STANDING COMMITTEE ON PUBLIC ACCOUNTS
COMITÉ PERMANENT DES COMPTES PUBLICS
Thursday 1 April 2004 Jeudi 1er avril 2004
2003 ANNUAL
REPORT,
PROVINCIAL AUDITOR
MINISTRY OF FINANCE
The committee met at 1026 in committee room 1, following a closed session.
COMMITTEE BUSINESS
The Chair (Mr Norman W. Sterling): As people are getting ready to make their presentation, Ms Martel has indicated to me that she wanted to raise a point of order, so this might be a good time.
Ms Shelley Martel (Nickel Belt): Thanks, Mr Chair. Anne will hand out a copy of a motion that I'd like to table in the committee today and would like to debate next week. I'll read it into the record and then just make a small point at the end. It reads as follows:
I move that as per section 16 of the Audit Act, the public accounts committee direct the Provincial Auditor to fully examine the government's intensive early intervention program for children with autism, including, for example:
(1) Why there was no increase in the number of children receiving services -- 516 children -- between June 2002 and December 2003, despite a $4-million increase in the budget for the program over the same period of time;
(2) Why the cost per client has increased so dramatically from August 2, 2001, to December 15, 2003. For example, in the southwest region the cost per client was $33,220 on August 2, 2001; $50,000 on June 1, 2002; and $76,850 on December 15, 2003;
(3) Why the average cost per child to deliver the IBI program has been estimated to be $55,000 by economists retained by the Ministry of the Attorney General for the Wynberg/Deskin court cases, while the regional range to deliver IBI per child is $65,746 as of December 2003;
and that the Provincial Auditor report to the public accounts committee with his findings and recommendations as soon as possible.
Chair, I said at the outset that I'm tabling this now for debate next week. I wanted to give it to members so they would have an opportunity to review it. You know I can be very political on this matter, but I am raising this because I have some information that I do believe would be interesting to the committee and to the Provincial Auditor that I think would clearly show that there need to be some changes made in this program to deal with the waiting lists. This has nothing to do with the most recent announcement made by the minister; it has to do with some documents that have been released through disclosure at the two court cases. I have some of those documents, and I am very clearly concerned about the cost differentials in the programs between providers and between regions. If we could get to the bottom of it, we might be able to be in a position to actually serve many more children, which is what I want to do at the end of the day. So I would be happy to talk to any members, and I will be tabling some of the documents next week as part of the debate.
The Chair: Thank you very much for your advance notice.
2003
ANNUAL REPORT,
PROVINCIAL AUDITOR
MINISTRY OF FINANCE
Consideration of section 4.08, gasoline, fuel and tobacco taxes.
The Chair: Mr Andersen, welcome to the committee, finally. It's traditional that we give the deputy the opportunity to introduce the people who are with him and, as well, make an opening statement. The microphones will come on automatically. The Hansard reporter will turn them on. The button is to turn them off. That's basically the way it works.
Mr Colin Andersen: Thank you, Mr Chair. My name is Colin Andersen, and I'm the Deputy Minister of Finance. Joining me today are Marion Crane, Pauline Goral and Brad Lawrance. Marion is assistant deputy minister of the tax revenue division.
Ms Marion Crane: It's Bruce Mitchell instead of Pauline Goral.
Mr Andersen: Sorry. We've got people here from the motor fuels and tobacco tax branch and the audit and inspection functions in the branch, and when and if they speak I'll ask them to introduce themselves.
I'd like to thank all of you for the opportunity to come here today, and I also want to say that I appreciate the flexibility you've provided to us in scheduling and rescheduling this appearance.
We're here today to talk about the Provincial Auditor's 2003 follow-up report on gasoline, fuel and tobacco taxes. We propose to give a brief background on our administration of those taxes to set the context for discussing the concerns and recommendations that came out of the auditor's 2001 value-for-money review and then the subsequent follow-up.
Gasoline, fuel and tobacco taxes are collected under the authority of their respective acts. The primary responsibility for administering these acts comes under the ministry's motor fuels and tobacco tax branch. By way of comparison with other taxes that are under the ministry's purview, these commodity taxes totalled roughly $4 billion in fiscal 2002-03, as compared to about $18 billion for personal income tax and $14 billion for retail sales. These petroleum and tobacco taxes are levied at a set rate per unit -- for example, 14.7 cents per litre of gas -- and are considered, and are, a direct tax on consumers.
Although these are direct taxes, we administer a taxation program whereby accountability for the products is established more upstream of the eventual purchases by consumers, primarily through large distributors of the products -- what we refer to as collectors. In other words, the oil companies and the tobacco distributors, which are designated as collectors, pay tax to finance up front and subsequently collect the tax after the fact from the ultimate consumers of the products. We also register manufacturers, importers and exporters, thus establishing accountability for the products throughout the entire distribution chain.
