move out.

Mr. Elkin: If you accept that the policy intent is that Canadians can own taxable Canadian property, then you get the exact result that you're talking about: a Canadian trust has taxable Canadian property; taxable Canadian property can then be shipped out of the country - which was done in this case, it was passed on to a non-resident trust - and there's no tax. The question is, can you tax that non-resident trust?

So you're right. If you accept that -

Ms Whelan: Well, no, I'm reading from section 1.30 of your report, which says:

You're stating quite clearly that that's an exception and that taxable Canadian property.... So I guess you then have to look at what kind of property it is.

How do you determine what kind of property it is when you know all along that the beneficiary of a trust is a non-resident? So technically who owns the trust?

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Mr. Elkin: You've hit the nail right on the head. You can define what taxable Canadian property is; taxable Canadian property is something that's latent. Any piece of property has the potential to be taxable Canadian property if it is owned by a non-resident. It's a phrase; it's a term we've coined so that we can tax non-residents.

The Chairman: That's ridiculous. You said that any piece of property could become taxable Canadian property.

[Translation]

Mr. Loubier: It's the Income Tax Act...

[English]

Mr. Elkin: Well, I'm talking in general terms.

The Chairman: I think you'd better be a little more precise if you expect us to -

Mr. Elkin: In general terms, certain types of property can be classified as taxable Canadian property, the idea being that what's classified as taxable Canadian property is something that we ultimately have the right to tax in the hands of a non-resident. If we don't have the right to tax it in the hands of a non-resident, we want to tax it when it leaves Canada.

Ms Whelan: Who owns the trust?

Mr. Elkin: Well, the assets would belong -

Ms Whelan: To the beneficiaries?

Mr. Elkin: The beneficiaries would have rights. I don't know what you mean by ``own''. There would be capital income beneficiaries.

Ms Whelan: But the assets technically go to the beneficiary. The beneficiary is the non-resident.

Mr. Elkin: In this particular situation that's what happened.

Ms Whelan: So if you look at the property, technically I think there's a real problem, and I'm looking for a solution in the definition of the law. When you apply it to a trust, there doesn't seem to be a clear-cut way to say that you can't have taxable Canadian property.

If that's what you're saying should happen, if you look at an individual or a corporation, when they move property out to have it deemed as taxable Canadian property, they have to provide security. That's not provided for under the trust section right now. If that's the solution, then tell us that's the solution you're recommending, because right now that doesn't appear to be there.

Mr. Elkin: To put them on the same basis as individuals and corporations that can make elections, basically you'd have to have a law that clarifies that taxable Canadian property cannot be owned by Canadians. If that law were clear -

Ms Whelan: That doesn't make sense, though. You go on to say, in paragraph 1.31, that when a Canadian or a Canadian corporation moves out, they're entitled to deem certain property as taxable Canadian property when they become a non-resident.

Mr. Elkin: They're entitled to deem it to be taxable Canadian property.

Ms Whelan: But before they leave the country they're still a resident, and before they leave the country the law insists upon them giving satisfactory security. When they give that security, they're still a resident. You've already deemed that they have Canadian taxable property. They're not a non-resident at that point, so I'd say there's a bigger problem with the law.

Mr. Elkin: No, the law would work in that sense. When you take a look at the technical wording of the act, it says that it's taxable Canadian property. It's deemed to be taxable Canadian property as if the resident were not a resident of Canada. Basically what you're trying to say is that with an individual who makes an election, by making the election and classifying it as taxable Canadian property, we're going to maintain our hooks on it when that asset goes out of the country. The purpose of taxable Canadian property is to get a means to continue to tax it.

What we're saying is that there are certain assets that are hard to tax when they're out of the country, such as shares in a public company, for example. For those types of things, we want some type of security to ensure that ultimately, when it was realized by the non-resident, we would get our fair share, or what we're entitled to get.

Ms Whelan: But the law allows an individual or a corporation resident in Canada, who leaves Canada, to elect to have public or company shares become taxable Canadian property, upon giving proper security. You're telling me you're going to let them leave and then ask for the security?

Mr. Elkin: No.

Ms Whelan: So they're going to have to give the security before they leave. They're not a non-resident when they give the security, but they have the intention of becoming one.

Mr. Elkin: The election is conditional. You want the election before they go, and obviously you want the security before they go, but it's all contingent upon them being a non-resident.

Ms Whelan: In the situation of the trust, are you suggesting that we should have similar laws when property is moved from the trust to a non-resident trust?

