Assemblée législative de l'Ontario

1995 ANNUAL REPORT, PROVINCIAL AUDITOR
RETAIL SALES TAX

RETAIL COUNCIL OF CANADA

CANADIAN FEDERATION OF INDEPENDENT BUSINESS

CONTENTS

Tuesday 30 January 1996

1995 annual report, Provincial Auditor: Retail sales tax

Retail Council of Canada

Peter Woolford, senior vice-president

Leonard Eisen, treasurer

Canadian Federation of Independent Business

Catherine Swift, president

Judith Andrew, director, provincial policy

STANDING COMMITTEE ON PUBLIC ACCOUNTS

Chair / Président: McGuinty, Dalton (Ottawa South / -Sud L)

Vice-Chair / Vice-Président: Colle, Mike (Oakwood L)

*Agostino, Dominic (Hamilton East / -Est L)

*Beaubien, Marcel (Lambton PC)

Boushy, Dave (Sarnia PC)

*Carr, Gary (Oakville South / -Sud PC)

*Colle, Mike (Oakwood L)

*Crozier, Bruce (Essex South L)

*Fox, Gary (Prince Edward-Lennox-South Hastings / Prince Edward-Lennox-Hastings-Sud PC)

*Gilchrist, Steve (Scarborough East / -Est PC)

Hastings, John (Etobicoke-Rexdale PC)

*Martel, Shelley (Sudbury East / -Est ND)

*McGuinty, Dalton (Ottawa South / -Sud L)

*Pouliot, Gilles (Lake Nipigon / Lac-Nipigon ND)

*Skarica, Toni (Wentworth North / -Nord PC)

*Vankoughnet, Bill (Frontenac-Addington PC)

*In attendance / présents

Substitutions present / Membres remplaçants présents:

Sheehan, Frank (Lincoln PC) for Mr Hastings

Johnson, Bert (Perth PC) for Mr Hastings

Wood, Bob (London South / -Sud PC) for Mr Boushy

Spina, Joseph (Brampton North / -Nord PC) for Mr Boushy

Also taking part / Autres participants et participantes:

Erik Peters, Provincial Auditor

Clerk / Greffier: Decker, Todd

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1000 in room 151.

1995 ANNUAL REPORT, PROVINCIAL AUDITOR
RETAIL SALES TAX

The Chair (Mr Dalton McGuinty): Good morning, committee members. Welcome to the standing committee on public accounts. We're conducting hearings today into the matter of section 3.07 of the 1995 annual report of the Provincial Auditor, more specifically known as the tax gap.

RETAIL COUNCIL OF CANADA

The Chair: Our first witnesses this morning are appearing on behalf of the Retail Council of Canada. Welcome to the committee, gentlemen. Would you kindly introduce yourselves before beginning, and I'd like to let you know as well that we're going to have ample opportunity this morning to hear from you and for committee members to ask you questions. So please proceed.

Mr Peter Woolford: My name is Peter Woolford. I'm a senior vice-president of policy for Retail Council, and with me is somebody who actually knows what he's talking about, in contrast to myself, Leonard Eisen. Mr Eisen is treasurer of the Oshawa Group. He was telling me this morning that he has been in the accounting profession for some 38 years, so there's a lot of experience that I have sitting beside me this morning, and I'm grateful for that. He is the chair of Retail Council's tax committee. He's a past chair of the Canadian Tax Foundation. He has been very active as a leader in the accounting profession for many years, so he is certainly someone who brings a great deal of knowledge and expertise.

I had expected to have with me this morning, as well, an independent business representative. Unfortunately, the end of January is the year-end for many retail firms, and the person who was to join me this morning at the last minute ran into some problems and could not join us. I think the way he put it to me was that they wanted to be sure they were in compliance with the provincial tax requirements rather than showing up here to explain how they could be improved.

Thank you for inviting us to appear before the committee. It's always a pleasure to have the opportunity to present the views of the retail trade. We have well over 2,000 members in Ontario, and because of the presence in that collection of a large number of larger firms, we represent better than two thirds of all retail sales in the province. So we have a fairly representative group of members who belong to Retail Council.

I should stress, though, that the vast majority, 89%, of our members are independent merchants, people in the malls, on the street fronts and the strip malls, who have one or two stores and are trying to make an independent living.

We also include within our membership the members of the Canadian Council of Grocery Distributors, of which Leonard in his role as an employee of Oshawa Group is one. They represent all of the major grocery distributors in Canada, and they fully support the views in our submission.

As a general opening remark, I think the key point we would want to stress here is that when collection of consumption taxes, and particularly the retail sales tax, is being considered, the Ministry of Finance should look at the retailer as a partner. It is the retailer who acts as the collector for the government of this tax, and we feel that underlying that relationship there should be a recognition that this is a partner rather than, let's say, a potential offender, a potential cheater or a potential lawbreaker. If the ministry approaches this from the point of view of building a working relationship with business people who basically want to do the right thing, we feel that a more positive and a more professional relationship will result.

I should say that when I talked to our members about this, the vast majority of them said they thought that their relationship with the ministry was a fairly professional, responsible one. They feel probably that the ministry spends more time doing needless audits than it should, but there have been relatively few members who have reported to us instances where they feel they've really been attacked or harassed. They do feel, though, that the burden of auditing is substantial.

When we got the letter of invitation, the staff of the committee made it known to us that the focus of the committee was with respect to both the underground economy and the audit process, so I'd like to address each of those in turn.

I would stress first of all that legitimate retailers are hurt as much as the public purse by people who go underground for their economic activity. In fact, then the legitimate retailer feels pressure on his or her prices, on his or her margins. They face a loss of market share from product being sold outside the legitimate process, and so they suffer in the same way that the province does from a loss of revenue and all the damage that causes.

When we first appeared before, I think it was the standing committee on finance and economic affairs back in 1993, to talk about this, our principal concern was with smuggling, particularly the flourishing illegal trade in tobacco, and secondly, the informal smuggling of cross-border shopping. Out of that, we think we've identified a number of lessons for governments in terms of how they deal with the tax and audit conundrum.

Before you come to questions of how to audit more efficiently, we think there are really four key things governments need to do to ensure that the tax system is accepted by the public, and we've enumerated those in our submission.

First of all, obviously there must be broad public support for what is considered to be the appropriate size of the public sector itself. Secondly, there must be public support for the spending priorities of the government. Thirdly, the structure of the tax system itself must be perceived as being broadly fair. The previous government, for example, spent quite a bit of time on a tax fairness commission to investigate those issues. Then finally, citizens must believe that the overall burden of the taxes themselves are supportable. If those measures and those conditions exist, then within that environment you can use audit measures to enhance compliance and ensure that non-compliance is discouraged.

I'd like to turn to the audit issues themselves. First of all, we would suggest that there are very real limits to what can be done to ensure compliance. A couple of points here. I'm not entirely happy with the way we've expressed it in our submission. I'm trying to get the nature of this conundrum across to the committee.

The reality is that the vast majority of retailers, like the vast majority of citizens, are law-abiding and they want to comply with the law. The second point is that those who want to cheat, those who wilfully want to evade taxes, will take steps to do so.

The combination of those two things, a large majority who are essentially law-abiding and a very small minority who are taking efforts to hide, means that auditing has very real limits. It means that most of the audit effort, no matter how you shape it, will be spent on firms that are trying to be in compliance with the law. Equally, it will not do much to touch those who are making significant efforts to hide away from the light of exposure.

The unfortunate result of that is that the vast majority of firms will feel, to a greater or a lesser degree, that they're harassed when they're being audited and those who are wilfully avoiding their responsibilities will see relatively low danger of being caught. So there are very real limits to what you can do with auditing.

In the Provincial Auditor's report there were a number of tactics for improving the precision of auditing processes. We broadly support those and I'd like to go through a number of those here in my opening remarks.

The first tactic that the Provincial Auditor talked about was cross-referencing: cross-referencing a reporter's reports in respect of different tax bases within the provincial area and then also cross-referencing provincial records with federal records. We think these are both very good methods of identifying potential areas of non-compliance. Particularly as you go from the RST revenues to personal income tax or corporate income tax reports, there are often discrepancies in the case of firms which are trying to hide from or evade their responsibilities. With the use of good analytical tools, it should be possible for auditors to sharpen their focus on to firms where there is a higher likelihood of non-compliance.

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We think there's particularly good value or particularly good opportunities in relating the provincial records to the federal GST records. As I'm sure many members of this committee know, the Retail Council of Canada has been an endless supporter of harmonization of the provincial retail sales tax with the GST. This is just another reason why harmonization makes so much good sense, and again we would urge this committee to strongly support harmonizing the provincial sales tax with the goods and services tax.

One of the features of moving to a value added tax is that for business-to-business transactions, firms want to know how much tax they have paid. They want to pay that tax because they get it back. Once you have a system like that, there is an internal dynamic to it which encourages reporting of tax paid and tracking within the private sector itself, because they know then they can get it back. That encourages compliance, because if you know your customers are reporting how much tax they have paid to you, you as a vendor have a natural incentive, then, to report how much tax you have collected to the province or the federal government.

The other issue I'd like to talk about at a bit of length is audit coverage. This was the issue that got the greatest attention and concern of our members. Particularly large and small retailers would be very concerned if the response to concerns about compliance were simply to do more audits and to do more thorough audits. There was a great deal of concern about the burden that would place on firms and some doubts about how effective that would be.

In particular, we would take issue with the suggestion by the Provincial Auditor that there simply should be an increase in the number of audits on small firms. We do not believe that would increase compliance, and we think that would amount to an increase in the burden and the harassment that these firms would face. No audit program, no matter how extensive, is going to cover more than a very small percentage of the independent businesses in this province. That means that if I want to hide away from the province some of the revenues that I should be reporting back, I can be reasonably sure that I'm going to get away with it.

As a result, as I said earlier, what you'll have is that those who want to cheat will still feel that there's a relatively low level of danger that they will be caught, and those who are legitimately reporting their taxes will feel that they're being hit on more frequently than they are now. Again, what we would suggest is more precision, more accuracy in selecting appropriate candidates for audit and trying to identify firms where there's a higher likelihood of evasion or mistakes.

The other key point that a number of our independent members have made is, "You know, when the auditors come in, what they find is not evidence that we've been cheating or hiding but that we don't know what the rules are." This is a pretty complex piece of legislation, and we're not always aware of what the requirements are. We don't have professional auditors, professional accountants like Leonard, on staff. More than anything, what we need from the auditor who comes in is advice on how to comply. So don't come into our business and treat us like criminals; come in and teach us what we need to know so that we can comply in the future. That's an approach that we would very strongly recommend to the ministry, that if an auditor gets into a company and realizes that there are some weaknesses in the way the firm is reporting its revenues, reporting its taxes, take the time to teach them how to do it right rather than seeing this as an opportunity simply to claw money out of the firm.

The principal concern, then, of our large members is that they will simply be viewed as milch cows, that this is a place where you can go and get your quota up for the month or a place where you can simply claw out more revenue for the province.

The reality is that most large firms have extensive internal checks in place. They hire professionals, whose professional reputation is on the line with the reports they make. The likelihood of cheating or deliberate tax evasion in those larger firms is very small. What you get into is a situation where professionals will disagree on the detailed interpretations of the law and of detailed definitions of what constitutes a taxable sale and what doesn't. Those are issues on which professionals can disagree legitimately. Again, it's not an attempt to evade responsibility or to hide revenues from the auditor; it's a question of differences in professional interpretation.

If the ministry wants to have a partnership relationship with those larger firms, it should treat that as a partnership rather than simply a place to go hunting for cash. A repeated concern from our larger members was that, particularly if auditors face a quota that they have to reach every month, they will then be inclined to go for the cash rather than for the crooks. That's something we think the ministry needs to think about very carefully as it sets up its audit processes.

Again, we like the suggestion in the auditor's report that there be more precision in this area, that criteria be developed for identifying appropriate firms for audit in this area, and we would be happy to work with the government to try and identify how it could go about doing that.

In conclusion, we very much share the concerns that the Provincial Auditor identified in his report because we think that many legitimate retailers are as much concerned about these problems as the province is. We would emphasize that a partnership approach stressing training, education, information exchange is a more fruitful way to go than catching bad guys, because we don't think you can ever be effective at that. Finally, we would certainly express our strong opposition to just a general, unfocused increase in an audit effort. We think that would do more simply to harass independent businesses and medium-sized and large firms than it would do to discourage noncompliance by those who really want to.

Mr Chairman, those are my opening remarks. Both Leonard and I would be happy to answer any questions or comments from the committee.

The Chair: Thank you, gentlemen. Committee members, as I indicated at the outset, we have ample time for questions. I'm going to propose that we begin with the government side with a period of 10 minutes, and then we'll proceed in rotation after that. Mr Skarica.

Mr Toni Skarica (Wentworth North): Looking at this report of compliance costs for the GST and PST, one of the things that disturbed me is that there's never been a study of how much it costs to comply. Places like Bermuda and Hong Kong have no sales tax. When the GST came out, I noticed there was an explosion in the law library of those reports from the reporting services, and when you open those up, there are accountants and lawyers ad nauseam who are preparing those things and are out there doing that. Is there any idea of how much it costs Canadian business to comply with these complex laws?