The auditor's 2001 value-for-money report expressed concerns in a number of areas in regard to the adequacy of the ministry's information to ensure that all taxes due were being paid in accordance with the statutory requirements. We're pleased to see that the auditor's follow-up report, under discussion today, recognizes that the ministry has made substantial progress in addressing these concerns.
In several instances, legislative change was needed in order to make progress, and we have made a number of those amendments and corresponding regulations associated with them. Administrative policies and procedures have been examined and were changed where necessary, and work continues in the ministry, as detailed in the most recent update we provided to the committee.
We'd like to turn now to the content of that report, which follows along with the format of the auditor's report, starting first with fuel, then we'll go into tobacco and finally there are some more general areas.
With regard to fuel production, the auditor's position was that accountability for potentially taxable products should be established as far upstream as is practicable, and we certainly agree with that. For a variety of technical reasons, the upstream point of first accountability occurs at the refinery production level, where refined gasoline and middle distillates come out as finished production. In consultation with other provinces, with the Canada Customs and Revenue Agency, with the US Internal Revenue Service and with the industry, our ministry resolved a number of technical and administrative issues around capturing this point of upstream accountability. Legislative support for this broader reporting framework was achieved through amendments to the gasoline and fuel tax acts, which passed in 2003.
Regulations that prescribe return-filing and record-keeping requirements were recently filed -- February 27, 2004 -- and manufacturers will commence reporting to the ministry in August. I believe we also provided the bulletins associated with those to the members of the committee.
The auditor also expressed concern around the movement of tax-exempt fuel between collectors. Again, this is not an issue of collectors not paying tax, but rather the concern is about accounting for the exchange of products that will eventually be taxable at the time of sale to consumers.
Recognizing that there are a number of technical difficulties in accounting for these tax-exempt transactions, the ministry collaborated with the Canadian Petroleum Products Institute to form a working group with a mandate to resolve the problem. The working group has determined that exchanges, known in industry parlance as swaps, are tracked in detail in the industry's marketing systems.
There's a time difference between resolution of the exchange contracts in the marketing systems and the due dates for the tax returns, thus resulting in the apparent differences that were noted by the auditor. At the most recent meeting between the ministry and the industry, in December 2003, industry agreed to provide after-the-fact reconciliations on a regular basis, which will resolve any apparent discrepancies as regards these swaps. The ministry is currently finalizing a bulletin and a guide, which will resolve the final few outstanding technical and reporting details.
As previously stated, imports and exports of fuel are administratively tracked as part of fuel accountability. Administrative procedures have been tightened up to improve reporting and tracking of the various parties involved in importing and exporting. Additionally, legislative changes through Bill 198 now provide better sanctions for enforcement when they're needed
The auditor also noted shortcomings in the processes and procedures whereby the ministry gives tax relief to exempt consumers. The vehicles for providing relief take the form of refunds for gasoline taxes and acquisition permits for fuel taxes.
The ministry's refund processing is a high-volume, manual vetting system that monitors and approves incoming claims. Staff resources are assigned to those areas where we perceive the risk of tax loss to be greatest. Where the ministry finds instances of ineligibility, we take compliance action as warranted. Controls over the acquisition of tax-exempt fuel through acquisition permits have been strengthened through a combination of field enforcement and desk-audit strategies.
Moving on to tobacco, the auditor's concerns have been taken to heart and actioned accordingly. Two primary concerns around manufacturing were expressed: first, again around upstream accountability for manufacturers' production volumes, analogous to the refiner situation we were just talking about; and secondly, in regard to accounting for the tear tapes that are found on cigarette packs.
We continue to review production information as detailed on manufacturer returns by desk-audit analysis. Federal information is also compared to information submitted by the tobacco manufacturers. Ontario has also coordinated and executed field audits with other provinces. We are confident that registered manufacturers are being held accountable.
I would also note that amendments to the Tobacco Tax Act proclaimed for July 2004 will further enhance accountability at the manufacturing level through control over cigarette-pack tear tapes. These amendments are the result of the efforts of the national tobacco marking steering committee, which is chaired by Ontario.
On the downstream side of the tobacco business, the ministry has reinforced reporting requirements with both importers and exporters. Co-operation continues with the former Canada Customs and Revenue Agency, which is now two federal agencies: the Canada Revenue Agency and the Canada Border Services Agency. As detailed in our status report to the committee, our efforts continue to strengthen controls over transporters of tobacco products.
As indicated in the auditor's report, a population-based allocation system is in effect for status Indians, whereby a sufficient quantity of tax-exempt cigarettes is provided for sale on reserves in the province. In fact, the process of implementing cigarette allocations has just been completed in January this year, as the last remaining reserve in the province was formally allocated.
With respect to cigars, we continue to review the need, legal basis for and practical implications of an allocation system for cigars, as suggested by the auditor.
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I'll now turn from the commodity-specific concerns to other issues that were raised by the auditor.
