1995 ANNUAL REPORT,
PROVINCIAL AUDITOR
MINISTRY OF FINANCE
CONTENTS
Friday 30 November 1995
1995 annual report, Provincial Auditor
Ministry of Finance
Dina Palozzi, deputy minister, revenue and financial institutions
Roy Lawrie, assistant deputy minister, tax division
Bob Moxley, director, retail sales tax branch
Peter Spiro, manager, macroeconomics branch
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Chair / Président: McGuinty, Dalton (Ottawa South / -Sud L)
Vice-Chair / Vice-Président: Colle, Mike (Oakwood 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
Also taking part / Autres participants et participantes:
Peters, Erik, Provincial Auditor
Clerk / Greffier: Decker, Todd
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1101 in room 228, following a closed session.
1995 ANNUAL REPORT, PROVINCIAL AUDITOR
MINISTRY OF FINANCE
The Chair (Mr Dalton McGuinty): We're now back on the record. We're considering item number 3 on the agenda and in particular we're going to hear from the Ministry of Finance.
Good morning and welcome. I wonder if you might please state your names for the purposes of the record and proceed with your presentation.
Mrs Dina Palozzi: I'm Dina Palozzi, the deputy minister for revenue and financial institutions within Finance. We have a number of staff here today. I'll let them introduce themselves.
Mr Roy Lawrie: Roy Lawrie, ADM, tax division.
Mr Bob Moxley: Bob Moxley, director, retail sales tax branch.
Mrs Palozzi: If I may, in the seats behind us I have Dario Savio, who is the senior manager for the audit branch within retail sales tax, and Peter Spiro, who is the manager of the macroeconomics branch in the office of economic policy.
The Chair: I understand you have a presentation for us and that you as well will allow us an opportunity to ask questions.
Mrs Palozzi: Absolutely.
The Chair: Thank you. Please proceed.
Mrs Palozzi: I propose first that I take a few minutes to set the context and then I'm going to ask Bob to describe briefly the ministry actions that we have under way or have planned in response to the Provincial Auditor's report, and presumably the committee will ask its questions.
I would like to just make one caveat at the beginning, if I could -- and I know that Erik certainly is familiar with this -- that if the committee wishes to discuss actual audit coverage rates, I guess the procedure would be to adjourn to an in camera session. If you're actually looking for the statistics on coverage rates, given the nature of that information and the impact that it has on voluntary tax compliance, I would suggest that that's what we do, if that's okay with the Chair.
The Chair: I'm in the hands of the committee. It's agreeable.
Mrs Palozzi: Just a few minutes then on the retail sales tax branch in the context of the overall tax division and then also just my brief comments on what I believe to be the two principal recommendations that Erik has made in the Provincial Auditor's report; that is, the specific recommendation on the additional research to be conducted into the underground economy and then using those results to focus on reducing the tax gap, and the second recommendation, the audit coverage rate of small vendors and the recommendation that it be increased significantly.
There is a handout that we have for you that gives a brief summary. You may know that the tax division within the Ministry of Finance is made up of nine branches with the responsibility of administering 21 statutes. There are five program branches: tax credits and grants and corp tax, employer health tax, motor fuels and tobacco, and retail sales tax. In addition, we have four branches that perform specialized functions on behalf of all those statute branches: collections, tax appeals, special investigations and business services.
As the PA noted, retail sales tax is a significant portion of total provincial tax. That proportion is even larger if you exclude provincial income tax, which is administered for us by Revenue Canada. In the 1994-95 fiscal year, retail sales tax comprised 47% of the total tax revenue from taxing statutes administered directly by the province.
The annual net growth in the retail sales tax roll is typically around 3%, or 10,000 vendors. Our experience is that 50,000 to 60,000 new vendors register their businesses each year and, at the same time, 40,000 to 50,000 vendors cease operating. This tax roll growth, combined with longer audits, has resulted in some reduction in audit coverage of small vendors over the last six years.
As you know and may have had information on to date, there is no definitive estimate of the size of the underground economy. While the analysis of the use of cash indicates that it is probably in the range of 8% to 11% of GDP for Canada, details of the individual components of the underground economy are largely conjectural and there is no accurate measurement of the size of the tax gap in relation to particular tax statutes.
Certainly it is a general perception, as the PA notes, that the overall tax gap has increased in recent years. At the federal level the Auditor General has made those remarks in past years, and the key sorts of events that this has been attributed to relate to both the introduction of the GST and the recession, which appear to have contributed to that growth in the underground economy.