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Mr. Elkin: In the case of a trust the law specifically precludes a trust from making elections. When you go back to tax reform in 1971, you have this concept of wanting to provide for mobility. You have Canadians who want to be out of the country for only a short time, etc., so you didn't want to penalize them by taxing them. They would go to school or on a short-term work assignment and come back to the country. So you had certain rules.

Ms Whelan: I'm not talking about making an election. Right now private shares that become public shares are deemed to be taxable Canadian property if owned by a non-resident. We allow Canadians and individuals to have taxable Canadian property or shares in public companies provided they provide security on their way out. We have special provisions for trusts that don't require trusts to move out.

I think there's a much larger issue here. You don't require trusts to move out and they can dispose of property out of the country. The exception for payment is known as taxable Canadian property. There's a section of the law that says it's deemed to be taxable Canadian property if it goes from a private company to a public company.

Mr. Elkin: You're absolutely right. In the case of this trust, it had what Revenue Canada considered to be taxable Canadian property. When it had that taxable Canadian property you could send it out of the country - which is exactly what it did - to another trust. The trust in the U.S. was a beneficiary of the trust in Canada. So there is a capital distribution and there is no tax; you're absolutely right.

If it were an individual, an individual would have to say gee, I have these public company shares and I elect to have them be taxable Canadian property. The government says fine, give me some types of security so when you're a non-resident I'll ensure you can live up to your obligations under the Canada-U.S. treaty and if you don't I have some security.

There's another issue. If you had a trust that had public company shares it didn't get through an exchange, it couldn't ship those shares out of the country as this trust did. So you have inconsistencies. If a trust had acquired public company shares in some other fashion, for example an individual -

Ms Whelan: I don't see the inconsistency when private company shares are deemed to be -

Mr. Elkin: With trusts there would be the inconsistency.

Ms Whelan: How can there be inconsistency when the law says public company shares -

Mr. Elkin: Not for trusts.

Ms Whelan: - exchanged for private company shares are deemed to follow through? If they're an election, it's a deeming position.

Mr. Elkin: What I'm trying to say is this. If you have private company shares and you exchange them for public company shares, which is what the observation says, those public company shares become taxable Canadian property because of the exchange.

Let's assume you had a trust that had cash and it went out and bought public company shares. It didn't get those public company shares through an exchange.

Ms Whelan: It's not the same situation.

Mr. Elkin: No, they're not deemed to be taxable Canadian property.

Ms Whelan: I never said it was. It's not the same situation at all.

Mr. Elkin: What you're doing is you're treating taxable Canadian property -

The Chairman: Thanks, Ms Whelan.

Mr. Dhaliwal, please.

Mr. Dhaliwal (Vancouver South): Obviously this is a complicated issue. It goes back to what I've said: does anybody really understand the Income Tax Act? It makes me wonder if anybody does.

Let me try to put it in simple terms, terms I understand. Perhaps it's naive, but I hope you have patience.

Let me start with trusts. I presume people have trusts for a variety of reasons. One of them is it reduces tax liability. Is that one of the major motivations for creating a trust, in most cases: that it reduces tax liability?

Mr. Elkin: To give you a blanket answer is very difficult. Trusts are obviously used as a means to hold property because generally you can have very flexible arrangements concerning various types of beneficiaries: capital beneficiaries, income beneficiaries, discretionary beneficiaries. You have a lot of leeway with what can happen with those assets and how those assets are controlled. Certainly trusts are also used to sprinkle income. You can have discretionary beneficiaries and you can do certain things like that.

Mr. Dhaliwal: When you say ``sprinkle income'', you mean income can be divided among more people, therefore reducing the tax liability.

Mr. Elkin: I don't know whether it necessarily reduces tax liability. It's a means of saying you want to get income to a particular individual with less difficulty than if the individual owns shares of the corporation or an interest in a partnership. You can have discretionary beneficiaries and things of this nature.

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So they're used for that purpose. They're probably used for a variety of purposes.

Mr. Dhaliwal: In this particular decision, where, from hearing you, an exception was made that you and I, in reading the Income Tax Act, would not know about, this is an exception made that really is not in the structure of the law. I understand that from what you have said and from what I've read. Whenever an exception is made in a tax situation, there's a loser and a winner. Who's the loser and who's the winner in this situation?

Mr. Minto: Our contention has been that the loser is the Canadian tax base, that Canada has given up substantial claims to future tax revenues.

Mr. Dhaliwal: You couldn't put a finger on the range of the amounts of tax losses as a result of this decision?