The Provincial Auditor was concerned about exempting certain fuel, gasoline and tobacco tax registrants from the statutory requirement to post security, based on an administrative policy which had grandparented existing registrants from the security requirements when they took effect in 1992. The ministry has reviewed its policy and we've decided to end the grandparenting. At the same time, the ministry is going to consider reducing the amount of security required of all registrants to an amount that is more in line with actual risk. Notification of this policy change was published by way of a bulletin issued last month. We are currently engaged in the process of determining how this new policy will apply to each registrant. There are now about 200 registrants subject to the new security requirements. The current communications plan would see the ministry making each registrant aware of the impact that this new policy will have on them by mid-year.
With respect to the audit and inspection functions for petroleum and tobacco taxes, the ministry completed initiatives and process at the time of the 2001 review to strengthen our audit procedures. Efforts continue to enhance and maintain professional audit standards in all of our tax branches throughout the tax revenue division under several strategic initiatives. The auditor's comments are valued and reflected in these initiatives. Field inspections have been strengthened through better use of technology and recruiting of two permanent managers in the inspections unit. The question of whether additional inspectors are to be added is being weighed against other enforcement priorities. In the meantime, the ministry is participating in the Inspections, Investigations and Enforcements Secretariat, one of the objectives of which is to leverage enforcement personnel across all ministries in the government. We are exploring new and creative ways to more effectively apply our enforcement resources.
Finally, the ministry fully concurred with the auditor's recommendations as regards the importance of using information technology and developing appropriate effectiveness measures, and has implemented management information systems, as detailed in our report to the committee.
In summary, we'd like to thank the Provincial Auditor for his recognition of our substantial accomplishments, as reflected in the follow-up report. We'd be pleased to take any questions that you might have.
The Chair: Questions?
Ms Martel: Thank you for being here this morning. Can I just move to point 12 on the document that you provided to us. You described a little bit of the business re-engineering process. I have to admit that I don't understand what that means. Can you give me some idea of what that entails in terms of how it responds to the auditor's concerns?
Mr Brad Lawrance: I'll respond to that. I'd like to introduce myself. I'm Brad Lawrance. My job title is senior manager in charge of audit and inspection in the branch. I've lived with the re-engineering project for a little while, so I think I can describe it.
The motor fuels and tobacco tax branch encompasses not just three different petroleum and tobacco statutes, but a number of other statutes. When I was an internal auditor in the old Ministry of Revenue, my biggest nightmare was to come into motor fuels because I had to audit all these statutes.
The purpose of the re-engineering project was to present one window to our clients, regardless of which statute they registered under or what kind of registrant they were. It's an information platform that allows our front-line staff to interact with persons calling in, walking in or contacting us for any kind of tax matter and being able to speak to that client on a variety of issues and statutes, whatever their concerns might be. It's to take a bunch of different silos, as is the current buzzword, and combine them into one window for the client.
Ms Martel: Did you have to make changes in computer technology as well?
Mr Lawrance: Yes, very much so. It's a mainframe system that required movement from old legacy systems, COBOL-based mainframes right down to small, PC desktop applications. You combine all the information to take the bedrock data from those systems, do all the reprogramming and provide that window for the clients.
Ms Martel: Is it actually complete?
Mr Lawrance: Yes, the project is complete. We'll probably always be providing enhancements to that, most particularly because of new legislative situations that arise, new initiatives that have to be programmed into the system.
Ms Martel: On your page 10 of 15, when you're talking about the security, how do you determine the amount of security from a registrant?
Ms Crane: I'm Marion Crane, assistant deputy minister of the tax revenue division. There are legislative requirements for security right now. We have discretion of what security we require from different collectors. It's a risk-based system. We're looking at the collectors with the higher risk posting more security. We look at such things as the time frame for the collectors getting the tax money into us. We base security on a number of factors, and we relate it to the risk of tax loss.
Ms Martel: Can you give us some examples, some ranges?
Ms Crane: Bruce, do you want to give some ranges of that, the numbers?
Mr Bruce Mitchell: Yes. Bruce Mitchell, senior manager, tax advisory and motor fuels. Just for example, on a fuel tax collector the legislation requires that security be in an amount equal to an average of three months' tax or $1 million, whichever is greater. The legislation further provides that the minister has the authority to increase or decrease that amount. So the legislation, in that three months' tax or $1 million, is essentially giving us a benchmark from which to start. As Marion has indicated, we're mow in the process of looking at that benchmark and whether it should be moved, whether the actual security required should be moved up or down, trying to take into account much more closely the actual tax at risk.
Ms Martel: Have most of your registrants purchased security, ie were they outside of the grandfathering clause and had security, or is it the reverse, that most of them will now have to pay the security?
Mr Mitchell: There are roughly 200 registrants that will be subject to security, and at the moment we have security from approximately 120 of them. So we're looking at obtaining security over the next several months from those additional 80 or so.
Mr Mike Colle (Eglinton-Lawrence): The question I have is with regard to this peculiar thing called yellow tear tape on cigarette packages. Not being a smoker, I'm just wondering, what's the status of this tear tape? Is it an effective way of ensuring that the cigarettes that are sold and consumed here in Ontario have this tear tape on them?