Mr Woolford: I don't have any numbers for the retail trade as a whole. Leonard, do you have any sense of what it would cost your firm? Oshawa Group has about $6.5 billion in retail sales a year, so that would give you at least an insight into what it costs one firm.

Mr Leonard Eisen: In answer to this specific question, we've been unable to really come up with a hard number. The Canadian Tax Foundation has attempted on numerous occasions to come up with studies dealing with the costs of compliance. There was a study done a number of years ago which talked about tax compliance in its totality but not focused on retail sales taxes or GST. We have attempted within our own organization to see if we can come up with some numbers and, regrettably, anything we've come up with has been so soft that it's really not been able to be focused or be meaningful.

Mr Skarica: How about directing it another way then? What kind of a competitive disadvantage would it put you in vis-à-vis firms from the non-tax places like Bermuda and Hong Kong?

Mr Eisen: Again, you're really not competing, in a sense, if you're looking at the domestic retail market. If someone decides to go on a vacation, you're competing with the world, essentially, in any approach to products.

In our domestic market what you're really competing with, if you will, are those jurisdictions where the public perceives value or markets to be less, going back a year or two ago where there was a fair bit of cross-border shopping. You also have to be sensitized to your own internal cross-border shopping, whether it be other provinces that border on Ontario where there may be products moving across the border which may not have tax charged in either jurisdiction -- internal smuggling, if you will.

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Mr Skarica: On that point, we've had a number of US retailers like Wal-Mart and so on come into the country. Historically, Canadian banks have gone worldwide, but I don't see Canadian retailers going outside the country. Retailers are coming in here. Does our tax regime have anything to do with that?

Mr Eisen: I think there are a number of issues. One of them, of course, is the size of the organizations and the ability to source product, if you use Wal-Mart as an example. They're sourcing product both domestically and worldwide and just their purchasing power gives them a certain level.

Unfortunately, many retailers have gone into the United States and have not fared well in competing in that environment. So, while you speak the same language, you think it's the same industry, each market is unique unto itself and the understanding of that uniqueness is either a strength or weakness as the case may be.

Mr Woolford: US firms have a couple of other advantages too. One is that even before they arrived in the Canadian market, the dominance of the US market and the advertising machine that goes with that just washes over into Canada. Canadians read American magazines, they watch American television, they listen to American radio, which have advertisements in them for American retailers and American products, initially aimed at the American market but washing over into Canada. So, in a sense, their market entry into Canada is prepared in advance. Because we are so much smaller than they are and our reach on our advertising into the States is much narrower, Canadian retailers don't go in with that kind of prepared market.

The other factor that Leonard alluded to, of course, is just the raw size of many of the American firms coming north. The Canadian market is a relatively small extension for them, whereas for a Canadian firm to go into the US market is a huge leap. So the difference in the sizes of the two countries does make a difference as well.

Mr Skarica: On the balance sheet, just from that last question, do you have any idea what proportion of your expenses would be attributed to tax compliance, accounting fees, legal fees and that type of thing?

Mr Eisen: Again it falls within the earlier comment I made that in the case of audit fees, to use one example, the audits are being done for so many different purposes. Particularly where it's a shareholder audit for the purpose of rendering an opinion, it's not specifically focused on that area.

I should point out, just to give you an idea of the concerns that exist, there has been an industry that has developed on contingency audits where firms will come in to not exclusively retailers but any business environment, and on the basis of their expertise, where a firm doesn't have it, will share in recoveries because firms have not been able to comply -- they may have overpaid -- and share in the recoveries.

I should point out just one comment, by way of size. There's been a lot of hype about Wal-Mart coming into this country, and other large-box retailers. As you know, Wal-Mart has a very significant large position in the US. They're really recognized as general merchandise, but their food segment, by the way, happens to be in the vicinity of US$16 billion, just to give you an idea, and this is not a major focus on their part.

Mr Woolford: Could I just pick up on your question a bit? It just occurred to me, I was talking to one of our members recently. We were trying to get a hold of what the cost just of auditing is for the private sector. She reminded me that one way to get at this would be to look at the cost to the province of auditing. She estimated that for large firms, they probably used two people for every auditor who came in, just feeding them information, giving them responses, preparing material for them, that sort of thing. She thought if you looked at the total provincial government expenditures just on audit, you'd have at least twice that in the private sector simply responding to that audit pressure or that request for information.

What it doesn't capture, of course, is the work and the cost the firm goes through to produce the results for the province in the first case. But just on audit, we were kind of speculating and she speculated that it might be as much as twice as much as what the province itself spends to audit. So that's one professional's very rough benchmark of what the cost of auditing is.

Mr Skarica: So roughly, in dollar terms, what would that be?

Mr Woolford: I'm not sure. Maybe Mr Peters knows how much the province spends on the audit effort every year, but her guess was it might be twice that in terms of private sector costs.

Mr Skarica: I'm sure he'll tell us it's a bargain.

Mr Erik Peters: If I may, probably on a tax audit there would be less involvement of management than would be on other audits like a shareholders' audit or the audits for value for money or compliance in other areas. So I'm not surprised at the ratio of two to one. It may be slightly high but it's probably in the ballpark.

If I may comment a little bit further on this, one of the issues we did raise in our report, and I'm glad, Mr Woolford, that you picked up on this, is that audit effort has to be aimed. I would like to get away and the ministry is certainly getting away from the point of having blanket audit coverage. What we are encouraging is that they install a management information system that allows them to target their audits where they have the most payback. In other words, they don't harass the good guy and they deal more effectively with the actual evader, which is hurting the retail trade just as much as it's hurting the taxpayer in the pocketbook. I'd just leave it with that comment.

Mr Woolford: I really wish that our independent retailer could have come this morning. He had exactly that case. This firm was audited, I think it was two years ago, and reported that the auditor arrived and was very professional. They had a good working relationship. There were no complaints about the behaviour of the audit other than that this is a small firm with four stores.

The auditor showed up on the first day, went through the company's books over the course of that day and at the end of it, commented to the owner that he could see already that they were basically clean, that he wasn't going to find much of anything. But he didn't stop there. He was there for another three days doing a series of tests after tests after tests, each one of which showed no errors, no mistakes, no evidence of any non-compliance. But he stayed there rigorously doing test after test for four full days, at the end of which the province got zero revenue, and that firm's financial person had spent four full days working with the auditor rather than working on the affairs of the company: a waste of time for the province, a waste of time for the firm.

As Leonard suggested to me beforehand, maybe the thing to do is to start with what he called a desk audit, where you look at the information that the firm has submitted initially to make a go/no-go decision even before visiting the company and then go through some kind of tree of decisions to determine early on whether it's worthwhile proceeding with an audit in any depth in that firm. Have you got some additional, more precise, advice, Leonard?

Mr Eisen: Not specifically, other than if you go to an MIS system, or a management information system, what is the cutoff point of compliance? Are we looking at 100%, 90%, 60%? Obviously most taxpayers who are complying, I would suggest, are probably somewhere in the 90% plus category. What I mean by that is that nobody is absolutely perfect and if they're too perfect, I suspect they're probably hiding something. But honest errors do creep in, mistakes are made, people change. Where you think you have somebody controlling issues, a new person comes in, maybe inadequately trained or has forgotten, and things slip through. But, generally speaking, if there is a level of expertise and acceptance, perhaps effort should then be devoted elsewhere, and this would be of course subject to further investigation from time to time.

Mr Bruce Crozier (Essex South): I've always been interested in this debate of the cost to a business of collecting and remitting tax. I'm sure, because there is such a wide variety of business, that there are many anecdotal stories of the likes of which you've given, where the auditor may have appeared to spend too much time and there are perhaps others where they didn't spend enough time.

I was in the retail business for 22 years, in a retail lumber business that had three stores, so the sales were in the numbers of millions of dollars. I found, in my own experience, if you have a system of recording and accounting for the tax, the compliance time spent was really very little. I would suggest at the end of the month, when I reconciled the retail sales tax and sent it in, it might take a matter of several hours, certainly less than a day.

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In those 22 years we were audited twice. As a matter of fact, I think the auditor did find some small amount, because in the retail lumber business, with all due respect, you have, for example, the farm community who feel that they shouldn't really be charged tax. So it wasn't unusual to have a farm operator who would basically insist on not paying the tax and, rather than argue with them, we didn't collect it. I think it was originally in the days where it was the responsibility of the payor for the tax. That's since changed, I believe, has it not? The retailer is responsible for remitting the tax?

Mr Peters: The tax they collected, yes.

Mr Crozier: So I just suggest, and maybe you'd like to comment further, that the cost of collecting and remitting the tax may be exaggerated, because it's an easy point to attack and say, "This is something I wouldn't have to do, therefore it's costing me money." My experience wasn't the same as the one you mentioned, where this person had to spend three days with the auditor. We gave them the information. Do you think there might be some exaggeration because tax is an easy thing to attack?

Mr Eisen: Mr Crozier, if I may, I don't believe the issue is so much the compliance of preparation of monthly returns and remitting that. I think when you look at the broader aspect of compliance, it covers the whole spectrum, from setting up your systems to people managing those systems to people meeting with auditors and issues that flow from an audit etc. If you narrow the definition of compliance strictly to the preparation of your monthly returns, I quite agree, it's not an onerous task, but it's the broader spectrum of how you define that term.

Mr Woolford: Can I pick up on that as well a bit? One of the unique features of retailing is that the people who go into it tend to be people who are strong on people skills, strong on sales skills, know the product area very well. You don't find a lot of strongly financially trained people going into retailing. It's not an occupation that attracts them.

As a result, many independent retail entrepreneurs are not as strong on the accounting and reporting side of their business as perhaps they should be. In contrast, let's say, with other small businesses, where you may find a higher scientific or professional background to people who are running still fairly small businesses, in retail you tend to get people who simply know a lot about this product or that product, and that is their talent, that's what makes their business successful, rather than good analytical or accounting skills.

The second thing we found is that, while computers have been around now for quite a while and the cost of them is relatively low, a large number of our independent retailers still are not using electronic point-of-sale systems. They're still back either in electromechanical cash registers or actually using pencil and paper. Only 42% of our independent members are electronic at this point, which I was very surprised at. I would have thought, particularly with the advent of the GST, that a lot of independent retailers would have finally had the incentive to go electronic. We were quite surprised when we did this research last year and found out that only 42% of our independent members use an electronic point of sale. What that means then is that they're still dealing with a lot of pencil-and-paper work, and that's where the errors start to creep in.

I think your point's well taken that, when you go to a good management information system, some of that tends to fall away, on the monthly reporting at least, but many of our members have not yet either had the time or the money or the inclination to make that switch.

Mr Crozier: That's interesting and I'm glad you brought that up because I am surprised.

Mr Woolford: Yes, it was a real surprise to us as well.

Mr Crozier: In this day and age you would think that it would be much more computerized, mechanized. Certainly, depending again on the size of the business, the cost of that equipment obviously is one of the reasons why they probably don't have it, because in a retail business those kinds of costs you try to keep to a minimum. That's a good point that I certainly wasn't aware of.

Mr Eisen: If I may, Mr Chairman, I should also point out that a lot of the electronics in point-of-sale equipment relies upon the capability of scanning. Scanning is those funny little bar codes that you see on products. Some of it is scanned over a flatbed, some of it is hand-held. Depending on the nature of the retail business, many of these products come in from offshore and therefore there has not been a standardized bar code that is being used on every product worldwide that is universal. Depending on where you're sourcing your product, it may have to be manually affixed or may come in without any identification, and therefore helps add to the complexity of recording your sale.

Mr Crozier: We'll perhaps have more questions, as I say, but I'll pass on right now.

Mr Gilles Pouliot (Lake Nipigon): Thank you for your time. It's not the first time that you've appeared in front of not only this committee but the committees of the Legislative Assembly, and no surprise with more than two thirds of 65, as you have testified, or more of retail that committees would be well-advised to listen and to listen intently.

I came here today with the hope that tax fairness, that you would give yourself that boldness, would be addressed just as much as tax collection and tax audit, which in my mind are two different subjects or they can be "harmonized" only in this context and they can also be separated.

I would appreciate your comment vis-à-vis an endeavour and under the umbrella of ongoing progress, computerization, a better database, more information, trying to go through the complexities, educate, educate and again educate, and also the reality that governments are being encouraged, if not to run some sectors of government, some service, like a business, certainly at least to streamline.

Sometimes, as you try to improve, let's say on the audit side, you need more, some people would say, audit police, if you wish. On the data side, you must be more sophisticated. So you have some projects; in fact you will be most familiar, last year we endeavoured to have when we were the government, not last year but in 1994, a project, Project Fair Share. Yet, as we look to the immediate future, we see that the Ministry of Finance, like others, will have to fight for disposable resources because governments are cutting back, not only this administration but all over.