While no one has yet come up with any precise measurement of that tax gap, the ministry has taken several measures to address non-compliance with tax statutes overall, and they include a range of things:
Legislative amendments to enhance collection processes, such as increase in fines and penalties for tax evasion.
Improved collection measures overall.
The publication of our successful prosecutions for tax evasion, including an annual tax enforcement bulletin that summarizes major prosecutions for the previous year so that the general public becomes aware of the consequences of tax evasion.
Information exchanges with other jurisdictions and with other ministries.
The signing of a memorandum of understanding with the federal government to coordinate various measures to address the underground economy.
The ministry has also recently signed an exchange-of-information agreement with Revenue Canada that will permit a number of new cooperative initiatives between retail sales tax and the GST area. These planned initiatives include:
The matching of the vendor database with the federal GST registrant database to identify non-registrants.
The sharing of RST and GST audit plans to enhance coverage and to better coordinate our efforts.
The sharing of actual RST and GST audit results to leverage coverage and improve efficiencies.
We are also looking at the ways in which we can enhance our current systems that will facilitate better risk assessment for retail sales tax auditing and collection so that our resources can be more effectively utilized.
We shall also be redeploying additional resources to the audit function from within the ministry, and I reference the minister's statement yesterday.
We conclude that there are no panaceas in these measures, no quick fixes that will spell the end to the underground economy or to evasion generally, but we believe that, taken together, these measures will go some way in addressing the compliance issues and some of the specific concerns of the Provincial Auditor in this area.
What I'd like to do now, if I may, is ask Bob Moxley, the director of the retail sales tax branch, to quickly highlight for you, in response to the PA recommendations, the kinds of things we have under way or have planned, and certainly questions at any time.
Mr Moxley: If we just go through perhaps the recommendations quickly, one by one, as they appear in the printed auditor's report, that might be a useful starting point.
The first one, the one that appears on page 107, if you have the auditor's report there, was that "the ministry should conduct additional research into the underground economy and use the results to focus its efforts on reducing the tax gap."
The ministry response was essentially that we agree in principle that future planned systems will give us better availability of management information, and we referenced as well the 1994 agreement, the memorandum of understanding on the underground economy, that was signed with Revenue Canada.
Just to give you a bit of an idea of what's being done under that particular agreement, the deputy has alluded to some of the audit projects already:
Looking at cooperation by sharing the audit field, make sure that we can leverage the audit resources that are available to both jurisdictions to do audits.
By deciding in advance what particular areas will be concentrated on, sharing audit plans to make sure we're not doubly covering one particular area and not covering another between us as well.
Sharing audit results.
Sharing information about audit selection techniques. With the introduction of greater amounts of technology and new software in the way of audit selection programs, techniques for making better audit selections are important, and there's a project under way there.
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Another project that's under the underground economy agreement, the memorandum of understanding, is to look at new registrants -- new vendors for our purposes, new registrants for purposes of GST -- and see what we can do there in terms of a compliance assistance program. It's the kind of thing that we used to call a special vendor assistance program that we had in the ministry specifically for a number of years, and we still do, where we go out and visit new vendors in particular industries or types of operations where you may have a higher percentage of problems or confusion about the applicability of tax than you do in other areas; wait till they've been in operation three or four months and then go out and see how they're getting along, see what problems they're running into with regard to the tax, see if their books are set up just quickly in such a way that they can properly record and remit the right amount of tax to the ministry.
We think there are some things there that can be done in conjunction with GST to again leverage the kind of resources that are available to both jurisdictions to do more in that field.
The second recommendation appearing in the PA's report, on page 108, recommended the comparison of databases and cross-referencing information from various sources in order to pick up people who may be on one database and should be on another but are not. We agreed with that in the response and noted that we have database matching plans.
There are in fact database matches that currently go on. We do receive now information, for instance, on alcohol purchases from the LLBO and the Brewers Retail and we match those back against information that we have on tax remittances by those members of the hospitality industry that have made particular purchases. That's very useful in identifying people who should be audited.
From the Ministry of Transportation we get information on motor vehicle transfers by dealer, which again can pinpoint areas where we may have particular problems and help to direct audit resources in the right direction.
From corp tax branch we get information that helps us to identify non-registrants again but also reported sales discrepancies by comparing what's being reported in certain areas for corp tax purposes and what's being reported for retail sales tax purposes in the way of sales.
The deputy minister mentioned the other large planned database match that we hope will take place in the fairly near future, and that is with GST.