Mr Lawrance: Perhaps I could speak to that, being in audit and inspection. I actually brought a sample today of a cigarette pack for any non-smokers in the room. I can pass it around if that's convenient.
The yellow tear tape is an adhesive strip that goes underneath the cellophane wrapping on the cigarette pack. There's some indicia, some markings on this tear tape, that are specified by law. It must say "Ontario tax paid," and it also includes an indication of Canada tax paid. When we see a yellow tear tape on a package of cigarettes, it means to our inspectors that Ontario tax has in fact been paid and it's a legitimate product that's on the shelves in the market. Each province in Canada has a different coloured tear tape, so that we can tell for which province the cigarette was produced and is therefore legitimately for sale. It being that provinces have differing tax rates, this is an important visual indication of tax compliance.
The tear tapes themselves previously were loosely held under the cellophane. There's been some enhancements to make them more effective, including making them sticky so that they are ruined when they're taken off, thus alleviating potential counterfeit problems. The tear tapes also provide covert markings that inspectors can access in order to determine whether or not they are legitimate tear tapes.
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Mr Colle: Have you got any recent indication that there might still be some counterfeiting of this tear tape or is it still easy to get around it?
Mr Lawrance: We do have indications of counterfeiting that have been in the news of late: The RCMP seizures of counterfeit cigarettes in Vancouver and Toronto. That's in the public and in the press. There hasn't been too much incidence of that yet.
We have just recently implemented new regulations, following February 27, that make manufacturers more accountable for the acquisition, storage and use of these tear-tapes, and the licensees and suppliers of these tear tapes. We're trying to make sure that those dealing in these are legitimate players in the market.
Mr Colle: Just one last question: I guess the key to having counterfeit, bogus cigarettes is trying to copy and get hold of these tear tape facsimiles or get them in an underground manner. I guess it's critical to keep the integrity of the tear tape.
Mr Lawrance: It is critical to keep the integrity of the tear tape. As far as counterfeiters are concerned, tear tapes are not the only things they are adept at counterfeiting. Just as with currency, whenever there's an opportunity, there are persons who are very entrepreneurial in terms of providing and designing counterfeits.
Mr Andersen: We put out a bulletin at the beginning of March, and there are just a couple of highlights we should draw to your attention. I think we did send these over to the clerk. I'm not sure if they were distributed. They are obviously available on the Web site, and the like, but there are a few key points just to highlight.
Mr David Zimmer (Willowdale): This is a question looking into the future. When you go through the report, there were a number of glitches or anomalies and that sort of thing. When this two-cent-a-litre gas tax is going to be passed on to municipalities, to ensure that we don't have to come back next year and talk about embarrassments on this, how is that going to play out administratively? What are the plans, so that that works well?
Mr Andersen: The form, design and implementation of that specific commitment have not actually be finalized. It's a commitment to share 2% of the existing gas tax with municipalities. The allocation of that is also to be determined. Really, all we can say at this stage is, stay tuned.
As you are aware, there is a federal commitment as well. Discussions at both senior levels of government about how those commitments could be implemented are going to involve discussions among all three levels. I can't really answer the question specifically at this point, because the discussions are yet to get going on the very detailed design of it.
Mr Zimmer: Just a follow up: Let's assume that the governments have to settle what they have to settle. How quickly can you folks get up and running?
Mr Andersen: It really depends on exactly how that commitment is implemented, depending on whether it's an allocation among municipalities or more of a process whereby it would be collected and distributed at the point of sale.
The Vice-Chair (Mrs Julia Munro): We'll go to Mr Sterling.
Mr Norman W. Sterling (Lanark-Carleton): Along that vein, is it your understanding that the two cents they're talking about here is in terms of gasoline, or is it gasoline and diesel? Because there's a big difference. In 2001, they raised $2.3 billion in gasoline tax and $0.7 billion in diesel. Is there any clarification on that at all?
Mr Andersen: I think we'll have to get back to you on that.
Mr Sterling: If it was two cents -- the number we have is $2.3 billion. That was in 200l. Is that number bigger now?
Mr Mitchell: If I might step in here, I have the table from the 2003 budget, which shows gasoline tax -- this was interim at that time -- as 2.3 for 2003.
Mr Sterling: So it's the same as in 2001? There hasn't been an increase in usage?
Mr Jim McCarter: The figures we provided -- the 2.2 was for the 2003 fiscal year, and I think that agrees with the number you have.
Mr Sterling: OK. Now the tobacco tax, the 1.2 number.
Mr McCarter: The 1.2 is for the 2003 fiscal year.
Mr Sterling: OK. How does that split out? When was the increase in tobacco tax taken? What was the effective date of that?
Mr Andersen: The most recent increase, you mean?
Mr Sterling: Yes.
Mr Anderson: In November. There was a $2.50-a-carton increase in November, and then Quebec followed in December.
