1995 ANNUAL REPORT,
PROVINCIAL AUDITOR
RETAIL SALES TAX
ONTARIO RESTAURANT ASSOCIATION
ONTARIO BOARD OF
PAROLE
CRIMINAL INJURIES COMPENSATION BOARD
AUDIT ACT
AMENDMENTS
OFFICE OF THE INFORMATION AND PRIVACY COMMISSIONER
RETAIL SALES TAX
CANADIAN COUNCIL OF GROCERY DISTRIBUTORS
ASSOCIATION OF CANADIAN DISTILLERS
CONTENTS
Thursday 29 February 1996
1995 annual report, Provincial Auditor
Retail sales tax: Ontario Restaurant Association
Paul Oliver, president
Rachelle Wood, director, public affairs
Ontario Board of Parole: Criminal Injuries Compensation Board
Chisanga Puta-Chekwe, chair
Retail sales tax: Noel Rebick
Audit Act amendments: Office of the Information and Privacy Commissioner
Tom Wright, commissioner
Ann Cavoukian, assistant commissioner (privacy)
Retail sales tax: Canadian Council of Grocery Distributors
Max Roytenberg, vice-president
Arlene Lannon, Ontario director
Association of Canadian Distillers
Ronald Veilleux
FED UP
Charlie Flynn, founder
TCMJ Auditing Service
Thomas Finch, president
Carol Hoffman, associate
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 / -Sud 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:
Cleary, John C. (Cornwall L) for Mr Crozier
Stewart, Gary R. (Peterborough PC) for Mr Fox
Rollins, E.J. Douglas (Quinte PC) for Mr Gilchrist
Clerk / Greffier: Decker, Todd
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 0933 in committee room 2.
1995 ANNUAL REPORT, PROVINCIAL AUDITOR
RETAIL SALES TAX
ONTARIO RESTAURANT ASSOCIATION
The Chair (Mr Dalton McGuinty): Good morning, ladies and gentlemen. Welcome to the standing committee on public accounts. Committee members will have had a copy of today's agenda before them. You'll notice that we'll be doing a bit of jumping back and forth in terms of the subject matter we'll be covering, but we're to begin this morning with a presentation from the Ontario Restaurant Association. Welcome to the committee. Please keep in mind that you've been allowed a half-hour for your presentation and committee members would appreciate that you'd allow some time for questions. Please begin by stating your names for the record.
Ms Rachelle Wood: Good morning. The Ontario Restaurant Association welcomes the opportunity to appear before you to discuss Ontario's retail sales tax system. I am Rachelle Wood, director of public affairs for the association, and I am joined by Paul Oliver, president of the association. As an industry which generates over $2.2 billion in taxes for the government of Ontario and the government of Canada, we are extremely interested in the tax collection, tax assessment and tax avoidance practices.
The ORA believes that tax avoidance concerning the PST is a growing and serious problem, but the solution to this situation cannot be developed in isolation. The cumulative tax impact as well as the application of specialized taxes play a major role in tax evasion, the growth of the underground economy and, ultimately, PST avoidance. Any solution developed by this committee must incorporate a comprehensive approach to combating the black market and should not focus only on reducing PST avoidance. In fact, singular approaches could have the unintended consequence of not only adding to PST avoidance, but also enhancing other tax avoidance.
During today's presentation, we will focus on a number of key issues pertaining to tax avoidance and potential solutions to address this problem.
The high level of taxes paid by consumers and businesses has led to the creation of black markets in items such as beverage alcohol, as the smuggled tax-free products are significantly less expensive than when purchased through legal channels. The differences are primarily not in the base price but in the tax component. The value savings created by black market products are enhanced by PST and GST avoidance. The underground economy that has been created can no longer be ignored.
On a positive note, meaningful government action could substantially reduce or eliminate black markets that currently exist. These increased government revenues will also go a long way to assist the government in managing its debt load, achieving its fiscal objectives and preserving existing services. However, the approach to controlling tax avoidance cannot be limited to only the PST, but must include a meaningful evaluation of all taxes and a broader policy approach.
The ORA believes that the frustration experienced by consumers and business over the high taxes that they are required to pay on purchased goods has led to a general belief that the avoidance of the payment of taxes is justifiable and acceptable. One only need look at the market that existed for illegal cigarettes to realize consumers had no difficulty, both psychologically and in terms of accessibility, in purchasing this illegal product solely to avoid the payment of high taxes.
In terms of the business community, the underground economy is in many cases a welcome relief to the costly administrative burdens associated with tax collection and compliance. For both the general public and the business community, there is a strong perception that government is constantly either increasing existing taxes or introducing new taxes, with no end in sight.
I'd next like to talk about PST-GST harmonization, an issue that we believe would encourage further PST avoidance. There has been significant public discussion about the possibility of the province of Ontario harmonizing the provincial retail sales tax with the federal goods and services tax. Some individuals have suggested PST-GST harmonization will reduce PST avoidance. The ORA believes that the negative impact harmonization will have on consumer spending and consumer confidence will actually enhance PST avoidance.
Economic analysis suggests that in order for harmonization to be revenue-neutral for both the federal and provincial treasuries, the combined GST-PST rate would need to be 15%. This 15% combined rate would also have to be expanded to cover a wide range of services and products including previously PST-exempt items such as books, postage stamps, haircuts, home heating fuel and many other services. This would result in a net increase in consumer taxes of approximately $2.5 billion. The ORA believes that the psychological impact of adding $2.5 billion in additional direct consumer taxes will have a profound impact on tax avoidance, the same way the introduction of the GST substantially increased tax avoidance and provided consumers with the psychological rationale for general tax avoidance.
Harmonization will also lead to increased black markets for goods as consumers strive to avoid payment of further taxes. Harmonization will only further exacerbate sales tax evasion. Government must be cognizant of the fact that the public no longer wishes to pay high taxes and is opposed to any direct new taxes that would be created through an initiative such as GST-PST harmonization.
There also appears to be strong public opposition to harmonization. A September 1995 public opinion survey by Environics Research found 55% of Ontarians were opposed to harmonization. This confirms the potential psychological impact harmonization will have on the propensity for avoidance.
We believe the government of Ontario should oppose GST-PST harmonization because of its detrimental impact on consumers and instead encourage the federal Liberal government to fulfil its campaign promise to eliminate the GST. This in itself will go a long way in reducing PST and general tax avoidance. I'll now turn the floor over to Paul.
Mr Paul Oliver: The application of audits within the foodservice industry generally appears to be designed to determine if all PST has been collected and remitted to the provincial government. The ORA supports efforts by the Ministry of Finance to ensure all merchants remit the appropriate and accurate amount of PST due. However, the association is concerned that while this process focuses on the collection of PST, it has the potential to create an unintended impact on the prevalence of illegal alcohol and creates a systemic perception that the PST collection audit process is not being applied fairly within the hospitality industry.
The concerns of the ORA focus on the collection of PST due on beverage alcohol sold in licensed establishments. It is our understanding that the Ministry of Finance audit process is based on an input-output model which uses generalized industry statistics. The model amounts to taking the total input of beverage alcohol purchased from the LCBO and Brewers Retail, applying the establishment standard markup, allowing a 5% spillage factor and multiplying by the 10% PST, equalling total PST due and payable.
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Unfortunately, this model contains two major deficiencies. First, the spillage or damaged product ratio of 5% is not applicable for all types of hospitality establishments. The 5% factor covers all types of product loss, including stolen product, free product, damaged product and overpour product, including both draft beer overpour and free pour of spirits that may not be measured exactly to one ounce. For many establishments, the 5% factor is neither appropriate nor realistic. This creates a system where operators are being assessed PST due for transactions and sales which have never transpired. This creates a systemic view by many foodservice operators that the PST collection system is simply not fair.
To respond to this unfair audit process and to ensure that actual sales take place to cover spillage and damage levels above 5%, some operators are forced to supplement legitimate beverage alcohol purchases with black market beverage alcohol. Without this supplement of illegal products, operators would be required to remit PST collected on sales which have never taken place. Recognizing the lack of profitability within the foodservice industry, the only opportunity for some operators to create the PST payable, where it really does not exist, is to sell underground, illegal alcohol. The ORA does not support this, but it is a reality.
The ORA does not believe that it was the intention of the government to administer a PST audit process which unfairly assesses merchants for PST on sales which have never taken place, nor is it the government's goal to support an audit process which forces operators to supplement legal beverage alcohol sales with illegal ones. Therefore, the ORA would urge this committee to recommend that the Ministry of Finance undertake a review of the hospitality industry audit process and, in cooperation with the association, develop a more appropriate audit factoring rating system.
Relative to general contraband alcohol in Ontario, much has been said recently about the growing level of beverage alcohol smuggling. With a 750-millilitre bottle of spirits taxed at 83%, wine at 63% and a case of beer at 49%, it's hardly unexpected that a black market would develop. As a result of high taxes, liquor smuggling, especially spirits, has become a $1-billion industry and is representing substantial lost revenue for the government of Ontario and the federal government. In Ontario, some estimates suggest as much as 28.6% of spirits are sold illegally and that with this a significant amount of PST is avoided. It is estimated that Ontario loses more than $290 million in taxes annually to smuggled alcohol.
The ORA would urge the government of Ontario to reduce the level of taxes paid on beverage alcohol in order to make Ontario more competitive and reduce and hopefully eliminate the enormous black market which currently exists for contraband alcohol.
Over the last few years there has been a growing prevalence of illegal alcohol in Ontario's licensed establishments. A number of factors contribute to this phenomenon. In addition to wishing to avoid the PST, the use of smuggled alcohol by licensed establishments occurs in Ontario due to a need to remain competitive by offering lower prices, to avoid the special and discriminatory hospitality gallonage tax, to compete with competitors using illegal product or operating in a lower-tax jurisdiction, and in some cases simply to survive. These may appear to be small factors; however, they enhance the psychological justification of illegal products.
Further deciding factors for licensed establishments to purchase contraband liquor are that liquor smugglers simply provide better service than does the LCBO monopoly. They allow licensees to purchase on credit and with competitive credit terms and provide delivery. While the general public is able to purchase alcohol from the LCBO on credit, licensees are required to pay cash in advance. Operators do not believe that there is any justification for this unfair and discriminatory treatment that they are receiving from the LCBO.
With the downturn in the economy over the past several years, hospitality operators are finding themselves strapped for cash necessary to purchase beverage alcohol. Smugglers of contraband liquor, by not charging the licensee the 12% gallonage tax or any other taxes and by offering credit, are an alternative which many operators are forced to turn to.
The ORA has repeatedly requested that licensees be able to purchase alcohol on credit or be allowed to use personal credit cards like everyone else in Ontario. This is something that the government could implement practically overnight and would show to the hospitality industry that the government is committed to bringing fairness to Ontario's alcohol distribution system and eliminating the black market for beverage alcohol.
While the taxation of beverage alcohol is very high in Ontario and is a major cause of illegal products, the taxation of beverage alcohol in licensed establishments is even greater. Foodservice and hospitality operators are required to pay a special 12% gallonage tax on the purchase of that alcohol, which customers of the LCBO retail stores do not pay when purchasing the identical product. Combined with the cumulative impact of an additional 10% retail sales tax upon resale, foodservice customers are required to pay approximately 50% higher taxes for their adult beverages when purchased in a restaurant than if the identical product was purchased for home consumption.
The perceived inequity in the tax system provides for a strong rationale for tax avoidance and the creation of the black market. Much of the tax system is based upon the perception that it's fair and equitable, but just to give you an example as to what the perception is for the hospitality industry -- I've brought props -- this is a bottle of wine. If this bottle of wine were hypothetically sold at the LCBO for $6.35 to the retail customer, the government of Ontario would collect about $3.41 from that. If this bottle of wine, an identical bottle, were sold in an LCBO agency store for the same price, the government would collect $2.72, even though it's the same product. If this same product were sold in an Ontario wine store, the government would collect $1.07 -- same product, same tax. If this identical product were sold in a restaurant, the government would collect $4.21 -- same product, identical product. Why is there this major difference? It's because of the LCBO markups, the discount system and the special gallonage taxes applied to the hospitality industry. For an operator sitting there saying, "I'm already remitting $4 in tax, and I know that when that same product is being sold to my customer at a wine store, only $1.07 is going to the government," the justification that the system isn't fair hits home very quickly and very hard.
To ensure the viability of the hospitality industry and other related sectors, such as the tourism industry, there is a need to change the existing tax arrangements on that beverage alcohol in the interests of fairness for operators of licensed establishments and our consumers. Even with the elimination of the special restaurant and bar gallonage tax, customers would continue to pay more tax when purchasing in a hospitality establishment than when purchasing the identical product in the LCBO, an agency store or a wine store. However, the elimination of the special hospitality tax is an appropriate first step towards tax equity.
The ORA strongly urges the government of Ontario to eliminate the double taxation on beverage alcohol sold in licensed establishments by eliminating the 12% restaurant and bar gallonage tax and reducing the special 10% alcohol sales tax to the standard 8%.
Ms Wood: The final issue we would like to discuss is recapturing the black market through video lottery terminals. Much of the focus of public policymakers pertaining to the black market has rested on ways to reduce the underground economy. The ORA would encourage this committee to also consider mechanisms which will help bring black or grey money back into the structured and regulated economy.
One mechanism which warrants more exploration is the introduction of video lottery terminals. The food and beverage industry has been encouraging the government of Ontario to authorize the introduction of VLTs in liquor-licensed establishments throughout Ontario as a means to provide an economic stimulant to the hospitality sector and create new financial revenue for the province.
Currently, VLTs operate in eight other provinces. It is estimated that the introduction of VLTs would generate net revenue for the government of Ontario of approximately $700 million to $1 billion in non-tax new revenue. Current estimates are that there are now approximately 20,000 illegal machines operating in Ontario, machines from which the government and its taxpayers receive no benefit. By allowing VLTs into licensed establishments, the government will be able to substantially enhance job creation; help stabilize the licensee sector of the hospitality industry; reverse the outflow of Ontario residents to competing jurisdictions, such as Quebec and Manitoba, which have VLTs; and begin to address the massive black market which has already developed for VLTs.
The introduction of VLTs into LLBO-licensed establishments will also provide the hospitality industry with some degree of economic stability, as well as a level competitive playing field in border regions which already have or are in the process of introducing VLTs. This initially would reduce the propensity to engage in tax avoidance.
In conclusion, we thank you for providing us with an opportunity to appear here today.
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Mr R. Gary Stewart (Peterborough): Thank you for your presentation. I look at your lineup of four bottles of wine and the variance in taxes etc. Do you think that privatization of the liquor industry will help to offset that, if there were some rules and standards put into effect?
Mr Oliver: A two-point answer: In Alberta they did get a levelling of this because they introduced a flat-tax system. There's still a higher tax because of the GST application in Alberta, but it was a levelling of it in Alberta and a competitive market. For example, we're not allowed to even buy wine from an Ontario wine store. But in Alberta, you can buy from any store. You can buy it from the government warehouse. You can buy it from any of the private stores. You negotiate your own price for the hospitality industry. So they did get wholesale pricing and they also got an elimination of special taxes so that they had a flat markup, the same as any other operator. Does it require privatization to accomplish that? No. If the government wants to address this without privatizing, it can be addressed in a public or private system.
Mr Stewart: I ended up getting a couple of other presentations from the restaurant industry, and most operators use an upper-level quality of liquor in their establishments. They found, again because of the type of privatization, that the middle class or the middle pricing went down, which had an added benefit for the food industry. Do you concur with that as well?
Mr Oliver: Yes. We're actually just running those numbers for Ontario. We've requested, under freedom of information, from the LCBO the listing of the top brands or top skews so that we can actually come up with those numbers. But generally, in Alberta, they found that the prices of their standard brands didn't go either upwards or downwards, but their upper premium products, which are showcased in a lot of restaurants, did come down in price.
But more importantly, what they did was they got the price that it goes into the system at, not what it comes out of the system at. So they're buying at what it goes into the liquor store at, the back-door price, not at the front-door retail price. We pay full retail for our product when we buy it in Ontario and then we have special gallonage tax applied. Whereas in Alberta, they're buying at the same price as the operator of our liquor stores.
Mr Stewart: On the smuggling across the border of contraband liquor and cigarettes and so on, how do you see us trying to control that?
Mr Oliver: I think the only way you're going to be able to control that is through adjustments in the tax. I just don't think you have enough police or customs inspectors to control it; it's the same problem you had with contraband tobacco. You accomplished that by adjusting the taxes so that people believe they're fair.
Mr Mike Colle (Oakwood): In terms of the illegal sale of alcohol, whether it be smuggled or otherwise, that the mainstream restaurants are selling and being taxed on, is there any type of analysis of the illegal sale of alcohol through booze cans, the underground restaurants that operate after hours, and any kind of analysis of what percentage of that is alcohol bought from LCBO or smuggled, or whatever?
Mr Oliver: We would estimate probably somewhere around 80% to 85% in a booze can that's operating illegally is illegal product, because if you go into the LCBO and you're buying huge volumes of liquor, someone's going to say, "Why are you buying huge volumes of liquor?" "Well, I'm operating an after-hours club." They're going to be at your front door the next day. So you have to buy illegal product, because if you don't, they have a means of identifying where you are.
The only time where it's actually bought through the LCBO would be if you're operating that establishment under an SOP, a special occasion permit, where you can justify going in and buying dozens of cases of liquor. But if you're not operating under an SOP, and most booze cans don't operate under an SOP because if you operate under an SOP, then the inspector has the right to go into your establishment; if you don't have an SOP and you don't have a liquor licence, the liquor inspector can't go into your establishment, or won't go into your establishment. So if you just completely operate outside of the system, you have no regulatory side. Then, on the purchase side, you just buy it from the smuggler who drops by and delivers on Friday afternoon and will refill on Saturday. So even if you get raided, you don't have the product seized.
Mr Colle: In fact, I've heard that there are regular routes that these smugglers have throughout the city, that they have their dropoff points. It's a growing business in terms of all the ancillary aspects to it, like delivery.
In terms of beer, it's been my experience that there's been no control out of the Beer Store, that we've had booze cans where people were shot and the place was raided a couple of days before, and the proprietor of the booze can will be at the Beer Store the next day buying 40 cases of beer and there are no questions asked. Have you heard of any controls through the Brewers Retail in terms of control of this type of thing?
Mr Oliver: None whatsoever. The only one is a sharp employee saying: "Why are you buying 40 cases for home consumption? Either you have a very big drinking problem or a very big family or something else is going on." At the LCBO, they seem to be a bit better at identifying those. At the BRI, there's no incentive, because you're paying money to walk in and buy the product. Why would I question you? Just make sure you have the truck not blocking our back door for too long when you're loading it up. But a lot of the product that flows into those booze cans is completely illegal, and in that way it's not tracked. If you go and you buy through either the BRI or the LCBO, there's at least some paperwork there to trace that purchase. If you're operating an illegal operation, you don't want any paperwork, any trace of it.
Mr Colle: Just in terms of the consumption of other alcoholic beverages, beer and the taxation rate on beer --
Mr Oliver: The smuggling of beer seems to be far lower than the smuggling of distilled spirits, and wine is even below distilled spirits, partly because the taxation level on beer is only about 48% or 47%, and it's a larger commodity. The per inch or per square foot of smuggled product that you're moving, you just don't get as big a return, whereas a case of 40-ouncers, you get a far bigger return. Generally, what we're seeing on wines is not so much smuggled product; some smuggling, but also people making it and using it in private events and things like that. There's a lot of that goes on. Distilled spirits seems to be the overwhelming area because the return per bottle is so great. You can make $8, $10, $12 a bottle in profit for a smuggler per bottle, whereas you can only make a few pennies on a bottle of beer.