On page 109, there's a recommendation with regard to a management information system. The Provincial Auditor was aware of the design by the ministry of a new integrated computer system for taxes, encompassing a number of taxes over the longer haul, and the recommendation was that we "should ensure that all information needed to facilitate the selection for audit of high-risk vendors is considered in the development" of that system, and then once that information is available, the sales tax branch "should revise its audit selection assessment criteria to take it into account." The response was essentially that we agree and that file selection improvements are planned.
In terms of what we're currently doing, the retail sales tax branch now identifies high-risk vendors using profile codes and industry yield information and, as I've mentioned, in some cases third-party information, and the new integrated system is still being developed. However, we're looking not simply at the longer-term development of an integrated system but at steps that can be taken in the shorter run to facilitate audit selection, and we have a couple of things that we're working on now.
One of them is to provide for better, more user-friendly inquiry capability on the bases system itself. This is the computer system that supports the operation of retail sales tax, the concept here being that if managers have access to better information, audit managers, when they're planning their audits and making their audit selections -- that those audits will be more productive audits and the selection process will itself be better. It might not be as complete a management information system as we'd like to see in the long run, but we think it's a useful interim step. We're also looking of course to merge and compare other databases and third-party information, PST being one that's already been mentioned.
On page 111, there appears a recommendation on audit coverage of large and medium vendors. There the Provincial Auditor indicated the branch should formalize, document and implement appropriate risk-based criteria for selecting large and medium-sized vendors for audit, and audit files should contain the rationale supporting the selection of such vendors for audit.
We agree in the response and indicated that we are currently developing standardized risk-based criteria for selecting large and medium-sized vendors for audit.
One of the points noted in the Provincial Auditor's report was the existing classification system where vendors were classified as to large, medium and small -- A, B, C, as it was known, or at least the system that existed at the time the Provincial Auditor was examining it. Our audit policies called for us to audit once every four years, four years being the length of time that you can go back and assess someone without proof of evasion -- then, of course, you can go back further. In order to protect what was then essentially 50% of the known revenue base of the retail sales tax we would do in effect over a four-year period 100% audit coverage, or close to 100% audit coverage. Technically it's 25% a year, which doesn't quite come out to the same thing over time because vendors are going from one category to another or they're closing or they're opening or restructuring.
While our policy called for us to audit all of these vendors then, in effect 100% over a four-year period, and the auditor indicated that we should be doing risk-based criteria, recognizing that for the larger vendors it is useful certainly to have a very high coverage rate, but at the same time recognizing it might be a better use of resources if we could use risk-based criteria to select out of that group -- rather than doing them all over a four-year period, select a portion of them for audit. What we've done in restructuring the audit categories into A and B is we've changed the definition of what's a small vendor so we in effect now have two categories, one of which, rather than having roughly 4,000 vendors as it did, being the combination of the old large and medium vendors, now has 8,000. That will give us a base from which we will select audits. We will review each of those 8,000 vendors for audit every four years, but we will not audit them all; we will audit a portion of them. That's probably a better use of the audit resources involved. It won't be the 100% coverage that we used to aim for in the past, but it will be 100% in terms of consideration for audit. By and large we agree and we think it's a better approach.
I should say as well that while the new category of roughly 8,000 vendors that will now be in that A category, that comprises remittances of maybe 57% or 58% of total revenue from the retail sales tax. So we will still be having a heavy coverage of the largest part of the revenue base of the tax, if you like. By the way, our procedures now call for, as the Provincial Auditor recommended, documenting the reason for selection in every case.
The final of the printed recommendations had to do with audit coverage of small vendors. The response talked about audit coverage being a blend of selection for dollar recoveries and encouraging voluntary compliance through wider coverage, and we agreed in the response that an increase in small vendor coverage was appropriate to the extent that it was practical in terms of other priorities.
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On current action, audit has been identified by the ministry as a high priority. That was certainly confirmed in the statement that was made yesterday, which talked about the reallocation of internal resources to the audit function. At the ministry we're working on a comprehensive plan to increase retail sales tax enforcement and we're developing that plan currently for the minister's consideration.
Maybe I should close it down now. I think that covers the major recommendations in the report, where we are in responding to them.
The Chair: Thank you. I guess then, if that concludes your presentation, we'll open it up for questions.
Mr Steve Gilchrist (Scarborough East): Let me start with the very last recommendation because I think that's the one that disturbs me the most.