Mr Sterling: So the projection for 2003, prior to the tobacco tax increase, was what? And what is it going to be in the end?
Mr Andersen: If you'd like, what we can get is the most recent Ontario finance figures. There were the figures in the budget that were obviously before the increase that occurred in November, and then Ontario finance would have a projection.
Mr Sterling: What did you collect in tobacco tax for the first half or three quarters of the year? What did you collect in tobacco taxes to September 30?
Mr Andersen: Well, if what you're wondering is how much the annual per carton increase will be --
Mr Sterling: Yes.
Mr Andersen: We're estimating that it would be about $140 million in tobacco taxes in a full year. Obviously it was implemented halfway through the year.
Mr Sterling: I guess I'm a little confused, in that I think we were told by the auditor that there was a fourfold increase, from 2.6 cents a cigarette to 9.8 cents a cigarette. How would it only be a $140-million increase in a year when the total revenue is $1.2 billion per year in tobacco taxes? Some numbers are not adding up here.
Mr Andersen: There's an interaction between -- when the price goes up, consumption can go down, and whether or not we get back into a zone where there's greater exposure to any smuggling problems. We've talked about some of the measures that have been put in place to counter that.
Mr Sterling: But let's take it that if consumption stayed the same and you had adequate controls -- we were told that the tobacco tax was $1.2 billion. Is that correct?
Mr McCarter: Yes, $1.2 billion for the 2002-03 fiscal year.
Mr Sterling: So the tax went up fourfold. I would have thought simple mathematics would have been four times that number.
Mr Lawrance: Perhaps I could speak to that point. The information I have is that the tax per carton of cigarettes was $17.20 in June 2002, and it went up to $19.70 in November 2003, so just over a one-year period, which equates to about one cent per cigarette. I think that fourfold increase relates to the earlier figures back in 1988, from which there has been a dramatic increase.
Mr Andersen: When was the base that you were talking about to start with?
Mr Sterling: Something's not adding up here.
Mr McCarter: We were discussing the amount of the tax increase before you came in. I think one of our staff had phoned someone at the ministry, because we thought we might get asked the question, and they indicated that over time it had gone from 2.6 to 9.5. But I don't have the base year jotted down here, so we'd have to check into that --
Mr Lawrance: That would be November 6, 1999, when it was 2.65.
Mr McCarter: OK.
Mr Sterling: So it has been going up even prior to what they did in November?
Mr Lawrance: Yes.
Mr Sterling: So in November it was $140 million, and this tax year, then, we can expect an increase of about a quarter of that $140 million, so an increase in revenue in your bottom line of about $35 million or something like that?
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Mr Andersen: For the remainder of this fiscal year?
Mr Sterling: Yes.
Mr Andersen: We would have to see whether that price increase is having a noticeable impact on consumption and return of any smuggling activity. It's a little early at this stage to be able to tell that.
Mr Sterling: So if we're going to collect $140 million more a year in tobacco tax, what is the ministry doing in terms of -- are you hiring more inspectors? As the tax goes up, there's a greater tendency for more illegal activities to take place. Is there an increased investment in making sure that this doesn't happen?
Mr Andersen: In general, and as I alluded to before, we have to balance off the resources that we have against all of our enforcement activity across all of our revenue sources. Marion, maybe you want to speak specifically to it.
Ms Crane: Our audit inspection and investigation functions work closely together to detect any smuggling activities. We also work closely with other provinces and the federal government because, of course, this is an issue that affects us all. We look at how we can put in measures to prevent smuggling under various underground economy initiatives that we look at. Any incidences that we come across of contraband tobacco activities are met with appropriate assessments, fines, penalties, whatever we can do under the legislation. I think the most important part is that we work together with our partners and make sure that we're sharing information and addressing the problem as soon as we become aware of it.
Mr Sterling: Can I ask one other question? The two cents promised the municipalities: What would that mean in this taxation year or in terms of what they would be receiving from the province, notwithstanding you don't know how that would be distributed or whatever?
Mr Andersen: Maybe we could endeavour to get back to you on that one?
Mr Sterling: OK. As well, whether or not that includes the diesel.
The Vice-Chair: I'd just like to ask the auditor to clarify some issues around our current discussion, particularly in the area of tobacco.
Mr McCarter: Perhaps to provide some perspective on the numbers, in 2001, tobacco tax receipts totalled $493 million, and that was where cigarettes and cut tobacco were taxed at 2.65 per cigarette. In 2003, the number we have is $1.2 billion, which I think agrees with the number you mentioned previously. So that gives you an indication of the increase over the two-year period.
Mr Sterling: What was the budget document number in May 2003?
Mr McCarter: The budget number is probably better directed to the deputy.
Mr Mitchell: The interim figure in the budget for 2002-03 for tobacco I have shown here from the budget booklet is $1.215 billion.
The Vice-Chair: Thank you very much. We'll move on to Ms Broten.