Mr Gilles Pouliot (Lake Nipigon): I've been a patron, like all. You can't escape your client group. Tell me, on the first bottle that says $4.21, $4.21 is the tax portion that is remitted to the Ontario government, right?
Mr Oliver: Yes, and that's based on the standard 2.5 markup in the hospitality industry.
Mr Pouliot: What's the cost of this bottle of wine, sir?
Mr Oliver: When it's resold, $15 I think, $14.50.
Mr Pouliot: As a customer, I would pay $15 for it?
Mr Oliver: Yes, around $14.50 or $15.
Mr Pouliot: So $4.21 would be a markup of, what, 100%?
Mr Oliver: Just over 100%.
Mr Pouliot: So $4.21 is what's in the bubble here. Obviously you feel that it's excessive.
Mr Oliver: Yes.
Mr Pouliot: Is contraband a direct result of the $4.21?
Mr Oliver: In some cases, yes; in other cases, it's the result of the psychological impact. As a restaurateur, if I'm sitting there and I have no money to buy liquor at the end of the week and I want to buy something on my credit card, I can't do that even if I wanted to put it on my personal credit card. But I need something to sell Friday night, and someone walks in your front door and says: "We'll deliver to you every Wednesday or every Friday or whenever you want. Pay us in three weeks or four weeks."
For the smuggler (a) they're offering credit, but (b) the smuggler doesn't have to carry cash around. If they're caught, they don't carry the cash with the liquor, they want to separate the transaction, whereas at the LCBO, we have operators who want to pay for it on their personal credit card. There's no risk to the LCBO, there's no potential of revenue loss; they can't do that.
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Mr Pouliot: You seem to have taken a certain fervour on the following of the cigarette episode. Following Mr Stewart, who initiated this by mentioning the privatization, hypothetically at this stage but nevertheless maybe a reality in relatively short order, on the one hand, you have mentioned that it would give you the opportunity to strike a deal, if you wish, and yet on the other hand, you would have to factor the ability of the LCBO to go to the brokers, to go to the wineries, and exercise the pressure of volume. In other words, if I'm a private entrepreneur and I go and buy 100 bottles of Chateau Bonnet, and if LCBO goes and buys $500,000 of Chateau Bonnet, the rest is semantics, we know what happens. So you reach an equilibrium, a balance here. What you gain on the one hand by privatization, you might lose on the other because you don't have the same force of bargaining.
Mr Oliver: We hear a lot about the LCBO's purchasing power, but that purchasing power doesn't seem to hold up across Canada, purchasing power that other jurisdictions have, because a lot of other jurisdictions simply put in a rule that you have to offer the best price that you offer anyone in Canada. The liquor board in PEI or Newfoundland gets a similar price as in Ontario because they're saying, "What is your best price? Match it or we don't list your product."
What you also do is you bring more products into the marketplace. The last numbers I saw, the LCBO has reduced its number of standard brands from 2,800 to 2,300 since 1990. I believe now that the official number from Alberta is somewhere around 6,500 products that they have available, and within a six-month period of time it will be 12,000 products. There's more competition in the marketplace, so the manufacturers are more competitive in listing the price. There's no incentive for someone that isn't listed on the LCBO to offer a price that's substantially lower, because if they can't get on it, then they can't pay the listing fee, whereas in Alberta they can.
Mr Pouliot: Well, yes, it's a judgement. You would know better. You have to turn the stock. The Remy Martin, Louis XIII, is not something that you would want to stock your shelves with.
In some parts of Montreal, you have what they call the frais de manutention, it's a handling fee, and you bring your own, and they seem to be able to survive. I guess the food makes a difference. What is the percentage that you estimate where taxes are not remitted to Revenue Ontario, 10%, 15%?
Mr Oliver: It's very hard to arrive at, because you can go out and you can audit, but if you're auditing and coming up with number on sales that didn't exist, it's very difficult.
Mr Pouliot: So on the bottle, $1.07, that's what I would pay as a consumer?
Mr Oliver: No. You would still pay the wine store $6.35 for this bottle of wine, but that's all the government generates out of it, so you should pay $6.35.
Mr Pouliot: So you buy three at $4.21, you buy one at $1.07, and if I pay you cash, that's an invitation to sin, is it not?
The Chair: Final response.
Mr Pouliot: Okay.
The Chair: Thank you for your presentation.
ONTARIO BOARD OF PAROLE
CRIMINAL INJURIES COMPENSATION BOARD
The Chair: The next presentation is to be made on behalf of the Criminal Injuries Compensation Board. Good morning, sir, and welcome to the committee. We have allowed a half-hour for your presentation, if you would proceed, and please keep in mind that, if possible, committee members would like to have the opportunity to ask some questions of you.
Mr Chisanga Puta-Chekwe: My name is Chisanga Puta-Chekwe from the Criminal Injuries Compensation Board. I'd like to begin by thanking you for the invitation to appear before the standing committee to express the views of the board with regard to the parole system and to the auditor's comments in his report.
Perhaps a few background remarks will help put my comments in context. The board I represent, the Criminal Injuries Compensation Board, is part of the criminal justice system. We are not an advocacy group. Although most of our involvement is with victims of violent crime, we are a quasi-judicial tribunal and our job is to make decisions.
Our legislation, the Compensation for Victims of Crime Act, gives the board one function and responsibility. We have to make decisions on whether or not we will exercise our statutory discretion to award compensation to victims of violent crime who have applied to our board. We are not there to compensate victims of all crime. We do not compensate for losses from theft, for example. We are asked to decide whether victims of violent crime, who have been injured, ought to be compensated and in what amount. Where the victim was murdered we may contribute towards funeral expenses incurred by the victim's survivor or survivors.
After victims of crime have gone through the trauma of the incident in which they were injured, and have gone through all the court procedures -- in which, by the way, they rapidly discover that they aren't the focus of attention -- they come to us. They come to us with the fear and concern they have about the person who caused them violent harm and hurt them. If that person was found, and charged and convicted, he or she may be in prison or may be on parole.
I'd like to emphasize once again that we are not an advocacy group for victims of crime or for anyone else. Our job, on behalf of the people of Ontario, is to examine applications for compensation and award compensation where this can be justified under the Compensation for Victims of Crime Act. Where the offender has been convicted, our legislation tells us to take that conviction as conclusive evidence that the crime was committed, thereby making the victim compensable, subject to other statutory considerations being met.
Even in the absence of a conviction, however, our legislation still empowers the board to find a person to have been a victim of a violent crime. There are many good reasons for this power. For example, a crown attorney may have decided that a child victim of sexual abuse was too young or too fragile to testify in court. Again, it may be perfectly clear that a victim was injured as a result of the commission of a crime of violence, but there may be problems over positive identification of the assailant. Again, a case may have been dismissed because a witness failed to appear. For all these reasons, we can make a finding on a balance of probability that the crime was committed, the absence of a conviction notwithstanding.
Offenders or alleged offenders are parties to our proceedings and the board as a quasi-judicial tribunal must at all times remain impartial and fair. We use our discretion to award compensation where appropriate, always bearing in mind the principles of natural justice. That means we must treat like cases alike.
Apart from the fact that they are parties to our proceedings, the board has a particular interest in offenders and alleged offenders. Our legislation gives us powers of subrogation. Once the board has made the decision to award compensation, we are subrogated to the rights of the person awarded and may seek to be reimbursed from the offender or the alleged offender. I will have more to say about this shortly.
The Criminal Injuries Compensation Board is very appreciative of the recent passage by the Legislature of the Victims' Bill of Rights, 1995. We welcome the positive statement this piece of legislation makes about victims' rights. We also are appreciative of the maintenance of the victims' justice fund account.
I would now like to share with you some thoughts with respect to the Provincial Auditor's comments and recommendations about restitution in the 1995 Annual Report. The report states at page 252: "Restitution orders are intended to provide victims with compensation; non-payment situations undermine the intention of the court and may make victims feel victimized again." It is not my place nor my responsibility to comment on the processes by which restitution orders are made. However, I would like to emphasize that when restitution orders are made but not enforced, and the victim is thus forced to seek compensation from our board, it is the taxpayer of the province who pays for the consequences of the crime on the victim, and not the criminal.
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I therefore welcome the recommendation that, "The ministry should seek direction from the court when offenders do not meet restitution order requirements; and work with the courts to ensure that offenders' abilities to pay are assessed before restitution orders are imposed."
Of course, we are all aware that a great number of criminals are judgement-proof. I mentioned a few moments ago our powers of subrogation. In our efforts to recover money from criminals, we've been quite familiar with the judgement-proof status of most offenders.
I would also add that it is not the most profitable use of public funds to pursue in the courts subrogation claims unless the amount hoped to be recovered is substantial and there is a reasonable guarantee that the pursuit will be effective. This consideration makes it all the more desirable that when restitution orders have been made by the courts, they be enforced.
The growth in the number of applications to the board, particularly from victims of sexual abuse, has been continual. The amount of public money available to meet these as we realize other needs remains limited. Our board, when deciding whether or not to award compensation and in what amount, must take into consideration any compensation obtained by the victim of crime from other sources. That, of course, includes restitution orders, but it is not fair to the victim to take this payment into consideration unless the restitution has actually been paid or been made. In that way, the effectiveness of the enforcement of restitution orders directly affects the operation of our board.
I would also like to point out that any restitution obtained from a criminal potentially frees money for this board to award to another victim of crime whose assailant was never found, convicted, or who is judgement-proof.
The current discussion on cost-effective ways of dealing with anti-social behaviour is re-emphasizing the value of restitution. The search for effective alternatives to costly incarceration has led to a reconsideration of the value of restitution. The responsibility to make restitution encourages the offender to appreciate at a personal level, not at an abstract level but at a personal level, the harm done to the victim.
Younger offenders and those not yet hardened to the operations of the justice system and multiple incarcerations may respond to the financial consequences of the damage caused. The victims, on the other hand, have a sense of getting something back, a sense that something is being done to restore order to their lives.
As the report indicates, one third of offenders ordered to pay restitution do not have the ability to do so. The victims of these offenders must look elsewhere for compensation. I reiterate that our experience shows that generally, offenders are judgement-proof. In light of this, these offenders' victims have nowhere else to go but the Criminal Injuries Compensation Board for compensation. Even the victims of those offenders who do pay restitution often have to come to us because the money they receive from the offenders or the assailant is insufficient.
It is clear, therefore, that repeat offenders and offenders returned to society prematurely because of the problems and deficiencies to which the auditor has drawn his attention, represent a cost to society.
Of course, many of the offenders who have caused injuries leading to applications before the board have been sentenced to terms considerably longer than two years less a day and do not therefore fall under the jurisdiction of the Ontario Board of Parole. However, through plea bargaining, concurrent sentencing and other means of keeping the wheels of the justice system operating, there are criminals who have created very serious harm but who have received relatively light sentences and who therefore fall under the jurisdiction of the Ontario Board of Parole.
As the auditor notes, the Board of Parole needs to improve the quality of its parole decision-making process by obtaining sufficient information, assessing risk more objectively, providing better training for board members and taking corrective action when necessary. The board also needs to develop measures to assess and report on its effectiveness in protecting public safety and assisting the reintegration of offenders in the community.
The premature release of some of these offenders because of inadequate attention to the opinions of the court, the police, their therapists and counsellors does have serious consequences. We know this because we see the direct consequences through applications received from their victims.
Let me give you one example of an actual case. In January 1995, a victim was walking home from the Eglinton subway station in Toronto when she became aware of a man following her. She walked into her apartment lobby with the man right behind her, got into the elevator and pushed the button for her floor. When the elevator reached the victim's floor and the victim tried to get off, she was grabbed from behind by the man, who also placed his arm around her throat. According to the judge who heard the matter, the offender attacked the victim in a manner which involved the gratification of sexual desires, and which attack was such that it caused her bodily harm beyond a mere touch or bruise. Things would have been much worse had some tenants who heard the victim scream not rushed from their suites and pulled the attacker off the woman. The offender was convicted.
At the time of this offence the offender was on parole, having been earlier convicted of choking a woman in an elevator. The victim came to the board and was awarded $5,000 for pain and suffering. Provision was also made in her award for an additional $5,000 to cover the cost of therapy. Clearly the victim in this example I have given would not have been injured had the offender not been released prematurely from prison, and society would not have had to compensate her.
The board recognizes, of course, that there are instances when early release from incarceration is justified. I would suggest, however, that there could be no justification for early release without a convincing case being made that the offender's release would not in any way be prejudicial to public safety. Accordingly, I welcome the auditor's recommendation that the Ontario Board of Parole should institute the use of objective risk assessment tools to help members assess and support their judgement on the risks of releasing offenders.
In addition to monetary loss, the lower capacity of victims of crime to function normally represents another cost. This is a cost that is preventable. It is the pain and hurt, the fear and dread which presently secure, productive and optimistic members of society will feel because of the crimes of offenders. This feeling of insecurity undermines society's ability to perform to its fullest potential. In addition, perpetrators of crime place permanent as well as temporary demands upon the resources of the province as their victims turn to society for help.
For example, because of the demands placed on the Criminal Injuries Compensation Board to finance counselling and other therapies, we have had to limit our contribution to these costs to $5,000 except for very special circumstances. I would remind you that victims of sexual assault and child abuse make up the largest single category of our caseload. In the last report in the fiscal year, they made up about 42.2% of the entire caseload. The vast majority of these victims require counselling.
In closing, I would like to reiterate that there is a cost to society, both monetary and non-monetary, involved in early release of offenders. At the same time, I recognize that some useful purpose can be served by parole as long as the persons charged with assessing suitability of offenders for parole satisfy themselves on an objective standard and without reservation that early release is not inconsistent with society's security concerns. In this regard, I am encouraged by the auditor's report and recommendations contained therein.
Mr Dominic Agostino (Hamilton East): I want to address to you, sir, the question of the suitability of the awards and the limits that are on the awards that the Criminal Injuries Compensation Board often is limited to. In the system itself you mentioned the maximum of $5,000. That would be in most of your cases.
Mr Puta-Chekwe: No, that would be a maximum for counselling costs only.
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Mr Agostino: But that doesn't give you the long term of someone who has been severely psychologically scarred as a result of an attack or a criminal act. Obviously it would often require long-term counselling that the $5,000 won't even touch. In the whole system itself, in your view, is the compensation that is given to victims adequate, and would you like to see an option or a system whereby your board has more flexibility as to the type of awards and the amount of monetary awards you give?
Mr Puta-Chekwe: The compensation that we give to victims of crime is not, and I don't think can be, adequate. I don't think the legislation ever pretended that it was going to place victims in the position they were in prior to being injured. I think the purpose it serves is to assure victims of crimes of violence that society does care about them and that society recognizes that it has failed them in that it hasn't provided them with sufficient security to avoid this crime being committed against them. That's, I think, as important as and in some cases more important than the money for compensation that the victims receive. So the recognition is an aspect.
In terms of the actual monetary compensation, the maximum amount that the board can award in terms of a lump-sum payment is $25,000. Now that's awarded under various heads. Expenses incurred: In the case of counselling you have a policy that limits that to $5,000 except in exceptional circumstances. That is a reasonable amount to award, given that $5,000, going by current therapists' charges, will allow the victim to undertake something like 70 sessions of therapy. Most therapists agree that usually two years or less is adequate to address most of the problems these victims have.
But the third point I would like to make is this: The compensation program in Ontario relative to other compensation programs in the country remains quite generous, so I think in some real sense society is doing what it can to help victims of violent crime.
Ms Shelley Martel (Sudbury East): What's your overall budget?
Mr Puta-Chekwe: In global terms we are talking about a figure of around $18 million.
Ms Martel: Does all of that come from the province, or do you get some money that comes back into the fund through recovery from those who perpetrate crimes?
Mr Puta-Chekwe: The vast majority of that comes from the province, but we do have subrogation rights. We haven't collected very much by way of subrogation. If you get $100,000 a year, you are doing well. But I think it's going to change for the reason that as sexual assault cases have increased and as we've been successfully notifying offenders, we have noticed that sexual assault seems to transcend economic class. If you are going to get dollars back from perpetrators, that is a category where you are going to get it back. Unfortunately, you cannot really subrogate without notifying offenders, but now that we have been more successful in notifying offenders, we expect that there will be an increase in the amount of money that we are getting from perpetrators, and particularly from perpetrators of sexual abuse.
Ms Martel: Do you spend all your money annually?
Mr Puta-Chekwe: Oh, yes. We have no difficulty in that area.
Ms Martel: Explain to me some of the criteria you would use in awarding money to victims. I was looking on page 2, where you said, "Where the offender has been convicted," that's certainly one, but also that it was "subject to other statutory considerations being met."
Mr Puta-Chekwe: Yes. Where the offender has been convicted in terms of section 11 of the Compensation for Victims of Crime Act, we have conclusive evidence that the crime was committed and therefore we generally have no difficulty in awarding compensation in those circumstances. But second, where there is no conviction, we can make a determination on the balance of probabilities that the crime did occur and there was an injury and make an award in those circumstances.
More important perhaps with respect to your question, where there's evidence that the applicant, ie, the victim, contributed to his or her injury, we'll take this into account. The result of this will be either to deny the application or to reduce the level of compensation. We may also deny or reduce the level of compensation where the applicant has failed to provide reasonable cooperation to the police. Those are the other statutory considerations that I had in mind when I said that.
Ms Martel: I notice that you said that offenders or alleged offenders are often parties to your proceedings, and I'm just curious as to why, if someone has already been charged and convicted, they would then be a party. Why would there not be an automatic granting of compensation without having those people appear? I would think victims would feel victimized again if they have to go through yet another proceeding, albeit not a formal court proceeding but a quasi-judicial proceeding, and have all that rehashed.
Mr Puta-Chekwe: I think that's a very good question. Certainly I think the case is clear that where there has been a conviction, the alleged offender is entitled to make his or her representations and say, "Look, please don't make a finding on a balance of probabilities, but I am responsible for" --
Ms Martel: I understand that one.
Mr Puta-Chekwe: That's understandable. Where there is a conviction, there are two points I would make. One, it could be argued that the offender is entitled to say, "Yes, I did commit this crime, but I wasn't responsible for the injury." In other words: "I struck him a blow but I could not have been responsible for the injuries to his stomach. I struck him the blow in the face."
The second point is, I personally think, and I think the majority of the board members think, that perhaps we should revisit the legislation and see if it's not more beneficial to society to simply say, "Look, since there is a conviction, since the amount of the award that's provided is entirely discretionary under the statute, since we're not going to determine who did what -- that's already been determined for us by the court -- why do we need to notify the offender?" I think there is much sympathy for that view on the board. So if we were to participate in a change of legislation, I think you'd find the board promoting that view.
Mr Toni Skarica (Wentworth North): You've indicated that you spent about $18 million this year, and about five years ago I think you were spending a little under $10 million. If you look at a chart of your spending over the last five years, it looks like a hockey stick on an upward trend. If you superimposed it on the previous government's spending, it would be a virtual perfect fit. What concerns me as well is that I think your budget's going to go up. Isn't that correct? Or your spending is going to go up?
Mr Puta-Chekwe: I don't anticipate an increase in spending, certainly not over the next two fiscal years. I expect it to remain around the $18-million or $16-million level. One of the reasons for that is a lot of efficiency measures are being implemented at the board. We are hoping to deliver the same program but in a more efficient fashion. But I don't expect an increase in spending.
Mr Skarica: The reason I anticipate it is because I think you have about triple the number of applications now that you did five years ago. I think there was a dramatic increase in 1992-93?