When you talk about an erosion in voluntary compliance, it's all very well and good for the very, very, very small percentage of small vendors who will have an auditor drop in to see them unannounced at some point in the next year to learn the lesson that voluntary compliance is the only way to go or there's a heavy price to be paid in the alternative. But if we know that there is a decrease in voluntary compliance, what other steps are being taken to make sure the message goes out to every vendor in this province that there are significant penalties and that the government intends to do something to not just steady the decline but to turn it around and strongly enforce the existing laws?
Ms Palozzi: If I could comment on that. One of the ways we've attempted to convey the message and the government's view of the seriousness of failing to remit tax or tax evasion in its ultimate form is through essentially -- it's only been the last two years that we've taken on a policy of publicizing the results of our enforcement activity.
There is a balance to be achieved in any society around tax administration, and the extent to which one wants to create a system where people understand what the requirements are on registration, and understand what the law requires them to do and then understand the penalties and the extent to which one can actually go on an individual basis, is limited in some senses.
I'd like Bob maybe to comment on the sort of thing that happens on registration, so that a vendor understands what their responsibilities are as they register.
Mr Moxley: One of the key things on registration is trying to make sure the vendor is aware of his responsibilities, make sure, depending on the industry he's in, that he knows how the tax applies to the goods or the services that he will be selling.
New vendors are supplied with a series of bulletins which comprise in effect a startup kit that talks about their responsibilities as vendors for retail sales tax purposes, which talks about the process for remitting tax, which talks about the application of tax in various cases.
Where a new vendor, someone who registers, is in default on their first return, we try, through a field visit, to find out why that vendor was in default and try to catch people who are in default on say the first return that's due to the ministry fairly quickly to get them back on the right path.
In some cases, of course, it's the fact that the business that has been registered as a vendor and was planned to start on a particular date didn't get off the ground for one reason or another. There may not be financing; there may be other problems.
In particular industries as well, whether or not there's been any default in filing returns -- but there are some industries where there have been higher rates of default in filing returns, or higher rates of recovery upon audit than others and we try to get out to see those approximately three to four months after the startup, even if they haven't been involved in default in filing the returns, just to make sure the vendor is again aware of the requirements and that from a quick check things seem to be going reasonably well in terms of the appropriate collection and remittance of tax. Those are not audits; those are sort of field visits.
Mr Gilchrist: That's all very well and good and I appreciate you outlining the status quo but, clearly, if your own admission in response to the auditor's report is that we're seeing an erosion involved in compliance, I guess my question really is: What are we doing to change the operating procedures to turn up the heat, as it were; if you are currently constrained under the legislation, and do you think there are other tools that should be afforded you? I think the committee would benefit from knowing that.
For example, is there a need to go after a loosening of the protection of hiding behind the corporate veil? Should officers and directors be more obviously and openly exposed to charges under the act? Should we be requiring a bond from anyone opening a business in a high-risk category to post a bond and provide security so that if you want to open -- I don't want to generalize in any one industry, but you know what they are -- open a business in that category for at least the first couple of years until you establish that you are not part of the high-risk component in that industry, that the taxpayers of Ontario are protected by knowing you've pledged an asset like your house or your car or whatever to stand behind the tax revenue that is rightfully belonging to the citizens of this province?
Mr Lawrie: I'll see if I can answer you, Mr Gilchrist.
First of all, we do have director liability with a due diligence defence in the Retail Sales Tax Act. It only applies to tax collected and not tax in own respect of use or tax in business inputs. If my memory serves me correctly, I think we've assessed over 153 directors for a total of just under $10 million, and we've actually collected just under $1 million. That sort of comes under the heading of what we've done already to address the problem.
I think it's fair to say that consideration of bonding will be one of the measures that we review and will make recommendations to the minister on. We have the legislation in place to require bonding. The problem is that if you're going to apply it on a selective basis, to be fair to the vendor population in general you have to have pretty good reasons for saying to some people, "You have to pay a bond," and saying to others, "You don't require a bond." We would want to take a very close look at that.
Finally, we've also got plans, just approved by the deputy, to reassign a manager to prosecutions of strict liability offences under the Retail Sales Tax Act. The main strict liability offence is failure to remit tax collected. That is probably fair to say a bigger problem than outright tax evasion in the retail sales tax statute. It's particularly understandable in small businesses that are new where perhaps accounting and internal control aren't the best but, at the same time, with an increase in accounts receivable, particularly in RST, deterrence is required to stop deliberate abuse.
By reassigning a manager to actually prosecute the POA offence -- the Provincial Offences Act offence -- we think we can leverage the deterrent effect over current prosecution effort which is, as I recall -- of 28 press releases on convictions and evasion since early 1993, 18 of those related to retail sales tax. We currently have convictions awaiting sentencing on retail sales tax evasion convictions of over $5 million. I think you'll see some publicity arising from those cases because some of them are quite high.
