1995 ANNUAL REPORT,
PROVINCIAL AUDITOR
MINISTRY OF FINANCE
CONTENTS
Thursday 23 November 1995
Subcommittee report
1994 annual report, Provincial Auditor: Ministry of Finance
STANDING COMMITTEE ON PUBLIC ACCOUNTS
*Chair / Président: McGuinty, Dalton (Ottawa South / -Sud L)
*Vice-Chair / Vice-Président: Colle, Mike (Oakwood L)
*Acting Chair / Président suppléant: Cordiano, Joseph (Lawrence L)
*Agostino, Dominic (Hamilton East / -Est L)
*Beaubien, Marcel (Lambton PC)
*Boushy, Dave (Sarnia PC)
*Carr, Gary (Oakville South / -Sud PC)
*Colle, Mike (Oakwood L)
Crozier, Bruce (Essex South L)
*Fox, Gary (Prince Edward-Lennox-South Hastings / Prince Edward-Lennox-Hastings-Sud PC)
*Gilchrist, Steve (Scarborough East / -Est PC)
Hastings, John (Etobicoke-Rexdale PC)
*Martel, Shelley (Sudbury East / -Est ND)
*McGuinty, Dalton (Ottawa South / -Sud L)
*Pouliot, Gilles (Lake Nipigon / Lac-Nipigon ND)
*Skarica, Toni (Wentworth North / -Nord PC)
*Vankoughnet, Bill (Frontenac-Addington PC)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Cordiano, Joseph (Lawrence L) for Mr Crozier
Also taking part / Autres participants et participantes:
Erik Peters, Provincial Auditor
James McCarter, executive director, ministry and agency audits
Clerk / Greffier: Decker, Todd
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1005 in room 228.
SUBCOMMITTEE REPORT
The Chair (Mr Dalton McGuinty): I think committee members will have a copy of the agenda before them, and the first matter for our consideration is consideration of the report of the subcommittee. Your subcommittee met on Tuesday of this week after question period. A report has been placed before you, and I'm just going to read that into the record:
"Your subcommittee agreed to recommend that the committee's initial schedule of hearings consist of reviews of sections 3.07 (retail sales tax) and 3.18 (Ontario Board of Parole) of the 1995 annual report of the Provincial Auditor.
"The subcommittee agreed to recommend that the committee commence its review of section 3.07 (retail sales tax) at today's meeting, and to request the Deputy Minister of Finance to appear before the committee at a subsequent meeting of the committee following a briefing on section 3.07 by the research officer and the Provincial Auditor."
What I'm going to require now is a motion that we adopt the report of the subcommittee. Mr Boushy, thank you, a motion. The seconder for the motion? Mr -- I'm sorry, could you --
Mr Steve Gilchrist (Scarborough East): Gilchrist.
The Chair: Sorry, I haven't got the names down yet. That'll come with time.
All in favour that we adopt the report of the subcommittee? The motion is carried.
At this point in time we can also have an opportunity for discussion. If members have any other items they would like our committee to consider apart from those two that have been raised, if they want to put those on the record now, please feel free to do so.
Mr Mike Colle (Oakwood): I have two areas I'd like to have this committee perhaps follow up on as a result of the auditor's report. The first area which the Provincial Auditor touched upon was the accountability and cost-effectiveness of municipal government, and especially I think it's very appropriate considering the massive changes proposed in the Municipal Act and also the changes of the governance structure in the greater Toronto area. I would like to put that on as a possible area of further study by this committee.
And, if I may, a second area is the area of the Ministry of Transportation, 3.19, to look at the overall issue of quality and standards of our provincial roads. Especially intriguing is the challenge of the fact that 60% of our roads in Ontario are substandard. I think it's an area when we can maybe be of some help in eliminating this backlog of retrofitting and re-engineering our roads and how to best do it for the biggest return on the dollar invested. It's 3.14 and 3.19.
Mr Gilles Pouliot (Lake Nipigon): Good morning, Chair. In terms of the rotation, I would like, at your convenience, of course, to address both the municipal spending -- and I say this as an answer. I'm not offering that we do anything, but we have our own philosophy regarding both municipal spending and also the second item that was read under the auspices of the last Provincial Auditor's report, that of roads. So I'm in your hands. If you will recognize me, I will speak briefly on both matters.
The Chair: By all means.
Mr Pouliot: In terms of municipal spending -- and I too read with a great deal of interest and some concern -- what is evident, what is a departure from yesteryears, if you wish, the reality, in my opinion, is that when you spend less money in the envelope, you also accompany that envelope with another one that tells you that you will have more flexibility. I'm concerned, putting our auditor in the kind of position whereby jurisdictional capacity overtakes what is being done here, what is being examined.
I would seek clarification later on -- well, not clarification but exactitude in terms of what should the mandate be. We're getting fewer transfer payments. Except for the statutes, I'm not too aware that the federal government is conducting a value-for-money audit on how the provinces spend money. They just go to the statutes; they don't do that.
I see validity that you're not going to go to -- well, why not school boards, boards and commissions? You control the envelope and you give more flexibility. That's what the government of the day says and I think it's right. If you don't send as much money, at least make some overtures that they can spend it -- that there's more flexibility. To go at the same time and say, "We want to make sure the municipal taxpayers are getting value for money," I have some reservations on that.
In terms of the roads -- and this is please -- of the five years in cabinet, three and a half years were spent in the fascinating world of bridges, culverts -- not sewer and water; that was another department that's just as fascinating, but in the road system, and you're right, Mr Auditor, with respect. The Ministry of Transportation has a lot of expertise to provide the database.
The roads need to be upgraded. I go back to my younger days in Quebec under the Duplessis regime. Some things change; others --
Mr Colle: The Three Rivers bridges.