Mr Puta-Chekwe: Yes.
Mr Skarica: And there's a rather large backlog of applications?
Mr Puta-Chekwe: Yes.
Mr Skarica: One of my concerns is that for subrogation, having prosecuted sexual assault victims, offenders do transcend all levels of society and there's been virtually no subrogation. Even though you have the right to go after these offenders and they do have assets and income, there's been virtually no pursuit of those people after an order is made. Is that an accurate statement?
Mr Puta-Chekwe: No. Actually, I've been seeing more correspondence dealing with subrogation over the past year than I have done since I have been on the board, first as a member and then as chair. I think what you are going to see is an increase in the amount of money that is recovered that way.
Mr Skarica: I think $18 million was your budget this year, and you say that less than $100,000 is what you pursued? Your budget in the mid-1990s was $16 million, in that area. What was subrogated during those years?
Mr Puta-Chekwe: I don't have the exact figure, but I think it was substantially less than $100,000. A figure of $6,000 comes to mind, so it was really quite low in those years. But as I say again, I expect there will be an increase for the reasons I've outlined: one, more sexual assault cases are being pursued.
Mr Skarica: What steps are you taking to pursue your subrogation rights?
Mr Puta-Chekwe: I pointed out in my presentation that it's not really a prudent use of public funds to pursue small claims. What we have done is, whenever an award is below $5,000, we generally don't pursue that. But in cases where the award is greater than $5,000 and where there is a likelihood of recovery, we pursue that quite vigorously now.
The Chair: Mr Puta-Chekwe, thank you very much for taking the time to appear before us this morning.
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RETAIL SALES TAX
NOEL REBICK
The Chair: The next presentation is by Mr Noel Rebick. Good morning, Mr Rebick. Welcome to the committee.
Mr Noel Rebick: Good morning, ladies and gentlemen. I wish to address the issue of the audit in respect to the retail sales tax and in particular an area that I don't know if it's been discussed yet or not, but any of the information that I've received says it hasn't, and that's an area of companies in financial difficulty and insolvency, the responsibilities of the management and the directors of these companies in respect to the collection of retail sales tax.
As you well know, Ontario, as is the rest of the country, but particularly Ontario, is going through some very difficult times. The situation with free trade has not been as great as everyone thought it was going to be in a lot of sectors, and this has required a total restructuring of business, of people's careers and a whole new adjustment to life, with not that much time to do it in and not all that much capital available to handle it.
I am addressing now the area of small business: the formation of small business, the operation of small business and the transformation of small business into a viable situation. You may have been viable prior to free trade, but because of the things that free trade brought on stream, the company has to be changed and there has to be substantial capital introduced and so on, and a great deal of risk. Now, this creates jobs and this creates growth, all of which we have to have, and not just necessarily in the service business but in a manufacturing business, and not necessarily just in software or high tech. There can be low-tech development as well.
There is a situation where there is a liability on behalf of the management and directors in respect to the retail sales tax, as there should be. But the question now arises that if everyone does their proper attention to the running of the business and tries to make that business survive and is taking the risks thereto, does one shut down the business because of the retail sales tax? In other words, it's now a choice: Do you make payroll or do you pay the retail sales tax? Do you shut down a plant that has 60 people and put them out of work or do you pay retail sales tax? It's a terrible decision to have to make. It's a serious problem.
There seems to be an attitude now that the directors are liable and the management is liable and automatic assessments are made against them without any recourse because of the fact that the assessment is arbitrary and you have to pay it before you can appeal it, which isn't fair, but in the interim a business that might be reorganized may not be reorganized. Capital which may be brought to bear because people who put in capital want to sit on the board of directors, they may not want to take the risk. Director insurance is very expensive and onerous.
It's quite a dilemma, and there are a lot of businesses that are running into difficulty. How much retail sales tax is being lost because of that? I haven't got the exact figure, but I would imagine that it would be substantial. So I'm here to raise the problem and address some answers to the situation.
To put the directors and the management of a company into a position where they either have to shut the business down or pay the retail sales tax, now, you say, "Well, the retail sales tax is trust funds." But the fact of the matter is, those trust funds are commingled with the money in the business. In other words, it all becomes part of working capital, and there are terms given, because you pay roughly a month later, and the business works on that money. Whether they like it or not, the fact of the matter is the business works on that money, and when it comes to paying the sales tax, you may think money's going to be there, but for one reason or another, money isn't there, and what do you do? You shut the business down. I mean, if it's trust funds, if the attitude of the province is that you're liable for it, then you've got to shut the business down. All the people go out of work and that's the end of the story.
I don't think it should be that simple. I think there's a lot more to it, because I think we want to have development in Ontario. It's fine to cut everything back to the bone and cut expenses, but eventually you have to get to the point where you have to have some growth and some revenue -- some real revenue. I mean, we can all stop eating and get down to skin and bones, but then where do we go from there? The bottom line is we need development and we should be creating an atmosphere in the province to get that development.
Now, one of the things this government is doing, rightly so, is trying to create an atmosphere for investment in Ontario. Well, one of the things is that in small and medium-sized business, this is where you get your job creation. Capital comes in with strings, and part of the strings are directorships. People don't want to be directors of small companies because they have tremendous exposure and insurance becomes onerous.
My recommendation would be simply, if indeed these are trust funds, and if indeed a business is the collector, a tax collector, as it says in the act, then those funds should not be commingled. Right from the beginning, no company should commingle those funds with the funds of the business. They should be in a totally separate account and should be dealt with accordingly. And there should be some compensation, because in the act it contemplates compensation paid to the collector. There should be some compensation paid to the individual business.
Now, if one plays around with money in that particular account, it becomes out of a civil realm into a criminal realm and it has to be dealt with. It's like embezzlement. If that's the way we want to treat it, then that's the way we should treat it. Either we're pregnant or we're not pregnant. We can't be half pregnant and put the onerous decision of shutting down a business on the management because some money didn't come in that was supposed to come in or because the company suffered some severe losses that month and didn't have the money. It's a very difficult decision. It's something that I feel is going to become more and more apparent as we move along in this area.
In any event, basically that's what I wanted to bring to the attention of this committee and that's the completion of my presentation. I'd be happy to answer any questions.
Just by the way, I've had a tremendous amount of experience in the business sector. I started in business in 1960 on my own. I've been in a number of different businesses, manufacturing businesses, service businesses, I've been a turnaround consultant. I've had a tremendous amount of experience. I've seen exactly what happens in all these cases and I'd be very happy to answer any questions that you would have.
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Mr Pouliot: Good morning, Mr Rebick, and thank you for a good insight. With respect, if I may, I never thought for one second that government could afford a latitude not to redeem on the coupons. Therefore, governments don't easily yield tax revenue, as you've been able to appreciate through the years.
It's estimated that a 5% reduction in the Ontario sales tax would be an equivalent to the proposed 30%, be it in stages, reduction in the PIT, the provincial income tax. As an entrepreneur, and I take it as a small entrepreneur, medium-sized entrepreneur, if the Ontario sales tax, providing that we would arrive at revenue-neutral, was reduced by 5% in lieu of a proposed reduction of 30% in personal Ontario income tax, which one would you favour?
Mr Rebick: I would favour the reduction in the retail sales tax, because that would be a positive motivation for the consumer to say, "Maybe now's the time to make that decision on that purchase that I would want to do and I've been holding back," because the consumer is sitting on the edge, and it takes a little bit of stimulus.
Mr Pouliot: I see. So let's say -- and I want to wish everyone well -- a rich person, and the mathematics are easy, and I'll catastrophize, but a real story, to illustrate: If a person, as chairperson of one of the major banks, and with bonuses, would make $2 million a year, that person would pay taxes at the federal level. That person would also pay a rate of 58%, plus they would pay surtaxes, both federal and provincial. But that person can only eat one meal at a time or wear one suit at a time, whereas if the same amount of money was taken and put in the hands, at the disposition, of consumers, the impact on the economy would be a lot more vibrant, a lot more noticeable.
Mr Rebick: Yes. I agree. I think that it would be a positive sign. It would be recognized. In dollars and cents, it may be the same amount, but the fact is, people can see it right away. They can see something positive. It'll stimulate retailers to promote their products. It'll be seen as a very positive approach, and it certainly will add to the government's perception of trying to not only draw in the purse-strings and cut out the waste but to stimulate some growth in the economy.
Mr Stewart: I can appreciate what you're saying, sir, after being in business myself, because I swear I spent half my working life either paying or collecting taxes.
Some of your comments were most interesting. I think one of the comments you made where you're suggesting that trust accounts be set up and be mandatory, possibly, for business, I believe that's where business gets into trouble. All of a sudden they have a bad month and the tax money goes into the operation.
First of all, how do you feel you can control that? Do you think that can be mandated?
The other one that concerns me is the fact that you want to decide whether you pay tax or pay payroll, and I can again relate to that as well. But I guess the concern I have is, how do you control that? It's very easy for me as a businessperson to say: "Hey, I got a problem this month, so I'm not going to pay any tax," and I can maybe have the same problem next month. I'm not going to pay any tax. How do we control it? Do we somehow work it that it's deferred and paid over the next number of months or whatever? Because what bothers me is that it could be used and abused.
Mr Rebick: Well, it's used and abused right now, and it's in a grey area and it isn't crystal clear. Management and directors are always optimistic. If they're going to continue the business, there's always a plan that they have on the table, new funds that they're out trying to raise. The indications are that those funds will come in and everything will be wonderful. It doesn't happen. Bingo. We have a major problem. We have an insolvency, a bankruptcy, a reorganization, whatever. It's a serious problem, because it's a grey area.
What I'm saying is, if indeed we don't want to be a financier -- Ontario doesn't want to become a banker or a financier or a risk-taker in a small and medium-sized business to help the growth of the province -- because it doesn't have the wherewithal to do that or doesn't wish to do that, then let it be a tax, let it be set up in a separate account. Let it be a criminal offence and in the act, it's there. I mean, it's a criminal offence to mishandle a trust fund, same way as a lawyer. You don't let a lawyer commingle his clients' funds with his own because they run into problems.
Mr E.J. Douglas Rollins (Quinte): It has happened.
Mr Rebick: It has happened, of course, but it's dealt with.
Mr Rollins: Bad lawyers.
Mr Stewart: Do you think, though, that will control it well enough strictly by mandating that they have to put it in a trust fund? Do you think that will solve the problem?
Mr Rebick: I think it makes it very clear that if you mishandle that money, you're in serious trouble, number one. Number two, give them a fee. In other words, say: "Fine. For collecting these taxes" -- it's like privatizing the taxes -- "you will receive a fee." Again, in the existing act it contemplates I think up to 4%. I'm not suggesting that you give them 4%, but something is given every month to the tax collector, because that's what he is. He's collecting funds that aren't his on behalf of the government and he can't touch them, but he gets paid for doing this, so he's compensated. Then it becomes crystal clear that if anyone mishandles these funds, it'll be dealt with with severity, and you're dealing out of the realm of a civil action into the realm of a criminal action. I'll tell you something. It'll make everybody think twice before they do anything like that and it'll cut down a lot of the problems and it'll polarize the real problem of the people who are trying to take advantage of the system and misuse the system with ill intention, not with good intention.
Mr Colle: Thank you, Mr Rebick, for taking time to come here today, because I think your input is what really makes it possible for us to get a bit of insight into the real world in terms of real hands-on solutions. So it is, I think, appreciated by the whole committee that you've taken this time as a private citizen to be here.
You expressed a concern about the liabilities that might be borne by potential members of a board of directors of a company and how this is a negative in terms of attracting people into boards and so forth. I know the federal Senate has just had some meetings in terms of the roles of boards of directors of corporations and maybe we should be taking a good, hard look at what the roles and functions are.
I know this is an ongoing concern, that when you take on a directorship of a company, the potential downsides to it are starting in many cases to outweigh the benefits that might accrue to an individual. So if you could just restate that concern and express that again for us.
Mr Rebick: First of all, let's look at what management and business wants from its directors. It wants direction. It wants direction in its business. It wants input. It needs directors with acumen who are going to furnish the necessary advice and help to manage that business. I mean, God knows it's so difficult today with the complex economy that we're dealing with and all the different things that affect it, you need all the help you can get. You need expertise. Therefore, the director should be offering expertise, not covering his ass -- excuse me for using that expression -- because that's what's happening. If they sit on the board, half of your board meeting's spent on: "Has this been paid? Has this been done? Has this been paid?" I don't know how we can grow the business, how we can make money. I mean, very little time is spent on that.
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Then of course all these guys are busy guys and so after an hour and a half of going through all of this, after you go through the minutes to make sure every t is crossed and every i is dotted and after we go through, "Has this been paid and that been paid?" so they have covered their due diligence, no time is spent running the business. That's if you can get a decent director. In most cases, the first thing he asks you is, "Does your company have director liability insurance?" and if you say no, he's not even interested because for a small and medium-sized business, it becomes prohibitive because it's very expensive. The insurance companies make sure that they're well covered and it becomes just intolerable.
We should be able to get people who have acumen and who will participate in directing the business rather than covering their ass and making sure the minutes are properly written so that they can go back again and cover their ass. Therefore, I would take that responsibility off the directors. I wouldn't have the directors liable. I would certainly hold management liable, but I wouldn't hold the directors liable.
Mr Colle: Then when it specifically comes to, let's say, the area of tax collection or paid taxes, and when you've got to turn over any corporate board of directors, is it the fear of a lot of these directors that perhaps there are unpaid taxes and that they may be all of a sudden liable for these unpaid taxes and there's maybe no mechanism to let them know that? As you said, in the rush to go from one meeting to another they may not be aware of the fact there are these liabilities.
Mr Rebick: They are very aware of the liabilities. They survived six months after their resignation. I mean they're very, very conscious of the liabilities. As I say, most of your time is covering their exposure, if any, rather than running the business. Therefore, the role of the director -- and after all, what we're trying to do here is create an atmosphere for small and medium-sized business to grow in job creation through the private sector, through entrepreneurship, through enterprise.
Capital is very important, but acumen is as important as capital. A board of directors should be a sounding board for management and your time should be spent on discussing the business and they should be advising management of what their thoughts are and should be an integral part of their business plan. This isn't happening.
I'll give you an example. I won't use a name, but let's say there's a venture capital company that invests in a new enterprise. The new enterprise needs to be nurtured by a knowledgeable director. They don't put a knowledgeable director on the board, they put some kid on the board who has to learn.
Mr Colle: A whiz-kid, yes.
Mr Rebick: He's not even a whiz-kid. It's a training school. You end up training him for something better and you really don't get what you need from your board.
The Chair: Mr Rebick, on behalf of all committee members, thank you for taking the time. You know, we hear at the committee on a regular basis from people who have more direct interests on the outcome of our deliberations and recommendations and we're particularly appreciative of the fact that you, an ordinary citizen so to speak, have taken the time to appear before us.
Mr Rebick: I look at it this way -- and I thank you very much -- that it's fine for us to be picketing outside and waving flags and putting signs up in the air and going on television and grimacing, but you need to be exposed to the real world with genuine people who will come here and speak freely and honestly to give you the insights in order that you can make the right decisions. I'm happy that I could take my time today and be present. Thank you.
The Chair: Thank you very much.
AUDIT ACT AMENDMENTS
OFFICE OF THE INFORMATION AND PRIVACY COMMISSIONER
The Chair: The final presentation this morning is to be made on behalf of the Office of the Information and Privacy Commissioner. Good morning, Mr Wright.
We have allowed an hour. I'm not sure if we're going to need that much time, but just in case, we thought we'd devote that much time to your presentation, and obviously committee members are going to want an opportunity to ask some questions of you.
Mr Tom Wright: Good morning. I can assure you that the remarks I have to make this morning will leave lots of time for committee members to ask any questions that you may have.
Just by way of introduction, then, my name is Tom Wright. I am Information and Privacy Commissioner for the province of Ontario. With me this morning is Ann Cavoukian. Ann is the assistant commissioner and her primary responsibilities relate to privacy. That's why I've asked her to join me this morning.
My hope in my remarks this morning is simply to share a few of my thoughts on privacy and personal information as it relates to possible amendments to the Audit Act. I'd like to thank Mr Decker, the clerk, for providing me with the Hansard for your meetings on February 1 and 2. I had a chance to go through those and get a sense I think of the kinds of issues that you may be interested in hearing about as it relates to those amendments and concerns for personal information and the privacy protection of that information.
I'd also like to indicate that there have been discussions between my office and Mr Peters's office regarding the implications or possible implications for privacy of the suggested amendments. We've offered our assistance to the Provincial Auditor, and I would do so in a similar fashion to this committee in reviewing amendments to the act once they are developed by legislative counsel.
I thought, before I began my remarks, it might be helpful for those members of the committee who are not familiar with the Office of the Information and Privacy Commissioner to give you a bit of an understanding of my role as I appear before you this morning.
Like the Provincial Auditor, I am an independent officer of the Legislative Assembly, and among my statutory duties as commissioner is the responsibility to comment on the privacy implications of proposed legislation or government programs. I was pleased to read in Hansard that Mr Peters had suggested that hearing a privacy perspective might be helpful for this committee as you consider the possible implications of the amendments.
I also saw in looking at what had been said at the committee earlier this month that there was a recurring discussion of the need for both public accountability and the protection of personal information, themes which are the basis of Ontario's access and privacy legislation.
The discussions also seemed to indicate that the goal of the committee is to provide a broader framework of accountability for the entities which now receive transfer payments from the provincial government, that is, the community colleges, universities, hospitals, municipalities and school boards, which I gather are referred to, depending on your preference, either as the CHUMS or MUSH sector. It certainly was a bit of an education in terms of looking through and seeing how these acronyms develop. Again, one of the mechanisms for achieving this accountability would be through amendments to the Audit Act.
From my perspective, that accountability right now is at least partially ensured for community colleges, municipalities and school boards since they are covered by the provisions of the freedom of information and protection of privacy legislation. This doesn't address, of course, the auditor's concerns, accounting concerns relating to transfer payments, but it does make community colleges, municipalities and school boards accountable to the public for their actions.
It's long been my view that this mechanism to enhance public accountability should be extended to hospitals and universities. These are organizations which perform important public functions and, as you have discussed, receive substantial government funding. I believe it is in the public interest to make them more readily accountable. At the same time, and this brings me to the main focus of my remarks this morning, universities and especially hospitals hold sensitive personal information which requires legislated privacy safeguards.
I've commented on a number of occasions on the need to protect the privacy of personal medical information. Medical information, I think we can all agree, is one of the most sensitive kinds of personal information that is available about any one of us, and in my view it is this level of sensitivity that demands a higher standard of care in protecting privacy.
I think individuals expect that when their personal information moves beyond their direct control, specific limitations and controls will be in place to safeguard it. After all -- and if I leave you with anything this morning by way of thoughts, I'd like to leave you with this thought -- the information in question belongs to the person to whom it relates. Any organization, public or private sector, is merely the custodian of the personal information which an individual has entrusted to it.
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I mentioned the expectations, and I believe it would be fair for me to say that if you went to a member of the public and said to them, "Who do you think would be able to look at your hospital records?" for example, I'd be willing to bet -- not a large amount, but I'd certainly be willing to bet -- that not one person would suggest to you by way of a response that the Provincial Auditor would be looking at their medical information, which is not to say and I'm not here to say this morning that that shouldn't happen, but I just would bring your attention to the fact of what the expectations of the public would be.