What is your comment when you look at the GST and the retail sales tax? Studies indicate that the GST is far more complex, that it has more layers, more levels, and that on the other hand the retail sales tax when compared with the GST is quite simple. Ontario governments to this date have refused to harmonize both for many reasons, one of them that it's not seen as revenue-neutral. Another one is that when you look at comparisons, you see that others have only partially harmonized their GST and respective provincial sales taxes. Do you feel that harmonization would make the system less complex, and if so, how so?

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Mr Woolford: I think we would argue very strongly that shifting to a goods and services type of tax and harmonizing it with the federal government is by far and away the best way to go.

First of all, it cuts very substantially the level of duplication and double-auditing, double-reporting, double administration that goes on now. What we have operating in every retail store in Ontario and Canada is two sets of tax calculations that the retailer must make. The basis for those taxes are different. The systems on which they operate are different. The reporting systems are different and every year two sets of auditors come in. So that alone, just moving to a single system, is a very substantial saving in time and effort for both the public sector and the private sector.

It is in the nature of a value added tax that it is more complex to operate, but in return for that, what you get is a fairer tax; that is, you do not get either tax cascading or double-taxing, which is one of the key problems with a retail sales type of tax.

I think about a third of the provincial retail sales tax that is collected is levied on firms. They may not get that tax back, so they simply build it into their price. So when a retail-type product is manufactured in Canada, a roll of paper towels, that manufacturer includes in the price of that roll of paper towels some provincial sales tax. That's built into the price of the paper towel. It is sold to a wholesaler who has paid some retail sales tax in respect of the equipment that he or she has bought. That's built into the price of the paper towel. It's passed on to the retail firm who have paid retail sales tax on some of the equipment that they use to operate their business. That's built into their margins. So the roll of paper towels that you buy at 99 cents already has a chunk of retail sales tax in it, which the company has not been able to get back.

Then on top of that, the 8% provincial sales tax is charged again. So you have tax on top of tax on top of tax and it starts to add up and it is not seen.

The second problem with a retail sales type of tax is that it's hard to extend it into the area of services. When you're dealing with hard products, like most retail products, it's relatively easy to identify the products that you want to cover and to ensure that those are essentially consumer-oriented products, even with the problems that I've just noted.

When you move into services, it's much harder to distinguish between services that are typically business services and those which are typically consumer-type services. So that problem of double-taxing and tax cascading gets even worse. Over time, as our economy moves increasingly into a service economy, the base for that retail sales type of tax gets smaller and smaller.

So while there is complexity in a value-added-type tax, it has some merits in terms of fairness and in terms of allowing the government to levy that tax on a broader range of transactions. We feel that is the right way to go.

Do you want to add any additional points, Leonard?

Mr Eisen: I should point out that regardless of what is said, there is only one taxpayer and that is the ultimate consumer of the products or services. As you continually attack that consumer, the ability to pay the tax and the appearance of whether or not that consumer is getting value for the tax dollar that is being collected is what's driving this part of the underground economy.

Mr Pouliot: With respect, we hear mention nowadays, in fact some administrations, some regimes, have adopted the "one taxpayer" as one of their slogans and yet they never underestimate the capacity and the ability of that one taxpayer.

You've mentioned VAT. When you mention VAT, would you favour that the tax be hidden, for instance? You represent retailers. For instance, if I have a cup of coffee here and it becomes taxable, if the tax is in the coffee, the coffee would tend to taste better, would it not? As retailers, candidly, would you like to see the tax hidden or would you like that quote again, one taxpayer to be able to see in front of her very eyes --

Mr Mike Colle (Oakwood): Put it on the sugar.

Mr Pouliot: That's right.

Mr Woolford: I'll let Leonard talk on behalf of Oshawa Group. This has been a very lively debate inside the retail trade, in fact, with each individual member having arguments on both sides. We just have not been able to get our members sufficiently in one camp or in the other to be able to give you an answer that represents the consensus view of the trade.

Let me give you some of the considerations. First and foremost, a lot of our members say one of the key elements in focusing the attention of Canadians on the tax burden that they pay is the exposure at the point of sale of the GST. They say that crystallized for Canadians the burden of government taxation and caused them to understand the weight they were carrying. As people who work with the public every day, they feel that's been a very beneficial insight for the public to have, for them to suddenly start to understand the burden of tax that they're paying.

On the other hand they say, "The customer shows up at the point of sale and we add 15% on and he or she is embarrassed because that person finds out there's not enough money in their pocket or in their purse to pay for the product." They get cross at the sales clerk for having to collect the tax, they argue whether or not they should pay tax on this. It's a downer at the sale. Merchants of high-value products will say, "I'll have a customer come in to buy an $800 sofa and then realize that when you add the tax on it's $1,000, and they say, `I'm not paying $1,000 for that sofa, it's not worth it.'" That's the negative side.

Merchants in border communities say: "If you add the tax in and hide it, our Canadian prices will look higher compared to US prices. So we want it broken out so that we can advertise paper towels or kids' shoes at this price rather than at the tax-included price, because that's how the customer looks at it, Canada-US."

So there are arguments on both sides and it's been very difficult for us to get a clear consensus within the trade or indeed even among single members as to what they would prefer. Leonard, I know that Oshawa Group has gone through exactly this kind of debate as well.

Mr Eisen: We have ongoing debate even within our own executive group. The difficulty you're experiencing is, as Peter has said, how are you perceived in border communities? Unless one is to accept an integrated system and it is uniform across the country, then I think it also has to be included across the country, to this extent, that if you start getting into prices extra as compared to price included, retailers being competitive animals are going to see if they can get a march on their competition, "I'll start advertising prices out so my price looks lower than my competitors." Unfortunately, I don't have a simple answer for that very complex problem.

I should just point out one other issue that perhaps is often overlooked. When you compare the taxing regimes of other countries, and we looked at a European model, they're dealing with a unitary government as compared to the complexities that we have with provincial jurisdictions and 10 taxing jurisdictions. They only have one, and therefore it becomes much simpler to deal with the issues.

Mr Woolford: Can I give you one more example? One of our members who is no longer with us kindly volunteered to give us some experience in this area. When the shift to the GST was made, Woolco did a lot of research with its customers. Woolco was a set of stores that focused on lower-income women. They did a lot of customer research to find out whether those customers wanted the tax included in the price or exposed at the point of sale. Their customers said: "You know, I really kind of scratch from payday to payday, and I find it embarrassing to show up at the point of sale and find out I haven't got enough money in my purse to pay for the things that I've put in my shopping basket. So I really would like it included in the price."

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On that basis, they decided that they would include the GST in the price. They were the only firm in Canada who did so, and they got killed. They just got slaughtered, because their prices appeared to their customers to be higher than everybody else's. And within a matter of a few weeks, they were being forced to switch over. They started to change their ads. They would say: "This is our before-tax price. This is the price you'll see on the sticker." It didn't work. The customer focused on that larger price and said: "Oh, Woolco's more expensive. I'll shop somewhere else."

So the competitive realities that Leonard is talking about are very substantial, and customers react to that in an immediate and very tangible way.

Mr Steve Gilchrist (Scarborough East): As a member of the council for many years before taking on this career, I see we're getting our dues' worth --

Mr Woolford: I hope you've kept your membership up.

Mr Gilchrist: -- in your presentation here today. I'll try not to have a conflict here.

Actually, in fact, it's interesting that the discussion has revolved primarily around the question of audits, because our business, a Canadian Tire store, had two audits over our years, and despite the fact that we had Canada's most sophisticated point-of-sale system, it still took a week, at considerable expense, and just the sheer volume of business. In fact, I think contrary to my colleague's experience, the volume of business was what drove the complexity, and what almost ensured would not be a simple matter for the auditor to come in, oversee our original submissions and sign off. And so I can relate to your colleague who wasn't able to make it here today.

You've made a number of comments about how you thought it would be inappropriate for the government to simply extend, in general terms, the audit regime. I guess I've watched over the years the proliferation of flea markets and other retail enterprises, which I would suspect are not, by and large, members of the Retail Council, and I think would tell me something else. That fact would add to my original suspicion that these are probably not, by and large, individuals who are likely to be in compliance of most, if not all, of the laws.

I'm wondering whether you would have any specific suggestions to the government on how, instead of a general expansion in audits, we better target the resources of the government to go after, as you say, the bad guys instead of the good guys.

Mr Woolford: I think in Mr Peters's report, he identified a number of ways of sharpening that focus. Certainly one is to go after non-registered sellers, which would be typically the kind of operators who appear at flea markets.

I'll give you just a by-blow from our sister association in the province of Quebec. They were concerned about flea markets as well, a couple of years ago now. For a while in that province, sellers at a flea market were exempt from collecting provincial sales tax, and they were allowed to be open on Sunday, when legitimate merchants in the province couldn't be open; so they were pretty unhappy about this. Then they found out, as they did some research, that in Quebec at least, a large amount of the merchandise that was being offered for sale at the flea markets in fact had been stolen from retail stores. They were a little unhappy about that. They said, "These folks come in, they steal from us, and then they get to sell when we're closed, and they don't even report tax on it." So they had a few concerns.

There was a certain alliance in interests between the Quebec Ministry of Revenue and the retail trade. So, yes, I think that what you do want to do, first of all, is focus on non-registered sellers, because in many cases they are less formally organized. They are not as professionally trained, as thoroughly knowledgeable about the requirements of the act. I'm not saying they're wilful evaders, but that opportunity for education and information is that much higher, so that's clearly a process Mr Peters has identified that we would support.

Secondly, I think within the small business community, there are probably ratios, typical industry standards for a typical ladies clothing store, a typical drug store, a typical lumber yard that when an auditor goes through in what Leonard calls a desk audit you can see whether this firm is within the ballpark. Do their sales look normal? Do their returns look within the ballpark? How does that line up with the corporate income tax return or the individual's personal income tax return? Is there evidence that there's something going on there? Again, you can narrow that for firms that have registered for PST collection purposes.

Equally, within the larger firms there are probably ways that the focus can be sharpened on to particular areas within the company that are problematic, areas where problems are more likely to appear. Again, the focus of the auditor can be directed to areas where there is scope for education, for sorting out what the appropriate interpretations are. That means working smarter rather than working more.

Mr Gilchrist: One other question. I appreciate that you appear to have a very solid position on the harmonization of the GST and PST.

Mr Woolford: We sure do. I sure hope your government will carry it out.

Mr Gilchrist: As a previous retailer, I can certainly agree that, if nothing else, the elimination of one entire set of procedures to have our office staff go through would have meant dramatic savings.

I address these comments to Mr Eisen, who does deal across Canada. When we talk about the complexity of dealing in the different provinces, many of the provinces continue to pay a small stipend to retailers to be tax collectors, in effect. I'm wondering whether if in exchange for the greater efficiencies that would be brought by harmonization there would be an opportunity to effect some savings for the government, and some procedural savings as well, because there are audits of that portion of the process as well, to no longer pay for that small stipend or honorarium for doing your tax remittance accurately.

Mr Eisen: I would say most retailers will try to do their remittances accurately, regardless of the stipend or not. In many of the smaller firms, while the stipend may not be a significant amount, any amount when you're struggling in a competitive environment helps defray a little bit of the overhead. I would not be so bold to suggest on behalf of certainly our franchisees that it be done away with. I think the ability to focus is more important. While every bit helps when you're in a difficult economy, I think the stipend, by and of itself, is not what drives the industry.

The need for understanding, the need to be able to take some of these smaller organizations that do not have the staff, where you have a husband and wife trying to make ends meet, where certainly in the food industry the wife may be the head cashier and the owner is the general manager, the butcher, the baker and whatever else, becomes a very complex situation. After putting in a 14- or 18-hour day, the last thing that crosses his mind is completing the appropriate tax return and getting it out quickly and on time.

Mr Gilchrist: I want to pass over the rest of my time to Mr Beaubien, but I would just like to get a simple answer from you, though. Do you think the savings that they would achieve by being able to eliminate, for example, the complete RST process would be greater than what they're currently receiving in terms of the stipend in most firms?

Mr Eisen: In my opinion, yes.

Mr Woolford: I would agree with that and de facto, if we went to a GST-type system. Under the GST rules today, merchants don't get any compensation for it. That was part of what was traded away when they brought the rate down. So I think if you made that shift to the GST system, the compensation that merchants get today would probably fall away to the side. Our members weren't happy when that was given up under the GST negotiations but, quite frankly, I think a lot of them accepted that as part of the process of the shift and I think you'd find that even the independent merchant for whom that few hundred dollars is meaningful would agree that it's better to have a cleaner, simple, single system than to get paid for running two competing systems.

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Mr Marcel Beaubien (Lambton): I do agree that there is one taxpayer. We keep talking about costs, fairness, avoidance, complexity, compliance, harmonization related to taxes. There seems to be an awful lot of discussion, not only today but in the past and I'm sure there will be in the future.

I'll make my point very quickly. Gentlemen, do you have any suggestion how the government could obtain its revenue through another means? We're continually discussing the fairness, the cost of taxation, whether it's federal, provincial, GST or retail sales tax. Why is it that we keep discussing it? Because there seems to be an awful lot of problems within the system. Do you have any suggestion of another way that could provide revenues for the government?