Ms Laurel C. Broten (Etobicoke-Lakeshore): Mr Sterling asked a number of my questions, but I just wanted to follow up on whether or not, following the tobacco tax increase in November, we've seen any effect on the ability to collect that tax increase -- I guess the tax component, including the increase.
Mr Lawrance: The ability to collect, meaning -- I'm not sure what impediments might get in the way of collecting it. There are some impediments, but I'm not sure which ones you'd like us to speak to.
Ms Broten: I guess all of the impediments that may be out there, and whether or not there's a correlation to an increase in the taxation, whether that is creating any effect.
Mr Lawrance: Of course, our registrants continue to collect tax and remit as normal. We have them compliant with the system. It's a little too early to say what, if any, effect this last increase has caused on smuggling or counterfeiting. We have anecdotal information that I've mentioned previously regarding RCMP seizures. We are working with the partners that Marion mentioned to try to detect any smuggling that might be impediments in the way of collecting the tax, but it's simply too early to see how this has washed out from the November increase.
As regards regular streams of tobacco collection, we're encountering no difficulties that are abnormal.
Ms Broten: Is there historical information that you can relate as to the cause and effect associated with the tax increase and the collectability of the taxes, previous increases in taxes in which you can look at that information and transpose it out?
Mr Lawrance: The stark example would have been the tobacco increases in the early 1990s that led to a smuggling problem. I think most folks are well aware of that. The tax increases did contribute to that channel of smuggling. That was the most overt example we know of.
Since that time the federal government has put an export tax on cigarettes to prevent that from happening again. It appears to be working effectively. We're keeping an eye on it, working with the CRA to monitor it. Of course, that's not to say there won't be other avenues appearing in the near future or as prices go up. There is a correlation between the incentive to indulge in the contraband market and the level of taxation; that's a simple economic equation. Our job is to make sure that does not happen.
Ms Broten: Have there been any increased mechanisms put in place to ensure that does not happen as a result of the latest tax increase?
Mr Lawrance: There are a number of investigative projects underway that of course we can't speak to in detail here that are of the nature of joint forces operations with other agencies and in-house, in audit, inspection and investigation. So the answer is yes, we are trying to make sure that we're ramped up to respond to a potential threat.
Mr Andersen: Maybe I can just add a couple of things. I would caution about trying to draw parallels with history, because obviously over time things have changed. The market has changed. There are a number of different measures that have been put in place by both the federal government and the province to combat the smuggling problem. As well, societal attitudes toward smoking have changed even in the last 10 years. So you can't always extrapolate from the experience of the early 1990s, when there were some of those high taxes and then a tax decrease, to the situation that we're in now. Hence, the answer about it being a little bit early. We are certainly keeping our eyes open and monitoring to see whether we're seeing any up-tick in activity and whether there's anything with regard to the volumes that we're seeing.
As well, just the other part of your question, the tear-tapes that we were talking about earlier, for example, are mechanisms that are being put in place -- strengthened mechanisms, if you will -- to get at some of those same kinds of issues.
Mr Richard Patten (Ottawa Centre): I'd like to follow up on the issue of field inspections. The auditor had given an example. In the GTA, apparently, there is one inspector. How that person can function -- he or she must be an exceptional individual to cover that territory. Given the increase in prices on gas, on fuels, on tobacco and everything else that interests certain factions to become involved in looking for ways to avoid paying the required taxes, of course -- and we've seen this as a general pattern in other ministries in terms of inspections. When the message gets through, somehow the commercial sector gets a little lax, and some aspects become a little more lax and they don't take seriously the compliance requirements because they know the inspectors are few and far between. So the potential for the estimate of the variance of what would be 100% of compliance in dollar terms and the investment of inspectors -- making the assumption that a certain degree of inspection really does do the job.
I heard a passing comment being made that, "Well, we have to work within our resources," and of course that's always true. Sometimes those resources are not adequate and sometimes certain resources are an investment. That gives you a better payoff and more than pays for the addition of X number of inspectors. Would you care to comment on that?
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Mr Andersen: Sure, I'll start off and then Marion might want to add some more specifics. We do have to balance off our resources against the payback, if you will. Our whole inspection and taxation process rests largely, in part, on the concept of voluntary compliance, in encouraging people to do that with regards to making it as easy as possible for them to remit. We also are looking at a more risk-based approach to our investigation and enforcement activity, trying to identify those areas where there might be a higher probability of somebody not remitting taxes that are owing. That way we can focus our resources most strategically.
Marion, do you want to add anything to that?
Ms Crane: What you said is certainly the direction we're going in. We always have to look at what our return on investment will be for all of these enforcement people across all of our programs and where is the best place to put our resources. We're looking, as the deputy has mentioned, at all of our approaches to be more risk-based, and looking at what we can do because we know that every dollar we can spend to have voluntary compliance is much more cost-effective than having to go out afterwards and find these people through inspections or audit or special investigation. Yes, we're looking at what increased resources we need, balancing that with other requirements in other areas as well.