When you go into a hospital, I think the expectation you have is that certainly doctors, nurses in some cases, possibly others, would have access to that information because they would need to know what's in those records. When you move beyond that immediate group and look at, for example, the Provincial Auditor, I suspect they simply wouldn't anticipate that the Provincial Auditor would have some need to look at those records. I think that's sort of the first point on the continuum for privacy in this area: Is there a need to look at this kind of information?
Having said that, I think that indicates why I'm very pleased that the Ministry of Health is now developing privacy legislation which is specifically designed to protect health care information. My office is working with the ministry as it begins this process, and I do have high hopes that the legislation that will be developed meets the mutual goals of protecting privacy and assisting in the efficient operation of Ontario's health care system.
I think that's the other point I would make this morning, that when we talk privacy, we talk balance. I don't come before you this morning and suggest that privacy is paramount to every other interest. That's simply not the case. But what I do think is that there is room for balance so that you do have an opportunity to meet the needs for administrative efficiencies as well as the concerns that people would have around the protection of their individual privacy.
But until that kind of legislation is in place, I think there is a need to remain vigilant, taking all reasonable measures to protect the privacy of personal medical information. And while the effect of the proposed amendments, or those that have been suggested, to the Audit Act would provide Mr Peters and his staff with greater access to hospital records, including patient records, his view appears to be that such records be anonymized, and that is consistent with the view of my office. As I indicated earlier, we hope to have an opportunity to review the amendments to ensure that they are I guess what I'll call privacy sensitive.
The issue of confidentiality of medical records has been shown to be of considerable importance to members of the public, and again I'm pleased to have the opportunity to appear before you today. I anticipate that the involvement of my office in some fashion in developing amendments, as well as the privacy legislation under way, will address the privacy concerns.
As promised, that's the extent of my remarks this morning, and I'd be pleased to answer any questions members of the committee may have.
The Chair: Thank you, Commissioner Wright. Committee, members, there's obviously all kinds of time for questions here this morning.
Mr John Hastings (Etobicoke-Rexdale): Mr Wright, you were talking about the confidentiality of medical information and the potential for developing a model that would exclude a lot of names, addresses and more of a personal nature.
Yesterday we had a presentation from I think her name was Ms Price from the Elizabeth Fry Society, talking about the adverse editorial sort of information about an individual's behaviour who may be eligible for parole under the parole board. She was referring specifically to somebody making comments about an individual's behaviour and then another individual in the parole system maybe reaffirming or reconfirming negative, adverse information again, based on what they were reading.
I'm wondering whether you would like to comment as to whether we should be developing a similar model of information or disclosure that reduces that kind of repetitive negative editorial information about a person's behaviour in an incident in which they weren't involved but they're commenting on it because they've read it before. They think they've come across that individual, possibly.
Mr Wright: It's a little hard to comment on the specifics of that, but I'll try to catch on a few principles. I think one of them would be that you have to look at the context in which the information is used, and once again -- and I'm talking about personal information -- the need for personal information to be made available to the public in certain circumstances. I'm thinking again of your example of the parole board, if that is the one you're referring to, and what information needs to be out in public.
My understanding in that area is that by way of legislation and other public policy initiatives, there has been a shift around the kind of information, how much information, should be available to certain people who may be affected by the decisions of the parole board.
I guess the question once again becomes one of balance. How much information is it appropriate; how much do the privacy rights, the privacy interests, of the individual to whom the information relates; where do they fit when you balance against the public interest? Arriving at that balance in each situation is not a terribly scientific process. I think what is useful, though, is for a protocol or guidelines or something to be created so people know what they can and cannot do as far as the use of the information. I think that's one of the things I referred to in my remarks, that there would be an expectation that when your information is being used, there would be these kinds of controls in place. What they would be specifically would depend, I think, on the individual situation.
Mr Hastings: What is your thinking regarding the proposed smart card in terms of what kind of information, quality of information and principle of balance ought to be in place should we move in that direction?
Mr Wright: You have surprised me with that question.
Mr Hastings: Or should we not even be moving down that road?
Mr Wright: My gosh. Okay. Let me offer a preliminary observation, and I hope this doesn't surprise anyone that I would say that. I don't have a fundamental opposition to a smart card from a privacy perspective. What concerns me, and I think what concerns our office, is how it's done. There are ways to do it that I think we could show you would in fact protect privacy better than it is now. But I think the feature, and it would be of concern to me, is that as you move up the levels of protection of privacy, there are cost implications in doing that. So you can have a smart card which does all the things you would want it to do, and it also respects privacy, but it may cost you too much to do.
So I can't give you -- I would try, if I could -- a categorical answer, but I would say that I am not and our office is not fundamentally opposed to the notion of a smart card, depending on a number of qualifiers, one of which is how it's designed, whether encryption is used, who has access to the various information fields within the card, will there be data matching capabilities within the card, central database issues, whether that is a component of the card. There are a lot of things that would have to be looked at, but if the will was there, I think it's a perfectly workable alternative.
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Ms Ann Cavoukian: If I could add one remark, technologies of privacy like the type Tom was describing are readily available now, but of course there are cost implications. But some of the technologies that we're talking about can be done in a very simple way absent smart cards. Privacy protective features on smart cards often mask the identity of the individual -- pseudo-identifiers. They try to make it difficult for the agency or institution you're doing business with to know who you are, other than the information that they legitimately need, so they restrict access.
But that principle can be done by anonymizing data in much the way that was referred to earlier. There are methods by which you can anonymize data in very simple fashion so that only those who have a real, legitimate need to access information would be permitted access, and for others, you can still keep track of a patient or the records. However, you wouldn't know that it's Ann Cavoukian's files moving down the system, for example.
Mr Colle: Just trying to get back to the area of concern we had as a committee in terms of getting into the MUSH area with the hospitals and universities and those confidential files, as you know, the auditor essentially I think believes that there should be accountability. Now, how do you anonymize medical files to ensure that the auditor isn't invading an area that, as you said, the consumer or the patient, for instance, in a hospital, isn't intruded upon by an auditor? What suggestions do you have? How do you proceed in that area to anonymize those files so the auditor can still play his role or her role?
Mr Wright: We have discussed this, and one of the suggestions that we would put forward would be basically to make a distinction between looking at the information and taking the information away with you and try to draw a line there, and basically accepting -- and obviously I have no comments on it other than accepting the need for the information if that is indeed the case.
If you're onsite, if you will, looking at the information, then, fine, you look at it in identifiable form. But if you're going to take that information away with you as part of your notes or records or whatever, then our suggestion would be that it be anonymized, that there be some obligation on the part of the hospital to remove any personal identifiers, so when it has gone into someone else's hands, the potential for it being inadvertently disclosed out of the auditor's office is simply -- well, it's eliminated, by and large, because you don't have those kinds of personal identifiers.
It's something that has been done in other areas, and I think it has some potential for meeting, as I said earlier, both those needs, of saying, "Fine, at first instance you can verify in identifiable form if you need to do it, but to do anything more with that information, take it offsite, you've got to remove those identifiers," simply to keep the risk down, because, as I believe I indicated, we are talking about very sensitive information which I feel requires that kind of special treatment.
Mr Colle: So instead of a specific name, part of the directions would be that the auditor's staff would not be allowed to see a name on a file, that that would be basically turned into a code or number. Is that the way you would do it, so hospital staff would be given that kind of direction to basically eliminate any kind of personal identifier?
Ms Cavoukian: Following up on the commissioner's remarks, in the first instance, when the auditor or one of his inspectors is onsite, then I think we would accept that he or she would view the information in identifiable form with the name associated with the file material. However, if that was to be taken offsite, either in whole or in part, thereafter, any information that would be removed and would travel to other individuals, that information would not have the identifier on it. So that information would either have a pseudonym on it or a unique identifying number which you would attach to it, some other method of linking of that and being able to assign a code to it. I think that was the distinction.
Mr Colle: The critical thing is not to be allowed to take it offsite. The other thing is, I guess the auditor's function wouldn't be one of specific, let's say, designation. The auditor is looking at groups -- that's my understanding of it -- is looking at trends, is looking at not microanalysis, I think is looking at macrotrends in the way provincial dollars are spent.
Mr Wright: Certainly in my reading of Hansard that was my understanding, and it comes back to this question of, in what situations, and it may. I come before you this morning I suppose in some way painting worst-case scenarios, but I think we have to be aware of what the possible implications are, and in that situation the question does come up about, why would you need to look at an individual patient's records and how much detail would you need to go into? I think that's one of the concerns that we have raised.
Mr Colle: One final question I have in this round is, you mentioned the sensitivities in the area of college and university files or information, data that they may have. What areas would you find to be highly sensitive that universities and colleges may have on hand or information they have that relates to individuals?
Mr Wright: Ann is assisting me just absolutely wonderfully here. One of the responses I was going to have, of course, is that -- a couple of things. One is that universities have medical clinics attached to them. Second, they have counselling facilities attached to them. As a lot of institutions do, they get involved in harassment investigations. Things of this nature I would consider to fall into the category of sensitive types of information.
Mr Colle: It's almost like a pseudo or ancillary medical-type undertaking which universities do. Again, I guess it gets back to this thing about whether the auditor's in there to do this microanalysis or this macroinvestigation. I'm wondering whether as a privacy commissioner you could work out mechanisms or suggest mechanisms, as you do in the Ministry of Health, where you're putting these protections in place and then also giving instructions -- not instructions but certainly let's say a general directive that this is a macro almost overview of what's going on in an institution rather than being interested in the specific activity of a specific individual as part of a university or even a group. It's basically the functions of that exercise or that responsibility that an institution may have. Is that possible to do, working alongside the auditor?
Mr Wright: I would want to be very careful about doing anything that would get involved in terms of what the auditor feels is appropriate. The auditor is the expert in terms of what the need is, and I would certainly defer to that expertise. But what I would be more than happy to do would be to discuss those kinds of issues around how things can be done. In light of discussions that we've had already, I think it's fair to say that Mr Peters is very sensitive to the kinds of concerns that you've just raised. I would think that we could have very productive discussions which would again go towards meeting the mutual needs here.
Mr Pouliot: My colleague and I had the opportunity to occupy a few ministerial posts with the previous administration, and of course, with the highest of respect, I can assure both of you that you quickly can become the "bête noire" among members of both political and ministerial staff. In fact, I've heard it said that you can be a royal pain through your vigilance. People at times will ask what is the ability of the state to operate. I know I went through the agonizing sponsorship of photo-radar and I was judged very harshly as a minister of the crown, so now it's indeed a pleasure to meet the people who have caused me many nights without sleep.
Mr Rollins: Did you pay the bill?
Mr Pouliot: I must remind you that I am now a member of the third party and also that I have immunity. It's those little fantasies of mine that you get to appreciate, so today is my day and I want to say thank you. Yet, who cannot appreciate the vigilance? I remember vividly Bill 26. You must have heard about it. It's part of the jargon here. It's an immense piece of legislation. You must have read about it; it was all over the papers. I read about it in both Frank and Now magazines and I wonder, if you should check your mail, that they don't photocopy these fine people at Frank and Now.
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The Provincial Auditor, the government and people, as a matter of fact, because it illustrates well, talk about "my citizen's medical record," which is an easy sell. Everyone relates to it; everyone has a medical record. Not many would wish to have that information, for obvious reasons, spread around, be it for an insurance policy, be it for the right to privacy. It's not the kind of thing that sits well with people.
I only have a comment but maybe you can help me: What is the line between -- it's a nuance and maybe you can define it for me -- respecting the state's right to operate, avoiding the witchhunt, and yet at the same time in that collectivity protecting the rights of the individual? It's not easy for governments, because they have to legislate for the collectivity and at the same time protect the rights of the individual. How do you reconcile that? Because the line is very thin in my book and it changes from issue to issue. What motivates you? What are your criteria? What do you look for?
Mr Wright: As far as where we come from, we work from what the Freedom of Information and Protection of Privacy Act says by way of the rules that appear in that legislation as far as the collection, use and disclosure of personal information. Trying to draw a line, I fully agree with you, is not an easy thing to do. I also will say that I don't see it as the role of the Information and Privacy Commissioner to attempt to draw that line.
I think what the Information and Privacy Commissioner has a responsibility to do is to bring to the attention of members of the public issues that need to be viewed. The public will respond to those issues as the public feels. I think at the end of the day that is, at least as I see it, the way the system works. The public will tell us, and you're absolutely correct that the public will respond differently depending on how they feel about a particular issue. The public seems, certainly from recent experience, to be concerned about medical information.
I think what you do then and certainly what we are trying to do, and with the deepest respect, I would include the case of photo-radar -- I feel badly about your nightmares but I would like to simply say --
Mr Agostino: These guys took care of the nightmare, so there's no problem.
Mr Wright: What you try to do is to say that absolutely, the state has an interest and that interest has to be respected. Are there ways to respect that interest and also to look at the interest that people have around personal information? I think the idea of this morning of anonymizing information is one way where the Provincial Auditor, in the interests of the state, can carry out his function and at the same time do it in a way that doesn't put, in this case, health information unnecessarily at risk. That's certainly the approach, and I appreciate that you may not fully share this view, that we have tried to take, that there are ways of doing it that address both sides.
The Chair: Any further questions? Mr Wright, why don't I, with the permission of my committee members, just profit from your presence here. I'd like to raise something with you. It arises out of the line of questioning that Mr Pouliot was following. I'm unclear as to the principles which should guide government, or us as legislators, in determining whether or not public interest ought to override privacy concerns. Are there principles, have those been articulated and can we have them now?
Ms Cavoukian: There's a set of principles that is very widely known and highly acclaimed in the privacy community. They're called fair information practices. This is a set of principles entrenched in all privacy laws worldwide that reflect basic practices in the fair treatment of information by government organizations that are collecting that information. They're not restricted to government organizations, they can also apply to private sector organizations, but the history of them has evolved in the context of government or the state collecting information from its citizens, and what is the proper role to be played? How is this information to be respected while on the same hand acknowledging the legitimate need for government to access and use this information?
Without getting into a long list of what these are, they're not very complicated, they're relatively easy to apply and it requires just an understanding of the fact that this information belongs in the first instance to the data subject: the individual. If you start from that premise, the times that government should use the information are when there is a legitimate need, that need or that use should be identified to the data subject, to the individual, the purpose explained and then the use of that information should be restricted to the use identified to the individual. End of story.
It's never quite that simple. There are of course legitimate exceptions where you may need to share that information with another organization in government for a compatible purpose consistent with the first use. There are a number of other exceptions that come out. But I guess the premise is that you limit your use of the information, you identify it to the individual and you use it essentially for that purpose. There's more with respect to disclosure and retention of records, but these can be made readily available to you in terms of information relating to these practices. It's not new and it may be helpful to you to have some information concerning them.
Mr Wright: If I may add two comments to that. For example, in the area of smart cards, which were referred to earlier, one of the things our office has suggested is that as part of the development process there would be a privacy impact assessment done, in terms of the principles that Ann has just mentioned, and how that would impact on those fair information practices, which I think again is just an opportunity; in many ways I think it's to the advantage of all concerned to simply factor this in at a very early stage and not wait for the unknown. I think in fairness there is an unknown element to it, and trying to define that line between what should or shouldn't be done is, if not difficult, virtually impossible.
I think at the same time that privacy, as I see it and as our office has tried to articulate, does not have to be a barrier to doing things. What I will say as well, though, is that there has to be a willingness, I believe, to take into account the validity of the privacy concerns. That's all I every suggest: Take it into account when you're doing something. You will find, and I think the experience has been, that organizations that do this find they can do exactly what they want and they can do it in a way -- and to my mind this is what is very important -- that's every bit as effective and in fact arguably more palatable to members of the public. I think a very important part of doing any of these kinds of things is to achieve the success, achieve the goal that you're trying to. This is one issue where by simply taking it into consideration, factoring it in, you make it easier to do.
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The Chair: Thank you. When you raise concerns and these are publicized, is that kind of like a final decision on the part of your office to some extent or is it with a view to stimulating or provoking debate, and at the end of the day it's up to the public to make a decision whether it's a valid concern or not?
Mr Wright: Your last comment I completely agree with, absolutely. It's up to the public. Also I would add to that: It's absolutely up to the government at the end of the day to make its decision what it wants to do. I have never pretended nor would I expect, because I happen to have the good fortune to be in the position of commissioner, that that's my decision to make.
I think there is an element, and the legislation clearly says that, an obligation on the part of my office to raise these kinds of concerns, but at the end of the day, the process, the political process, the parliamentary process, is what governs. I fully respect that fact and that reality.
Mr Colle: A couple of areas of concern here: There seems to be a trend, whether it is when you're consuming government services or private services -- as you know, there's now the direct deposit Interac system in stores and whether you are going to go into -- obviously, there's going to be some kind of smart card technology, probably used in Transportation or in the Ministry of Health.
There is a growing trend where there are databases being created that monitor basically more and more of your activities. You can trace the time and place when you go to your Green Machine. They've done this in criminal cases. They know the time and place when you've shopped at the local store, now even the grocery store; it's recorded. When you're on and off the highway, that monitoring is -- is this trend one that can be controlled or is it just too large? It's in every aspect of our life now and growing. I think we're just, as you said, on the edge here. Are we going to be able to control this monitoring basically of daily activities of human beings?
Mr Wright: I'd begin by saying that I consider myself to be an optimist. Whether you can actually control it is a different question. What you can expect to do is to at least have the rules in place that deal with the kinds of things that Ann mentioned in her response to the Chair's questions, what you can collect, what you can do with the information once you collect it and whom you can give it to, the fact that the individual will be able to find out what kind of information you have about them and to correct that information if it's inaccurate.
These kinds of rules would make a difference and there's been some momentum in that way. The Canadian Standards Association, the people who certainly for me and perhaps for yourselves are most familiar with the little tags they have attached to electrical appliances, have come up with a model privacy code for business which they've worked on for three years and have finally agreed on, and I think the idea is that as a voluntary code businesses would respond to this. The Canadian Direct Marketing Association has rules in place around what their members can do with the information.
I think there is an opportunity to address those concerns because I fully share them, but it will take willingness on the part of industry, possibly the involvement of government. There's been talk at the federal government level of some form of data protection legislation, privacy legislation, for the private sector similar to what exists right now in the province of Quebec and has existed since January 1994. There are ways of dealing with it. Whether it happens or not obviously is well beyond my control, but it could be done.
Mr Colle: The other thing I fear that is happening is that, as you know, databases are sometimes more valuable than any currency or money. It's currency basically; information is a very valuable commodity. I know what happened recently, in the last couple of years in the greater Metro area, was that a number of consulting firms got hold of databases dealing with property taxes. These are runs that the Ministry of Finance did on people's property and then the municipalities had them, but certain private consulting firms got hold of this database and they made huge fortunes of money, windfall profits, by just targeting people who might be eligible for a tax assessment reduction.
The temptation is that people are obviously entrepreneurs and you can't blame them for that, but then government will be offered money for information, for data. How can you protect or how can you develop a certain approach that will at least try to ensure that government, and governments are always scrambling for money, doesn't sell this information? Who's to say? "This is just your property tax. It's public information." On the other hand, there is this temptation for governments, which are going to have all this data, are going to have basically the potential through selling it off to make huge revenues from selling off this data. How do you stop that kind of allure of pocketing the revenues from the selling of data?
Mr Wright: There are two parts to the response, specifically with respect to the assessment records. In law now -- I believe it is in the Assessment Act -- that information is designated as being publicly available information. There are really no restrictions around the sale of that kind of information, in that example. But looking at what might happen beyond that, I refer to the Management Board of Cabinet directive dealing with the sale of information, and that directive, I think very directly, touches on the issue of personal information and suggests that is not an item that is appropriate as far as the sale of any data the government may hold are concerned, and I think that, as well, provides some kind of indication what should not be occurring.