Mr. Minto: We are not familiar with the taxpayer's detailed tax position. We don't know the cost base of the taxpayer. We do know that for 20 years there was appreciation in the value of those assets and they are $2 billion in total.

Mr. Dhaliwal: You were saying earlier that, as a result of this exception that's made, even though waivers or side agreements were made, we as the government may not be able to collect any tax from this trust, which would have had to pay tax if they were in Canada.

Mr. Minto: The question here is how Revenue Canada is going to monitor the activities of the trust while it's in the U.S. How is it going to get reports back on what's being sold?

We know that the only way to enforce the waiver is to argue against your initial ruling yourself and your basic position that you've taken. We know that what the undertaking is saying is basically that the taxpayer is giving up its legal rights, and evidence from Revenue Canada's own files indicates that those kinds of undertakings are not enforceable. So if the shares are sold, we don't know how we are going to get the tax.

We don't know what happens to the trust, whether it stays in the U.S. or it goes somewhere else.

The point we make is that the mechanisms they put in place to guarantee that tax don't work. We don't see them working.

Maybe Revenue Canada has a better explanation.

Mr. Dhaliwal: I guess one of your concerns is that obviously you're looking at huge amounts of money. When you're looking at a trust that may have $1 billion or $2 billion, you're talking about huge amounts of money that we may not be able to recover at some future time.

Mr. Minto: That is our contention: that Canada has given up large future claims to taxes.

The Chairman: Mr. Pomerleau.

[Translation]

Mr. Pomerleau (Anjou - Rivière-des-Prairies): Thank you for your report, Mr. Desautels.

My first question relates to the company that made the transfer to the United States. We were told this morning that under certain agreements and treaties, if this company were to sell its shares within a 10 year period, these shares would normally be taxable in Canada. You seem to be telling us that we could be collecting the tax. In your report, you said that under a clause of the tax convention between Canada and the United States, if the protective trust were in existence for less than 10 years, Canada would practically have no right.

Could you please explain what you mean? It seems to me that there is a discrepancy.

Mr. Desautels: We said that in theory, since the protective trust had in a period of less than 10 years been created and then transferred to the United States, it had not been treated as a Canadian resident. It's because of this technical detail of the Act that Revenue Canada required from the taxpayer the commitment that we referred to previously to the effect that if the shares were disposed of in less than 10 years, he would be required to report the fact. However, the taxpayer did make a commitment not to dispose of them within the 10 year period.

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The Act allowed for a certain treatment but Revenue Canada required the taxpayer to make a commitment that he would not dispose of the shares within...

Mr. Pomerleau: If the taxpayer did not dispose of the shares within the 10 year period but did so in the eleventh or twelfth year, would he then come under the Canada Income Tax Act?

Mr. Desautels: If the taxpayer's shares were sold in the United States after the 10 year period, they would not be taxable in Canada because under the tax convention...

Mr. Pomerleau: They would be taxable in the United States. So even if the taxpayer fulfils his obligations and does not dispose of the shares before the 10 years are up, but waits until the eleventh year, then no Canadian tax will be paid on this amount.

Mr. Desautels: This is the principle that applies not only to this particular transaction but to all transactions of this type.

Mr. Pomerleau: This morning, I think it was the Deputy Minister of Revenue, told us that to his knowledge, since the 1991 advance ruling there have been no other rulings. You tell us that Revenue Canada received a request for an opinion, not a ruling, in July 1994 and that an answer was given only in July 1995. You have not done a thorough analysis of this. You simply noted that there had been a request for an opinion. This particular transaction was not one that you analyzed.

Mr. Desautels: Because of our presence in the Department, we know that this opinion has been given. The opinion is not an advance ruling and does not have the same status as an advance ruling. It would be almost impossible to do a survey of all the transactions of this type that may have taken place.

The transactions may have been done by the taxpayers and simply reported later on in their tax return. It's only when the tax returns are examined that we know that other taxpayers have carried out transactions of this type.

Mr. Pomerleau: So you quote this request for an opinion because it's the only one that you've seen. Have there been no others besides that one?

[English]

Mr. Minto: We haven't looked. We haven't looked for them since this -

Mr. Pomerleau: This is the only one you saw, but there might be some others.

Mr. Minto: Mr. Chairman, since the conclusion of this audit we have not gone out to look for any more. In future audits we may look for them, but we haven't looked for them.

The Chairman: Mrs. Brushett, please.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.

Thank you for throwing light on this issue.

It appears to me there's a lot of room for personal interpretation and there are ambiguities and inconsistencies in that area of interpretation. One wonders if this is a common event, that there is this great discrepancy in personal interpretation under these rulings.