Mr Woolford: I think, as your party has pointed out so vigorously, Canadian governments have identified just about everything that can be taxed right now. I don't think there are any tax fields that are left unplowed, are there, Leonard?

Mr Eisen: I can't think of any.

Mr Woolford: I sure don't want to suggest any new taxes. My sense is that a consumption tax, as much as it hits the retail trade, is still a relatively good way of raising revenues for public purposes. The personal income taxes levied in this country now are just about as high as they possibly can get. There is no room for additional growth there whatsoever. Equally, on the corporate side, given the requirement for firms to be competitive worldwide, the scope for increasing those taxes doesn't exist. If you want to reduce consumption taxes, it's hard to know where that revenue would come from. For that reason alone, for the foreseeable future I think we're going to see governments collecting a consumption tax.

The other consideration, and in a sense I'm arguing against the interests of the retail trade here, is that a consumption tax is a relatively good way of collecting taxes because it does not affect individuals' decisions on investment or saving. A consumption tax goes on my consumption, not on my savings or my investment. Those are things that Canada needs very much right now. We need to strengthen the productivity and competitiveness of our economy and that requires investment dollars; it requires individuals to save.

Second, a consumption tax is something that I volunteer to pay when I buy something; if I don't want to pay a consumption tax, I don't buy the product. In that sense it's voluntary, in a way that it's not voluntary for me to pay a tax on my income.

Those are reasons why a consumption tax is better in some respects than an income tax on individuals or income tax on corporations. I hate to say it, because we represent the retail trade, who collect a great deal of sales tax and find that it discourages consumption, but at the very highest level of appropriate balance between taxation instruments, we don't have any choice, and second, it is a relatively fair way of collecting a significant chunk of revenue for the government.

Mr Dominic Agostino (Hamilton East): I apologize for being a few minutes late, but I had a chance to review your brief. I'll just touch a little on where you just finished off, on the consumption tax. It wasn't a question I was going to ask, but your comments led me to that.

You believe in some ways it is fairer than an income tax provision. What is your view, though, on a choice between an income tax that is based on people's earnings and ability to pay and an across-the-board consumption tax with no consideration for ability to pay, particularly for necessary items that people have to purchase?

Mr Woolford: First of all, that's why governments have exempted many products from certain consumption taxes. Second, that's why they have a blend of both income taxes and consumption taxes. Third, we have seen at the federal level, for example, that they have put in place a GST credit, payable in advance, to account for the burden of that tax on lower-income taxpayers. We support all those design features.

Mr Agostino: The concern I have, obviously, is that once you open up the door, it's always up to government to decide which items are "necessary," and that ultimately is a judgement based on the political ideology of the government of the day, whatever that government might be; it would determine some things to be necessary for people while another government may not. I think there's always that danger, and a real inherent unfairness in a consumption tax is that it takes very little consideration of ability to pay.

Mr Woolford: In theory, that's the case, but as you look across Canada, as you look across the United States, there has emerged a remarkable consensus on what should be taxed and what shouldn't be taxed. The differences at the margin drive Leonard crazy. He can talk very feelingly about six muffins versus five muffins, a 125-millilitre tub of yogurt versus -- Leonard used to have shiny dark hair before these things came in and I used to have a whole head of hair.

The differences between different administrations with different political stripes are relatively few. In fact, it's the smallness that drives many of our members crazy. It's things like products that are questionable about whether they're food or a snack, and there are a few other goods that are on the margin: books, feminine hygiene products, bicycles, other reading materials. The margins around which governments disagree are very small, so there is a broad public consensus in Canada as to what is necessary and what is not necessary.

Mr Agostino: We have Crime Stoppers, we have other public service programs in place; a welfare snitch line. Our concern is not the vast majority of honest retailers but the minority of individuals who are flouting the tax system and the tax laws in Ontario, as would be the case with most other government-type abuse. Would your organization support a system whereby there was a complaint line set up, highly visible, highly publicized, similar to the welfare fraud snitch line, that would allow people to call in and complain on retailers or individuals who are evading paying sales tax in Ontario?

Mr Woolford: I don't have any trouble with that. The concern would be that as a competitor, I might use that as a way of harassing one of my other competitors. Simply a phone call shouldn't trigger the whole weight of the ministry to come down on a firm. That might be a signal to the ministry to do the kind of desk audit that Leonard talked about earlier, to see whether there is any factual evidence to support this expression of concern from the public.

Mr Agostino: But in general, with provisions of some common sense and responsibility in those types of investigations, you would support that type of setup?

Mr Woolford: What's your sense, Leonard?

Mr Eisen: Speaking personally, I have difficulty with those snitch lines, for the various reasons that Peter has outlined. But more important, it gives the impression, in my opinion, that the whole world is cheating, yet you're going after a relatively minor number of people. I'm not referring to the amounts as being minor, but the number of people going out of their way to be fraudulent. Speaking personally, I have a great deal of difficulty with that. There are other means. I still have faith in society that we have not gotten to that point that we have to turn and snitch on our neighbours. We found that took place in Fascist Germany for many years, where if you didn't toe the party line, a call would go out and before long you'd be visited by the SS. I have difficulty with that.

Mr Agostino: My concern is the consistency. Many of the concerns this gentleman just shared I have as well. It just becomes a question of consistency. If it's acceptable in one sector, is it acceptable in other sectors of society as well? If it's acceptable to have snitch lines for welfare, is it acceptable to have snitch lines for business fraud? That's a question I throw out to the government members.

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Mr Woolford: Can I follow up on that? I wouldn't want to leave the committee with the sense that, as an organization, the Retail Council supports a snitch line. I don't think we would oppose it. I think we have the concerns that Leonard has raised.

The other reality is that someone who sets out to cheat is going to hide it, whether they are a business, an individual, whatever. Entirely apart from the other issues that Leonard quite rightly has raised, this is a question of the efficacy of snitch lines, whether they do tell the government, the auditor, anything that is helpful. If I'm cheating on my taxes, if I'm misrepresenting my personal economic circumstances, I'm going to do what I can to hide the reality from people; I'm going to keep very poor books, I'm going to hide my true cash away somewhere, I'm going to operate in a way that makes it very difficult for anybody, including the auditor, to know what the true state of my affairs is.

For the moral reasons that Leonard has raised, there are some questions around it. Practically, I'm not sure it will give you very much. I don't think we would be opposed to it in principle, but I'm not sure it would do very much for you.

Mr Eisen: I should point out that anybody who has an issue can call the Department of National Revenue now. It may not be a dedicated line, but there are people prepared to take down information and follow up, so the lines of communication do exist.

I should also point out, dealing with the consumption tax, that the tax does not differentiate between the wealthy and the poor. If you buy a particular product and it's subject to tax, both pay it. But as a matter of tax policy design and policy of government, various incentives and various credits can be designed, whether it be through the income tax system or otherwise, such as the GST at the federal level, so that certain underprivileged members of our society can be brought back to some bases of equality. At one end you are collecting and charging tax, but I think you get a better measure of your assistance costs through the tax system by having a specific income refund, if you will. There becomes a refundable component; therefore, I think you get a better measure and you're not melding the collection with the rebate.

Mr Crozier: Gentlemen, I'd like your opinion on something, since you have no, I suspect, political axe to grind from a practical standpoint in your experience with the buying public. We're talking here about a consumption tax. You've made comments that people will come to the cash register and when the tax is added on they find the price is too high and they may back off. You've mentioned that the consumption tax is voluntary; also that it's a tax that doesn't differentiate between the wealthy and the poor. I'm going to throw this out: Perhaps if there were less tax charged, there would be less avoidance; in other words, the more it becomes beneficial, the more you're apt to try and avoid the tax.

Right now in the province we collect about $9 billion a year through the provincial sales tax. Although our points of view differ, I suggest that much of what is being done today by way of the finances of the province is being driven by a tax cut to what I would call the wealthy as opposed to the poor, notwithstanding the fact that the government is even going to borrow the money to do that.

If we reduced the retail sales tax to 4%, it would give back to the taxpayer approximately the same amount the government is suggesting we give to those who are better off, yet it would spread it across everyone who makes a purchase in this province. The amount of tax collected provincially through the sales tax would be less, therefore perhaps the avoidance would be less, and perhaps we would even have to do less auditing because there would be less money involved. Would you have any comment on that?

Mr Eisen: Mr Crozier, I believe that comes back to the comment I made a few moments ago. Within the tax system, if you were to maintain the provincial rate of tax but agreed to give back, whether it be three or four points of tax base, on a particular individual's level of income, you would accomplish something along the lines I believe you're prescribing, yet at the same time targeted to where the government believes it can be best utilized. Therefore, similar to the GST, certain income standards and levels have to be met before one qualifies. This would have a double-barrelled effect to the extent that many people today do not file income tax returns because they have no income. This would at least bring those people to the fore and, as I said a moment ago, put you in a better position to forecast your expenditure side and your revenue side.

Mr Pouliot: Thank you very kindly. The emphasis on consumers being a matter of choice -- it's always a struggle between things one must have and things one chooses. Under the proposed harmonization, a tax on home electricity and fuel oil -- consumer choice? A tax on women's hygiene products -- consumer choice? A tax on children's clothing, on footwear less than $30, a tax on books -- in many cases it's a matter of necessity, you will agree; it's a given.

Also, a shift from business to the consumer -- there's no denying it. Also, the federal proposal includes a 1% flat tax on income. That's the reason successive governments have been reluctant. The retail sales tax, on projection, represents approximately 27% of revenues for 1996. Governments don't let go of revenues very easily; they know that.

Harmonization, if it were to be achieved universally in the context of 10 provinces and two territories, would be through harmonization. In this endeavour, you have to appreciate that people look over their shoulders to see what is being done here and what is being done elsewhere, because we have a movement north-south and east-west. Things change. Things move very quickly.

The federal government would wish to have harmonization, for reasons that are obvious. The business community, you've mentioned, would also wish to have it for the sake of simplicity. I take this, in fairness, from your focus, sir, and I choose to do some more homework in terms of the shift. Assuming we'll raise the same dollars, it becomes a matter of the style, the mechanics we use to go and get those much-needed revenues.

I agree there's a need to simplify, to make it far less complex. I too sympathize with the need to protect those who have less, the marginalized. We must not by virtue of good fortune be allowed to run away from the field. That's not very egalitarian and it should not happen. If that too is a given, then we both have to assume the responsibility. I'd like your comment, and please help me, candidly. You want to see the method simplified. You want your members, the people you represent, to have less of an invitation to -- not to evade; it's not right to impute motives -- but to say, "I understand the system and the more I understand it, it's more expedient obviously, and also I don't even have to be tempted. I know I'm going to do what's right because it's a one-shot deal and here's the money etc," without the shift. Where is the emphasis? Is it that the retailers would save money or is it to simplify the system and only pay to one source?

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Mr Woolford: Let me try and come at a couple of points. If anyone thinks that the customer is not paying the retail sales tax that the businesses are paying on their inputs, they're wrong. When a manufacturer, a distributor, a retailer pays retail sales tax on their office equipment, on their vehicles, on whatever, that gets built into the price and the customer pays for it.

The second thing is that it is tax levied on tax, as I tried to explain earlier. So not only is the shift from business to consumers not real, in fact it is helpful to the consumer in that that double taxation and that tax cascading is cleaned out of the system.

As I said, if you have a roll of paper towels, the manufacturer of those paper towels has paid retail sales tax and that's included in the price of the paper towels. If it goes to a distributor, the distributor has paid retail sales tax on his or her inputs and that goes into the price of those paper towels. It goes to the retailer and the retailer has paid retail sales tax on his or her inputs, it goes into the price of the paper towels that the consumer pays.

Retail sales tax has been charged at four levels: the manufacturer, the wholesaler, the retailer and the customer. It has been added into the price at every point in those transactions and everybody bases their margins on that tax-included price. So if it comes from the manufacturer with one cent of retail sales tax in it, then it has extra margin added on to it at the wholesale level and another set of retail sales taxes added in. The next level, it's two cents plus the margin, and so on. There should be no question that the customer is paying the retail sales tax. So that shift is more apparent than real.

The second thing is there should be no doubt that in today's marketplace, if there is any reduction in the prices coming through the system, the retailer will pass those on to the customer instantly.

Mr Pouliot: Like they have in the past.

Mr Woolford: If you look at retail prices in the last five years, they have gone nowhere. Retail prices today on many products, and I think Leonard can bear this out, are lower than they were in the late 1980s. If you look at the profitability of the retail trade, it is awful. That's a measure of a vicious competition in the marketplace. That is right; that is good. It's excellent for consumers and it guarantees to them that they are getting very, very good prices. It is simply impossible, and I'd like Leonard to talk to this, if he would, today to pass on legitimate costs, let alone raise your prices because you want to make more money.

Mr Pouliot: At one time, I used to own shares of -- well, Leonard, in your shop, Oshawa. I can assure you, without having scrutinized a book, that you've paid all of your taxes and beyond, for as a shareholder I was not the recipient of a vast fortune. I guess my reward was reading your glossy annual report.