Once again, there is the ability through the legislative process to make a particular database, whether it's assessment or some other, a matter of public record, in which case people can take it and do with it as they wish. Adding to that, of course, is the fact that they can take that database and that information, and since it's in electronic form it can be easily manipulated. It can then be combined, matched, whatever, with something else and before you know it you have this perhaps extensive profile of you, me or whomever, which I think we all have cause to be concerned about.
Mr Pouliot: In your opinion, does the Quebec model offer more protection for its citizens than the Ontario?
Mr Wright: Mr Pouliot, all I could say is, absolutely, yes, simply because what it does is -- right now in Ontario we have the protection in place for public sector organizations, governmental organizations, municipal and provincial; nothing in place for the private sector. That's what the Quebec legislation does. It moves the same kinds of principles and applies them to private sector organizations.
Mr Pouliot: And there's no tradeoff, not restricting the ability of government to conduct its business?
Mr Wright: There have not been reports -- we are in regular contact with our counterparts in Quebec and the impression that we've been given, certainly both from an industry perspective as well as governmental, is that the legislation works.
Ms Cavoukian: Perhaps, if I could add, more importantly, the economy has not suffered at all. We've had the benefit of two years' experience now. We've heard from both the business community and our counterparts in Quebec that this legislation has not impeded their ability to continue with business, and quite the contrary, businessmen in Quebec are using the privacy protection they now extend to their customers as a marketing tool. They're using it to their advantage, which is quite fine, but it's certainly not tying their hands in any way.
Mr Pouliot: Thank you very kindly. I'm now convinced that the Provincial Auditor in future comments would have at the ready in his or her library a copy of the Quebec model because I'll be checking on them and I'll make sure it's well read. I thank you very much.
The Chair: If there are no further questions, Ms Cavoukian, you made reference that you might be able to provide us with a list of principles. If you could do that, we would appreciate that.
Ms Cavoukian: Yes. Send it to you, sir?
The Chair: Send it to the clerk. Thank you very much on behalf of the committee.
Mr Colle: Mr Chairman, I hope it's understood that the auditor will continue to consult with your office as we continue to examine the new amendments to the auditor's act etc, so we appreciate your input already.
The Chair: The committee stands adjourned until 2 o'clock this afternoon.
The committee recessed from 1140 to 1400.
RETAIL SALES TAX
CANADIAN COUNCIL OF GROCERY DISTRIBUTORS
The Chair: Good afternoon, ladies and gentlemen. Welcome to the continuing hearings of the public accounts committee. Our first presenter this afternoon is the Canadian Council of Grocery Distributors. Welcome to the committee. We have allowed one half-hour for your presentation.
Mr Max Roytenberg: My name is Max Roytenberg. I'm a vice-president of the Canadian Council of Grocery Distributors.
Ms Arlene Lannon: I'm Arlene Lannon. I'm director for Ontario for the Canadian Council of Grocery Distributors.
Mr Roytenberg: I have a brief submission and I'll read it to get it on the record. It won't take long. We'll have plenty of time for questions.
The Canadian Council of Grocery Distributors appreciates this opportunity to present the views of distributors and retailers in the grocery business to the standing committee on public accounts. The issues before the committee are of great interest to our members. Our members collect the majority of the provincial sales tax in the grocery trade.
Ontario grocery distributors are responsible for in excess of $15 billion in grocery sales and the employment of 125,000 Ontarians. Our particular focus in the submission will touch on the collection of retail sales tax on tobacco products. You've already received a submission from the Retail Council of Canada and it sums up the views of the retail sector. It is our view that the current situation requires an urgent evaluation.
While the number of wholesalers in the grocery trade are few, the number of retailers number in the tens of thousands. The current regime requires both wholesalers and retailers to collect the retail sales tax depending on their particular corporate organization and the nature of their distribution business.
While all our wholesale members are organized and have in place systems to ensure full compliance in retail sales tax collection where they also act as the retailer, the same cannot necessarily be said about all parts of the retail segment of trade. For some retailers with limited volumes, the establishment of systems for retail sales tax compliance is very costly in relative terms and even inefficient. When we add the equation of the problem of a product like tobacco, with its high unit value, a history of non-legal distribution and the province's limited policing resources, the whole process of tax collection can become problematic.
Our members have grown increasingly concerned to see again a mounting diversion of tobacco products between the wholesale and retail level. This diversion undermines the economic viability of those many retailers who are fully complying with the regulatory framework for the collection of the retail sales tax. This growth in illegal channels of distribution for tobacco products, after their sale by the wholesaler, creates a competitive advantage for illegal sellers of such products.
This diversion results in a loss of revenue by the provincial government as well as having an impact on legitimate retail sellers of tobacco products. It is difficult at this time to estimate the cost, but our members consider it to be very substantial. For each carton entering illegal channels of distribution, the provincial government loses about $1.75.
We as an industry have come to the conclusion that the burden of collecting and accounting for tax on tobacco products is better placed at the wholesale level of distribution, which is often better equipped to handle such matters efficiently. Wholesalers are already accounting for and remitting provincial taxes. Avoiding duplication for tobacco products at the retail level will create operating economies at the retail level.
Shifting the responsibility for payment of retail sales tax on tobacco products to the wholesale level will go a long way towards ensuring that provincial revenues will not be lost. At the same time, this change could create a more level playing field for operators at the retail level from a competitive point of view.
We have become aware of a recent action by the government of Nova Scotia to institute a measure of this kind and a partial copy of -- I say legislation here, but it's proposed legislation; it has not yet been promulgated -- is appended.
We are all conscious of the financial challenge being faced by the province of Ontario. We believe that the suggestion contained in this submission will operate in the direction of improving the conservation of the province's financial resources while putting an end to a trade problem we face and improving industry efficiency. An important consideration must be that such a procedure will ensure distribution through legal channels where compliance with provincial regulations regarding the sale of tobacco products to minors can more reliably be enforced.
Mr Stewart: Thank you for your presentation. If I understand this right, you're suggesting that the wholesaler pay the tax.
Mr Roytenberg: That's right.
Mr Stewart: I am a little concerned when I think then that when it goes to the grocery store, he's paying the tax prior to selling the product, which in my mind is a bit costly for the grocer. All of a sudden he's got a great deal of money tied up in tax before he gets that back. Do you think that is acceptable from their standpoint? Because it will be a major cost factor for him.
Mr Roytenberg: Tobacco is one of the most rapid turnover items in the store. So what you're saying is correct, sir, but in fact the turnover between payment and receipt of payment from the purchaser is very short. If he manages his inventory in a proper kind of way, the time involved will be short from his point of view.
Mr Stewart: So you're suggesting plus the fact that they don't buy the quantities of that product because of efficiency of distribution. You don't see it as a problem of tying that money up.
Mr Roytenberg: I'm sure there's a differential cost, as there always is when you make a situational change like that, but people are already minimizing their inventories, for safety reasons, for security reasons, and because even without the tax it's a very costly investment. So in this aspect of the business, the turnover is rapid and the holdings are relatively small.
Mr Skarica: Before you address the problem, I'd like to know how big it is. You say there is substantial illegal distribution of cartons of cigarettes. What would substantial be? Could you give us any kind of approximation?
Mr Roytenberg: My members were not prepared to estimate, but the degree of their concern indicates to me that it is substantial. I could not get them to give me a figure, but they urged me to make these representations to you.
Mr Skarica: So you can't tell us whether it's 5% or 10% or 50% or give us any percentages at all, like a global estimate.
Mr Roytenberg: At the height of the illegal distribution, we were getting as much as 75% and 80% being diverted from the normal channels. I'm not suggesting it's that, but it's conceivable it might be 25%.
Mr Skarica: Has there been any study done on the correlation between the rate of tax and the amount of illegal distribution? For example, in Alberta, I gather there would be virtually no illegal distribution of cartons of cigarettes. Is that fair?
Mr Roytenberg: There certainly seems to be a relationship between the level of tax and the amount of illegal distribution.
Mr Skarica: Government has a history of trying to fix something, putting in another program, and it just gets worse. The simple solution would be to gradually eliminate the rate of tax, it would seem to me, to get to the point where Alberta is where there is no illegal distribution because there's no incentive to do so.
Mr Roytenberg: I think everybody would welcome less taxes rather than more taxes. We're faced with an economic situation which I don't think allows us the luxury of perhaps considering that option. If the government has the resources to do that -- well, of course, obviously. There are some other considerations on the part of some sectors of the population regarding whether that would create an incentive to increase smoking.
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Mr Skarica: The classic way of dealing with this in the past has been to enforce the laws. How much money would be required, how many investigators would you need, to enforce it if we kept the same system we have now? How many tax investigators would be needed to fix this "problem"?
Mr Roytenberg: I think one of the reasons why we're coming to the table with this suggestion is we don't believe the existing compliance system will respond to the challenge that the system is facing. I cannot give you figures that you're requesting. But certainly whatever we're doing hasn't in the past met the challenge nor is it likely meeting it now.
Mr Skarica: My last question was the penultimate one. I foresee a situation, then, where the wholesalers themselves would be put in a similar situation, where some wholesalers, perhaps to gain a competitive advantage, would be buying illegal cigarettes on their own.
Mr Roytenberg: There are very few wholesalers. They're easy to police.
Mr Dave Boushy (Sarnia): I'd just like to read a very brief statement into the record. It's taken from Maclean's magazine, February 12, 1996, which says: "Nova Scotia Finance Minister Bernie Boudreau seems to have stuck in his thumb and pulled out a tax plum. In November he eliminated the retail sales tax on cigarettes, transferring an equivalent levy to cigarette wholesalers. Early estimates indicate the move will help the province recover an additional $15 million a year."
Mr John C. Cleary (Cornwall): You had mentioned about 75% there illegal, contraband cigarettes coming in. I totally agree with you, it was that at one time, because I happen to represent the Cornwall area, and I know what's going on. I know that many of the grocery people in our area were not selling any cigarettes at all at that time, very minimal. Right now, it's better because there's a joint task force in place that is doing its best.
The gentleman over there mentioned about how many investigators it would take. I guess my answer to that is, you don't know how big that thing really is. You have them coming across by skidoo, you have them by boat. I was out there looking at the problem, and it's big. It's still big. The government is losing all kinds of money. They're coming by van loads, and coming over to the 401 and going east or west. So it's a big problem.
I don't know what the answers are, but it worries me somewhat, the cutbacks, because the OPP is involved in this investigation, and I know they've had cutbacks and they've had their members taken to other areas in the province. It's quite worrisome, and it's very dangerous right at the moment too. Anyway, I just wanted to mention that I think you were very generous in your 75%, because I know it was that or more at one time.
Mr Roytenberg: Mr Chairman, the honourable member, I think, is entirely correct, but I would not like to suggest that what we're proposing will solve the problem at the border. This is not a solution for that. That effort has to continue, and I think the move to reduce the tax has had a salutary effect in that direction, but we will probably always have it with us to some extent. What we're talking about are existing channels of distribution, which are broad and which permit large flows of product within the legal system; which, because of the multiplicity of outlets at the retail level, are impossible to police and make it, it appears to us, sensible to consider an alternative which at one stroke will minimize some of the burden on our existing policing efforts and collect resources which rightly belong to the province.
Mr Cleary: I agree with what you're saying there, but I just had to say what I did because many of the smaller distributors of groceries in our areas depended on that market to survive. Since the tax was taken off it has helped a bit, but it's still a big problem out there.
Mr Roytenberg: The current situation, sir, adds to that problem, right? If it was collected at the wholesale level, those who are complying would not be under that competitive pressure.
Mr Colle: Briefly, have you got any recent data in terms of the impact that the legislation just passed in Nova Scotia has had? Have you heard any of the analysis of that?
Mr Roytenberg: I could ask my colleague to speak.
Ms Lannon: With regard to the legislation in Nova Scotia, I was speaking with them today and what in fact has happened there is that they did have a retail tax on tobacco. That has been removed; there is no longer a retail tax on tobacco. They have put what was the retail tax and added it on to -- under the tobacco act it has become a tobacco tax at the wholesale level and my understanding is that they anticipate -- I'm sorry, I don't have the same figures as this gentleman over here had -- that this will solve or partially solve the problem they do have now with contraband and thus make up the loss that they're feeling in tax. This particular act that we have included here has not as yet been promulgated, but they are at this moment, under the tobacco act, collecting that tax.
Mr Colle: So it's already in effect although this act is not passed.
Ms Lannon: That's correct. It was, I think, as of November 1995.
Mr Colle: Under the existing act they were able to direct that.
Ms Lannon: Yes, that's correct.
Mr Colle: I see. That's what the status is.
Just as a point of information, early on we did ask for this act to be brought forward. We were aware of the changes that the province of Nova Scotia has made in a variety of areas with the retail sales tax in their province. So we've got that act, all of it, and we were looking at that very seriously as a way of gleaning some good ideas from what they've done in Nova Scotia.
Mr Roytenberg: Mr Chairman, you would certainly have the distribution industry's cooperation in implementing a similar program here.
Mr Pouliot: Welcome. I find this all in agreement with the proposal and you're right, sir, that it keeps on being difficult times and governments are not sympathetic to yielding revenues, especially when those revenues are received from traditional sources such as sin taxes, if you wish -- the evils, the demons of alcohol associated by marriage with the very damaging habit which is nicotine, or cigarettes.
But we too when we were the government, at cabinet, looked long and hard at a discrepancy, a shortcoming, between $450 million and $500 million. In fact when I was Minister of Transportation, I was asked to attend a meeting in Tillsonburg. In my opening remarks -- I was entering tobacco country. You could smoke in the council chamber. It was so terribly civilized and somewhat elegant. They asked me to turn around and go to the real tobacco, and I found it. I ended up in Cornwall -- $450 million to $500 million in lost revenue. So we looked at the wholesale picture that says if you go as close as possible to the source you may strike gold.
Someone said, "Why don't you do it at the manufacturing level when it comes off the line, as soon as it gets into the package, and then you'll really be close to the truth?" Our snag, among others, was the distribution system. We didn't have a handle on it, because the cigarettes would leave, go to the States and come back through a réseautage, through different channelling systems, preferably under the cover of darkness, cloak and dagger. People are very innovative, especially when it's quite lucrative.
I know in Quebec it was 60% or 70% -- and I don't think I'm catastrophizing -- illicit. The government will be watching very closely the impact on Nova Scotia. It's embryonic yet, but what is the difference if we speculate between the distribution system and its impact in provinces such as Nova Scotia and Ontario? What I'm asking is whether what's good for Nova Scotia would be applicable in Ontario.
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Mr Roytenberg: The reason my members have suggested I appear before you is that we feel that, although conditions are always different, they are not so different that it couldn't work here as well. And the reason why, again, is that there are few distributors and very, very, very many retailers. When you have few outlets then it's much more easy to supervise, it's much more easy to police and it's much more easy to ensure that the bona fide people are handling the product the way they should.
As I say, it doesn't solve the problem of transport across borders. That is an area of vigilance that must continue, but for that vast majority at this time a product which flows through legal channels to the wholesale level and which we now find offers opportunity for diversion after that level, this could solve the problem.
Mr Rollins: One of the things I would like to point out to you people, and I listened quite closely to your idea, in the gasoline business, which I'm in, we pay the tax. As a buyer of the gasoline, I pay the tax. The wholesaler collects the tax. The oil company that I buy the gas from collects it. It works very well in that system. They don't allow me as a taxpayer -- and yet I collect tax on oil and on labour and everything else, and in most cases I send it in at the end of the month, or I'm told that. But the thing of it is it's got to be --
Mr Pouliot: Hansard, I hope you got that.
Mr Rollins: In most cases I do; in all cases.
However, with the gasoline, I don't have that opportunity to make an entry of a cash register or anything else. It is already paid for at that same time, so I think that's some support on your part with the same way of the wholesale part of it. I think that needs to be -- and that's one industry that has worked and what their wisdom was, when they brought the sales tax on, to collect it through that method, that's the way it goes in.
The Chair: Thank you very much, Mr Roytenberg and Ms Lannon, for taking the time to appear before us today.
ASSOCIATION OF CANADIAN DISTILLERS
The Chair: Our next presentation will be made on behalf of the Association of Canadian Distillers. Good afternoon, Mr Veilleux. Welcome to the committee.
Mr Ronald Veilleux: Mr Chairman, members of the committee, we welcome the opportunity to make a short presentation to this committee today. Most of you are very well aware of the significant problems facing our industry. It's a problem of excessive taxation leading to loss of revenues for both levels of governments and, obviously, for our industry.
Today I would like to bring to your attention three key issues: The first one is the Ontario retail sales tax imposed on different products, taxation and the underground economy and the impact it has on our industry and the RST loss because of that underground economy.
I think you had a presentation this morning from the Ontario Restaurant Association, Mr Paul Oliver, and he explained the different taxes imposed on different products. If you go to page 2 of your presentation, there's an RST of 8% applied to most goods and services in Ontario, but there's a 12% RST applied to beverage alcohol products for off-premise consumption and 10% applied to beverage alcohol products for on-premise consumption.
Knowing that beverage alcohol products today are excessively taxed compared to our neighbour to the south, the US, and knowing that this excessive taxation of 83% in Canada versus 43% in the United States leads to a tremendous amount of underground activity and tremendous losses to the federal and provincial governments as well as to our industry, we suggest it would make a lot of sense if we had only one RST applied equally across the board at the 8% level. Our point is, why again surtax or overtax beverage alcohol products which are already excessively taxed?
I'd like now to turn to taxation and the underground economy. I have distributed to you a report produced by KPMG and published in September 1995. This report states that there's a serious loss of public confidence in government's ability, both federal and provincial, and I should include municipal, to spend taxes wisely. That's the perception, and you ladies and gentlemen know better than I do that in politics perception is reality.
There is a strong perception out there -- as a matter of fact, 56% of Canadians and Ontarians believe that their taxes are not spent wisely. These escalating taxes that have been imposed, combined with this perception that they are not spent wisely, is leading or pressing ordinary folk or citizens to adopt the underground economy or to go to an alternative which they believe has the correct price for the goods they want to purchase.
This has become a very clear situation for Canadians and for Ontarians in the last five years and it's due mainly to NAFTA, the FTA and the famous GST, which brought to the attention of Canadians that certain products are excessively taxed in Canada and in Ontario versus the same product taxed in other countries, thereby opening the door and inviting many Canadians to use the underground economy or some type of illegal system to acquire these goods.
For our industry, numbers released by the Liquor Control Board of Ontario indicate that there's a loss in excess of $500 million per year. I would like to repeat, $500 million per year is lost to the underground economy. With an RST of 10%, this is $50 million per year minimum that the province is losing.
We're not incorporating in this half-a-billion-dollar loss the losses to our industry. This is corn, grain, bottles, jobs, cardboard, packaging, marketing, distribution that we do not do, that the marketers and the illegal producers don't do either. They don't pay taxes. They don't publish annual reports. They just buy other illegal goods with it. It does not include the impact on the tourism and hospitality industry, significant numbers again, and it does not include the losses to the federal government. There's a significant amount of tax revenue lost each year at the federal, provincial and industry levels.
I have circulated to you some reports. I've already mentioned the KPMG smuggling report, but there's another report produced by the Conference Board of Canada. That report again makes the case that the issue is not really whether or not you should tax spirits, beer and wine at a specific level in Canada. The issue is that the same products sold an hour away south of the Canada-US border are available at a third of the price in certain states and mainly at half the price, and we all know that the border is becoming increasingly open and people are taking significant advantage of that.