Mr. Desautels: The Income Tax Act is a complex piece of legislation and it cannot really plan for all possible situations that taxpayers eventually could find themselves in over time, so I'm sure there are regularly situations where Revenue Canada is asked for interpretations in situations that maybe are different, unusual, or were not foreseen at the time the Income Tax Act was put together. It is a complex piece of legislation and there is a need for continuous interpretation of what the law means. So this is not unusual. As we reported in 1993, a process is in place to provide advance rulings to taxpayers, and the reason is just that, that the Income Tax Act is a complex piece of legislation and people have difficulty interpreting the intent of the act on their own.

Mrs. Brushett: As a follow-up to that, is it also common not to have any documentation or signatories to such interpretations?

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Mr. Minto: If you look at the report we have, just looking at these transactions, for example, we found that the files were very well-documented right up to the time the decision was reversed.

In a complex thing like that, a lot of people were involved, a lot of people gave opinions, and there were a lot of discussions. There were many meetings. They had meetings, minutes of those meetings, and analysis related to that.

My answer to you is that with something of this magnitude and this complexity, I would find it most disturbing and unusual if you didn't have documents when a major decision was changed and when all the way through you had documents.

The Chairman: You have just one more question, Mrs. Brushett.

Mrs. Brushett: Yes, I have just one brief one, then.

May I refer you to paragraph 1.36 of your report, where you talk about this opinion and supporting the opinion. You say, ``Revenue Canada advised us that it now considers the opinion to be technically incorrect.'' Yet the audit hasn't provided that. Could you elaborate?

Mr. Minto: Mr. Chairman, this is the opinion that was given in 1985. If you look at the sequence of events, in 1985 the department had given a ruling to a certain effect. A week after that, it had a request for an opinion on a similar topic with similar circumstances. This opinion was a totally reverse position that said residents cannot hold taxable Canadian property.

When they did that, we became aware of it during the audit. The department then said, ``Well, we now think this was technically incorrect''. So we said, ``Well, how did you get to that conclusion? You can only get to that conclusion by looking at the basis of the original decision.''

That is when we requested them to search the files to see if they could find any documentation. They could find none. Therefore, through the audit, we cannot provide you assurance whether that was technically correct or incorrect because we couldn't see the basis of that decision.

Mrs. Brushett: Thank you.

The Chairman: Thanks, Ms Brushett.

Mr. Campbell, please.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman. I have a couple of comments and a couple of questions.

Mr. Grubel used some provocative language earlier when talking about this explosive issue and this abuse. I just wanted to point out, Mr. Chairman, that I don't think we've made any such conclusion here as a committee. I'm sure Mr. Grubel was speaking for himself.

Mr. Grubel: No, I wasn't saying that. I was asking questions about whether there was.... Please have the record straight. I didn't mean to imply -

Mr. Campbell: You're usually scrupulously fair about things like that.

Mr. Grubel: I'm asking whether it might be a possibility.

Mr. Campbell: All right.

So we've not made any conclusion as a committee. The Auditor General has made an observation and others may have taken a position, but as a committee we have not.

Mr. Chairman, Mr. Loubier also expressed some concern about steps being taken in light of the publicity.

It's ironic. We welcome the Auditor General's publicity of these things, but it's the nature of the kind of publicity he gave here...others may be looking at this and planning their affairs accordingly.

In response to Mr. Loubier's question about what's being done urgently and whether something could be done, he neglected to mention the announcement the Minister of National Revenue made in the House today in answer to a question from Mr. Loubier, an announcement to the effect that all similar tax rulings are being suspended and will not be entertained pending the outcome of these deliberations before the committee. I wanted to clarify that.

Now I'll go on to some questions.

I'm looking at paragraph 37 in the presentation and I wonder, Mr. Chairman, if the Auditor General, who is quoting, I think, from his findings, could explain what is meant by the sentence:

I wonder if he can restate that without the negative - or the double negative - so we can understand what he means, or Mr. Minto can do it, as you wish.

Mr. Minto: Mr. Chairman, if I may, the member wasn't there, but at the public accounts committee - let me go back a little bit - Mr. Dodge from Finance stated that there was no immediate tax effective and that without this ruling the transaction would not have occurred. We're saying that if the transaction had not occurred, the assets would have stayed within the Canadian tax base and in the future we would have had some tax revenue.

Mr. Campbell: So there's no situation here where there was tax imminently to be paid and suddenly it was snatched from the coffers of the Consolidated Revenue Fund?