Mr Eisen: On which we paid sales tax. I think, to expand on what Peter has just said, the position you'd find yourself in today, and certainly in the food industry, is that your competitors are out there and everybody who has a wagon, a horse, a corner is a competitor.

The ability to move prices is going to be dictated by the marketplace. You cannot work and function in a vacuum. When you consider that our industry makes $1, probably closer to 90 cents, on every $100 sale, it doesn't leave too much room for error, and one has to be particularly vigilant that the market you think you're serving and the customer who is coming to your place of business is retained, because obviously it costs a lot more to woo a new customer than to keep the customer you have.

Within the food industry itself over the last five years many prices have come down as various costs are knocked out of the system. You probably read in the press in the last day or so where one of the more profitable companies, Kellogg's, is going to take an $80-million hit in order to downsize and continue to knock costs out of the system, and this is universal within the operations.

People in the industry are trying to deliver as good a product as efficiently and as cost-competitively as they can, and the cost-competitiveness is one that cannot be overlooked. We cannot unilaterally move our margins unless we're prepared to self-destruct. You're facing whatever the market will bear to a certain extent, but it's on the downside, not the upside, because everybody is fighting for the same consumer dollar.

Mr Woolford: It's hard for people to understand how ruthless the customer has become in the last five years. They have seen their own personal incomes stay flat. Everybody in Canada today is concerned about the future of their employment. They're concerned about the health of the economy and the country generally, and that plays out in their purchasing behaviour very directly, so that the individual consumer who goes into the store is driven to take the lowest price, without question. Loyalties, past history, any of those considerations don't make one bit of difference. Consumers want to get the maximum return for their dollar.

I've got a wonderful story. I was talking to one of my members in Ottawa who has an independent lighting store. He had lamps on sale, 50% off, and a customer came in and wanted one and asked if he couldn't give her a better price than that. He said, "No, that's in fact my cost." She looked him in the eye and said: "That's fine. I'll come back and buy it when you're having your going-out-of-business sale." That's a measure of just how ruthless the customer is today. If the price isn't what the customer wants to pay, the product doesn't move.

Our members found that before Christmas, when they found that even if they offered significant discounts before Christmas, the products didn't move because, even though merchants had brought the price down in some cases virtually to their cost, it wasn't at the level where the customer was prepared to buy and the product just stayed on the shelf. It's a very, very tough market out there, right across the face of the retail trade.

Mr Eisen: If the committee would indulge me, one brief story about the new competitor who comes into the marketplace and has a great big sign: "Opening Special. Everything at Cost." The customers of course are flowing in to the new merchant and the oldtime competitor sees his competitor on the street and says: "I see you're doing a fair bit of volume. You must be blowing your brains out." The response was, "No, as a matter of fact the accountants were just in and I turned a small profit." He says: "Come on. I've been in this business for 30 years. How can you tell me you turned a profit when your sign says `Everything at Cost'?" He says, "I buy below cost."

Mr Woolford: Is that your secret, Leonard?

Mr Frank Sheehan (Lincoln): I have three questions. Not having been a collector of retail sales tax, but I recall hearing, when people were making purchases, you had to give your retail sales tax number. What was the purpose of the vendor collecting that information?

Mr Eisen: Depending on the nature of the sale, if I'm purchasing product for resale I can buy under either an exemption certificate or a licence and therefore I do not pay the sales tax up front but must charge it on my taxable sale to an ultimate consumer.

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Mr Sheehan: Then I'm confused when you say that the paper manufacturer converts it into rolls, the wholesaler etc all added it on and didn't recover.

Mr Woolford: The paper manufacturer doesn't pay sales tax on the roll of paper, but they will pay it on --

Mr Sheehan: On the input?

Mr Woolford: They will pay it on the desks that they buy for their office. They pay for it in the gasoline that they put in the trucks that deliver the product somewhere else.

Mr Sheehan: But it's not on the product.

Mr Woolford: It's not on the product itself, so it's not a full 7% on the price, but there is a small component of retail sales tax in there.

Mr Sheehan: Okay. My next question is following on what Mr Pouliot started on. If you were to -- what do you call it? -- consolidate these taxes and if you were to reduce the exemptions to zero, like charge tax on everything, but having regard to what Mr Pouliot said about certain essentials, if you will, do you have it within your computing skills or your sales analysis skills to say, "Yes, we can put the tax on everything and we appreciate that that will bring in X dollars of revenue on items that were previously exempt, but because we're collecting the tax on a broader base the government's going to be revenue-neutral and the reduction in the amount of tax, what the people will be paying for these essentials" -- can you balance that out?

I'm not expressing that very clearly, but let's assume, for example, that that's tax-exempt but this is taxable. We lower the rate of tax and apply it to everything. Can you balance out what the person is paying now here on this new item that's taxed with the amount that's saved on the higher item?

Mr Woolford: You couldn't do that on a store-to-store basis.

Mr Sheehan: No, it would have to be the industry.

Mr Woolford: Even within the industry that might be difficult to do, because individuals also buy things outside the industry. They pay their phone bills, they pay for their heating oil and for their electrical rates, they buy cars, that kind of thing.

I think the way Leonard described it is a better way to go, which is that whatever you tax, if you are concerned about the burden of that sales tax on certain individuals, you provide a credit through the income tax situation. The great strength of that, of course, is that it allows the government to flow revenue back to those who need it. Quite frankly, I don't need a rebate on consumption taxes that I spend on anything, whether it's a necessity or not. Someone who's making $10,000, $15,000, $25,000 a year, the government may decide they do need a rebate.

Mr Woolford: And the way to do that is through the income tax system.

Mr Sheehan: But to calculate how much of a credit you should be giving them should have some foundation in fact, should it not?

Mr Woolford: But you wouldn't need to do it on a detailed basis. You could approximate that. What's your sense, Leonard?

Mr Eisen: I believe that over the years there have been a number of studies put out by various levels of government dealing with certain units of production and within various categories. I don't have that information handy, but there was an attempt made, certainly with the introduction of GST and striking the base and looking at the numbers of exempt items versus taxable items, to see where the balance would take them. I believe there has also been a number of studies done on harmonization, which addresses that same issue. As I say, I don't have them at this time.

Mr Bob Wood (London South): To put it mildly, the GST has not achieved universal popularity, which comes to the point. There's really no point in talking about harmonization unless this thing has a certain degree of political acceptance among the general population. Do you have any suggestions as to how the GST might be changed in order to make it more acceptable to the population as a whole?

Mr Woolford: We've wrestled with that. Unfortunately, the way the GST was brought in created a lot of unhappiness and annoyance in the general public and it has carried that burden to this day. The fact that it is exposed at the point of sale makes it just a lightning rod for discontent.

I'm not sure how you bite that political problem. One way, obviously, would be to hide it, because what you don't see you don't worry about as much. As I say, we're not in a position as an organization to support hiding the tax inside the price, but from a political calculation point of view, I think that while there might be a fair amount of public concern about that at the time it was done, a tax that people don't see becomes by definition over time a good tax. As I say, I'm not advocating that; that's simply a political calculation that any government has to make.

It's hard to know how you do that other than to recognize that it's the right thing to do, to try and explain that to the public as best you can as a government, and go ahead and do it and just grit your teeth. We recognize it's a step that will not be popular. It's a step that will be difficult for any government to put in place.

The unfortunate thing is that it's the right thing to do. It's the right thing for the government in terms of its operations, in terms of the revenue it hopes to get. It's the right thing to do in terms of economics. It's a better way of collecting tax than a retail sales tax. But we recognize at the end of the day that we can explain those points till we're blue in the face and the public still won't like it at the time it's done.

Mr Bob Wood: Well, beauty is in the eye of the beholder. You think the GST is a fairer tax than the retail sales tax. The public doesn't think that.

Mr Woolford: We recognize that.

Mr Bob Wood: I'm inviting you to tell us, if we were to accept what you're suggesting, and by the way, there's no reason the federal government couldn't go to a retail sales tax. If the public likes that tax better, we can get the administrative simplicity you want by having them convert to our system rather than us convert to theirs.

Mr Woolford: The retail sales tax is not a good tax. It has a number of flaws that we talked about earlier. Especially from the point of view of the government, it's a lousy tax to have in place because increasingly our economy is moving to services and away from goods, and a retail sales type of tax is very difficult to place on services. Over time, the base on which the retail sales tax can be levied will be growing more slowly than the economy as a whole, so that you will find it more and more difficult over time to collect an equivalent amount of revenues through a retail sales type of tax than you could through a GST.

Mr Bob Wood: That leads to my final question, and I hope you will consider what I have just mentioned. You think it's a better tax and the public doesn't, and you're going to have to do something about that perception.

Mr Woolford: We have tried. Retail Council has been very active in explaining the GST. At the time it came in, we made extensive efforts to try and explain to the public what the benefits of this were. We have worked with provincial governments across the country. We've tried to carry that message forward. We recognize that it's a very, very difficult sell. We're under no illusions there, Mr Wood.

Mr Bob Wood: Let me fire my last question at you. You suggested earlier that it was difficult to broaden the scope, which I don't particularly favour anyway at this time, of the retail sales tax. I don't understand why it's that difficult. Why can it not be extended to other transactions if we want to?

Mr Woolford: As you extend it, what you end up doing is taxing more and more service transactions, and those tend to be transactions which occur both between companies and other companies and companies and individuals. If the intention really is to capture consumer-type transactions, it becomes harder and harder to break apart what is a consumer transaction and what is a company transaction.

Legal fees, accounting fees, many of the other services that perhaps a government would want to tax are services provided both to individuals and to companies. So, from a taxing point of view, it is hard to break apart a consumer's consumption of legal services or any other kind of service as compared to a company's consumption of the services.

Mr Bob Wood: In order to raise more revenue, there's no problem in that.

Mr Woolford: Oh, you can do that, but then what you do is exacerbate that problem of double taxing and tax cascading, and that's a very, very bad way to run a tax system. Basically, you're ripping off the consumer. You're taxing them twice and in some cases you're charging tax on tax, and that's a very, very unfair way of operating a tax system.

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Mr Colle: Perhaps we're going to have to take some lessons from Steve Forbes in the States in trying to honey-coat the tax and revamp the tax system as a way of doing it.

I have a bit of a lateral question in terms of retail and how retail is facing what's happening out there. I've had some complaints from retailers who are advertising and they advertise liquidation sales. As you know, under the present legislation they're subject to fines if they advertise that without a special licence, yet there are people who are operating these full-time liquidation stores, liquidation outlets and liquidation centres. What are your retailers saying about this kind of restriction or competition, where they can't say they are offering liquidation sales and have to pay a fee to do that, or certainly register that they are liquidating, as opposed to the established liquidation outlets? Have you had that kind of feedback?

Mr Woolford: Liquidation sales have been a significant problem for the trade in recent years. We've been pleased actually to see that the federal Bureau of Competition Policy has spent some time looking at precisely that problem. Primarily it's a problem of misleading advertising. They are advertising that they're liquidating merchandise when in fact they're not. The bureau has gone after a number of basically fraud artists across Canada who have been advertising liquidation sales when in fact they weren't, and they've secured a couple of convictions. It certainly has been a problem and we've been pleased to see that the appropriate enforcer in this case has been keying in on that problem.

Certainly there are reputable, responsible liquidation organizations and they have been doing very well because of the distress in the retail trade. We saw through the early 1990s a devastating round of bankruptcies and closures. That generated a lot of surplus merchandise, distress sale merchandise, which legitimate liquidators were able to pick up and sell at very, very low prices in their operations. That's legitimate competition. It's very hard for the traditional retailer to compete with those organizations, but at least they are genuinely selling merchandise that is being liquidated out of a firm that has gone out of business, gone bankrupt, or closed certain stores. The real problem for the trade has been people who have seen this as a way to essentially cheat the customer and offer merchandise which is not being liquidated, and therefore they attract the customer essentially on false pretences. That damages the trade. It damages the reputation of legitimate retailers. It steals sales from them. It drives margins down even further.

I don't know if you have noticed it in the businesses you're in, Leonard, whether that's been a significant problem or not.

Mr Eisen: It hasn't been a problem to the same extent as the general merchandise field. But there have been for many years liquidators who have bought product that has been damaged either in the warehouse or in the process of manufacture and is sold as distress merchandise. To say that these have hurt sales, anybody who takes a piece of the action hurts sales. But at the same time, they are serving a need for a product which is still usable, has passed the Department of Health standards and isn't going to kill anybody and is being sold at a price to certain people who are prepared to buy substandard merchandise. They know what they're buying and are paying accordingly.

Mr Pouliot: I keep going back to your presentation, and if there is one message that comes through, simply put, you're expressing a certain fear that -- you even mention the word "harassment." If I were a cynic, the dark side of me could perhaps go as far as to say that some retailers would view Revenue Canada and Revenue Ontario as organized crime entering their premises.

Mr Woolford: Perish the thought.