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Mr Gilchrist: Final supplementary, a very quick one. We heard before you arrived today that the amount uncollected from what was reassessed was somewhere in the neighbourhood of $25 million a year, though. Every one of those companies had directors and officers, and $10 million is certainly a laudable start, but it seems to me that unless they have completely left our jurisdiction or are personally bankrupt, there would appear to be some opportunities still ahead of us in terms of going after the owners of those companies. I would encourage you to take whatever steps necessary, and if it is your expectation that we'll see that number closer to $25 million a year, then I certainly applaud those efforts.
But I think that at the end of the day this is of critical concern to the people of this province. The dollars we're talking about in the underground economy -- when you look at the economic statement that was brought out yesterday and the listing of all the other taxes, you could do away with the gasoline tax and the tobacco tax and the entertainment tax and half of the other taxes in this province if we were collecting all the retail sales tax that was due us. I hope we will see an even stronger prosecution of officers and directors in that regard.
Mr Lawrie: Yes. Obviously, with the due diligence defence, it does take a while for some of the cases to go through the litigation process. In fact, we have still to have our very first case on due diligence where the director feels that he has exercised due diligence and we feel that he hasn't. We haven't had an Ontario case on that yet.
There are some federal precedents, of course, but things do tend to move rather slowly through the courts, but it is encouraging that simply using it so far has resulted in the collection of about one tenth of amounts that, without the director liability, probably would have been written off in the past.
Mr Gilles Pouliot (Lake Nipigon): I have appendix A, the 1995 annual report under the auspices of our Provincial Auditor, and it has some recommendations, and then there's the sometimes predictable and sometimes innovative and therefore less predictable answer of the ministry.
I learned a great deal in the English language, when I was with the different ministries, as to what the response would be when you came calling, Mr Peters, and we had to come up and say, "Look, by and large you are well advised to comply, to heed the recommendation of the Provincial Auditor." So we would prepare a response -- well, there's one here, the recommendation, "To more effectively enforce compliance with the law by the small vendor community and detect unpaid taxes owing to the province, the ministry should significantly increase the audit coverage of small vendors."
"Ministry response" -- in full agreement -- "As noted in the report" -- and then it goes on to say, well, it's rather simple, that some people fail to remit. The province says: "Hey, you know, we need the revenues. It's in the statutes." You comply. You check, you become the watchpeople, if you wish, of that community. That's within your mandate. Then you go on to say, "The ministry will endeavour to increase audit resources, while mindful of the current constraint environment and the government's downsizing initiative."
I want to commend you. I just have a look at you and you look very well. I don't know what your secret is. You must have a kind of self-discipline in your personal life, and I have to say this, and most of it is true here. I was there. I listened. I've been here 11 years and I listened to what they had to say yesterday. I'm in full agreement with the ministry. I think you're overworked, madam, gentlemen. They're asking you to abide by the recommendation of an apolitical team here, which is that of the Provincial Auditor. You have to go out there in the marketplace and get our dues as a state, as a government.
Yet you're not giving the tools. How are you going to audit people when you can't cut the anxiety? It's become so palpable, so concrete. There are fewer bodies; there are fewer experts; there are not the resources to go -- well, my God, the day may come where we don't even have the ability to collect our taxes because we don't have enough people. That's one thing. So I understand this dilemma. That's something the committee will have to reconcile and make recommendations to give people the resources to go and get the province's dues.
There are some other ones here in the same report, "The ministry should conduct additional research into the underground economy and use the results to focus its efforts on reducing the tax gap." The ministry response: "We agree in principle." One must not be too bold. "We agree in principle." If my mother were still alive, God bless her, she would likely get a nice gift again at Christmas. Why do you go out on a limb like this, that you agree in principle? Is that not a little risqué? Then you go on: "Our 1994 memorandum of understanding with Revenue Canada on the underground economy includes this objective. When the retail sales tax migrates to our new computer system, management information system development is planned following initial implementation." I'm supposed to learn English, but you're making it difficult. "Management information system performance indicators will include the type of statistics suggested in your report."
When I read this kind of response, if I'm a minister of the crown, I send you a little memo, "Well done." You've got the wolves out. You're buying a little time here. First you agree in principle. It's hardly a determinant, a bold move forward, and then thank God for the computer. "Give us more time." Hey, they're talking about the underground economy each and every day. I heard my Treasurer yesterday talking about $1 million per hour. He repeated it five times. At the end it was $5 million per hour. That was his focus. What are you going to do here? Are you going to do it or not? When are you going to do it? Where is the timetable attached to the ministry's response, madam? That is your responsibility.