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Mr. Minto: If you go with the deemed rules. If you were going with the interpretation of the law that said that when trusts take public shares across the border there is deemed realization, then yes, there would have been taxes.

If you're taking the other interpretation, then there would have been a deferment of the tax.

Mr. Campbell: I've heard you today in your testimony. This is much less interesting testimony and less provocative than that which was given before the public accounts committee, and there are fewer members of the press to pick up on it. It's a bit more boring today.

I'm sure inadvertently a number of the things that have been said along the way - and you're not responsible for what the media report - have conveyed some impressions that are unfortunate. One of those impressions that has been conveyed - and indeed a member on our own side of the table picked it up - is that somehow there might have been a substantial amount of tax owing and unpaid that we're never going to collect.

I don't think you wanted to create that impression, did you?

Mr. Minto: The chapter and Mr. Desautels' opening statement very clearly talked about Canada forfeiting -

Mr. Campbell: Today.

Mr. Minto: No, at the public accounts committee. The testimony at the public accounts committee clearly states that we are forfeiting future claims to taxation.

Mr. Campbell: I'm pleased that you clarified that.

You state in the next sentence:

Mr. Minto: Mr. Chairman, may I clarify that?

Our testimony today is that the mechanism that was put in place to make sure that Canada will collect its tax was the waiver and the undertaking.

Mr. Campbell: And you're not sure that would work.

Mr. Minto: We have demonstrated that we do not know how that can be reported.

Mr. Campbell: Then your statement is not correct.

You're making a statement here, ``move out of Canada tax free''.

Mr. Minto: The fact of the matter is they did move out of Canada tax free. There was no deemed realization, so no tax was paid.

Mr. Campbell: But the implication of a statement like that read by members of the public or members of the media is that the tax will never be collected, by us or by anyone else.

Mr. Minto: We're talking about the Canadian tax base. We are not here to strengthen the foreign tax base.

Mr. Campbell: I won't get back into the issue.

One of my colleagues, Mr. Dhaliwal, mentioned the issue of how difficult the Income Tax Act is to understand. I share that difficulty with him. However, I understand some basic tax principles. One of them is that we do exist - as the chairman pointed out earlier - in an environment in which we have to take account of tax treaties. One of the principles in tax treaty law is that someone collects the tax and we may collect the difference because people get a credit for their tax.

That seems somehow to have been lost in the discussion.

Mr. Minto: The undertaking they took was against that very principle. The undertaking said they wouldn't give up that right under the tax treaty.

So it hasn't been lost. It's part of the discussion.

Mr. Campbell: Let me conclude with a couple of other questions.

I'm very pleased that you made reference - I don't know if in the other committee or in any discussions with the press you have done so - to your 1993 report, where you looked extensively at the whole area of advance tax rulings. I'm very pleased that today in your testimony you've commented on the importance of the advance tax ruling process. I certainly hope you've done this elsewhere.

Some have been left with the impression - and I give you another chance here to say it isn't so - that it's unusual or unhelpful for taxpayers to obtain such rulings. I take it from your testimony today that you still believe, as you did in 1993, in the importance of the advance tax ruling system.

Mr. Desautels: Our position on advance income tax rulings is very clear. We think that it's a very good process and that on the whole it works quite well.

Mr. Campbell: It's important not just to the individual taxpayer but also to others who observe the process and then can guide their behaviour accordingly. Officials tell us that it is also of value to them in learning about the types of transactions taking place out there that otherwise they might not know about.

Mr. Desautels: We agree with that.

Mr. Campbell: I take it that it's not unusual - because someone suggested this - to obtain advance tax rulings at calendar year-end. Is it, in your experience in reviewing advance tax rulings?

Mr. Minto: Not just calendar year-end. Different taxpayers have different year-ends. Whenever they need a tax ruling, they come for it.

Mr. Campbell: In review of the process, do there tend to be more of these requests at calendar year-end? Do you know why that would be?

Mr. Minto: I would agree with you, sir, that a lot of people do have their tax year-end at the same time as the calendar year-end and they do request a -

Mr. Campbell: Thank you.

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The Chairman: Thank you, Mr. Campbell.

I'm sorry, but our time has run out and we have people waiting for this room. I think there are members who have a lot of other questions. Would it be possible for you to come back to share your experience with us? Could I suggest next Tuesday at 9:30 a.m.? Would that be okay?

Mr. Desautels: I think so, Mr. Chairman.

The Chairman: Thank you very much.

In conclusion, I thank our witnesses for being with us today on this very difficult and complex issue. We're adjourned.

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