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I have also included an Ontario Stakeholders report, which was released in April 1995. I have only brought to you the executive summary because the report is fairly heavy. That report again makes the point that a significant amount of taxes is lost every year to the hospitality industry because of the excessive taxes imposed on beverage alcohol products. I have also included in your report a summary of some recent evidence produced by the Fraser Institute.
In summary, we are asking today, is it possible to level the playing field and impose an RST of 8% on all goods and services in Ontario? We should not as an industry be treated differently.
Secondly, I believe that this committee could make some very clear recommendations to the Minister of Finance and to the Ontario Legislature to the effect that as long as taxes in Canada on our products are at the level they're at while those taxes on the same products south of the border are half of what they are in Canada, we are inviting Ontarians to do what they do today because people, taxpayers have lost confidence in the system. I strongly recommend that this committee study in depth the possibility of rectifying the inequity which exists between the United States and Canada.
Mr Colle: Thank you very much for taking time to come down here. There are some very interesting points that you've made. One thing I want to get clear is in terms of the Ontario retail sales tax. We know it's 8% on general merchandise etc. Then on alcoholic beverages that are off-premise consumption, do you want to explain that, what you mean by that?
Mr Veilleux: On-premise would be going to a restaurant or hotel and buying spirits, beer or wine.
Mr Colle: There's 10% on top of the --
Mr Veilleux: On top of the 83% taxes you pay.
Mr Colle: So it's basically 18% on that alcohol if it's consumed in a restaurant. Right?
Mr Veilleux: Yes. The RST is 10%.
Mr Colle: Then if the alcohol is consumed off-premise, what do you mean by that?
Mr Veilleux: Off-premise is alcohol that is purchased either at an agency store or from a licensee who has the right to sell beer, wine or spirits. The LCBO has the right to sell --
Mr Colle: You take that bottle home and drink it, or at your friend's place or whatever it is. Again, that's 8% plus 12%, so it's 20%.
Mr Veilleux: No, no, no. I'm sorry. It's not 8% plus. I just put the 8% in there because this is the normal RST imposed on products in general in Ontario as a provincial sales tax. For beverage alcohol it's different and I'm suggesting that we should not be different; it should be 8% for all.
Mr Colle: Oh, I see. So it's not 8% plus 12%?
Mr Veilleux: You're right.
Mr Colle: It's 4% higher if you buy that alcoholic beverage --
Mr Veilleux: That is precise, yes.
Mr Colle: You're recommending that it be reduced to 8% like other products?
Mr Veilleux: Across the board, yes.
Mr Colle: Then for beverages in restaurants, instead of being 10% it would go down to 8%? So it's a 2% reduction.
Mr Veilleux: That's right. Precisely, yes.
Mr Colle: Have you done an analysis? I haven't had a chance to go through the Peat Marwick stuff here, but in terms of where the tradeoff comes, in terms of what we're losing as a government in tax revenue, what we're losing as a government in economic impact as it affects, let's say, the potential extra profits we would make or extra revenues the government could reap if the tax was lowered, is there sort of an evening off that taxes place?
Mr Veilleux: Yes, there is. As a matter of fact, we presented the study to the Minister of Finance on February 15. The study indicates that if we are able to lower the tax and recoup approximately 50% of the underground economy, then the government breaks even. Now there's another piece to this, because if there is a 50% recouping of the underground economy, the federal government will make an extra $75 million, because for every bottle that they get back, they have the excise duty that they pocket. The suggestion was that there should be some discussion between the federal and provincial ministers in order to maybe share that profit. If that was done, then maybe in our calculation you do not have to recoup 50%, you only have to recoup about 40%.
Mr Colle: In essence, you've made that economic argument, you've done that analysis in terms of demonstrating that you won't necessarily be out of pocket as a government if you reduce the tax, because you're going to have the ability to recoup more sales tax, you're going to create more employment etc as a result of the business basically being legitimate and above ground.
Mr Veilleux: That is precise. In addition to that, I would like to point out, as it is in the Conference Board study, that our industry in Ontario contributes $900 million of economic activity per year and about 5,000 jobs. This $900 million of economic activity is in trouble in the sense that if the underground economy continues to grow, we will lose that.
We have closed 10 plants in Ontario in the last decade. Even at that, today the remaining plants are operating at 50% of their maximum capacity. So there have to be more closures. It's not totally due to the underground economy because we all know that people do consume less. People consume much more in moderation, and thank God for that, but if you do the study, the decline in legal sales at LCBO stores over the last decade has been about 50%. But if you look at the data available from StatsCan and Health and Welfare Canada, people tell us that they consume 20% less, so there's a big gap of 30%, and that 30% is the underground economy. So in Ontario it's a bottle in three; in Quebec a bottle in two.
Mr Colle: So you've taken that into account, that there's been a dropoff in consumption.
Just one last area: I'm just trying to get a sense of the differential between US cost and Canadian cost. It seems to me in an American restaurant -- I know we had Mr Oliver here before -- usually you get a bottle of wine for $8, $10. Here it's lucky if you get a bottle for under $20. Alcohol seems to be the same in terms of prices and this differential in sales tax doesn't seem to be the only factor. What other extra taxes would a consumer of alcoholic beverages be paying here in Ontario that are not paid by a consumer in the United States? Where is the other cost coming from besides the sales tax?
Mr Veilleux: The other cost comes from the federal excise tax. In the United States, the federal excise tax is about half of what it is in Canada. The other piece is the markup imposed by the provinces in Canada versus the markup that is taken by the controlled states, which are controlled liquor boards in the US, and that makes a difference. But in the United States, if you have an uncontrolled or a privatized state, there's no markup. If I can use an example of a bottle of, let's say, Canadian whisky, for which you will pay $20 in Ontario, $17 is taxes, $3 is the manufacturer's price. In the United States, the same bottle of Canadian whisky, produced in Canada, exported to the United States, will cost you $10. The producer will take $4 and the balance is taxes plus the profit of the distributor of the licensee. You can see that our industry would be much better off if we did everything in the United States, because we can sell at a higher price and the consumer can purchase at a lower price. Therefore, there's no underground economy.
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Mr Pouliot: Following Mr Colle's series of questions, we're talking in terms of American dollars and Canadian dollars. We don't factor in the 38 to 40 cents on the exchange at present, do we?
Mr Veilleux: I do, Mr Pouliot, yes.
Mr Pouliot: You have factored that in?
Mr Veilleux: Oh, definitely. In the reports that I have tabled in front of you, we're talking dollars; whether they're Canadian or American, they're the same.
Mr Pouliot: I thank you. I need your help. This morning, we had some restaurateurs, people in the service trade, painting a rather grim picture as to their mandate to collect on behalf and to remit, and during their lament they produced four bottles of wine. Oh, they took the wine back after their presentation, I can assure you. Their statistics -- I want to put this into what you have, Ontario retail sales tax rates. My understanding is that you're talking here about beverage alcohol. You're not talking about wine. You're not talking about products that are other than what the Ontario or Canadian distilleries distil in Canada.
Mr Veilleux: That is right.
Mr Pouliot: When you make your analysis as to the US and Canadian market, you're not talking about Drambuie, Grand Marnier, Château Margaux.
Mr Veilleux: Yes, I am.
Mr Pouliot: You are?
Mr Veilleux: Yes.
Mr Pouliot: If I was to go to the United States tomorrow, I would find the differences across the board of what you have indicated here?
Mr Veilleux: Yes, you would. May I say, maybe not all states, but the issue is, it does not have to be in all states.
Mr Pouliot: I am not talking about Utah and the like, but grosso modo, generally speaking. Some of those products which are very excellent products cannot be found in all states as readily as others because of the mentality, the lack of conformity.
How many litres here? Nineteen million litres of spirits are smuggled into Ontario annually. What is that in terms of percentage of consumption?
Mr Veilleux: I do not have these numbers in front of me, but they're available and I have them. Let's say that in Ontario per year legally the LCBO sells approximately 5.5 million cases of alcohol. Nineteen million litres -- there's nine litres to a case, so that would be about two million cases. So the total in Ontario you would sell that people will consume -- this is Ontarians, tourists and visitors -- is approximately seven million cases of alcohol, of which two million are illegal.
Mr Pouliot: Thirty per cent?
Mr Veilleux: That's approximately.
Mr Pouliot: I want to track this down with your help. I'm not a connoisseur. If I wish to buy a beverage, I will go to the local LCBO. I think they've come great strides. They're very well appointed. It's a good atmosphere and you feel good in there.
Mr Colle: That's when you leave, you feel good.
Mr Pouliot: That's right. That's no problem. Let's follow the trail here with a bit of tracking. Nineteen million litres; I mean, people like me don't have access to that. I would be such a small consumer. I don't run an establishment. Where do those 19 million litres go?
Mr Veilleux: The KPMG report indicates that approximately 20% to 25% of these litres are consumed or sold in licensed establishments. That would be hotels and restaurants, motels and bars. The rest of it is consumed by Ontarians and average Canadian taxpayers. That's the study. Also, this parallels what occurs when the LCBO sells alcohol legally. The LCBO will confirm to you that about 20% to 22%, or maybe 25%, of its sales are sold to licensed establishments; the balance is sold to the average Ontarian.
Mr Pouliot: Life's a dream and I have great confidence in the entrepreneurial spirit and so on. Of course, I hear the constant concern about the degree of taxes that they pay and they're obliged to charge the consumers more than they would really like because those people are good-hearted, and yet I'm trying to reconcile this, having had faith in all through my life and an admiration for the entrepreneurial spirit.
I'm torn now because, you see, you come here with an excellent presentation, a lot of data bank and a theme of pointing the finger that all is wrong, that that was tough, that was trapped, reached the table of sin because of high taxes. This is staggering that we would have 20% of people who sell alcohol through licensed establishments doing some of it illegally.
I'm surprised that to this date the government du jour, the government of the day has not proclaimed that it will soon go back to the old days -- because they're very good at doing that on other pieces of legislation -- and proclaim prohibition. I hope this is not futile, because next year when you come back, we might be under a state of prohibition as in the old days, as the temperance spirit is being revived almost daily around here.
But having said this, I'm really surprised. I will ask, value for money? We're getting taken to the cleaners and I'm not so sure that it's all on account of taxes, or if it's not easier the second time around. If you do it once, it becomes a matter of a mindset and a lifestyle and taxes are used as a convenience in the argument.
Mr Veilleux: If I may, Mr Chairman, provide an answer, this is not unique to beverage alcohol products. You've heard the lady and gentleman before me talk about taxation on cigarettes. I would point out that it doesn't matter what the product is. You find a product where there is excessive taxation on it, I'll show you an underground.
If you go to this KPMG report, that's exactly what it says. Some of you may be aware that in doing this study the RCMP officers or former RCMP gentlemen who did this study visited some of the establishments where this material comes through. They not only found cigarettes and alcohol, they found jewellery, armaments, chicken, eggs, you name it. If it's totally controlled in this country and the prices of these commodities or these products in Canada are much higher than the prices in your nearest country, you will find an underground economy.
I would also like to add that I don't want to point the finger at restaurateurs and hoteliers. I said before, and it is quoted in this document from Owen Lippert of the Fraser Institute, that in excess of 56% of Canadians are cheating. Why should restaurateurs be different? I think they are a reflection of our society. People are saying, "We're overtaxed."
The Chair: One short, sharp question.
Mr Pouliot: Yes. So polygamy is having one husband too many, and monogamy the same.
M. Veilleux, you've partly answered my last question. It's a matter of price. In this case, taxes are a definition of the price, so it's commonsensical to address that. Economy of scale: A unit sells for $100 a case. In the States, it sells for 30% less. In a dream world, there are no taxes. Does it change the problem? Which one do you buy? The only thing that is in question here is that you're smuggling it, but you're not smuggling it because of taxes. You make your case around taxes, but the case is to be made around the difference in prices; that's where the key is.
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Mr Veilleux: May I be allowed a short answer, Mr Chairman?
The Chair: Sure. Absolutely.
Mr Veilleux: You're right, Mr Pouliot, it's a matter of price. I would like to point out that the bottle of Canadian whisky that I referred to a bit earlier which cost $20 at the LCBO -- that's the shelf price -- is all-inclusive of all taxes. There is $17 worth of taxes, and $3 is the manufacturer's price. On the street, you can go around Queen's Park and some streets north of here -- I've tested the market, because I have to know what I'm talking about -- the same bottle illegally sells for $13.
So if tomorrow my members, members of my industry, decided to give away the product that they manufacture in this province, in Windsor and Corbyville and all these other good places, the price would go from $20 to $17. Now, we give it away. The underground economy is still at $13. It won't make any bit of difference. The consumer will still go to the underground economy. This is serious. I don't know of a single product in this country capable of surviving under these conditions. So it is a matter of price. The consumer sees $13, versus $20 or $17 if you give it away, and they'll buy it at $13.
Mr Rollins: Thanks for your presentation. When you say Corbyville, that was my home-town address for a good long time, and you've seen fit to tear it down. We must have collected a lot of taxes there over the years through the excise tax and everything else.
A fantastic amount of liquor -- and that's basically what we're talking about -- comes in across our borders by the hour, by the minute, however it comes in. Those people who are there tell us and tell people that I've talked to that they can pretty well detect the number of cars that are carrying it by the size of the car, the way it's loaded; many easy ways of telling that there's liquor in that car.
The way the system is set up, if they go to the point of trying to arrest that individual, and how many they can apprehend and how much liquor is dumped in the St Lawrence River running down towards Cornwall and all those good places down there that they catch every hour, they can't stop it all.
I don't believe, as an individual, that because something is being done that's wrong -- I firmly objected to seeing the taxes reduced on the cigarettes so that Johnny's no longer stealing, because he doesn't need to steal because the taxes are too high. Johnny's still stealing, regardless of what it is.
I think that's where we come back to the point where we've got to close down our borders and make sure that the illegal product that's coming in is caught and more is apprehended. Those people on entrances to Canada at the borders -- and that's where it mostly comes across; sure, lots of it comes across in boats and that, but most of it comes across in cars -- if we stop and search those cars, they get caught. Maybe the penalty isn't high enough.
We cannot take the taxes off. It would be nice, as a government, for us to sit here and say, "Okay, fine, we'll remove the taxes." But then we want to put a tax on to snow machines and things that are used in northern Ontario to get back --
Mr Pouliot: Watch it.
Mr Rollins: See, right off the bat he said, "Watch it." We can't tax it back. So where do we tax?
The cost of that bottle of liquor that we sell -- and I enjoy a drink; don't get me wrong that I don't, because I do. The costs that I, as an excess drinker, cause to our economy cost an awful lot, whether it goes in the health system or in the court system or wherever it goes through our system. Those are all parts and pieces that have to be looked after out of that 88%. I appreciate that the product that we're taxing is around 88%. It's pretty near as good to steal gasoline today as it is to steal liquor, because they're both getting to be about the same price. Do you think that we could cut down at our borders better and stop that illegal underground economy that way?
Mr Veilleux: I have spoken to all the police forces in this country, not only Ontario, in all the provinces. I personally went out there and looked. I have spoken to the RCMP, to customs and excise, and I'm in touch with, I have briefed all the ministers for the last five years at customs and excise. I know their people well. Everyone is pretty well admitting that you cannot close the border.
The reason is the following: The customs officers standing at the border know very well that most of the 2,000 or 3,000 semitrailers that cross a certain point on a certain day -- and it's the same every day -- have illegal products. If they stopped every single one of these trucks and inspected them, they would do a fantastic job but the political impact of such a decision is not possible to accept. You would have trucks lined up from the Ontario border to the Mexican border. The oranges and apples would go bad -- maybe that would be done for the local economy for a while -- the spare parts that are needed for our industries in this province would not come across, and it goes on and on and on.
So the recommendations made in these reports and also by various police forces is that yes, you must increase penalties, you must make people aware that if they purchase something illegally, it's hurting them and it's hurting the economy and everyone in the province. But at the same time, they say that if anyone believes that you can eliminate the underground economy by doing only that, it will never occur. You need to balance the tax level because as long as you keep the incentive of a tax differential the way it is, people will use this tax differential to smuggle and make a lot of money. That's what has been occurring. At least, I'm basing my response on these three points.
Mr Rollins: I hear what you're saying, but I'm saying that because everybody does it, it becomes legal -- I don't agree with you. But that's my opinion.
The Chair: Time for a short one, Mr Skarica.
Mr Skarica: Yes, quickly. Maybe you're not going far enough. You want all the taxes to be reduced to 8%, but that would still make taxes more here than in the United States. So you would have to reduce our taxes by half, correct? By 50%, 5% to 6%, then?
Mr Veilleux: It has to go down significantly, to a level where there's no incentive for the consumer to go buy it from the friendly taxi driver versus the LCBO. If the price is $13 from the taxi driver, if you sell it at $15 at the LCBO, our indications are that most people will reintegrate the legal system. It does not have to be equal, but it's got to be close enough.
Mr Skarica: Just because you lower the tax rate doesn't necessarily mean you're going to have a loss in revenue, because if you equalize to the States, you would bring the $500 million into the real economy and out of the underground economy.
Mr Veilleux: This is right.
Mr Skarica: You wouldn't have the expenses of having to go after the illegal activity, you wouldn't have the organized crime impacts and so on and so forth, correct?
Mr Veilleux: These are very precise observations. That's exactly what most of the people we've consulted are telling us. This is why we believe that if you can recuperate 50% of the underground economy, you would break even, and we don't factor into that equation the fact that the policing costs go down, the custom costs go down. The hospital costs go down also, because people purchasing illegally don't know what they're purchasing. It could be anything. As a matter of fact, they don't know what they're purchasing, but what's worse than that, the smugglers don't care if you're 12 or 13 or 15. For $5, if you're babysitting, they'll deliver, and that's scary.
The Chair: Mr Veilleux, thank you very much for your presentation. We appreciate your time.
FED UP
The Chair: The next presentation is being made on behalf of FED UP. Welcome to the committee, Mr Flynn.
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Mr Charlie Flynn: This is the first time I've appeared before a government committee of any type, so I apologize if I make any mistakes in form or content, but you're looking at a little frustrated businessman who would like to have a few words to say.
Mr Chairman, ladies and gentlemen, I am here as an individual, a taxpayer, as a tax collector, as a small businessman and, finally, as founder of an organization known as FED UP, which is predominately small business people and ordinary Canadians who feel alienated and disfranchised from this entire process. We are taxed beyond our ability to pay, with these two levels of taxation putting an onerous burden on small business. Please remember the words of Edmund Burke, "Bad laws are the worst kind of tyranny."
You have instituted these proceedings to identify and establish a basis to better facilitate the collection of money due this government from tax collectors, known as small businessmen, across Ontario. It is a frustration of this government, as pointed out by the Provincial Auditor, that there is a large tax gap, or in the vernacular tax fraud or cheating, through what Ms Swift of the CFIB calls the "informal economy," otherwise known as the underground economy. It is estimated by some sources at $100 billion a year, and this, ladies and gentlemen, is beyond a mere statement of perceived unfairness. This is a full-staged revolt. In fact, since the money is not there to pay the level of taxes demanded, it could be considered a commonsense revolution.
It must be remembered that the entire premise of the auditor's report is based upon the conception that small business is somehow hoarding this money or reaping huge unreported profits. This is not the case. They simply do not have the funds to pay the amount demanded of them. Canadians have been forced to become criminals in their own land. It is a matter of survival.
If you'd like to know where this money has ended up, look no further than the business section of your local paper. As you starve and squeeze us with cutbacks and high levels of taxation, bank profits hit the stratosphere and breweries' profits are up over 100%. Wall Street soars while main street plummets. Do you think maybe in this case correlation is related to causation?