Mr Pouliot: These people are for the public good, and then you privilege us with the proverbial wisdom; you go as far as to say that the majority of retailers are honest people and no doubt love their mothers, the Chair, and all the good deeds out there. I would hope the majority, for they have nothing to fear.

Mr Bruce Crozier told us about his story earlier on, and it became a matter of record -- in fact, we might have a chance to examine those records -- saying that in some 20-odd years, twice he was the host when the government audit branch, if you wish, on behalf of all taxpayers, came calling. In my case, I'm a T-4 person. I get one note, two words, from Revenue Canada. It says, "Please pay." I don't have anything to hide. I can't hide.

You've done very well in saying, in presenting us with the obvious, that whatever charges comes out in the wash. Well, government operates the same way. It needs so much money to operate, and if one retailer does not pay, it taints the organization. It doesn't give it a very good name, does it? It's the same as if one taxpayer doesn't pay, somebody has to pick up the slack. In fact, our neighbours to the south have exercised over the years much-publicized vigilance in going after taxpayers. My understanding is that Al Capone went to jail for tax evasion, and there were others.

You represent an important element, not only as taxpayers but also as the toll, if you wish. You receive taxes on behalf of government and government wishes to make sure, as the intermediary, that the money that you receive gets passed to government, which is a normal reaction. In this context, you don't produce anything; you don't sell anything. You're asked to be a perceptor of taxes. The alternative is to have the government do it. The government cannot do it with every consumer. It would be foolish. It doesn't have the resources. It would eliminate the purpose.

If you were the government and if you could focus on two or three items that would alleviate your burden, where would your priorities be? If tomorrow the government of the day calls an election, issues the writs, and you get in, and your priority would be your presentation -- you would have the power to apply legislation -- where would your recommendations be to treasury? What would you do? Two or three or four items.

Mr Woolford: I think we would pick up on exactly the points that Mr Peters made in his report, taking some time to develop tools that would enable the auditors to work smarter, to be more precise in selecting targets for auditing.

What would those be? As we've tried to suggest in our submission and as Mr Peters has identified, looking at non-registered organizations, those who are not now registered for sales tax collection, and developing tools that would allow for the auditors to identify firms within the retail trade, within other industries, where the likelihood of non-compliance, for whatever reason, is higher. So we would be looking at firms whose internal accounting systems don't appear to be terribly strong, whose reports don't appear to make sense, whose pattern of reporting is outside industry norms, so that the auditor can spend his or her time more in areas where you can improve the compliance of the industry.

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We certainly would not suggest and we do not think the government should stop auditing. We support audits. What we would argue and what we would put a priority on, I think, is that those audits be focused in areas where there's the greatest scope for return to the government and for improvement in compliance this year and in future years. So you spend more time with firms that are clearly having trouble complying and you spend time teaching them the tools and the skills they need in order to comply better.

Do you have any other things you'd want to add to that, Leonard?

Mr Eisen: I think that pretty well covers it. I would also direct thoughts to the fringes of industry, not specifically the retail trade but other parts that are very much involved in collection and payment of retail sales tax that are often not focused and do not have the resources and are unidentified. Within the Retail Sales Tax Act there is provision for door-to-door salesmen, as an example. They're supposed to be licensed and they're supposed to be carrying their licences with them when they come knocking at your door. I wonder how many people are actually doing door-to-door selling who are not properly licensed and whom Mr Peters, in spite of all his efforts, would not be able to identify at this time, who may be selling on behalf of a province, for delivering into the province.

The Chair: Gentlemen, just before adjourning, Mr Peters has asked to raise one final matter with you.

Mr Peters: Thank you very much for appearing here. I'm very grateful to see that we are so much in accord on so many issues, and even where you say you're in disaccord I think it would be very helpful to everybody who has heard from you.

There's one other question. As you know, under my mandate I cannot talk about effectiveness, but there's one particular question that I wondered if you could help the committee with. That is, how would you rate at both the individual level of your members and the organization level of your council the quality of the dialogue which you can enter into with the Ministry of Finance to make your views known, your concerns known, at the administrative level of government?

Mr Eisen: Mr Peters, let me first off say that, again, like retailers who are complying, the quality of the people at the management level and at the audit level for the most part is good. Like everybody else, you have good auditors and not so good auditors. Some go about their audits with a degree of fervour that sometimes is not warranted, but they're trying to do the job they can and what their mandate dictates. I certainly, over the years, understand the effects of trying to do the best job you can. I certainly have always found that I've been able to talk to people at the administrative level. We don't always agree, but we've certainly had the opportunity to express opinions.

The quality of the field auditor, like anybody else, and you find that in commercial audits also, varies. If one were to give an overall rating to the field audit, I'd say good; some excellent, some not so good, but generally good. I would put the same reading on the management personnel. But they're always approachable. We may not see eye to eye, but we can at least talk about the differences.

Mr Woolford: What I've heard from talking with our members is some concern that in recent years the more experienced auditors, both at the provincial level and the federal level, have tended to leave and move into the private sector, leaving an audit staff which is a little less experienced, a little more junior and a little less knowledgeable. That has meant, particularly for larger and midsize firms that have professionals on staff -- some of them tell me they feel like they're training the auditor in what the requirements of the law are. It can at times lead to some wrangles as to what the true interpretation is.

In smaller firms, to the extent that the audit staff is less experienced and less knowledgeable, of course you get kind of random results where the firm being audited itself has not a perfect grasp of what the rules are, and the auditor himself or herself on the field staff may not be as experienced as they should be and therefore produce results which are essentially aberrant.

In terms of Retail Council's relations with the ministry, I think we've had very good relations. They have always been very open to us. As a staff person anyway, and whenever I've sought access for our volunteer members like Leonard, they've been very open, very professional in their dealings with us, both on policy issues and on administrative issues.

If I have a concern, it's that in recent years we have not been able to do as much on the administrative side as we would have liked. We probably should be spending more time talking with the administrative staff and trying to sort out some of the differences and clarifying some of the issues where there are natural varying points of view so that we can get some of those resolved before they become problems in a firm's audit. That's just a to-do that I guess is on our list as members of the retail council tax committee as much as it is on the to-do list for the ministry.

Generally, I think the story I have back from the members is that the auditors are by and large pretty good. There is a sense that some of them are a little overly aggressive in their behaviour, that some seem to feel their principal job is to scrape up money for the province rather than either improving performance or improving compliance. Some of my members get quite excited after one of those audits when they call me, so that problem certainly exists. We recognize it's going to exist in any organization. Any organization has good people, has bad people, and the great majority are more or less in the upper half of the middle, if you will. It's a reality of life. It's a reality of any large organization.

The Chair: Mr Woolford and Mr Eisen, I want to on behalf of all the committee members thank you for spending so much time here with us this morning. I understand you were here on the understanding that you'd be here for about a half-hour. We have quadrupled the amount of time here. Thank you for sharing your time with us and for enlightening us.

The committee stands adjourned until this afternoon.

The committee recessed from 1158 to 1531.

The Chair: Good afternoon, ladies and gentlemen. Welcome to our continuing hearings in the standing committee on public accounts. Today we're looking at the matter of section 3.07 of the 1995 annual report of the Provincial Auditor, dealing with the tax gap.

CANADIAN FEDERATION OF INDEPENDENT BUSINESS

The Chair: This afternoon we have representatives of the Canadian Federation of Independent Business. Welcome to the committee. Would you please introduce yourselves, and I gather that you're going to allow time for some questioning. I also understand that you are prepared to stay until approximately 4:15, 4:20.

Ms Catherine Swift: Yes. If need be.

Ms Judith Andrew: Thank you, Mr Chairman. I'm Judith Andrew. I'm the director of provincial policy with the Canadian Federation of Independent Business. With me today is the federation's president, Catherine Swift. We're very pleased to be here on behalf of CFIB's 40,000 members in Ontario. Ours is a national business association that represents 87,000 members across the country.

We're pleased to be here to convey our members' concerns over retail sales tax collection issues. Certainly, these issues are very important to small business for a number of reasons. Any tax that has an impact on the economy generally is one that will in turn affect the small business sector. Retail sales taxes are by their very nature regressive, as they penalize those consumers who tend to spend a higher proportion of their income. Retail sales taxes also dampen consumption, which does reduce the money that can be recirculated through the economy, boosting expansion and job creation.

As small firms in the taxed areas also act as the tax collector for the government, compliance costs are incurred by the businesses and they are never fully offset by the government compensation that's available. We have found certainly in our research, and other research has shown, that the vast majority of the compliance costs of a particular sales tax is borne by smaller businesses that tend not to have the specialized resources that a large firm would have to deal efficiently with the sales tax collection. Generally, in a small firm it's the business owner himself or herself who is often the person who has to deal directly with the compliance, and this is hardly an efficient use of the business owner's time.

One other aspect to sales taxes is important. Small business is the contact point for the consumer, and this places the small business owner in the unfortunate position of being on the receiving end of the consumer's wrath for having to collect a tax which wasn't of their making. For all these reasons, sales taxes do have a dampening effect on the small business sector, and given that small firms have been the principal job creators in our current economic environment, the negative impacts of sales taxes on small firms do have implications for the economy overall in terms of job creation.

I would like to also introduce another document to you for your reference, and we may need to refer to this in our discussion, but you have a research document entitled New Signs on Main Street in our kit. This was a special survey conducted by the federation on retail and service sector firms, and you will see that it delineates a number of the major concerns of small businesses in these industries.

Figure 1 on the front page of the report shows that sales tax, at 70.5% response, is a major issue for small business and certainly the number one that showed up in our survey.

I'd just like to ask Catherine to continue.

Ms Swift: We've done a lot of research on underground economy issues over the years, and I'd just like to briefly go through some of the factors -- not just research that we've done but pretty much in concurrence with research that's been done in other countries around the world on these issues. Naturally, sales tax policy is a key factor that determines the extent of underground activity, notably, naturally, the level of the sales tax, how high is the sales tax? Generally, I think most of the research has concluded that something in the 10%-12% range tends to be a bit of a ceiling beyond which leakage -- of course it's cumulatively I'm talking about, because now we've got in Ontario, for example, 15% cumulatively. At that rough point, depending on the system, you tend to get so much leakage that indeed sometimes governments find they increase the rate and actually get less money. That's been a reasonably general feature, I guess, of a lot of the research that's been done in this area.

The structure of the tax is also important. Ontario PST, being a single-stage tax only levied at the retail level, is generally conceded to be "leakier" or easier to not pay in one way or another, whereas multi-stage or value added taxes, things like the GST is, do tend to be tougher to avoid because they are being imposed at several stages. Of course, that's the whole point of having a tax of that structure: to reduce non-compliance to the extent possible.

We find too, particularly with the small business sector, just the general burden, a cumulative burden of regulation and legislation that's imposed on businesses in the economy, is also a big factor. One particular added piece of regulation or whatever may not, in and of itself, seem particularly worrisome, but when you add the whole burden up, that's what really tends to matter. So naturally, if you have a highly regulated economy which is very costly to a small firm, for example, then you're going to have cumulatively a higher incentive for that business person to try to reduce his or her costs, and they may choose various ways of attempting to do that.

Another factor, of course, is the general state of the economy. In 1991, when the GST was introduced, there's no question the GST itself instigated an awful lot of resistance to paying taxes, but there's no question that its coinciding with a very serious recession doubled the whammy, as it were, in terms of the effect on people just not having as much disposable income for more than one reason.

We in Canada also have the geographic reality of our proximity to the US, with such a major proportion of our population within a reasonable distance of the US border that when we have such things as a high dollar, which was also around in the early 1990s, cross-border shopping becomes another means of avoiding sales tax.

Most of the surveying that we've done of our members on these types of issues did occur after the introduction of the GST and the couple of years following the introduction of the GST, so I guess it's a little bit out of date now. It's not perfectly applicable to PST issues but I think it still does provide some help in how small business perceives these questions.

What we found, looking back at this research, was that we even had a slightly greater sensitivity in Ontario than our national average in terms of their perception of the underground economy being a serious problem for their business. Again, this particular chart that's on page 3 talks about why business owners believed that the underground economy issue generally was a serious problem for their business. As you can see, the most significant factor was the perception that the total tax burden was too high for consumers and therefore consumers felt pushed over the edge and were not wanting to pay the GST.

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The second factor there -- actually, there's sort of a dead heat between the GST encouraging bartering or ways to get around conventional transactions and also consumers simply finding better prices in a more underground or informal economic context. Finally, just general consumer resistance to the tax was also viewed as a significant factor.

Finally, something that's always worth keeping in mind on these issues, is that the extent to which taxpayers believe their money is being well spent by government is always a subjective but important factor in how willing consumers are to comply with the payment of taxes.

We found again, looking around the international community, you have countries like Switzerland which have really quite high taxes but don't seem to have a serious underground economy problem. We believe that part of the reason for that is that that country actually has plebiscites on major changes in taxation so that people at least feel they have been consulted.