Mr Patten: Are there any plans for any additional inspectors?
Ms Crane: We're looking at that, yes.
Mr Patten: You're examining that right now?
Ms Crane: Yes, we are.
Mr John Yakabuski (Renfrew-Nipissing-Pembroke): I apologize I wasn't here earlier to hear your presentation, but it couldn't be avoided. I do want to ask some questions on tobacco. I know that Ms Broten and Mr Patten have asked some of those, as well as Mr Sterling. You alluded to the fact that with increased taxes, even though societal attitudes may have changed, human nature hasn't changed. We are looking at a situation where there is a greater propensity for smuggling and illegal activity to go on. I certainly have seen that in my own constituency. The number of complaints from business people with regard to the number of illegal cigarettes out there has escalated dramatically.
When you look at revenues that have gone from -- I didn't write down the numbers -- $400-some million to over $1 billion in cigarette taxes, of course that's a tremendous encouragement to conduct these kinds of activities. I think it would be important to ensure that, if that kind of revenue is being created, investment in investigations is in keeping with that. I certainly hope that there's a commitment to see that happen.
Is there a way of measuring? If the number of yellow-banded packages of cigarettes -- the taxes-paid cigarettes -- is going down, how do we tell it's because of, as you've talked about, societal changes? Some people will keep smoking despite higher taxes, but others will look for an opportunity to smuggle the product. How do we measure that, or is there a way of measuring that?
I've had people bring specific complaints about illegal tobacco in my riding and I've turned them over to the people at Canada Customs and Revenue. So that is ongoing. I wasn't aware that there were people in our government that we could report to. I would like to have that information as well because it is an issue in my riding.
Mrs Liz Sandals (Guelph-Wellington): It's coming across the river?
Mr Yakabuski: No. I'm not an investigator, but the speculation by retailers in my riding is that it's coming through the Pikwakanagan Reserve.
Mr Andersen: One general comment to start off; people are probably well aware of this. Obviously, the tobacco tax increase can result in smuggling, but the price increase also serves as a powerful incentive to get people to stop smoking, or not to start, particularly among the young.
The government-wide approach is to try to strike the right balance, having an anti-tobacco strategy that has all of the various elements in it, including the initiatives of the Ministry of Health with regard to public education and the like.
With regard to the structure of our units, maybe you can respond.
Mr Lawrance: I think I can respond to a couple of the questions that were asked. One was, how do we measure non-compliance? How do we measure the reduction of the amount of yellow tear-tape to legitimate product that's out there?
We in the enforcement business use a number of different indicators. Of course, we look to see how much tobacco revenue is going in and how many cigarettes are being produced and put out onto the market. When there is a tax increase, classic economics would tell us that, because of the elasticity of demand, the reduction we see is completely attributable to reduction in smoking. I think that's what our friends in the health department are prone to believe.
We look to see whether that's true or not by looking at other indicators, such as, what are our inspectors seeing out in the field? What's being reported to them by retailers and individuals? What kind of anecdotal evidence do we have, such as thefts and store break-ins to steal cigarettes? What information is coming our way that might lead us to believe that the decrease in legitimate yellow tear-tape parked on the market is not completely attributable to a decrease in consumption?
We work together, of course, with the CCRA, with other provinces and with the Internal Revenue Service in terms of getting information that helps us to form an opinion as to what is happening.
We know that there is, to some extent, legitimate product on the market. Our job is to try to control that to the largest extent that we can. Complaints will sometimes arise; for example, when product that is not yellow tear-taped, product that is meant for consumption of status Indians, makes its way off-reserve into the legitimate market. That used to be much more of a problem than now when we have an allocation system in effect. When we finally completed the loop on that in January of this past year we made big inroads on that kind of tax leakage, as we call it.
Our information is a combination of statistics and anecdotal information and tips.
Mr Yakabuski: I'm aware there is an allocation system and it's based on every citizen on the reserve, I believe. Anecdotal evidence notwithstanding, if a particular retailer would be reporting that their cigarette sales were down to less than half of what they were, it would be hard to assume that the light went on in that many people's heads and they decided to quit smoking in that short period of time. With that kind of evidence, I guess it would warrant some kind of investigation.
The question I have is--so I can understand a little better, because I get these questions -- do you have any responsibility or authority, or is that strictly a federal matter if their concern is that it's coming through a native reserve?
Mr Lawrance: Our enforcement policy is that we expect all players in the market to comply with provincial policy, although it's the federal people who exercise jurisdiction in the reserves and that's why we try to work with them. We are constantly addressing the kind of issues that are alluded to, and we expect compliance regardless of whether on-reserve or off-reserve.
I think I failed to address a previous point, and that was that we have provincial people, inspectors in the field, assigned to specific patrol areas across the province. We would be most pleased to provide that contact name for constituents or MPPs to contact for information or for enforcement information.
Mr Yakabuski: I would appreciate that. Thank you very much.