Mrs Palozzi: We indicated in our remarks and in our discussions with the Provincial Auditor that there are a number of things that relate to improving the information around the underground economy. There is a body of work that needs to be done that is based on economic analysis. I'm not aware of definitive works that in fact dimension the underground economy. What our response is relates to the tax division, the retail sales tax area, focusing in on the development of better management information that assists in identifying those areas for improved compliance to deal with the underground economy.
I do have with us from the office of economic policy Peter Spiro, who is familiar with the research aspect of the underground economy. If you wish, we could have some comments from there.
Mr Pouliot: If Peter can help us clear the path we'll welcome his contribution.
We're not getting away from the real issue here, are we?
Mr Peter Spiro: There is a variety of tools for analysing this issue. I think one thing to keep in mind is that no matter how hard you work at it, you will never measure it with a high degree of accuracy. People are out there. Obviously they have a strong economic motive to hide their income.
Mr Pouliot: With respect, I'm not too concerned about the hours; I'm concerned about the signs.
Mr Spiro: The one thing we've been able to do is using econometric analysis of the amount of cash in circulation. That's one thing on which we have good data because the Bank of Canada knows how much money it's printed, and generally people who evade tax use cash transactions in order to avoid creating an audit trail, which of course makes it very hard for the auditors. No matter how hard the auditors work at it and how high the coverage rate, there are going to be some people who are very hard to catch.
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So we look at the amount of cash that's actually in circulation and then we use an econometric estimation of how much cash we expect ought to be in use if GDP were only as large as the official data show, looking at that discrepancy we can, in a very rough way, estimate how large the underground economy is and how much it's grown. The auditor in his report referred to some of that research. We discussed some of the results at the standing committee on finance and economic affairs a couple of years ago.
There are other types of research that could be done. In the United States they do I think what's called the taxpayer compliance study every 10 years where they do a very large random sampling audit. That, from what I understand, is a very expensive process. It requires quite a lot of resources. If you undertake that kind of work, then you can get a more detailed estimate of evasion in various sectors.
Mr Pouliot: Thank you most kindly.
Mr Marcel Beaubien (Lambton): A comment; I don't know if I have a question, to be honest with you, and if I do, it probably would be addressed to our guests here today.
Peter, I was glad to hear you say that it is difficult to measure the accuracy of the underground economy, but I think my learned friend across the room here last week described this underground economy as the second-oldest profession in the world. It's been around for a long time.
Mr Pouliot: You're a new member.
Mr Beaubien: That's right, and I'm learning. Everybody seems to be of the opinion that the implementation of the GST has fuelled the growth of the underground economy. Do we have any documentation to substantiate that statement?
Mr Spiro: It's not the kind of thing on which you can ever have documentation, but there have been a number of studies, including one I did myself that was published in the Canadian Tax Journal in 1993, which finds a high correlation between the growth in the underground economy, to the extent, crudely, that we can measure it, and the introduction of the GST.
Again looking at cash in circulation, Statistics Canada uses a variety of other tools. They estimate GDP through various different surveys and methodologies and, by looking at the discrepancy among various indicators, their results also suggest that the underground economy grew substantially following the beginning of 1991, when the GST was introduced.
Revenue Canada, or rather the Department of Finance Canada, also has done some analysis which comes up with results suggesting an increasing loss of revenue beginning around 1991, and of course there are the great many surveys of public attitudes that have been published.
I think KPMG Peat Marwick commissioned one last year asking people about their attitudes and they of course revealed this increasing tendency and willingness of people to evade taxes. Especially when asked about the GST, if I recall correctly from the Peat Marwick study, over half the respondents said they feel that it's all right or they would be willing to contemplate cheating on the GST if they had the opportunity; it's somewhat lower for personal income tax. So there's this sense that the GST is a very unpopular tax and people are inclined to evade it when they can.
Mr Beaubien: Consequently, being so unpopular, it does affect the retail sales tax and the income tax or whatever?
Mr Spiro: That's right, because they go together quite often.
Mr Beaubien: Will the appointment of 50 new auditors, to have more stringent collection regulations, rectify the problem?
Mr Lawrie: No, obviously it won't. The increase in the number of auditors would have to be very much higher, in our opinion, to have a very significant effect on non-compliance. The most recent evidence we have that's been published was a COMPAS opinion poll on the underground economy, on tax cheating. It was commissioned by the Financial Post in May of this year. I've got some extracts from it which go into some of the reasons why people cheat on taxes or why there's been an increase, apparently, in their willingness to consider it. I can distribute that, if you like.