Mr Pouliot: That's right. Others are perennials and residuals. Especially if you live outside of Metro Toronto, I can assure you, blacktop pavement -- not the base. You can spend an arm and a leg on a bridge, but you get a lot more political value for money if it's a blacktop. Your car feels newer. It's like a clean car; it seems to go better.
Yet I read in the government's position -- oh, for it is written -- that they will spend $300 million less, so I'm having -- we're both Transportation critics. I can share the appetite. I'm curious, and my colleague is already salivating, as to what you're going to do with $300 million less when you have so many kilometres of highways and bridges and so many culverts in the province to be reconciled.
I would treat, this -- excuse the pun -- with a grain of salt, which brings me to winter maintenance. No. That's all I have to say and I thank you. That's the position of our party vis-à-vis those two items.
Mr Gary Carr (Oakville South): I have two items I'd like to take a look at and investigate as well. One would be the Jobs Ontario Community Action program, which doled out a lot of money over the last little while. I think this committee should look at that, as well as non-profit housing. As you know, we spend -- what is it now? -- upwards of close to a billion dollars on non-profit housing. I think those are two critical areas where the government has spent a tremendous amount of money, and in light of what has happened in the non-profit sector, as you know, the Metropolitan Toronto Housing Authority and the problems associated with that situation, I think we should look at both the Jobs Ontario Community Action programs and the non-profit housing as well. I think that would be a great idea.
Mr Gilchrist: I think it's particularly appropriate, given that both the Liberal and NDP members have indicated an interest in Municipal Affairs, to reiterate what we had discussed in the subcommittee, that perhaps that should be done in the context of changes to the Audit Act that would allow the auditor the ability to do audits to determine municipal accountability, as with other transfer partners as well. So perhaps if time permits after digesting these two, we could include the recommendation of the subcommittee, that that be another key issue to be expanded, to specifically include municipal accountability as relates to section 3.14.
The Chair: Of course, I would encourage members to speak with their representatives on the subcommittee so that the next time we meet to consider additional business they're fully aware of your items of interest.
1995 ANNUAL REPORT, PROVINCIAL AUDITOR
MINISTRY OF FINANCE
The Chair: At this time I'm going to propose that we move to the second item on our agenda, actual consideration of section 3.07 of the 1995 annual report of the Provincial Auditor. I understand it's the practice at this time to have a briefing, beginning with some comments from our researcher and then followed by some comments from the auditor, Mr Peters. So why don't we begin with Ms Campbell's comments, please.
Ms Elaine Campbell: Members will remember that during last week's organizational meeting, during my presentation I made reference to background reports that are usually prepared for the use of members prior to the commencement of a set of hearings on an individual section of the auditor's annual report. Those reports would summarize the relevant chapter in the report and supplement it with additional background information.
Unfortunately, due to time limitations, it hasn't been possible to prepare an extensive report for today's meeting. Something more substantial will be ready for next week's session. In lieu of a report, though, on section 3.07 of the auditor's 1995 annual report, I have prepared some oral briefing notes for the purposes of context. They cover selected developments over a limited period of time in one jurisdiction.
Those developments are the standing committee on finance and economic affairs's report on the underground economy, recommendations from the Fair Tax Commission and the Ministry of Finance's response to the committee's report. The time period covered is the fall of 1993 to the summer of 1994, and it's only dealing with the province of Ontario; there are no references to the federal government. The memorandum at each of your places is attached to materials that will be relevant to the developments that I'll be touching on.
The standing committee on finance and economic affairs undertook an examination of the underground economy in Ontario in the fall of 1993. The committee's decision was prompted by growing interest on the part of both the provincial and federal governments in the root causes of revenue losses. Committee members also had concerns about negative public perceptions of the tax system, the increasing incidence of reports of deliberate tax evasion and the smuggling and sale of illegal tobacco and beverage alcohol products.
The committee recognized that both legal and illegal activities were hidden or unreported. As a result, it decided that it would examine the issue of tax evasion as opposed to tax avoidance. The two terms were used interchangeably during the testimony of the various witnesses who appeared before committee members as well as in the literature.
Not surprisingly, the committee heard a number of definitions with respect to tax evasion. It decided to consider that provided by the Ministry of Finance and quoted in section 3.07 of the auditor's report:
"...any intentional non-compliance with tax statutes, ranging from late and non-payment of reported tax liabilities at one end of the spectrum to deliberate tax evasion at the other extreme."
The size of the underground economy stimulated a tremendous amount of interest in debate. The committee heard presentations on formal measures from the Ministry of Finance and economists. They spoke of estimates -- and I would stress the word "estimates" -- of between 7% and 22% of national GDP, and you must remember these were figures quoted back in 1993.
Presentations were also made by witnesses representing key economic sectors. The committee members recognized the legitimate concerns in all of these sectors but decided to focus on three in its final report, those being construction, particularly home renovations, which they considered to be representative of service-related activities, beverage alcohol and tobacco, those being the most common contraband commodities in the province.
Many witnesses agreed that all taxpayers were victims of the growing underground economy. Their reasons for concern were often activity-specific, but many were of a broader application, specifically economic and social.
The committee could only speculate on what caused the underground economy, but many witnesses cited the economic climate at the time as the major factor contributing to its development, being the then recession, unemployment, and to a lesser extent the changing dynamics in the formal and informal economies. A number of references were also made to developments in new technology.
One of the key elements of that economic climate, though, was the tax system. There were four major tax themes that seemed to be singled out by witnesses, those being general levels of taxation, tobacco and beverage alcohol taxes, fairness in compliance and, last but not least, the GST and the PST.