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Mrs Julia Munro (York North): I wanted to address a couple of issues. The first one is with regard to point 11 on the sheets that you've provided for us. As you explain here, you are moving from what are manual forms to computer-based planning. On the last one, point 12, where you are talking about the business re-engineering, I wondered if you could give us a sense at this point of how you would estimate the differences in the cost associated with providing the kind of manually based system you have today as you move to a computer-based planning system. How is that going to impact in terms of the cost of the services you provide here?
Mr Lawrance: This is with respect to the management information system for inspections, I believe, in point 11. This is a considerably different investment requirement than is referred to in our re-engineering program. That was a branch-wide, large-scale technology platform. Within the inspection system, the kinds of automation we're talking about can be accomplished through simple desktop or server applications. The difficulty is the logistics of getting the information correctly on a database and then using it. It's not worth the cost of the resources to do it. So we do not expect to have a high incremental cost in order to automate some of these things.
Mrs Munro: But presumably, if it's that much more efficient and so forth, there would be some benefits in terms of the cost of the delivery of that service. Is that fair to assume?
Mr Lawrance: There are some benefits in terms of the cost of delivery. The primary reason we are concerned about a management information system is to tell us what the inspectors are doing and where they are being most effective. One of the side benefits of that system is that we can feed information to inspectors on the road in electronic format very quickly. In that sense, yes, it will be a savings. They don't have to call in for information; it can come off the system and be sent to them immediately and, in the new world, maybe in a wireless environment, so that inspectors have real-time, secure, encrypted information to use for enforcement on the spot. Yes, there will be savings in terms of process and the hoops we are required to go through now to get the job done.
Mrs Munro: On a totally different tack, I wonder, are there any new programs for tobacco farmers? We've talked about the initiatives to reduce the amount of smoking in the province and I just wondered if, as we were taking away on the one hand, we were providing some support on the other?
Mr Andersen: The Ministry of Agriculture has been working with tobacco growers, and there is a round table, which is a government industry group, that was established by Agriculture Canada back in October 2003. They are looking at those. It's a work in progress at this point.
Mrs Munro: From that, is there any suggestion you would be familiar with that there would be a purchase-of-tobacco quota or any kind of investment in that area from the increase in tobacco revenue?
Mr Andersen: I know there are a lot of suggestions on the table; I am just not aware of how far along that has come. There wasn't anything specifically in the federal budget talking about it as far as I'm aware, but discussions are continuing. The examples you are talking about are some of the ones that people are discussing.
Mrs Munro: Does this round table include other provinces besides Ontario?
Mr Andersen: I believe so.
Mr Lawrance: Yes, I think we've had a few details from our colleagues in agriculture and food just recently. Quebec is engaged in that round table, as is Ontario, along with the feds. I'm not sure about other provinces, but one of the explicit objectives of that round table is to discuss transitioning of farmers to other crops in the face of the decreased demand that's projected.
The Chair: There being no further questions, thank you very much. We appreciate your attendance. If you would respond within a reasonable period of time -- let's say three or four weeks -- to any questions that were asked here and if you would like to provide clarification, our research officer will be in touch with you with regard to that information.
The committee continued in closed session at 1126.
CONTENTS
Thursday 1 April 2004
Committee business P-227
2003 Annual Report, Provincial
Auditor:
Section 4.08, gasoline, fuel and tobacco taxes P-227
Ministry of Finance
Mr Colin Andersen, deputy minister
Ms Marion Crane, assistant deputy minister, tax revenue division
Mr Brad Lawrance, senior manager, audit and inspection, motor fuels and
tobacco tax branch
Mr Bruce Mitchell, senior manager, tax advisory services, motor fuels and
tobacco tax branch
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Chair / Président
Mr Norman W. Sterling (Lanark-Carleton PC)
Vice-Chair / Vice-Présidente
Mrs Julia Munro (York North / -Nord PC)
Ms Laurel C. Broten (Etobicoke-Lakeshore L)
Mr Jim Flaherty (Whitby-Ajax PC)
Mr Peter Fonseca (Mississauga East / -Est L)
Ms Shelley Martel (Nickel Belt ND)
Mr Bill Mauro (Thunder Bay-Atikokan L)
Mrs Julia Munro (York North / -Nord PC)
Mrs Liz Sandals (Guelph-Wellington L)
Ms Monique M. Smith (Nipissing L)
Mr Norman W. Sterling (Lanark-Carleton PC)
Mr David Zimmer (Willowdale L)
Substitutions / Membres remplaçants
Mr Michael A. Brown (Algoma-Manitoulin L)
Mr Mike Colle (Eglinton-Lawrence L)
Mr Richard Patten (Ottawa Centre / -Centre L)
Mr John Yakabuski (Renfrew-Nipissing-Pembroke PC)
Also taking part / Autres participants et participantes
Mr Jim McCarter, acting Provincial Auditor
Clerk / Greffière
Ms Anne Stokes
Staff / Personnel
Mr Ray McLellan, research officer,
Research and Information Services