"Cheating" and "fraud" are strong words and just one generation ago would cause an individual or businessman to be castigated and looked upon with contempt by members of society. Due to repressive legislation, it has become the norm. The people simply have no other choice. Spend some of the money used to hire these extra auditors on a study. I would help to conduct it for free. Basically, you answer by intimidation, threat and repression, rather than seeking out the root cause. It is rather like the lord in the manor having the serf's hand cut off because he had taxed away all his grain and he had been caught concealing a bag to feed his family. Simply put, this is all we would like to be able to do: feed our families.
It is the federal and provincial politicians who have made fraud, cheating and lying a Canadian pastime. You have collectively turned Canadians into criminals in their own land. It is not because we are firebrand revolutionaries, it is just that we are taxed beyond our ability to pay, and most certainly this does not meet your criteria of fairness. Let's reflect on the alienation, cynicism and disfranchisement felt by the electorate towards the people occupying your offices. In most cases, they are either too alienated to speak out or too afraid of the consequences.
You feel you were elected to fulfil a mandate, clearly spelled out in your Common Sense Revolution. Well, simply put, I seek to appeal to your common sense, and yes, suggest a few steps that could be thought of as revolutionary, if adopted.
We are here today to comment on section 3.07 of the 1995 annual report of the Provincial Auditor, retail sales tax. In the preamble of the report on RST are the following two comments: "The branch's objective is to collect RST in a way that will encourage voluntary compliance...with the law and maintaining public confidence in the fairness of the tax system." These are lofty objectives.
A great man said: "People crushed by law have no hope but from power. If laws are their enemies, they will be the enemies to law."
Listen closely. We simply are taxed beyond our ability to pay. Like the feudal lord of old who demanded more grain, leaving the serf with nothing to feed his family, you are starving the engines of our economy of the fuel needed to drive them, stripping us of much-needed employment at the entry level. Small business does not rationalize and lay off just to please shareholders and have the Dow rocket to 6,000 on seven trillion shares. They reinvest their funds right back into the economy and create jobs.
I would invite Robert DeNiro's doctor from Awakenings to administer some of that el dopa to all levels of politicians in this land, and perhaps, like the pundits have reported as regards the unity issue, we could wake up the political élite to what they are doing to the small businesses today. It is an embarrassment that Prime Minister Jean Chrétien should have to beg multinationals on bended knee to create employment when we are standing here, ready, willing and able to comply.
Despite having no access to capital, being overburdened with taxation to fund a burgeoning and élitist bureaucracy and enduring the highest real interest rates in history, we survive and create over 85% of the new jobs in this country. What is our reward? In anger, one could say, some stuffed shirt bean counter decides we're not audited enough and a few more shekels can be squeezed from our drained coffers, and you immediately order up more bureaucrats, rather than ask yourselves, what's the real problem here?
What you have done through this regressive and reprehensible level of taxation aimed at this level of unorganized and optimistic investors in the Canadian dream is deplorable, and with such little true consideration and thought it could be considered a crime against the core segment of capitalism and indeed the root cause of most of our economic malaise throughout this great country and province. Why doesn't anybody in this august chamber or the one down the road in Ottawa stop and realize what you are doing?
Let's follow this through. An entrepreneur, otherwise known as Mr O.N. Citizen -- the O stands for optimistic and the N for naïve -- of Ontario, investing in this province and its citizenry, decides to go into business. The banks, who unlike Jesse James don't wear a mask or carry a gun, are nevertheless robbing Canadians with their diehard motto of "Don't invest, collect interest." We now pay them over $5 billion a year just on the federal debt. Oh, I know my pension fund is making millions. Maybe it will be able to pay me half of what I was promised I would get.
However, this backbone of Canada's entrepreneurs trudges off and convinces friends, family and his wife to beg, borrow and scrape together enough money for him to realize his lifelong dream of going into business for himself. He opens up his little café and submits his application to the government.
Well, it turns out the last guy never paid all his taxes, so in order to get a licence he will first have to sign a memorandum of understanding to pay the last guy's taxes over a period of time. If he does not pay them, they remove his licence. So he signs up and opens his business.
Now he pays heavy deposits to hydro and gas companies, which are monopolies protected by the same government. They exact a nice heavy toll for him to try and employ citizens of this province. If he makes his way through these hurdles, the municipal government knocks on his door and politely asks if they can have their business tax deposits. That's right: a deposit on future taxes, paid in advance for your right to do business.
He orders in his groceries, and these individuals, small businessmen, give him credit terms and take a chance on a new business coming into their area. Of course, they're not protected by any government-mandated monopoly.
Not one single individual from any government department of any level of government has shown up yet to say, "Hi, I'm from the government, and I'm here to help."
Now he wanders over to Brewer's Retail and puts in his order for product, paying a gallonage tax on his purchase, another little surprise. The brewery sells him beer at the same price as the consumer, no wholesale discount whatsoever. It is those same breweries whose stocks are hitting all-time highs along with their profits. You wonder where the taxes not being paid are going? The pie is only so big, you know. The consumer will only pay so much, and despite the retail price going down, the breweries just hiked their prices to the restaurateurs.
He's now fully stocked and ready to go. He hires a new immigrant willing to cook and clean for minimum wage, a student who has to work to make ends meet due to government cutbacks and a single mother on welfare trying to make ends meet, so two entry level employees and a welfare recipient.
The $100,000 this individual has invested of his life savings and borrowed money will have a multiplier effect on the local economy of roughly 10 times, so he's created over $1 million in additional economic activity in this area. Unlike the large corporations or institutions, not one single cent of taxpayer money has gone to convince him to invest in Canada.
What goes wrong?
He gets his first month's revenues of $40,000, a pretty good take. Now he pays 15% in occupancy cost, 40% in product cost, 25% in labour costs. He pays workers' compensation, a form of a tax, he pays business tax, he pays realty tax, he pays employers' health tax, he pays withholding taxes, including CPP, UIC etc. He asks his new accountant to plug all these numbers into his new computer to calculate the 7% of GST payable on most items sold and deduct his input tax credits and then calculate the 10% PST on liquor after first deducting the 7% GST, so as not to pay tax on tax, and then separate out the food and calculate the 8% on food, unless he's not supposed to on some items, then subtract his commission for collecting all of these taxes, and once all these calculations are done, he is left with a negative balance of $1,328. Oh yeah, by the way, there's nothing left for him. He goes out and borrows additional money to pay all his bills. He could've taken it out of his contingency fund, but that went to the hydro and gas people, so now he's left a little more in debt.
Now smiling hesitatingly, he continues on, but realizing the whole time that once you add up the gallonage tax, the business tax, the employers' health tax, the UIC contribution, the CPP contribution, the provincial sales tax, the GST and the realty tax, he's going more in debt every month.
Now along comes the smiling salesman who whispers his name quickly and tells him he can make him more money on his business. He listens, because his kids are wearing out their clothes and his in-laws are starting to make noises about getting repaid. This guy can deliver liquor to his back door, no need to pick it up, at half the price. Of course it is contraband and somewhat illegal, but he's reminded of why all the other establishments are undercutting his prices. He declines. This salesman calls on most establishments more frequently than any representative from the LCBO.
Next, in comes a smiling ex-athlete, known as a beer rep. He points out that if he sold just a little more volume, then he could be entitled to cash kickbacks and extra promotion material. At his present level, he gets nothing. He just doesn't have enough volume. He's told that if his sales really climb, he and his wife could get that vacation they've always wanted to Florida courtesy of Molson's or Labatt's, and all under the table, no taxes or anything. He leaves him a $50 bill to encourage him to switch to his brand and increase production.
He's amazed at these reps with huge budgets wandering around encouraging consumption, working short hours with nice benefits. Of course, they don't pay the gallonage tax or PST or GST either, and they still get 14 to 16 bucks profit on a hectolitre, as opposed to about 4 bucks right across the border. He discovers that during this recession their profits and stock prices are soaring, and so are their layoffs.
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It seems that Sir Bernard Shaw was correct when he said, "Any government that robs from Peter to pay Paul can always count on the support of Paul." It seems Paul is very generous at election time. They used to pay FST of 18%. They also benefited nicely from NAFTA, allowing some economies of scale and rationalization -- there's that word again. I know you'll tell me we're part of a global village now, it's just that none of these globe-trotters has found the village where my restaurant is located.
Are you getting the picture yet, where all those taxes you're trying to squeeze out of this economy are going? They're going in corporate profits and nice windfall, high real interest rates to the banks, the very entities that are not helping to grow the economy or create employment, just high stock prices and huge profits that one perverted bank president says belong to us. It seems, though, that we can't even borrow from ourselves.
Well, soon Mr Citizen gets the picture. He concentrates on quantity, not quality. Money talks, and this, he is told, is legal. Next thing you know, the liquor inspector wanders in and suggests he cut back on promoting consumption. So should he try to make enough to stay afloat or get some of those large kickbacks from the liquor and beer salesmen, they'll shut him down. It seems the government says: "Okay, guys, the last guy to the top of the rope goes bankrupt this month. Multinationals, your rope is on the left; bureaucrats, your rope is on the right; and small entrepreneurs, you have no rope. Good luck."
So now he won't have enough to send in his PST. But a lot of bar owners have two sets of books, and if he just slices a bit off what he owes, he can make it. So he claims 85% of his sales.
Finally, after 18 months in business without receiving one paycheque, the inspector cites him for encouraging consumption and overcrowding, so he cuts back on sales.
Now he has no money to send to PST this month. He skips the payment. He's called by a retail sales tax bureaucrat who has been assigned to ensure voluntary compliance. He is berated and commanded to pay these trust funds immediately. This bureaucrat is collectively receiving almost 20 million bucks a year from taxpayers, divided among 295 workers who produce nothing and invest nothing in this province. If the provincial government were to farm this lucrative contract out to citizens of this province, a lot more could be accomplished with a lot less. Yet these guys think they are still not getting enough. Perhaps rather than feigning their outrage at one who is not giving enough, they could reflect on the ones who are taking too much.
Once these 9-to-5 workers are awakened to a possible voluntary non-compliance, he quickly receives a letter demanding an audit and in they march, all smelling of the same cologne and rumpled old suits, sitting down at his desk, using his chairs and his electricity to occupy his office and his staff in order to discover if he has cheated the system. Like an invading army, they order employees in this direction and that, demanding immediate results to every little whim in search of those elusive funds per audit hour to justify their position. They have papers flying, calculators whirring, computers buzzing and copiers churning. They mean business, and all the time his business, already on the brink, is being pushed over the edge at a time he can least afford it.
The bureaucrats see red if it is discovered any of these trust funds have been used to pay another small businessman or employees, or even endeavoured to pay rent and keep his doors open. Couldn't one of these have gone without to ensure RST was paid? Then luckily the 5 o'clock whistle blows and Mr 9-to-5 quickly folds up his computer and shuffles off.
Next, in come the GST boys for their audit for three weeks of audits, taking up valuable staff time and effort in providing all the necessary documentation, with rumours swirling around the business, driving off what little he had left.
Now he knows exactly how much he can't afford to pay. He tells how he expected business to be better and the auditor merely comments, "A good businessman should forecast accurately." He doesn't explain how the government, with hundreds of econometric models and its employees computing away for eight hours a day, can be so wrong with their budgetary shortfalls. They let him know they are contemplating charges for misappropriation of trust funds. So this is his reward for trying to invest instead of collect interest. I guess the banks were right. Then they compute out that their additional tax assessed per audit hour is an astounding $975. Everyone is happy. We can justify more auditors with these kinds of results, and lock a whole pile more entrepreneurs up.
He recalls the guy who kept begging him to buy his contraband booze and dreams of all the taxes and hassles he would have saved. It turns out that any spillage he experienced over and above 5% he pays taxes on and all the theft he discovered by dishonest employees he pays taxes on. Nevertheless he was honest and bought every drop of booze at government prices through government outlets. Now these government employees, these tax collectors, with all their great benefits, are calling him a crook for not performing as an unpaid tax collector, with no pay and no benefits.
He loses his house, his business and goes bankrupt, and finally a government employee shows up to help: social assistance and legal aid. They get him an apartment, some food and give him a placard to march downtown to demand more, because he is truly one of society's underprivileged and deserves to receive compensation for being left out of its success stories. Finally, I guess he's getting paid for all that work as a tax collector.
Mr Colle: Social assistance has been cut off. Legal aid's been cut off too.
Mr Flynn: Well, it hasn't been cut off, it's been reduced.
Mr Pouliot: This isn't your story, is it?
Mr Flynn: It's close enough. It's very, very close enough.
Is this what you want? Every single item mentioned could be a personal experience and absolutely and undeniably true. Suffice it to say that once I, as a citizen of Ontario and Canada, pushed aside my cynicism and alienation from the process and took it upon myself to speak out about the inequities and overburdening taxation system, that is when I felt the real wrath of the civil servants. I'd dared to threaten their security and future employment benefits.
It is imperative you understand that this onerous burden of taxation, which we can't afford to pay, has created an injustice. Most small business men don't want to come forward out of fear of retaliation. So this legislation is used to threaten, intimidate and extort, if nothing else, such as money, then silence. Do you understand these small business men are honest, hard-working, optimistic individuals whose only crime was to believe and invest in this province and country? They do not march on picket lines or inundate you with complaints. They simply try to survive, and struggle as silently and alone as much as possible, in most cases afraid of being noticed.
When I mentioned during my GST protest that most small business men are lying and cheating or going broke, it was acknowledged by all of their associations, by bureaucrats and by politicians, but I was beseeched not to mention it. In your haste to ensure our multinational corporations could compete on the global stage, along with our banks, you left someone out of the equation -- the guy you want to collect all this tax from. Now, as stated, as Wall Street shines on the backs of laid-off workers, slow growth and low inflation, Main Street is full of potholes and in desperate need of repairs to ensure it stays afloat. However, you don't have to worry about us competing on the international stage or dragging down the stock market. We'll just shut up the doors, turn off the lights and send everyone home.
I've spent an enormous amount of money keeping my businesses going without ever receiving one single cent of remuneration or return on investment. Since I complained, I've been talked to, talked about, lied to, lied about, harassed, intimidated, threatened, cajoled, deceived and misled. I've had confidential information on my file distributed by civil servants. I've had my liquor licence revoked due to a lost renewal notice, not for any infraction of any regulation; I've never had one. My files have flown around government offices faster than a copy of On the Take around a Liberal Party picnic.
You must realize we are not taxed to the limit but beyond our ability to pay. You must address this immediately and resolutely. It is those headlines of huge bank profits that have robbed us of any fair hearing before a bank officer for a loan. It is those headlines of high real interest rates that have siphoned off investment capital. It is those headlines of high unemployment and welfare, with low inflation, that have robbed our customers of the disposable income to ensure a robust economy. It is those 100% jumps in breweries' profits, enabling them to hire athletes to encourage consumption, that have robbed us of our margins to pay the level of taxation you require. It is the unfair and disproportionate share of the tax burden heaped upon small business operators that rob us of our ability to create employment.
Let's read again your directive, "The branch's objective is to collect RST in a way that will encourage voluntary compliance with the law and maintaining public confidence in the fairness of the tax system." May I ask, is this the real objective? If it is, let us immediately ask the branch how they maintain public confidence in the fairness of the system, which is so inherently unfair. Do they research the huge profits reaped by breweries off the backs of small operators? Do they ensure that contraband is not available to competitors? Do they ensure in any way that there is enough of the pie left for the small operator to pay the amount required of him? How do they encourage voluntary compliance by shutting up guys like Charlie Flynn rather than listening to his commonsense solution to correct this imbalance?
Let me suggest:
Freeze the hiring of any additional civil servants. It is unnecessary. If it is collection and squeezing every available cent out of business you want, then contract it out to private firms with specific instructions and powers. You would pay only on performance or on funds collected. If you want to squeeze more out of those who must give, then give less to those who want to squeeze more.
Allow for the retail sales tax branch to research the size of the pie -- ie, total revenue from the sale of beer, wine and liquor and other products in this province -- and identify where the profit is flowing. Certainly by ascertaining the flow of funds from the sale of these products, the branch could fulfil its objective in ensuring that voluntary compliance is, at the least, possible.
Immediately implement a task force made up of small business people to implement a fair system within everyone's ability to pay, and make any cheating of the system subject to very stringent, onerous penalties.
It is totally without rationale or logic to assume one can pay more than he has in taxes. You must realize the pie is only so big, and when the pot is empty, your requirements to collect more are frivolous. Do you not understand small businesses are not keeping more to show encouraging profits to Wall Street, they are surviving to try and stall the foreclosure on Main Street? As it is said, you cannot get blood from a rock. Stop trying.
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The absolutely easiest and most commonsense solution is to collect PST at source on alcohol, once you've ascertained what is a reasonable division of the revenue, and provide for zero tolerance for anyone involved with contraband product. In plain English, one strike and you're out. You simply charge the PST on the prior shipment before any new product is shipped at both the LCBO and Brewers Retail. End of problem in our industry, which I am told accounts for over 40% of all collection problems. Nova Scotia has implemented a similar policy to deal with contraband cigarettes.
Breweries encourage consumption. Just like the casino bosses rate you according to the stakes you bet, they judge you on the volume you sell and compensate only those at the top end of the scale. All one has to do, without the cost of any lengthy studies, is look at the budgets for promotion used to push consumption on the consumer and volume on the licensee, the exact contradiction of the government's intention. Take a look at the breakdown in total revenue today. I'm sure Mr Labatt and Mr Molson are saying, "Shush, don't tell them."
In short, you ensure, through your study of revenue flow, fairness in the system. Any deals whatsoever in the informal or underground economy market are dealt with severely, as stated, on a "one strike and you're out" basis, or zero tolerance.
You must ensure voluntary compliance in the case of alcohol by taxation at source to ensure a level playing field. You must ensure fairness. It is incumbent upon the government to ensure compliance is not only complete but, at the least, possible and fair. I recognize that Mr Beaubien did suggest a potential core problem exists and I commend him, but I do not think even he realized the extent of that core problem.
John Kenneth Galbraith said, "Nothing is so admirable in politics as a short memory." It is a shame if you should forget that lesson learned by Mr Rae: Electors have a long memory; it is politicians who have the short one. You promised change, you promised common sense. Well, we need change and we need common sense.
In this case, correlation of GST and PST is certainly related to causation -- less compliance.
I beseech you in your capacity as legislators, as parliamentarians, as leaders, as individuals, as citizens of this province. You are in a position to enact change, to right a wrong, to eliminate injustice and to allow employment investment to begin to grow tomorrow. We've lost over 40,000 jobs in our industry since this inequity began. We are entry-level employers. Certainly, as you can see from the downsizing, those windfalls accorded the large corporations are not going into employment or reinvestment in this province or country as they shut down plant after plant. Small business creates 85% of new jobs in this province. They are investors with no demands, trudging on though government red tape and bureaucracy with an overburdening tax load and no source of investment capital, with little complaint. You need only to stoke the engines of business by reallocating this tax burden and its administration to a survival level and the results will be immediate. The new immigrant, the student and the single mother will cease to be a burden on the state, with all the resulting savings, and remain gainfully employed. Let us do our jobs with no grants, subsidies or handouts; just a fair shake.
The decision is yours, but the unemployed, the small business men wait for you to do the right thing, and it's not hiring more bureaucrats in an overregulated and overgoverned province; it is to loose the strings on free enterprise.