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I think I'll quote something from the report with respect to the section on the GST and PST:
"Witnesses told the committee that the GST was originally commended as a self-collecting tax that would actually reduce tax evasion because of the paper trail it required. Input credits were to be claimed at each value adding stage of production for the taxes paid at an earlier stage of production. The tax presumed that because the end retailers of goods had to pay the GST on all purchases, they would be compelled to charge the GST on final sales.
"In the opinion of the Board of Trade of Metropolitan Toronto, the tax's flaw is its inability to provide incentives to the providers of services with low material input costs to charge the GST. The CGA spoke to this flaw as well. In the absence of what the CGA called `an effective, point-of-sale means to enforce compliance,' consumers are unable to resist the temptation to evade the payment of the GST and the PST. Suppliers were equally motivated to participate, to make a sale and for tax reasons.
"References were made to what were considered the GST's positive characteristics. It is lower than both the MST it replaced and the Ontario PST. Low-income earners receive a credit and a number of goods have a zero rating. Unlike the MST, it is visible. This visibility led members to ask if the tax would have been more palatable had it been invisible. While some felt there might be advantages to invisibility on a theoretical level, the consensus was that visibility and consistency in the posting of prices were preferable to invisibility."
The Ministry of Finance and the Liquor Control Board of Ontario also advised the committee of the initiatives that they had in place at the time to counteract the effects of the underground economy. You'll have, in your briefing notes, the recommendations from the finance committee's report. I'll just highlight a few of those on page 27, under the heading "Taxation."
"(1) A consensus should be developed on what constitutes a `fair' system of taxation."
"(2) Attention should be paid to the limits of public tolerance and the elasticity of the relationship between consumption and the rates of consumption taxes."
"(6) Governments at all levels, and their agencies, should cooperate to the greatest extent possible in sharing information considered essential to controlling the underground economy."
This was one of the recommendations referred to by the auditor in his report.
With respect to enforcement and compliance, the committee recommended, in recommendation 13: "Audit surveillance should be increased, but only as long as it is effective. Enforcement/compliance might also benefit from the use of matched and cross-referenced data files, and additional information from tax filers."
Finally, and this recommendation was referred to by the auditor as well:
"(16) The Ministry of Finance and others should be encouraged to conduct further research into the underground economy. Areas of study could include compliance, enforcement, sector-by-sector analyses and audits. Consideration might also be given to the incorporation of taxes into posted consumer prices."
The finance and economic affairs committee finished its hearings in early December 1993. Later that same month, the Ontario Fair Tax Commission tabled its report, Fair Taxation in a Changing World. The commission had been created by order in council three years before to "advise and report to the Treasurer of Ontario and Minister of Economics on the design and implementation of a more equitable tax system in Ontario."
The commission made over 100 recommendations in a broad range of taxation areas. Two that are of some relevance to the debate today are those dealing with compliance and the retail sales tax. Those are included in the extract from the Fair Tax Commission's report that you have in your notes. Recommendation 10 deals with the issue of compliance. Jumping ahead to recommendation 60, under retail sales tax: "Given the existence of a comprehensive sales tax at the federal level, Ontario should harmonize its retail sales tax with a national sales tax modelled on the federal goods and services tax. This would involve accepting the basic structure of the GST as a multistage sales tax or value added tax." They list a number of provisions.
The finance and economic affairs report was tabled in February 1994. The Ministry of Finance tabled its response the following July, and you have a copy of that response. I apologize for the lack of clarity in the title. The sticker advising on this sessional paper number and the date it was tabled seems to cover up part of the title.
You may be particularly interested in the ministry's responses to the recommendations that I highlighted earlier, such as recommendation 1: "A consensus should be developed on what constitutes a `fair' system of taxation; and then number 2 on public tolerance; jumping ahead to number 6: "Governments at all levels, and their agencies, should cooperate to the greatest extent possible in sharing information considered essential to controlling the underground economy." There they had listed several of the initiatives that had been put in place.
Recommendation 13, regarding audit surveillance: The ministry also referred to a number of the initiatives, most particularly Project Fair Share, which was introduced in 1993, and also amendments to the -- well, it introduced a Revenue and Liquor Licence Statute Law Amendment Act.
Finally, on recommendation 16, with respect to further research: The ministry discussed some of the arrangements it had made with Revenue Canada and also amendments to the Retail Sales Tax Act.
The final point deals with the continuing discussion about replacing the GST. There have been developments in that area, since June and July 1994, at both the federal and provincial levels, but those will be incorporated into the presentation for next week.
The Chair: Thank you, Ms Campbell. Mr Pouliot, you have a question?
Mr Pouliot: Yes. Thank you, Ms Campbell. I will just start with saying that as per the recommendations, it's a duty to avoid but a crime to evade, but this is for another discussion.
I have only one question vis-à-vis harmonization of taxes, or integration, if you wish. There are some ramifications. I understand that some people a priori spontaneously say, "Well, yes, maybe the time has come etc, or, we understand that not everything stays the same": What is taxable, where do I get the hit and what is not taxable, because there are a lot of changes.
When we looked at it in cabinet -- and I must admit that cabinet and caucus were split -- we heard some sympathy among ourselves, but when you started to look at what it means, for instance children's clothing, sanitary products becoming taxable, we felt, and I speak very candidly, that in our case the political hit was not worth the supplementary revenues, especially at its inception, that we would get in year one.
We too looked at hiding, at making recommendations to others in terms of putting the GST in the cup of coffee, not leaving it outside as an aside. So, with respect, I believe my question is legitimate not because we've been through it, but it's fair, before we make some recommendations: What is it that we're looking at? What are the ramifications? When is the other shoe dropping? If we harmonize, the word, the concept makes immense sense. You avoid some duplication and it's a nice waltz. But one partner begins to leave you as you look at the downfall, and I'm interested, as a member of the committee, to say what would change?