Mr Beaubien: Don't you think then that the perception of the people who cheat on the taxes may be due to the fact that they feel it's not fair, it's not equitable, that they're paying more than their fair share? I keep going back to this, because it seems that we're trying to rectify the problem by having more stringent rules and regulations, more auditors. But we haven't stopped the oldest profession in the world yet with all the rules and regulations, and in some cases we're trying to legalize it.
Mr Pouliot: We have the lowest tax rate in the world.
Mr Beaubien: You're not sure? I'll talk to you later. We'll have a discussion after, Gilles.
But I think we're going -- by just appointing more auditors, by being more stringent in our collection procedures, yes, we may collect a few more dollars. But I think the underlying problem is that there is something wrong with the system, and I don't really think we're addressing that. We seem to skirt around it. We don't want to dance with it, we just want to bypass it. That's my feeling. Maybe I'm wrong, but that's the way I feel, because I really feel, rich or poor, everyone should pay their fair share.
Mrs Palozzi: Roy just distributed a summary of a survey that was published in the Financial Post that speaks to this issue of attitude. I think what's important to say is that a voluntary tax system is based on a notion of being able to maintain voluntary compliance through appropriate efforts. Therefore, the question around the population's attitude, what changes it in terms of values, I think what that survey would suggest is that there are a number of factors that one can attribute to shifts in those values, and I think some of those have been referred to both in the Provincial Auditor's report and comments made by Peter.
There is no exact science here. It is important that it is a combination of measures to be taken that maintain a voluntary compliance system in a tax administration system.
The Chair: Two more members have requested the opportunity to put some questions to you and we're going be required to adjourn close to noon, so perhaps you could keep that in mind in terms of the length of your responses.
Ms Shelley Martel (Sudbury East): With all due respect to Mr Beaubien, he will understand when I say that while tax evasion might be the second-oldest profession by some people's standards, I guess what concerns us as opposition members is the lack of desire I've seen on the part of this government to get at this issue. I mean, we've got big action on welfare fraud, big snitch line, all kinds of posters. I sat on a committee on WCB this week where we're going to have big prosecutions, big fines on injured workers who engage in fraud. But from this government so far I haven't seen a whole heck of a lot to deal with what is a most serious issue and probably $3-billion worth of a problem annually. And with all due respect to the ministry, I'm not blaming you for that.
The questions I want to get at have to do with two measures that we tried to implement as a government to deal in part with the question of fraud: auditors and the unified reporting system. I'm specifically referring to the Clearing the Path project and, secondly, Project Fair Share, which would have hired more auditors.
What I'd like to know, Dina, is if you can tell us where those two projects are now and whether or not in fact even the announcement the Minister of Finance made yesterday was just adding the total number of auditors we would have put in place in the third year of that project anyway or whether we are actually talking about new staff that are going to be reallocated under this government.
Mrs Palozzi: There are in fact two separate projects. I'd like to comment on Project Fair Share.
There was, as you know, an initiative that allocated additional auditing and collections resources to not just the retail sales tax -- it was broader than RST -- and I believe that was in 1994, if I have the year correctly, fiscal 1993-94, and we allocated those resources against the various tax statutes. However, as is the process in terms of acquiring these resources, there's a hiring process that has to be gone through and finally getting people on board.
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In the interim, governments have been undergoing constraint measures for numbers of years, including in-year constraint processes that often leave organizations in a position where in order to realize in-year constraint savings, there are only so many options one has in a budget, so that in order to deal with having to give up a certain amount of money, one has to respond to vacancies etc. So with that additional allocation in 1993-94, those resources were in fact constrained in 1994-95 by the ministry because of having to meet in-year constraints. That was previous to 1995. It was in 1994-95 that that occurred.
I think I have the exact numbers. They've been referenced before. Relating to retail sales tax, we had allocated an additional number of 29 auditors, and 21 of those positions -- not individuals, positions -- were constrained in 1994-95. That is part of the reality, unfortunately, in terms of dealing with in-year constraint situations.
Now, on the issue of Clearing the Path, if I could comment, Clearing the Path was an initiative, again of the previous government, around lessening the burden on small business formation and small business operation. It had two particular dimensions to it. One was the single business registration, which is an initiative where businesses can go to one location and through one form-filling exercise etc sign up for various requirements within the government. So a retail sales tax vendor number for EHT -- Bob, is that right?