We feel a lot of the non-compliance with the GST wasn't just because this tax was unwelcome -- I don't think one would ever have a welcome tax -- but also because of the way in which it was passed by that government. You might recall the Senate was stacked, we had kazoos, there was all kinds of absurdity surrounding the introduction of that tax, and given the fact that it was introduced at a very bad time for consumers, at a relatively high rate, coupled with the procedural sleight of hand that was used to bring it into being, we think all of these factors contributed to consumers' resistance.

When we look over what's happened in this province for the last 10 to 15 years, I think we can agree that all of the factors that I've mentioned have been indeed present in Ontario: high taxes, a high degree of regulation, a number of economic dips and consumers who increasingly had less and less confidence in how government was spending their money.

We're aware that a major focus of your review is to try to look at the extent of retail sales tax avoidance. We have in the past attempted to do some quantitative work on this. Of course, it's always like trying to nail Jell-O to the wall, as they say, trying to measure something that's invisible. We don't, unfortunately, I guess -- I don't know if it's unfortunate, but we're not going to make any stabs today at any kind of updated estimates of underground economy size or whatever.

We find that our anecdotal evidence that we get from our members on a regular basis is pretty reliable as to what's happening out in the economy. We have, as Judith said, 40,000 members in Ontario. If there's a problem, you can be sure we hear from a lot of them. We actually have had fewer complaints and problems from our members exhibited over the last couple of years than we did in the early 1990s.

Again, the GST clearly triggered an awful lot of impacts; the recession exacerbated them. But we've found, as the economy has improved somewhat -- not wondrously, but improved somewhat over the last couple of years -- we have had growth. We believe also the fact that governments have started, in most instances, to get a grip on the fiscal problems and to maybe give people a little more confidence that they're not just increasing taxes like mad and spending the money irresponsibly, things like our dollar having fallen dramatically to where it was a few years ago. All of these things, in our view, have contributed to there probably being less tax avoidance now than there was back in the early 1990s.

In terms of what we would recommend from our perspective on sales tax measures that could be considered to improve sales tax compliance, the obvious one is basically taking it in reverse direction from some of the things that are causing it in the first place. As I've mentioned, governments are getting a grip on some of the fiscal problems; we haven't seen any significant tax increases in a number of years now, which is obviously positive; we believe that tax reductions that are planned by this government will contribute positively again to having people feel that tax compliance is a positive thing and that the government isn't working against their best interests; and certainly, generally measures to overall streamline the kind of paperwork that small firms in particular deal with, trying to reduce the overall level of red tape in the economy, not simply that pertaining directly to sales tax. These measures all should contribute to further improvement, in our view, of the extent of sales tax non-compliance.

The whole issue of compensating small vendors is one that has been around for a long time. Ideally, of course, one would have a simple enough system that compliance costs could be extremely minuscule. We do have a system, as I'm sure you're well aware, of compensating vendors in Ontario right now and this was last increased back in 1991. So something that might be contemplated to facilitate compliance for small businesses is the notion of possibly an adjustment in this compensation level to conform with other cost increases in the economy. So we'd throw that out as a possibility.

One particular issue as well that we felt was worth noting that we actually have been hearing more problems with in the past couple of years than we had previously was the whole issue of tax treatment of the sale of tobacco on native reserves. This is becoming a growing problem, certainly gauging from the amount of input we're getting from our members on this. Naturally, it was diminished somewhat with the tobacco tax changes that took place not too long ago, but it nevertheless is an ongoing problem.

Something that the province of Nova Scotia has recently done -- which is extremely early days, so I wouldn't want to judge it; we don't know how it's going to work but we think might be worth considering in this light -- is that they have moved to collect their PST at the wholesale level on tobacco products. They believe that this policy, coupled with quotas for tobacco sales on reserves, together will reduce the incidence of unfair competition, because naturally those who are selling tobacco products off-reserve are at a serious disadvantage and obviously sales tax compliance generally from the government's perspective should be enhanced by such a policy. So it's very early days for this. We don't know how well it's going to work but it might be worth seeing what they're doing there and, if it does work out to be a workable policy, contemplating something similar here.

I want to make a few brief comments on the whole GST-PST issue. We've been following some of the testimony before this committee by others and we know this issue has come up a number of times. Naturally, this has been a very important issue for small businesses since the inception of the GST. We have a big mess of a system right now, to put it mildly, and small businesses are paying an inordinate amount of compliance cost, both in time and money -- and time is money, as we all know -- and we find also as our members typically are very often dealing with these issues themselves as business owners, it is a particularly poor use of owners' time to be having to deal with inordinately complex and costly compliance because we do not have a sales tax system that is well designed.

In terms of what can be done on the GST, I think all governments have been struggling to varying degrees with this over the last few years. Harmonization is certainly a technical possibility; one has to wonder at this point if it's a political possibility. I guess we'd like to think everything's possible, but so far we haven't had a whole lot of luck and somebody always has a provincial election and the timing will always have difficulties attached with it.

In any event, that's still naturally a proper harmonization, because not all harmonizations are equal, as we saw with the first stab in Quebec. But a proper harmonization that was accomplished efficiently would still be preferable to the current mess that we have.

We think too, though, there are some other options that should be considered. Some, naturally, would require coordination between the federal and provincial governments, but such options as the federal government perhaps even completely abandoning the sales tax field to the provinces, having some kind of offset with respect to whether it's transfer payments, possibly excise taxes, other tax adjustments, to ensure that the revenue isn't totally forgone at the federal level, which wouldn't be very realistic.

So we think there are a number of options that could improve upon the current poor system that we have with PSTs and GSTs based on such different bases, rates, other aspects of their systems. But the commonality is that we think certain principles have to be adhered to in any reform that would be supportable by the small business community, and the principles include that the reform can't be a tax grab -- and certainly in Ontario we know if we harmonized at 15%, there would be a considerable amount of excess revenue going to the government.

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We can't have different rates in different jurisdictions. We feel if we're just going to end up with a harmonized system but nevertheless have different rates in the different jurisdictions, then we've still got a big mess. If we're going to fix it, let's fix it properly. Let's not do another jerry-rigged job on sales taxes. Small businesses have already been forced to make a very costly transition to accommodate the current system, which is a disaster, but the notion of going through yet another changeover to have a perhaps marginally better system just isn't on. We feel unless it's going to be improved significantly, it's not worth going through the hoops yet again and incurring all kinds of additional costs for not only small business but, I suspect, the economy overall.

Just in conclusion, from our perspective -- and, again, it's not terribly scientific, it's just based on the feedback we get, but we have found over the 25 years we've been around our anecdotal evidence tends to be pretty good -- we don't think compliance issues are probably as serious now as they were three or four years ago, because of a number of factors: the economy, better government response to taxpayer concerns etc. However, we certainly believe that there is undoubtedly still a sufficient level of non-compliance that it is of concern to Ontarians and the government. We have always said that the government should certainly enforce the law as it stands, but I think the flip side of that is that obviously there are diminishing returns to additional auditing, as we know from the research around the world. When you get to a point of spending a dollar to collect a dollar, as is often referred to, it's gotten a little absurd. Clearly, throwing auditors at the problem is really treating a symptom. We feel if you treat the true causes of the disease, you'll have a much more enduring solution than simply cranking up the bureaucracy, and of course the costs associated with that.

I'll just conclude there and I'd be happy to take any questions you may have.

The Chair: Thank you very much. Committee members, there's between eight and nine minutes per caucus available for questions. We'll begin with the official opposition.

Mr Crozier: Welcome. I was interested. You said your association has been in existence for 25 years, so I guess the retail business I was in, we must have joined you at the inception, because for many, many years, in the lumber business I was in, we were part of the CFIB.

You've covered a number of areas, and just the one I'd like to touch on in is, in your brief you've mentioned the levels of taxation and maintaining them at their present rates, if not decreasing them. It's that I'd like your opinion on. I asked the same of the Retail Council of Canada this morning. Of course, we're dealing with a consumption tax here, which is voluntary in the sense that if you don't want to pay the tax, you don't buy the merchandise -- on some discretionary items. I suggested if we could think of it in the context that if the tax bite were not so great, perhaps there would be less incentive to try and avoid it. Having said that, it also doesn't differentiate between the wealthy and the poor. If you buy something, you pay tax on it no matter what your level of income is.

The tax cut that's being suggested by the government to be so necessary is in the neighbourhood of $5 billion, and we collect about $9 billion a year in retail sales tax. What would your opinion be, the political ramifications aside, if the government were to come to you and say, "Would it stimulate the economy more if we reduced the retail sales tax to a 4% level or if we went ahead with our income tax cut?"

Ms Swift: That's a tough one to answer off the top of my head, simply because I think you have to look at tedious economic concepts like marginal propensity to consume and so on and so forth. We have also not as yet seen the design of the income tax changes, because obviously how those are designed and where the savings go -- the majority of the dollar savings are going to go to people making the lower-income levels, even though there's certainly been a lot of attention on that person making a million bucks a year, none of whom I know. But I think it's kind of tough to say categorically how the two would stimulate the economy. They both clearly would stimulate the economy.

Taking it off sales tax, would it cause people to consume more or would they save that? You know, this is the question. I don't know the answer because I don't have the up-to-date data, and you'd have to guesstimate anyway, because it would be a forecast. But would they consume the difference or would they decide to save it or use it in some other way? The same with an income tax saving. I think a tax reduction of any kind would be good, because I think Ontarians rightly feel they've been taxed to the hilt, small businesses and consumers alike, but I think it's tough to say in a straightforward, simple manner. You would have to look at (a) the design of the income tax changes, which I haven't yet seen, and (b) how much you would assume of the PST reduction would actually be consumed. You can't say it would all be consumed. There's no suggestion it would all be consumed, but certainly a major proportion of it would be. Not to be evasive, I think it's tough to come up with a nice, clean answer on that one.

Mr Crozier: I am a little bit surprised by your answer. Right, we don't know what the income tax cut is going to be. We do know, though, at least at this point, according to a table that was put in literature that we've read, that the more you make, the more you're going to get back.

Ms Swift: But that's the nature of our tax system: the more you make, the more you pay proportionately.

Mr Crozier: That's right.

Ms Swift: So that's the arithmetic.

Mr Crozier: The point being that then becomes discretionary. You may save it. We may pay down personal debt, because it's the highest that it's ever been in our history. But what I thought you might speculate on is the fact that if you spend, if you buy something to which retail sales tax applies and it costs you less than it did before, that may tend to stimulate buying more than just simply giving me a cheque back or giving me a credit on my taxes which, if I have a sufficient earnings level, I may just go out and buy an RSP with.

Ms Swift: Yes, but you also might buy a car.

Mr Crozier: So I just thought from the stimulative standpoint, from the idea of how the economy works, a sales tax would appear to be, on the surface, more stimulative than another tax that goes to a different class of people rather than everyone and that is more discretionary in how you use it.

Ms Swift: I think it's tough to say --

Mr Crozier: I appreciate what you're saying. I'm just a little surprised that it didn't centre on that stimulus.

Ms Andrew: I'd just like to add that when we did see the sales tax raised by 1% in Ontario, and I've forgotten what year that was exactly, we heard from our retail members in spades about their concerns. It certainly is very devastating to retailers when the tax is raised, and so I just want to make that point.

Mr Crozier: That's who you represent, right?

Ms Andrew: We represent businesses across all sectors of the economy.

Mr Crozier: I see.

Mr Colle: Just quickly, by the way, we are looking at the Nova Scotia example to see how it is affecting tax avoidance. We note here in a document we have received that they have now removed the tax on the retail end of tobacco sales and just moved it to the wholesale and increased that.

Ms Swift: That's what we understand, yes.

Mr Colle: It'll be interesting to see what the effects are of that.

Ms Swift: Yes, but it's early days.

Mr Colle: Yes. The other question I have is, I noticed one of the real exposure problems for retail is bad cheques. Do you think this new direct Interac system is going to dramatically reduce that type of exposure for retail?

Ms Swift: Yes. We've actually had some pretty positive feedback on it so far. I think the best indication of that kind of thing is the takeup we've seen. You've probably noticed as a consumer yourself -- I certainly have -- that there's been a really rapid takeup, even in relatively small retailers, of the Interac debit card kind of system. So we would hope ultimately, once that becomes truly pervasive, and it's going pretty quickly now, that the NSF cheque would be a thing of the past.

You're absolutely right. It was not only grief, because of course the retailer was out the money, but also the bank dinged them with an incredible service charge when they got the thing back. Unbeknownst to them, it was a bad cheque. So yes, we're hopeful that will do away with it, but we're also wary that the Interac system access does not cost so much.

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Mr Colle: Yes, service charge. I think it's 50 cents a transaction, isn't it?

Ms Swift: It differs according to volume of business and what not. But our guys always, of course, pay the most.

Mr Colle: But I wonder if this will have an impact on reduction of tax avoidance, because there would be more of a record of transactions in retail, whether that might have an impact on that or not.

Ms Swift: I don't know. So much of it, from what we've heard from our members, is pushed by consumers. The merchant is put in the position of the consumer saying, "What's the cash price?" or whatever the euphemism used is, and the person is put in the position of losing the business or whatever. So the extent to which one can reduce the consumer's incentive to push for those lower prices, however achieved, in our view -- and again, all those factors we mentioned are part of that -- will be the real determinant.