Ms Campbell: There certainly are ramifications, but I think the Ministry of Finance will be better able to respond to your concerns when they make their appearance before the committee.
Mr Marcel Beaubien (Lambton): To follow up on my noble friend across the table here, we keep talking about more audits, more stringent enforcements of taxes, harmonization. We've been talking about that for 15, 20, 30, 50 years. The problem is, maybe the system we have in place right now does not work. Maybe we should be looking at another way of taxation.
As a former small business person I spent an awful lot of money on auditors. Revenue Canada or whatever government agency would come back and do an audit. You have to spend more money, and for what? In most cases they don't get anything. And why do we think that we have a very thriving underground economy today?
I think we have to look at what the problem is, not trying to be more stringent in enforcing the regulations. I think we should enforce the regulations that are there, but maybe the regulations that are in place are not enforceable. Are we going to try to stop every speeder on the highway today? We can't afford it. So I think, can we stop every tax cheat in this province? The answer is, definitely not. We cannot do it; we cannot afford it. So why not look at another way of bringing revenue into the province? What the answer is I don't know, but mainly we're going on a chase here and we'll never catch the cat, because the cat is way ahead of us.
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Mr Dominic Agostino (Hamilton East): I'm a little surprised at that sort of approach. It's almost a sense where we're saying let's throw our hands up and let's justify and say it's acceptable to continue this kind of illegal activity. It reminds me of what I think was a wrong approach by the federal Liberal government in cigarette taxes, which was the exact, same thing. We have a problem, and rather than trying to deal with the root of the problem -- it's an illegal criminal activity, smuggling cigarettes -- we're going to lower the taxes on the cigarettes so it stops the smuggling, and to hell with all the other consequences of what happens. I think that's a danger that we have to be careful of.
There's clearly a problem, and the tax system is part of that problem, but I don't think we can use the tax system to justify what clearly is massive fraud in the province of Ontario and probably across this country. It's massive. If the government can recover 10% of what is being defrauded out there right now, you can think of the kind of revenue that could come into the province of Ontario and could offset maybe some of the other things that we're doing here.
My sense is that we should be looking at a strategy that will make it tougher; I think you look at a strategy where you crack down even harder. There are some good models in Europe. It was a massive problem and it still is in many parts of western Europe, the underground economy and just everything being done without the use of taxation being avoided. They've got some of the countries on pretty stringent laws that require retailers and things like that to ensure, as an example, that it is a serious penalty if a retailer does not provide a receipt in every single instance.
All of us can probably think of examples where we've gone in and we have paid -- it could be smaller things -- for the film and we've paid the GST or PST on it, whatever, and you make the exchange. I don't even realize whether or not I'm getting a receipt for it unless it's something I think I'm going to have to bring back. Often that type of thing maybe is not punched in; it isn't paid. It's a simple thing like that and in some of the European countries it's a serious offence.
They have spot inspections and people to walk in and basically -- and there's almost a paranoid fear of not giving that receipt, when you purchase something, because the person there may be one of their auditors or may be one of the sort of undercover inspectors that are being used. It's that kind of mentality that has helped to cut that down.
I think you take the approach where you make it paranoia, literally, for people to make sure they don't get involved in that kind of activity because of the consequences of it. I think there are a lot of things that can be done but I truly don't think the answer is saying, "Well, we can't do anything about it and we really can almost justify it."
We said in the House before, there's a different standard that I think we're trying to apply, that my friends are talking about here, that would apply to this kind of fraud and this kind of cheating in comparison to welfare fraud. Income tax evasion is the same thing; it's almost a justifiable offence and the courts treat it as such. You get people who go into court on welfare fraud often getting nailed harder for a fraud that is minimal, compared to tax fraud at the other end, and they get off. There's a whole standard there, I think, that is applied and certainly that's not a mentality that I subscribe to.
Mr Pouliot: I took note of the quote, "economic climate at the time." Really, if you do it once, it's usually easier the second time around. I would not pay, in my humble opinion -- I could be wrong -- too much credence of time. It's a style. If, given the opportunity and if you have a buyer/seller -- it's an exchange. We all know the classic, if you wish, of "Who renovated your bathroom, your basement?" and so on. "Well, I got three different quotes," wink, wink, nudge, nudge. Guess which quote?
So it becomes a style of operation. The taxes need not be -- and that's arbitrary, because you have to factor in the services. It's an exchange. But since I earned my first dollar, I for one thought that I was taxed to the limit, thank you, that my duties as a citizen vis-à-vis the state had been fulfilled in their entirety.
Traditionally, governments don't forgo, don't yield easily, what they see as the state revenue. Usually it takes long. That's why we have the shortfalls in governments. They will put more resources into tax collection, perception of revenue. They will police this with a zeal that is unequalled in other ministries. When people say spending, they tend to look at the second, the sideshow. The thing is resources: Are we using all the gizmos, all the gadgetry possible? How do people operate? Are we getting value for money from the section of the ministry which is to go out there and collect what all taxpayers are entitled to? Maybe that's a question for thought.
To everyone, I'm sure, there's a side of us that says, when Cornwall becomes the tobacco capital instead of Tillsonburg and we yield on what is a consumer and view it as a sin tax -- completely optional and you have more latitude. Liquor is the next one. They're really not a necessity and we have to forgo $500 million of provincial money each and every year because we can't control the system because we didn't go to the factory floor maybe -- I know it's not that simple -- and collect the tax right at the source before it goes down the system, because it filters down.
I'm sorry -- and I'm a smoker myself; I do make a contribution -- but there's no reason why people like me should get a $1,500 break a year because of our failure as a government, feds and provinces, to stop the bloody system. It makes no sense at all. It's the biggest bargain in town and now I see that some people say, "Well, look at it in terms of smuggling for alcohol," and they want you to reduce the taxes.