In short, ladies and gentlemen, stop looking for that basket of grain the serf has hidden to feed his family and start allowing him one or two baskets to grow his business to allow for larger harvests creating more employment, resulting in less strain on the resources of the lord and his manor; in other words, the public purse. It is what you are sent here to do. It is common sense, and using it would certainly be revolutionary. As Edmund Burke stated, "Make the revolution the parent of settlement and not the nursery of future revolutions."
Sorry if it was long, but I had a lot to say.
Mr Pouliot: Thank you very kindly. FED UP stands for Fellow Entrepreneurs Determined to Upset Parliamentarians
Mr Flynn: Yes, that's correct. That was coined during my GST protest last January.
Mr Pouliot: I'm an avid reader, sir, and if I don't recognize the person, certainly I'm familiar with the tone. I see some association. The title fits the presentation. I see it as being upsetting, but not as being vitriolic. You walk the walk, so you go beyond the words. Then you come up with recommendations, which is most appreciated because we listen to what we feel is wrong. You develop a theme, a certain methodology, and then you always anxiously look for its conclusion. Then you try to it blend it with what has been said in the preamble.
When all is said and done, at the end of the day, as I listen, it takes on extraordinary proportions. But I kept in mind, how much money will it generate? Are you aware of how much money small businesses paid, not through their employees -- they pay taxes too, they're consumers as well, of course -- but themselves? What is the percentage of what the government takes? You see, the provincial government takes in about $46 billion per year. It spends $9.5 billion or $9.6 billion more. That's the challenge, that's the deficit; and with the tax break promised by these people sitting there -- because they're on the hook to an election promise that you talk about -- to the tune of an additional $5 billion or $6 billion. So when you talk about -- well, I don't say upheaval -- upset, you have to reconcile in a period of one term of office, and there's four years left to do, some $15 billion. That's one big task.
All businesses pay less than 10% in taxes. The taxes are paid by the consumers, the taxes are paid by --
Mr Flynn: That sounds nice on paper, but we both know it's just not factual.
Mr Pouliot: Okay, thank you. I see you have a student there, a cook, a sous-chef; a cleaner also. You took the person off the street. No doubt that person speaks five languages --
Mr Flynn: Sometimes.
Mr Pouliot: -- and maybe he's a soupier, he's a charcutier, he's a chef. I don't want to eat there because you're paying him the minimum wage. What is your opinion on the minimum wage, sir? Do you think it's a deterrent? Do you think it's too high?
Mr Flynn: Basically, on the minimum wage, if you want an answer on that, nobody abides by it, because every restaurateur in this province, or most of them, pays a salary per week to reduce the level of hours worked below the minimum wage. So it doesn't get across the government's intended purpose. All it does, unfortunately, is limit employment possibilities for people.
Mr Pouliot: So another example of people bypassing the system because the laws are bad.
Mr Flynn: There's only so much of a pie to go round. You can't squeeze blood out of a rock. You cannot ask an entrepreneur to spend more than he takes in; it's impossible. He's going to look for ways to survive. By nature, an entrepreneur is a survivor. He looks for ways. It was created in the halls of this building and in Ottawa; it was not created in some little restaurant.
Mr Boushy: Just one brief question: On page 1 you said the underground economy is estimated to be $100 billion a year. Can you tell me the source of information?
Mr Flynn: It would be many and varied, but mostly those figures were quoted to me through the media and through figures dragged out by Stats Canada during my protest last January.
Mr Boushy: Is this for Canada or for Ontario you're talking about?
Mr Flynn: Canada.
Mr Skarica: If I can paraphrase, what you're basically saying is that for a small business to survive and create jobs, you need less taxes and less paperwork.
Mr Flynn: In a nutshell, if you want them to survive and grow. Right now you're sitting here asking them why they aren't paying the level of taxation, thinking somehow they're hiding it somewhere. What you don't realize, or maybe you haven't realized, is that they don't have it. You've simply taken everything they've got, and what they're doing is borrowing or stealing from somewhere else to try and stay in business. You'd rather put the other small business man out of business by him not paying him and paying the coffers of the government or not paying the employees. It's a very limited choice the man's faced with. He's not like the multinational corporations or the banks. Take a look at his balance sheet in the last four years as opposed to theirs. You'll see a huge transfer of income.
Mr Colle: Thank you, Mr Flynn. I think you really are reflecting a growing frustration that goes beyond the normal tax revolt, because I think the thing that really hits home is this: Wall Street or Bay Street has got record profits, yet there are record layoffs on Main Street and record bankruptcies on Main Street, because no matter what government does, unless it shows that it's dealing with the big banks and the big corporations and monitoring and making them pay their fair share, I don't think we're ever going to get the cooperation of the small business person. I think that's one of the things I see which is something we as a committee are going to have to deal with. We can't be seen as picking on the small restaurant owner. We've got to be seen also trying to help him or her, but making sure that the big people at the top are paying their fair share and not getting a free ride.
The one thing I think you're in agreement with the grocers on is that you think it might be helpful to have the retail sales tax on alcohol, for instance, go to the wholesale level in the LCBO or the Brewers Retail. You think that might be one of the constructive things we should look at.
Mr Flynn: Absolutely, and can I just tell you why? What happens in this province is you have people churning over their licences. They'll come in for six months, keep all the PST and GST, and then go out of business, then open up down the road, all over the place, because you can get into any place nowadays for just about nothing. So what you're doing is you're allowing those people to go in and compete with the honest guy who's paying his PST and GST and drive him out of business. So if you collected at source, you'd stop that; everybody will have to pay it at source.
I would like the penalties to be stringent and onerous and unforgiving when it comes to contraband. You know what you do now? You give a 30-day suspension of a licence. That's like a cost of doing business. If a guy's caught selling contraband alcohol, he should be jailed or he should be forbidden from ever selling alcohol or being a licensee in this province again. It's a very serious crime and they should be faced with serious penalties, not a 30-day suspension.
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Mr Colle: So you're saying it's almost becoming impossible, given the economic climate, with the consumers unable to go out as often as they could; and on top of that you've got the competition with the people selling contraband and the lure of that; and then with the heavy tax burden, there's something deeply wrong with the way things are operating in small business in Ontario, like restaurants or the ones that sell alcohol.
Mr Flynn: Absolutely -- enough to drive you crazy, enough to make the words "common sense" fly out the window.
The Chair: Thank you very much.
TCMJ AUDITING SERVICES
The Chair: The final presentation today is to be made by Mr Thomas Finch. Welcome to the committee. You have provided us with a written presentation?
Mr Thomas Finch: Yes. The proposal the clerk's handing out has been already submitted to the Minister of Finance. It's based on the Provincial Auditor's report. I felt you might like the additional information if you had any questions about it.
Mr Finch: I'm Thomas Finch, president of TCMJ Auditing Service Inc, and this is my business associate, Carol Hoffman.
In the auditor's report, he makes some notes, especially on page 106, in section 3.07, on where the gap problems are. He mentions the unregistered vendors who sell taxable items but never remit the collected tax to the ministry, or vendors who do not even charge tax on the sale of taxable items. He also mentions the registered vendors who deliberately under-remit tax collected. On page 108 of his report, his recommendation is to identify the non-registrants, as well as vendors who under-remit.
I realize at this point in time, with the economic circumstances of the province, it's not feasible to employ a lot of auditors to make 100% coverage of all small businesses. What I have proposed is to contract it out. It would be quite a significant savings for the province by going with contract, about $3.9 million a year for Ontario in wage savings alone.
I propose the qualifications of the auditors be the same as basically retail sales tax now, minimum level 3 certified general accountant or certified management accountant. I've also recommended to the minister in this proposal that training and new methods be passed on to the contractor as soon as they've done their employees.
The area in the proposal is the city of Burlington, the Hamilton-Wentworth region and Niagara region. This area works out to approximately one tenth of the business population of Ontario. I chose this as a model because you could then multiply if you wanted to see what 50% would be like, or 75%; you could work from a base figure. All my statistics come from Statistics Canada, the Fraser Institute's report on the underground economy, and the Vernon's business directory of the region I chose.
I'm a little unorganized. I had 24 hours, so I do apologize for it right up front.
The report put out by the Fraser Institute says approximately 10% to 15% of businesses are underground. When you work that out to the area I've projected, and take an average of 12.5%, Ontario is losing approximately $14 million in taxes from all small businesses.
It would take approximately 13 auditors to cover that area at a cost of $970,000, and that includes wages, facilities to house them in, equipment, supplies. Tax generated from that area alone would work out to approximately $3.3 million a year. As I say, I used it as 10% of the Ontario business population, so you can multiply; if you wanted to find out what 100% would be, it would be $33 million.
The revenue would be gained two ways. We would go in and do an audit to see if they had a vendor's permit to start with, see what their sales were, see if the proper amount of taxes were collected and remitted. Any problem areas found while doing that would be automatically handed over to a provincial auditor, and they could do a more in-depth review of the file.
I propose taking the current 31 hours per audit that the provincial auditors do down to a four-hour compliance audit. I could do two a day, basically, where they're doing maybe one every three and a half days. I would be able to get more done that way.
If I haven't lost you on my jumping around -- I do apologize -- to solve the problem of the tax gap, the province is going to have to hire more auditors, because people can only do so much a year with the resources you have.
The big complaint I've heard is businessmen saying: "I'm paying my taxes. Joe down the street isn't. He's never seen an auditor in 10 years. What's going on? I've had one every four years." It's basically pick of the draw, I believe, and that's why I figured I'd put this proposal in, to say you need this many auditors to actually do it properly and this is the cost.
Mr Stewart: You say the audit you would do would be a four-hour one, in comparison to the government doing 31 hours. I have no problems with that, but what concerns me is that you suggest that if there are things you're concerned about, the government would go in and do it again. I have difficulty with that type of duplication. If it were to go into the private sector, which is what you're suggesting, why would you not do it completely?
Ms Carol Hoffman: To get the coverage the Provincial Auditor has indicated he would like, it would be a basic compliance audit where basic areas are covered, with an eye to other areas that may be more complicated: interpretation of legislation, that sort of thing. That area would be referred back to provincial employees to cover that off. It's basically to get out and get the coverage, and if anything else is indicated during that time, it would be covered off on a more in-depth basis.
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Mr Stewart: So we pay you X amount of dollars, and I'm looking in here and there's a good saving; I appreciate that. But if the government's got to go back in and do additional investigation on its own, are we not getting up near what it costs us now? My concern is duplication. If we're going to do it, do it right and do it once, without spending a whole bunch more on an additional process the government's going to have to do anyway.
Mr Finch: It would be more than just us handing a piece of paper to the Ministry of Finance saying: "There's a problem. Go forward." We would lay out the basic groundwork we have done. They would have a copy of the financial statements already in their hands, which would cut out a lot of the desk time the auditors would need to track this down. Basically, we're trying to make the actual auditors more efficient and streamlined. They'd go in where there are definite problems, but they wouldn't have to start all over again. They'd continue from where we left off. They would have the financial records up to that point, and they wouldn't have to redo that again.
Mr Stewart: To go a bit further, you're saying it takes them 31 hours now to do a complete one. I know it's difficult because you don't know the amount of investigation they may have to do, but what do you see under normal circumstances as the number of hours the province would have to spend to do an additional audit or investigation? I go back to what I said. It's going to cost us so many dollars for you folks. How many dollars more is it going to cost us to complete it? Do you have that in your study, by any chance?
Mr Finch: It's hard to say because when you get looking at businesses, they're different and complex. We could go in and do one maybe at 31 hours and come out with an assessment. Then again, I may go to his next-door neighbour and be in there for 300 hours. That's the problem when you try and average something like that, because you really don't know what you're going to find when you get inside.
I've heard a couple of people mention bars selling illegal liquor. For example, if we go in and find something like that, it's definitely going to take us a lot longer, and then we'll have to notify the appropriate agencies: "We found this problem. Maybe you would like to look at it. It'd be beneficial." That's going to take longer. It's hard to judge, because I can't tell --
Mr Stewart: I'm just concerned about the duplication aspect. That's where I'm coming from.
Ms Hoffman: There wouldn't be too much duplication in the area already covered because the Provincial Auditor would be aware of it. The saving to the government, still in the Ministry of Finance, would be to help select audits so the Provincial Auditor is doing revenue-generating audits 100% of the time rather than going on a hit-and-miss basis or whatever the method of selection current is. They would know before they went out that in a certain area there may be a problem.
Mr Colle: I guess the presentation's a way of looking at how we deal with the auditing function of our department here and how the government does the auditing. The suggestion you're making is that perhaps there should be some private sector involvement, that the government could save money. As opposed to hiring people in-house as civil servants, you're saying this kind of activity could be up for bid for entrepreneurs, people in the private sector to do this function who wouldn't have the overhead the government would have etc. You would essentially ensure that the auditor's initiatives would be done more effectively and efficiently, cheaper, and maybe in a different way by auditors in the private sector. Is that it, essentially?
Ms Hoffman: I think that basically sums it up.
Mr Colle: The saving would basically come from the shaping of the audit process that you'd do a bit differently, and second, you'd be able to get out there at a lower per-case cost than the government, it seems.
Mr Finch: Yes.
Mr Colle: Are you aware of the fact that if anything like that were initiated by the Ministry of Finance, it would probably have to go to some kind of public process where other private sector auditors or whatever it is would have an opportunity to bring forth their bid on this type of work, if that were the decision of the auditor.
Mr Finch: We're fully aware of that. By no means did I expect: "Here. It's good. It's yours. Go." It is public government and stuff like this. I'm a strong believer that it should go out to the public and should be open to the general public of this province.
Mr Colle: As you said in the beginning, it seems there's no way the auditor can avoid bringing about some of the tightening of the tax gap without bringing on more resources or more auditors out in the field.
Mr Finch: Basically, yes. I went out into the business community in the Niagara region and talked to a lot of them, and they hadn't seen an auditor in 10, 12 years. They said, "They don't come out here, and we never do see them." I'm not sure about the process of how they select their businesses to audit, whether they get complaints or whether they just pull a number out of the hat and say, "It's your turn this week," but that's what I've heard. There are places that have not been audited in over 10 years. They just don't show up.
Mr Pouliot: Thank you very kindly. I listened, with my colleagues, with interest. It's like a breath of fresh air. I think you're nice people. I do wonder, when I look at the letter to Mr Doyle -- he's your MPP?
Mr Finch: I know Mr Doyle personally from when he used to work for channel 11 in Hamilton. He's Hamilton East and I live on Hamilton Mountain.
Mr Pouliot: Okay. I look at this, and there's the prelude which is not unusual, the information contained within etc. Candidly, just for one second I reminded myself of the protocol of what the committee does, and then I said, "Why not have you two on the list, paying us the compliment of your expertise with a proposal"? You're right. If only the world was this easy, that you could come here and we'd say, "These people are fine and they come highly recommended. Here, go and do what obviously we are not totally able to do," so that the taxpayers get the return, get the money that's out there. Protocol will not let us do that as a committee. The Chair was to indicate that to you, I'm convinced.
Tell me a little, in a broadly summarized form, please, what is your experience? What kind of work do you do? What kind of client group do you serve?
Mr Finch: I'm a retired ambulance officer out on WCB with a back injury. I was in management positions for a good 12 years of that. I have worked with budgets before; I have worked out in the public, obviously. Presently, I'm enrolled in the Niagara College business administration program, taking operations management.
Ms Hoffman: I've got a bachelor of commerce from McMaster University and I've been working in the accounting profession in various capacities for the last 12 years.
The Chair: Thank you very much for appearing before the committee today and sharing some insight with us.
Mr Finch: Thank you for having us.
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The Chair: Committee members, there are a couple of items of business we should consider preliminary to next Thursday's meeting. Thursday has been set aside for consideration of a report to the House on the issue we've just been discussing, retail sales tax. We're looking for a couple of things. Are committee members satisfied that we no longer need to hear from any other presenters or witnesses, or did you feel we might have ministry staff back to follow up on anything we've learned during the course of the hearings? Should we proceed directly to consideration of the report?
Mr Colle: My only question of ministry staff, in terms of the suggestion made here today of going from the retail collection of provincial sales tax to bumping up to the wholesale area, is what implications that would have for the ministry. To me it sounds like an interesting proposal; I know it's within the Nova Scotia context. I wonder whether the Ministry of Finance has addressed that, the pitfalls of that. It sounds reasonable at first blush, but if we ask ministry staff, we might get a wholly different view of it and the problems with it. We could maybe get them to comment in writing on it. I don't know how to approach that.
The Chair: I'm in the committee members' hands. We could ask for a written submission or we could have them attend first thing Thursday morning.
Mr Pouliot: The government shall see fit, and that's great. The revenues are such that I can't help but part with Mr Colle. Our estimate was about $450 million to $500 million, so it's one heck of a lot of money. But I can't help you because I don't remember the snag, why the obvious was not done when we were at cabinet. Why didn't they say, "We'll go up one notch and we'll go right after the wholesale and then we'll get the money"? I'd like to have somebody from Finance come up. I know I would benefit to be reminded: "It sounds good, but this is the reason we can or cannot do it."
Mr Rollins: Once again, in the gasoline business, it's collected strictly by the wholesaler. It has been from conception; it's always been. You can't buy and sell a gallon of gasoline you haven't paid tax on. I can't buy it as a wholesaler unless I'm a distributor. There are always wholesalers. All those wholesalers who supply across to every place provide sales tax too. You will still have to charge the sales tax on the addition of sale. The product costs you this much here. As the gasoline cost is 50 cents a litre, I pay the tax on it. It's already paid. I sell it at 54 cents a litre. I have to pay the sales tax between the 54 cents, that difference, and that's the addition. They have to pay tax on other parts anyway, and it's the same with the alcohol. But you'd still stop that loss of the guy going in and out of business down the road.
Mr Pouliot: Quebec didn't do it either. They're in the same boat.
Mr Rollins: It's interesting. You should have those answers from those other people too.
The Chair: Then why don't we, if committee members agree, make an effort to have someone from the ministry attend on Thursday morning so we can review this. All right.
The other matter, if there are no other recommendations with respect to further information we might need, is that our researcher is looking for a bit of guidance in terms of the preparation of a draft report for our consideration. Maybe, Ms Campbell, you can tell us what you had in mind and then we can comment.
Ms Elaine Campbell: The Chair and I had a brief discussion last week as to what the committee's expectation was for my contribution next Thursday. After we discussed it for a while, it was decided that I would put together a framework for the report. My experience on previous committees has been to prepare a very basic outline at the first discussion of a report, and then prepare a draft report and bring that back to the committee, then make any alterations the committee deems necessary and come back with the final report.
The Chair suggested that rather than having just a sketchy outline, have something with a little more substance to it. I have prepared a proposed framework which is basically a paper with the presentations I've already made to committee plus a summary of what the ministry has presented to the committee. I'm also including a number of questions I would like some assistance on. I'm hoping to have the document ready for distribution on Monday so that the members will have an opportunity to look at it before the framework is discussed on Thursday.
The Chair: When I reviewed this with Ms Campbell, one of the objectives we thought would be important is to come up with something that prompts us into raising the right kinds of questions so we're not going to miss anything in terms of preparing the report. You're going to have a summary of recommendations in there, right?
Ms Campbell: What I thought I would do as a complement to the framework is prepare a summary of recommendations made by the various witnesses, and that might prompt the members to come up with some additional things they would like added to the draft report. That will be ready on Monday as well.
Mr Colle: I think that's a good starting point. It's a really good overview of what was recommended to us, and then get down to bringing it down to things that seem reasonable.
The Chair: My experience in the past is that whenever we show up without some kind of predetermined format in front of us, we're grasping in terms of where to proceed. I think this will be helpful in terms of concentrating the mind.
If there's nothing further, the committee stands adjourned until Monday morning.
The committee adjourned at 1556.