Mr Moxley: For EHT, for S-EHT, for workers' compensation.
Mrs Palozzi: It's meant to make the process that much easier etc.
The other piece of it was unified reporting. In reality the unified reporting initiative is one that is perhaps more helpful to medium or large organizations, and that notion is the notion of one billing system around the status of your tax obligations as an organization, so that your corporations tax requirements, your EHT, retail sales tax would come in -- that's the notion of unified reporting.
The design work for that system that would link things has been done, is complete. However, the implementation of that has been deferred, given other priorities in the organization and given the discussions that have been going on around the reviews, around all of the choices in front of the government at the moment, around responsibilities of the ministry and other options that may exist around efforts with the federal government etc. The work has been done, the design work is available, and we feel it's an appropriate reallocation of resources on a temporary basis.
Ms Martel: Maybe I'm not clear about one point. Will that second initiative help you or not help you deal with (a) the recommendations that the auditor has around management information and (b) also give the ministry a better sense to deal with some of the things the auditor has said need to be dealt with, that is, audit selection, assessment criteria etc?
Is the second project, whose implementation is being deferred while a number of other things happen within the ministry, going to help you deal with some of what's in this?
Mrs Palozzi: I'd like Roy to comment on this, but my general understanding of the unified reporting initiative is that it was designed to assist business in terms of reporting, the receipt of reporting. Maybe Roy could comment on the impact of unified reporting as related to the PA's recommendations.
Mr Lawrie: Included in unified reporting was a concept of building an electronic bridge between the ministry's new assessment, which at the moment holds data for employer health tax and corporations tax, and the Basys system, which is the EDP system for retail sales tax.
The reason that it was included in unified reporting was that it wasn't in the ministry's schedule to put retail sales tax on the new system until 1997. In order to have the benefit of linking RST with the other two major taxes, there was a fairly large expenditure to build this bridge. That's one of the items that was constrained in this year's constraint.
What we're currently doing in response to the Provincial Auditor's report is looking at ways in which, using Basys itself, as opposed to linking with the new system, we can allocate work in a more effective manner in order to try and leverage the resources we've already got.
So the long answer is, because the bridge is no longer funded because that was constrained as part of the sort of death of unified reporting, yes, there is an effect, but we think we can fulfil what we've undertaken to the Provincial Auditor in other ways -- probably cheaper ways, actually.
Ms Martel: I just wanted to know when the constraint went on on that particular piece of the puzzle.
Mrs Palozzi: We constrained resources within the ministry --
Ms Martel: In 1994-95?
Mrs Palozzi: In 1995-96. There have been constraints over the last number of years, as you well know, constraints going into the year and constraints in-year, and ministries and organizations make their choices as to relative priorities of things.
My point was that the intent of the unified reporting project was not specifically related to improving with the issues referenced in the PA's report, but was in fact an initiative linked to the improvement of process for small business registration. Therefore, those linkages around unified reporting, we're looking at building them in a cheaper way that will allow us to get the management information that results from better linkages of databases as opposed to counting on the unified reporting.
Mr Gary Fox (Prince Edward-Lennox-South Hastings): What about the private sector being used for tax collection on a commission basis?
Mr Lawrie: Yes, I think that's something that we want to take a look at. It's been tried in a few jurisdictions in the USA, a few state jurisdictions, and it's also been tried I think in one other jurisdiction on a limited basis in Canada, a provincial jurisdiction. No one has entirely turned over their tax collection to the private sector, no jurisdiction has, and I think there are very good reasons why that doesn't happen. The potential for conflict of interest and the potential for perhaps -- unless one was very careful in monitoring -- abuse of the minister's powers under the tax statutes puts jurisdictions off.
But there may well be a place for some sort of privatization, particularly for accounts that we would otherwise be interested in writing off. That happens in the jurisdictions and states and the other one in Canada. They all use private collection agencies for that, and you find that anything they get, obviously, as it's on a commission basis, is found revenues. They would have written the accounts off otherwise.
The other very common area in which privatization is used in collections is where the taxpayer is now outside your jurisdiction, skips, as they're called in collection generally. There is a problem with a debtor who moves outside the province in the resources required to mount any effective collection effort. A private collection agency that is reasonably large and has operations in other provinces might well be more effective than the tax staff in these sort of situations. Does that answer your question?
Mr Fox: Yes.
The Chair: We've reached the end of our time allotted for this morning's session. I want to, on behalf of all committee members, thank you for appearing before us and answering our questions. The committee stands adjourned until a week from today.
The committee adjourned at 1201.