I don't wish to impute motive, but we all preach for the parish. If I'm the owner of a small bar, I know my clients are going away, that if I sell a glass of bar Scotch at $6, I've gone over the threshold. Maybe it's because the taxes are too high there, but the thing is you have to collect as much as possible, because those are revenues that -- you make your projection on revenues, what's out there, and you fail to collect those revenues.
That's all I have to say, but I would like to see the focus; they owe us an answer. What are the people in Finance, the revenue side, saying? What is their expertise? What is it we should do to go and get the money that's owed to the government, owed to us as representatives of the public?
Mr Gilchrist: I certainly don't want to prejudge any of the commentary that will come from the auditor himself, but I think it's important to stress from a personal perspective that I certainly am not comfortable with throwing up my hands and admitting defeat in this category. Over 25 years as a retailer and as one who had put in, along with all my colleagues within that corporation, one of the most, if not the most, sophisticated point-of-sale inventory control systems in the world that quite literally left zero opportunity to avoid the remittance of the appropriate tax, because it's all captured and there was no mechanism at the office end to in any way work with the numbers that the computer had captured, so it was extremely easy to audit, I am certainly sympathetic to a suggestion that this same standard be applied to all businesses, with the exception perhaps of street vendors selling hot dogs and the like.
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But there is no doubt to anyone in the retail business that, if anything, the estimates that the auditor has reported are on the low side. I don't mean to besmirch the individual reputation of anyone in the categories I'm about to discuss, but as a generality, it is an absolute fact that flea markets, street vendors, any number of entire industries are populated with almost exclusively people who are abusing the tax laws of this province.
When you go to the flea markets -- and there are many of them in the Metro Toronto area; they pop up on the weekends -- all of these people tend to have Visa and MasterCard numbers. These are not unsophisticated ma-and-pa-cleaning-out-the-garage type flea markets. I have no problem with someone selling something on their front lawn. It would not be worth the government's time and money to try to police that sort of retail effort. But we're talking about very organized carpet and framed prints and perfume and any number of commodities which would normally be found in retail stores, department stores and the like, which are being sold. And the appeal is almost exclusively not the low price, but the fact that you are avoiding the tax, the GST and the PST. In some cases, it is actively promoted as such.
For government to have turned a blind eye to such obvious violations -- and this goes back many years. I am absolutely not pointing fingers here. This is a systemic problem and is one which I think would yield a far higher number than even the auditor's extremely scary total would suggest. At the same time, I've seen at first hand examples of people in the vending business, both machines and the street variety. I think back to a gentleman -- I won't name the location, but a particular hot dog cart. This gentleman was a recent immigrant to Canada, about eight years ago. Within two years he was driving a very expensive GM car.
Mr Pouliot: And he's small; imagine the biggies.
Mr Gilchrist: Within four years his wife was also driving a similar car, and within five years he had a house in Guildwood completely paid for with no mortgage. Now, that's not bad considering there wasn't a single product in that cart selling for more than $3, and there is no doubt in my mind, none whatsoever, that the Ontario government got not one cent from him. We can smile and say, "Isn't private enterprise a beautiful thing?" but the reality is that gentleman is using our roads, his kids are using our schools, the street lights come on for him the same as they do for you and me, and the fact of the matter is he is not contributing his fair share.
It is clearly incumbent upon us to find a mechanism to deal with that sort of systemic abuse. The members opposite have already made some suggestions that I hope the auditor at some point will comment on, such as harmonization. Clearly the ability to distil this down to one system would make it easier to enforce; the need for an absolute recorded mechanism to provide a specific audit trail that is absolutely ironclad; perhaps to require that all vending machines be upgraded to incorporate absolute, complete, 100% data capture that is inaccessible to the user and only an authorized manufacturer's rep would have the ability to come in and, in concert with your accountant, interpret the data that the machine has captured.
While we're all sympathetic that there have been tough times and that there's a need for small business to thrive, you can't make a case that there should be anything other than a level playing field, because when the Becker's store, which is audited perhaps by his head office, can't compete with the private milk store just down the road who rips up half of his incoming invoices so that when you come to audit him, there's still an appropriate balance between purchases and sales, clearly we've got to level that playing field.
I look forward to the auditor's comments on the need to both distil down the current complexity of the tax system to eliminate the duplication of the two systems, and to find a means to once and for all deal with the issue of fraud. I particularly like the comment from Mr Pouliot about looking at taxation at source on items such as cigarettes even if it means -- because clearly the problem was, when it was the manufacturers' sales tax, it was then refunded to you for any cigarettes shipped across the border, and that became the inspiration for smuggling back into Canada.
Maybe the time has come to say we'll lose export sales if we have to, because the health concerns and the tax concerns -- and, quite frankly, the irony is that my guess is the numbers would play out that even if we did lose all export sales, to go back up to the tax revenues we would garner by going to a tax at source, we could come up with an income replenishment program to reward tobacco farmers who saw a decline in their sales and still have more money left in public coffers and still be able to deal better with the health concerns and the very legitimate concerns of the people in Cornwall and the area around there of the criminal element that's involved in smuggling.
I look forward to the auditor's comments and I hope he'll touch on these subjects and more.
The Vice-Chair (Mr Mike Colle): I have Mr Boushy to speak, unless you have a direct question, Mr Pouliot, of the previous speaker.
Mr Pouliot: No, I don't have a direct question. I have a supplementary, but I can waive it because I've already taken a lot of time. So I'll wait. Thank you.