The question with Interac or debit cards in general I guess is, how much do they replace cash? Probably to some extent. I haven't seen any data on it, but I'm sure to a considerable extent. I know personally they have in my wallet. The extent to which you'll have fewer cash transactions, yes, I think that will reduce the ability of being able to avoid taxes.

Mind you, that segment of the population, however large it is, that does tend to go in and say, "How much for cash?" they're the ones that are not going to use the Interac too much. I think that's something we'll probably have to look at a couple of years down the road when we've had enough experience with Interac. But it has the potential to do that, sure.

Mr Pouliot: I need your help. In the last seven to eight months, my circumstances as a consumer have been impacted, well, negatively. I now live a rather spartan and frugal existence.

Mr Colle: They took away the limo.

Mr Agostino: The limo and the cabinet salary.

Mr Pouliot: Therefore, by way of necessity, I have become a very small consumer. But we're blessed today with expertise, and I thank you people who represent such a large membership and are the front line of benevolence to consumers. My question is rather philosophical. I read your brief and also the brochure. For a second I thought I was getting a brochure or a press release from my friends the official opposition, but it's not so.

American Express does not receive a very high rating, and yet it is the official card of the Ontario government, the government of the day, for instance. I see "Merchant Costs of Accepting Credit Cards." You don't do very well there. I'll come back to credit cards.

I also see the terminology. This is not my mother tongue, but I'm learning English. I can see here that you have the "informal economy" -- the convenience of synonyms -- in lieu of the "underground economy," which is the theme that is being addressed here. But "informal" gives it sort of a halo of, if not sanctity, "Nudge, nudge, wink, wink" -- an acquiesence.

Then, as I keep on reading the brief, now that you've set the table, you circle the wagons -- GST, that dreadful, very visible tax. Then we go on to, not compounding, but also adding to it the RST, the retail sales tax, which incidentally is 27% of projected revenues, a big chunk. Then, being a professional and being very polished in your presentation, with respect, you inform us that a 30% provincial income tax decrease -- and we don't know where it's going to go. For some, it will trickle down, you're right, although into Switzerland, I imagine. Some will be spent, some will go to RRSPs.

I would have liked to have also seen the same candour in trying to reach an equilibrium here, because we're trying to say, "Why is it that things are not being done?" Well, consumer debt is at a record high, I believe. Plastic, the 16% to 17% -- never mind these, they're low -- in a direct relationship of a CIBC Visa etc. People are taking money out of their savings. Savings are at, if not an all-time low, a recent low. They're even cashing in their RRSPs in record numbers. I don't know what the mean for RRSPs is, but it's about 16% of what the pool would allow, if everybody did participate. You would also be taking $10 billion out of the economy if you were to balance the budget in this term of office, plus the $5 billion, so that's $15 billion -- $5 billion that fills your pocket and $10 billion that leaves your pocket. It's quite a bit.

My question is this: We always search for a bargain. I think cross-border, which has, to all intents and purposes, if not been eliminated -- you have to be more selective. There are fewer bargains to be had. As a consumer, if I can go and see you and you're a small entrepreneur, regardless of what the tax is, because I'm under a state of seige and I must get the best value for money that I want to get, is it easier the second time around? Or is the focus because of taxes or because of this, or is it not like a flea market in Madrid and other countries, that you do it as a matter of style after a while? If you've done it two or three times, bartering very much becomes part of your philosophy at the marketplace.

Ms Swift: That's the risk. I don't agree with a lot of your preamble, so I don't want to have it on the record that I do.

Mr Pouliot: That's okay, madam. I wouldn't wish you to agree, with respect.

Ms Swift: But I'm not going to bother addressing all of the issues. It's too much off topic for this committee here today.

In a previous brief that we submitted, back in 1993, on the underground economy, we actually got into that very issue. I didn't belabour it. October 1993 -- it was the committee on finance and economic affairs at that time that looked into the issue of the underground economy generally. We did mention that very fact that in other countries which have had, say, VAT -- VAT in particular, as we know, like the GST, are major incentives to increase underground activity. This has been well established. There has been very much a tendency in other countries that once people get into a habit, or whatever you want to call it, of perhaps working in networks that are underground -- and, by the way, the "informal economy" is a very well-established term in the literature to refer to these. We didn't cook it up because it sounded good; it's a very, very accepted term in all of the literature on this. But you do find, once people do get accustomed to operating in a certain way, yes, there's definitely a hangover effect even when your original conditions -- say, you dropped the PST to zero, just for the sake of argument, and so on, but you still had obviously other costs that applied, then there would still undoubtedly be some people who would.

However, given that we can't change history, I think at this point what we all have to try to be doing is -- okay, in our current environment we've definitely had a higher level of underground activity in the country, not just Ontario, after 1991. We believe, like I say, because of our anecdotal -- granted, not scientific but anecdotal -- evidence, we probably have fewer problems now than we did three or four years ago, but nevertheless higher than pre-GST. Where can we act to try to reduce the problem? That's, I guess, the issue that we were attempting to address today. But I don't think there's any doubt that you're always going to have an underground economy of some magnitude. You try to minimize it, for all kinds of good reasons, and I guess our objective today is how can we minimize it yet further from the level it is now. Because we also don't in Canada have a problem anywhere near as serious as we know exists in a lot of other countries.

Ms Andrew: I would just like to add that I think the Department of Finance's approach with matching databases and so on will probably turn up some things and it would be rare that a business would be completely underground in absolutely everything and so forth. So those kinds of initiatives to uphold the law will likely be effective.

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Mr Beaubien: I'll refer almost to the same question I asked this morning. We've talked about taxes, about avoiding taxes, harmonizing taxes, the fairness of taxes -- we keep talking about taxes. In your research paper in figure 1, of the top three major concerns that your members have mentioned, two of them deal with taxes: number 1, sales tax, and number 3, property taxes. I concur that retail sales tax, like property taxes, are quite regressive.

However, this morning I asked the question of two individuals as to their feeling on what could we replace the sales tax with. They were in favour of a consumption tax, sales tax, basically; they were in favour of that. But we know in Ontario, probably in Canada, the value of the goods we produce is going down while the value of the services we're providing is going up. My beloved friend across can transact $900 million from his pension fund into another pension fund, yet there are no taxes on that service provided.

As you mentioned, what are the true causes of the disease? I think we have to rationalize the whole basis of taxes. How do we solve this dilemma? The government needs revenue, but how do we raise those revenues? What's your opinion?

Ms Swift: Boy, that's a biggie. Obviously, one of the main determinants in Canada -- we're all following the flat tax debate in the US pretty closely, because whatever they do, we've got to do to a certain extent whether we like it or not, or we'll have such a leakage out of our country -- or we could have an incredible advantage, if we did the smart thing.

Certainly on the business and personal income tax side, already companies in Canada are finding they have a tough time keeping their best people, because personal income taxes in Canada are so much higher than they are in the US that they're losing a lot of very top people. Bill Gates, as you probably know, has a whole pile of Canadians cooking down in Microsoft there, and there is a lot of other companies as well.

Those international considerations are very important. Consumption taxes -- economists theoretically like them because they discourage consumption and it's better to save, so there are those theoretical solutions. But in an ideal system, I don't know that we have anything novel to bring to bear in terms of what kind of overall tax system one would like, what combination of income taxes, consumption taxes and so on, but the aspect of things we are most experienced with is the compliance side.

It is clear that in sales tax right now in Canada we have a compliance nightmare, because we have two different sales tax systems. The services side -- you're right. Right now it is the growing part of the economy and has been for 20 years -- this isn't a recent phenomenon -- and is mostly not taxed in Ontario. Some other provinces have levied their PST on selected parts of the service sector and of course Quebec has more or less harmonized its PST.

That's where we focus. We see the most inefficiencies, because the number one rule is that we've got to have some kind of consistency with our major competitors south of the border and also with our other provinces, so there won't be any serious dislocations based on different tax advantages in different jurisdictions. Barring the generic rules, if we can really focus on minimizing that compliance cost -- because it's terribly inefficient in the economy when you have an inordinate amount of resources going towards compliance with the regulations because governments can't agree, which is the real reason we have this mess in this country. I think we'll end up with a much more efficient system, and then one can debate, do we want more income tax or do we want more sales tax, or vice versa.

I don't know if I answered your question.

Ms Andrew: Certainly not more payroll taxes. Payroll taxes are the worst culprits in terms of their discouragement to job creation and so forth. Unfortunately, in recent years governments have tended to rely more on payroll taxes because they're seen as more reliable sources of revenue, but you do pay the price for that in terms of job loss and discouragement of the job creators in the province.

Mr Joseph Spina (Brampton North): There are two issues I wanted to ask you about. One is that of a consumer disincentive, and the other is the compliance issue we've talked about, but from a slightly different point of view.

The consumer disincentive issue is what I'll address first. You alluded to it somewhat when you talked about the Nova Scotia situation: shifting the tax collection to the wholesale level versus the retail level. Is it really the visibility of the tax rather than the actual amount that becomes the disincentive to the consumer?

Ms Swift: It's both. Visibility is certainly an issue from the consumer side. We polled our members back in pre-GST days on the visibility issue, so that's quite a while ago now and I would want to resurvey our members before I had confidence. But interestingly enough, we actually found the majority of our members -- and it wasn't an enormous majority; it was about 59% -- preferred a visible tax. Their rationale was to keep government honest, because of the perception that a tax that is not visible is easier for governments to increase and you don't know quite what's happened there but you've got more money out of your pocket.

Mr Spina: Not as much consumer accountability.

Ms Swift: Precisely. On the other hand, though, there's no doubt that the visibility is a major bone of contention to consumers. They really feel like they're just getting whacked every time they buy something. So it's important. The level of the tax is obviously very important too. I think the level has to be more important because that's the really tangible thing, but no doubt, the perception of keeping getting whacked with a tax several times a day is also problematic.

But from our standpoint, what we've been telling the federal government on this issue is the same thing as we are saying today, which is basically that there are certain principles, and we think there's a whole pile of different ways we could arrive at solutions which would be true to those principles: no tax grab; a significantly better structure -- more efficient, lower compliance costs and so on. Visibility would be one possible factor of that, and then we would want to go back to our members and get an updated read, now that they've lived with the GST-PST mess for the years they have.

Mr Spina: I would make one suggestion when you resurvey: You may want to distinguish between tourist business and domestic business.

Ms Swift: We do that anyway. All of our data are disaggregated by three-digit SIC, so there's no problem with that.

Mr Spina: Great, because obviously the visibility is more of a deterrent to a tourist than it may be to a --

Ms Swift: Absolutely, and there was a lot of debate around the GST introduction about whether there should be rebates and so on, as I'm sure you know.

Mr Spina: The second element is the compliance issue. It's not so much the twice the work to remit two cheques to the feds and the province and so forth; it's the actual time frame, and I think this is more provincial in scope. For example, the retail sales tax I believe is remitted based on the invoiced amounts on a monthly basis as opposed to the actual cash received. If I'm in a cash business, obviously I get and I send. But on businesses that charge retail sales tax and charge an invoice, even if it's only 15 to 30 days, I as a small business person have to remit that amount and then hopefully I'll collect it, and I then have to go through a whole pile of paperwork to get reimbursed if I write that invoice off as a bad debt.

Ms Swift: Yes, it's a big problem. Any sales tax system tends to have that feature, when you look around the world. The cash flow implications are enormous with these taxes, especially in tough times when businesses are getting paid slower and slower and slower by their customers. This doesn't change, of course, the schedule when they get their input tax credits, or at the outset, like you say, on a PST where there are no input tax credits but you're paying the tax right up front, when you might not get the full price of whatever it is you sold till -- who knows? -- three months later.

The cash flow implications of these taxes are always quite deadly, and for a small business whose cash flow is more dicey -- they don't have the breadth of business that an enormous corporation or a government or whatever will have to get into a loop and always have a flow going there. The small business impacts of the cash flow problems with sales taxes are always more acute, yes.

Mr Spina: I'd also be interested in seeing your numbers on liquor taxes particularly, with licensed retailers, restaurants, bars, because of the tax on the tax, where you have the gallonage tax paid by the bar owner and then the retail sales tax paid again on top of that gallonage tax.

Ms Swift: Actually, we have a lot of members in that industry sector, and the liquor taxes have long been a source of disgruntlement, partly just for their level and partly for the reasons you say, because they're layered on top of each other.

Mr Spina: There's another committee before which you may want to bring those issues more pointedly.

Ms Swift: Yes, I suspect we will be.

The Chair: I promised to have you out of here by 4:20; it's 4:21. Thank you very much for appearing before the committee today and sharing some of your experiences with us.

Committee members, we are going to be meeting again tomorrow at 10 o'clock in the morning to deal with the issue of the Ontario Board of Parole. I understand we've been provided some background reports which we'll be disscussing at the outset. You may want to take a look at those before tomorrow morning.

If there's no further business, we stand adjourned till 10 o'clock tomorrow morning.

The committee adjourned at 1621.