Mr Dave Boushy (Sarnia): Just a question, perhaps, to Mr Peters: Can you tell me what is the fine for one who pays $1,000 in cash and what is the fine for a person who receives the money? Could anybody tell me how high the fine is, what is the penalty?
Mr Erik Peters: We will get you the answer, but we don't have it with us.
Mr Boushy: Because my personal experience is that the people don't seem to worry about any fines. They just get the money, "It'll be okay; let's go ahead and do this," kind of thing.
Mr James McCarter: Part of it too is, on the penalties, they have to determine whether it's kind of deliberate or whether it's a clerical type error too. I know, for the auditors, sometimes it's difficult to actually prove it's deliberate fraud, in which case you can level a penalty, as opposed to administrative oversight. But the actual amount of the fine, we'll have to get that to you.
Mr Boushy: I had a personal experience of a garage owner. The first time he fixed my car he asked for cash and I happened to have the amount on me, and I gave him the cash. Then after I thought: "Why would he ask for cash? The next time I go there I'm going to give him a cheque." So the next time I went there, he fixed the car and he said the amount and I took the cheque and he said, "Oh, well, leave the name blank because I'm going to put it in my wife's name." So the third time I made sure I put his name and the amount, because I knew what he was at. It seems like this is going on with a lot of businesses, and unless there's a heavy fine and the people are afraid to take this kind of money, I think they'll continue to do it. So according to my experience, this would be the answer.
Mr Colle: I just think we should maybe focus on process a bit. I know there are all kinds of cases and we've all experienced them at first hand, I'm sure, and with our constituency. I would hope we could do perhaps an examination of different tax collection or tax avoidance systems in North America or even western Europe to see what are perhaps some mechanisms that work. I know the province of Nova Scotia has just enacted some legislation to deal with this problem, so I hope we have an opportunity to look and see what their initiatives are and that perhaps we could take an overview of a carrot-and-stick approach, because I don't think one exclusively will work, and especially given, as someone mentioned, the economic climate.
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I also hope we don't just focus it on the retail end or on small business, because I think they're the easy targets perhaps. I think there is a systemic genesis to this, and I would think we could maybe get a lot more benefit from our time spent in this committee if we can come up with some really manageable, reasonable propositions that we could put forth to be adopted by perhaps the Ministry of Finance and essentially be of benefit to people who have to somehow make a living out there and deal with this problem, and we as government trying to collect its rightful taxes. I hope we will take that approach.
I would also think that some of the recommendations we might be able to make -- I think some of the ones I've read here in the last deliberations on this issue have to deal with the situation that ordinary small-type business people find themselves in.
I think Mr Beaubien was speaking and Mr Agostino was speaking -- it brought to mind a case in my own area where there is a small entrepreneur who opened up a barbecue chicken retail outlet in a very run-down area that everybody was walking away from because they said it wasn't a good area. But he went in there and started barbecuing his chicken and selling chickens. Before you know it, it was a thriving little business and the four or five adjacent stores that were empty are now rented out. He did so well that he took out a mortgage, bought the building next door and renovated it at quite a significant cost, and then he wanted to set up a chicken restaurant and have a liquor licence in the building. This was about two years ago. For two years, after spending the $150,000 on renovation, buying the building, carrying mortgage costs, he still hasn't been able to get a liquor licence.
Here's an individual who's basically trying to improve an area, employs seven or eight people, who's putting up his hard-earned money to try and essentially make a living, and then government is seen as sort of the obstacle to furthering his ability to earn a living. What happens is the government then comes along and tells him, "Well, now you have to be audited, and you owe us so many thousands of dollars on GST, PST." In fact, this individual is being audited right now. So he says: "What's the use of doing this? I mean, I just cannot get any cooperation with government. The only time I see government is when there's a tax problem -- I haven't paid my property tax or business tax or GST, PST, and Revenue Canada is after me now too."
I think those are some of the areas I would hope we could at least offer some suggestions where government can be seen more as a facilitator and not an obstacle, especially, as I said, to the small entrepreneur who's essentially trying to be independent of any kind of government assistance and trying to make a decent living. I would really like to see that made more of a holistic approach, and maybe we can be listened to, I think, if we do that. I think if we just come down in terms of sanctions and penalties we may perhaps get some attention, but I don't think we may end up with some productive results at the end that will help the situation out.
Those are just my comments on it, and I hope we can take those into account.
Mr Peters: If I may make a few comments and they may dovetail very well in what was just being said, this essentially is the meeting in which you organize the committee for the hearings that you want to do so I'd like to spend, if I may for a moment -- just some suggestions on process that you may wish to follow or take a look at.
All the recommendations that we made in our report were discussed certainly at length and some time ago with the Ministry of Finance, and their responses were duly noted in our report. You will see that they largely agreed with what we had to say and they were proceeding that way.
When you are considering calling witnesses before you in your hearings, you of course would like to hear from the Minister of Finance as to what is currently done, what the action is, take a look at some of the programs that they had in place at the time, how effective they were etc. So you will want to hear from them.
But you may want to also actively consider hearing from other witnesses. Maybe some of the small-vendor community could be represented, make their point to you, as to where there are concerns, because one of the major areas that is of concern is that when you look at our report, although the media very much picked up on this audit point, it is not really the main point of our discussion.
The main point is to do research in the underground economy to find out why it is happening, how it is happening and what is happening out there, because there is one other area that we very closely got into, and I think a number of speakers have referred to it, and that is, what are the rules? Are the rules clear enough? Can the people out there follow? In audit, into what is a totally nebulous area of rules and regulations, it is a very non-productive item because it then gets into interpretation of one side versus interpretation by the other side.
One of the areas that you might want to delve into, and I think it would be very helpful both to the ministry and for the work of the committee, is to find out what the real reasons are for the failure to collect. Are the reasons because the rules are confusing, people don't know what rules to follow? Are the rules in fact counterproductive to business itself? So compliance may be one area. Certainly, enforcement is another area, but enforcement becomes, you know, state police if the rules are not clear and if the rules are perceived as being unfair. These are some of the areas you might want to get into when you discuss as to whom you, as a committee, would like to call before you to talk to this issue.
The other area is in process. We follow a policy very clearly in writing our report of not stating particular areas of weakness in the system so that our report does not effectively become a blueprint for people who want to abuse the system. If you want to discuss some of these items, as to what is really going wrong, what is going on out there in detail, you may wish to consider holding that meeting in camera and off record so that you get, as members, a feel, an idea as to what is really going on out there. You may even want to have witnesses on that. But the minute you start to provide a record of those things, you become, in other words, maybe partly a contributor to people avoiding. We have had that before.
We, for example, had before the standing committee on public accounts in the meeting the matter of health cards some time ago and how to abuse health cards and went in camera on that one because we didn't want the committee to become part of giving a blueprint out there as to how to abuse your health card. So the same areas should be covered in here.
Very specifically, and we're glad to provide this to you if you need it, we have prepared a little extract of just the recommendations, and I'd like to particularly bring the first recommendation to your attention as a focus area, and that is that the ministry should conduct additional research into the underground economy and use the results to focus its efforts on reducing the gap. When we talk of focusing the effort, you can see very clearly it was not just focusing on hiring additional auditors; it was focusing on, what does it yield? When you find out why you're not collecting, what is the corrective action that has to be taken?
The second area is one of cooperating with other ministries in the Ontario government which may have information that could be used. For example, the Ministry of Consumer and Commercial Relations has a business registration database, and maybe that can be used.
The third area is to improve the audit process itself. In other words, do a risk assessment and focus the audit effort into the high-risk areas where things are going wrong -- from where you go.
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The last part was specifically addressed at the small-vendor community simply because we know that the community itself had grown since our last audit by 13%, the number of vendors audited had decreased by 22%, giving a net reduced coverage even from the 1989 level, which was the last time we audited, of over 30%. That was of concern.
Mr Pouliot: A subtle observation as to uniformity: one ministry, another ministry, and yet another ministry. Sometimes we tend to guard or see our own, or regard it is a fiefdom and they don't parallel -- they do more so, I believe, than they did at one time. At least they talk to one another. At one time -- please correct me -- it was expected that even the accounting system could have differed from one ministry to the next.
We need more people. We have a commitment to have US people; it's the style nowadays. I know that's where the money is, I suspect that's where the money is. The vendor, the person that goes from point A to point B -- it's not a witchhunt. The methods are there and people will abide by them as much as possible.
I'm not imputing more to that. We're T4 people and, at best, as a small supplementary, we're T5. We're easy to trace. Everybody knows us completely from tattoos to distinguishing birthmarks. There's nothing here that can be -- here I am. I'm not inviting people -- maybe my expressions are not right -- to "take your money and run." Don't go into the system of foundations. I can't even spell Liechtenstein, Mr Auditor; Switzerland I can, but there are some, the Grand Canyon and so on. Those are the consequential people, but it's all legit.
There's no question when you read -- you don't need the financial pages, but people who analyse those think the tax system, although there's an attempt to streamline, has become -- that's why you hire people, people like yourself in the private sector, with respect, people who know their way, they know the jargon, they know how the system works, they readily come up with a timetable, and then it becomes instinctive. You're right, I believe so. I don't know about that, and at times it's genuine. Ignorance is no pretext, or a very feeble one, vis-á-vis your commitment to pay, to fork over.
You don't have to go too far, once we get past the tax form; it gets to be pretty bloody complex. Who's to blame the street vendor on a day like today, when there's an ill wind, trying to make ends meet while cold makes you a little numb and sometimes you forget. You have to address the priority of the day; whether the Sheraton is going to open a hot dog stand right in front of you -- that's a scary moment -- and undercharge you by 50 cents a hot dog. It's not every day that we could organize or sponsor a demonstration where we get everybody in the business section and they buy hot dogs. Sometimes they get their supplies from the Daily Bread.
You don't think it's funny, Madam, but you'll see more here.
The thing is to go, when you see the tax evaders, publish the name; your recommendation -- you don't need that one, there are so many -- number 14, to publish the name. You have to be given a chance at tax evasion. When we talk about so many people making so many hundreds of thousands. I know we're at the retail level here, but before you buy things you have to earn an income. There's thousands and thousands of people who make so much money per year and don't pay a God-damned cent of income tax, and Josephine and Joe Lunchpail, the ordinary people, the middle class who are paying for all that, come under scrutiny when they try to open a small business.
I don't want to seem vengeful, but when we focus on the street vendor, let's go and look also -- no one is immune here -- at the people who are selling the products so he can retail at the street level.
K.C. Irving and the like operate from the Bahamas, which is sinful -- billions of dollars under the foundation. The foundation is a fraud by all accounts; it's being un-Canadian. But you have a sense of noblesse oblige; I mean, the Ballards of this world. Because you can be at times a bum with money, but if you have the money, you are above all these things. But no focus, hands off those people. So let's be a little more even; fairness of taxation was the first word that was mentioned here this morning.
The Acting Chair (Mr Joseph Cordiano): Mr Peters, you wanted to make a comment?
Mr Peters: Yes. I think those are very important points that are just being made, and this is why I was talking about the rules, because we are talking about the large vendors as well. The risk on the large vendor is tax avoidance because you can hire accountants and lawyers to find out what the rules are that can allow you not to pay the taxes. That's why in the overall conclusion we are talking about a perception that the tax system may be perceived as being unfair, and it can be perceived as unfair if the rules are not clear and if you can get out of paying taxes by making rules that are ambiguous and that cannot be followed.
That's why in my comments I was particularly keen that the committee may also want to focus on what rules are presenting a risk to the government not collecting the taxes, because both tax avoidance -- if there are loopholes that can be plugged, they should be plugged. The other one we're talking about, of course, is tax evasion, and tax evasion is considered tax fraud. It's not just all tax evasion we are concerned about; we're also concerned about tax avoidance.
It would be of interest to hear from the larger segment. I notice, for example, that today there is a very interesting letter to the Globe and Mail from the vice-president of planning of the Hudson's Bay Co who says: "Look, one of the problems that we are really suffering from is lack of clarity, having across Canada to collect under nine different systems. Something is in on one province and out in the other, and we have to get very complicated systems." If we can help the system by making the system fairer through clearer rules, we may be serving it as well as by getting into the enforcement area. So that's the comment I had.
Mr Toni Skarica (Wentworth North): I'm a little unclear what we're doing here, but I gather from your comments that we're trying to figure out how we're going to go about the meetings. I would like to suggest that when we get witnesses, we don't just focus on business people. We've been focusing on small business and big business. I would like to get a whole bunch of consumers in here from different income levels and ask them, "What's the point where you're prepared to cheat?" Because I know when the GST came in, I did not want to buy anything, because that was it, that was my tolerance level for paying new taxes.
There's very limited information on what the point is where people don't want to pay tax and they're going to cooperate, because basically business people can't cheat unless the consumer is prepared to be a willing accomplice. Mr Boushy indicated that when he was asked for cash when he got his car fixed, he was prepared to give it. If he's not prepared to give it, then that person can't cheat. I'd like to say, as an aside, he seems to be getting his car fixed a lot. I wonder if he's been doing a lot of driving on Mr Pouliot's roads.
In any event, I think it's important for government to know, in a climate where we're reducing taxes, how far down do we have to go before people will not cheat? Hong Kong, for example, has a 15% flat tax rate. There's virtually no cheating that I'm aware of. Obviously, as you get higher and higher tax rates, you're going to get more and more cheating, because it's worth it. So I would like to have some witnesses, just basic consumers at different income levels, and ask them, quite frankly, "What's the level where you're prepared not to pay taxes and pay cash and cheat?"
Mr Beaubien: I'd like to comment on Mr Peters's comment, when he said that we should try to find out what is wrong with the system. I think we know what is wrong with the system. I certainly agree with Mr Pouliot that we have to make the taxation system a more equitable and, certainly, fair system. As Toni pointed out, if you go buy a suit and the retailer says to you, "You pay me cash," you can save yourself 15%. I ask each and every one of you around this room today if you say, "Why shouldn't I do it when I see the big banks" -- and I don't want to pick on anybody -- "big enterprises getting away with millions and millions and millions of avoidance, if it's not cheating at times, so why shouldn't a little guy do it?"
That's why in my opening comment I said we should look at some other way of getting our dollars, or our revenue, because I think the system we have in place is too costly to enforce and we have too many people falling between the cracks. We can say, yes, we're going to try to be more stringent collecting the taxes, but if it's not fair, you're not going to beat that person out there; that person is going to beat you because the system is not fair.
How do we make the system more equitable and more fair? I think that's what we have to concentrate on, because let's face it, if the guy is in Manitouwadge and he wants to save 15%, why shouldn't he do it when somebody else in Toronto is avoiding millions of dollars in taxes? So there's that perception out there that the little guy, the middle class, is bearing the brunt of supporting the governments, whether they're municipal, provincial or federal.
Then look at the problems we also have with property taxes. It's not only income tax, retail tax, but also property taxes. I think the revenue-generating process for the different levels of government needs to be revamped throughout society today. I don't have the answer, but I think that's what we have to concentrate on.
The Acting Chair: Any further comments or questions or discussion? Next week will be a detailed briefing session. I think the committee should decide whether that should be in camera. It has been traditionally the case that we go in camera for those briefings and it's probably recommended that we would do that.
Mr Peters: If I may make a suggestion in order to move it forward, I just wondered if you might want to consider having your representatives on the subcommittee, in possibly another subcommittee meeting, discuss potential witnesses you might want to consider. Otherwise you have only so many hours of meeting, and if you want to spend the next meeting again on this sort of discussion, you may find it possibly a little bit frustrating.
There may be a way of putting together a number of witnesses you might want to hear from and then start scheduling those witnesses, because the clerk of the committee needs sufficient lead time to pull them together. Mr Chair, I don't want to put words in your mouth, but if you would like to have another subcommittee meeting that then will schedule the witnesses, that may be a way to go.
The Acting Chair: All right. So it's agreed then that the subcommittee will meet. The clerk can call a meeting to order for the subcommittee at the appropriate time, when you decide. You can do that over the telephone, I would imagine. I think it's decided then that the subcommittee will meet and order the selection of witnesses to appear before you next week, at which point you would determine how to move forward.
Mr Gilchrist: Further to that point, I wonder if we can get some indication from the auditor how long his briefing would be first, before we start making promises about whether witnesses would have the time next week.
Mr Peters: If I may, the briefing is normally actually done by the research officer with support from us, and having provided a fair bit of information at this meeting, I would suspect that the briefing may not be all that long.
Mr Gilchrist: Fine.
The Acting Chair: The clerk suggests that we ask the Ministry of Finance to appear before you next week as well, so that would give you some additional time to get appropriate --
Mr Gilchrist: I think that would be appropriate.
The Acting Chair: -- input from the Ministry of Finance. Is it agreed, then? Okay. No other business? We'll adjourn the meeting until next week.
The committee adjourned at 1115.