Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 17 - Evidence, June 21, 2000

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-25, to amend the Income Tax Act, the Excise Tax Act and the Budget Implementation Act, 1999, met this date at 3:45 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Today we are meeting on Bill C-25. Our first witnesses are from the Certified General Accountants Association of Canada. I believe Mr. Colby was before us recently. They have all been before us, actually. Please begin.

Mr. Everett Colby, Colby & Associates and North American Forensic Accountants, Certified General Accountants Association of Canada: Mr. Chairman, I am a certified fraud examiner and a certified general accountant. I practise accounting and forensic accounting in Toronto. With me today are Mr. Mark Boudreau and Ms Dawn McGeachy. I should like to thank you for having us appear before the committee today.

Before I detail our concerns, please allow me to put CGA-Canada activities and interests into perspective for you. The Certified General Accountants Association of Canada is a prominent and respected Canadian self-regulating professional body. We are responsible for the education, certification and professional development of over 60,000 certified general accountants and CGA students in every constituency in our country. Many of our members provide accounting, taxation and related services to individuals and businesses of all sizes, especially small and medium-sized businesses. Others occupy financial, administrative and policy positions in governments, financial institutions and not-for-profit organizations.

CGA-Canada is charged with ensuring that our members adhere to the highest standard of professional and ethical conduct. As you know, we also regularly appear before parliamentary committees to address public policy issues of concern to our membership and to provide our expertise to policy-makers whenever it is appropriate.

Our comments today apply only to the civil penalty provisions of Bill C-25. These proposed new penalties would be applied to a person who knowingly, or in circumstances amounting to culpable conduct, was involved in any manner in making or participating in making a false statement or omission. Let me state from the outset that our members are supportive of the government's need to root out tax fraud and evasion. Tax professionals who actually know of the deceitful nature of information provided by the taxpayer must face the consequences of that knowledge. However, we have very serious concerns about how this process will be applied and administered and the impact it might have on someone who did not intend to participate in such behaviour.

Knowledgeable professional accountants, such as CGAs, often catch a client's misstatements. CGAs also ensure the timely filing of returns, while at the same time advising on how to file honestly and ethically. It must be understood that professionally accepted practices do not require accountants to verify that the information provided by clients during tax engagements is correct and complete.

In Canada, tax advisors are already subject to criminal prosecution for intentionally advising or assisting clients in making false or deceptive statements in documents provided to the Canada Customs and Revenue Agency. We must question why the government feels that current sanctions against giving faulty advice are inadequate. We must also question why a person who is subjected to a new civil penalty can then still be criminally charged for the same act. These penalties are over and above the disciplinary sanctions that are applied by our own professional association.

While we recognize that officials have changed the term "gross negligence" to "culpable conduct" and that a test based on culpable conduct is more reasonable, this change has resulted in additional concerns. The term "indifference" in the proposed definition of culpable conduct is open-ended and needs its own definition to eliminate the basis of what would naturally be a very subjective determination. If professionals are to be held liable for indifference, then they should at least know what the term means in its legislative context.

Further amendments were made to the legislation by the House of Commons Standing Committee on Finance. Those amendments provided for a capped ceiling of $100,000 when levying the penalty, and also provided exclusions for employees of companies. However, while we appreciate those amendments, we are of the view that a capped penalty of $100,000 is still too high. The value is much higher than those that apply in other countries, such as in Britain, Australia or the United States.

Officials have also informed us that these provisions are intended to address extreme situations of false tax claims. Although we support that objective, CGAs are of the view that the rights of the taxpayer to receive independent advice and to legally minimize their taxes must be protected and that the process of applying the legislation may lead to abuse and thus the deterioration of professional relationships. If accountants have to focus on avoiding the risk of these proposed penalties, it will damage their professional relationships with their clients, as they will be forced to cross-examination clients on the accuracy of their information. In effect, accountants will become tax enforcers.

That has important implications. If accountants were forced by government regulation to examine and verify all information and statements provided -- that is, to do substantial additional due diligence before they compile the financial information -- the cost of the required added workload to our clients -- your taxpayers -- would be prohibitively high. Tax preparation fees could significantly increase for almost all Canadians.

We continue to hear from members that the risk of penalty under this bill could become too great for many professional tax preparers to continue to offer this kind of service to clients. This could force individuals to prepare their own often very complex tax returns or open the door even further to non-professional, or sometimes less than scrupulous, tax preparers. That would certainly result in more tax returns containing errors, which would force the government's tax processing costs up and actually reduce the total tax revenues collected.

We are aware that statements made by National Revenue Minister Martin Cauchon in September 1999 indicated that a penalty would not be assessed against a tax professional until after a head office review by the oversight committee had been completed. Under current proposals, this oversight committee would be composed of individuals from the Department of Justice, the Department of Finance and the Canada Customs and Revenue Agency. As it now stands, there is no consultation by this committee with any experts outside of the public service administration before a charge is made. We respectfully suggest that a representative from each of the professional accounting bodies in Canada, as well as the legal community, also be included on this committee. We feel that delegates from these four bodies would provide meaningful balance as well as perspective and a wealth of knowledge and experience to the committee.

Therefore, we request that the oversight committee be enshrined in the legislation and that section 163.2 of the Income Tax Act and section 285.1 of the Excise Tax Act be amended to read as follows:

The Minister shall establish an oversight committee composed of equal representation from:

(a) officials from the Department of Justice, Canada Customs and Revenue Agency and the Department of Finance; and

(b) nominees selected by the national professional accounting and legal bodies, including the Certified General Accountants Association of Canada, Canadian Institute of Chartered Accountants, CMA Canada and the Canadian Bar Association.

No penalty shall be imposed under subsections (2) and (4) of this section unless the oversight committee has reviewed all circumstances that have given rise to the proposed imposition of the penalty and determined that the penalty provisions are applicable.

We are very concerned that, without this representation on the oversight committee, tax advisers and others who may be subject to these penalties will have no real legal protection from potentially inappropriate behaviour by the Canada Customs and Revenue Agency. The possibility remains that overzealous CCRA auditors could use section 163 as a negotiating tool when reassessing a client. We have seen it happen that a field auditor may make the case to the tax preparer to allow the reassessment to stand without benefit of an objection notice or appeal while making the threat of applying the civil penalties against the accountant should they fight the reassessment, a purpose for which this section was neither designed nor intended. At present, there is no provision to "police the police" to ensure that abuse does not occur.

We would also like to see included within the legislation a provision for recourse to provide safeguards to those who are vindicated in court of wrongful conviction of civil penalties. The mere accusation of culpable conduct or negligence could result in enormous legal fees, waste of time in discussions and in court and potential professional ruin for accountants, regardless of whether or not a charge was substantiated. That is because, once an assessment is issued, the only remedy for the professional is to initiate an appeal, which is a public proceeding. Since penalties will adversely influence that professional's reputation, he or she should have ample opportunity to clear his or her reputation before being forced to undertake a public defence.

Perhaps we should think about how a professional will be able to recover fully the high cost of litigation or receive any monetary compensation for damages suffered should they be vindicated in court. Awards for assessment of costs and sanctions against overzealous officials should be provided in order to deter unwarranted court action.

The proposed law does not provide any legal protection from abuses by CCRA. Will this legislation be applied to relatively minor situations? Despite present assurances that that is not the intention, the powers are clearly there in this legislative proposal. Who knows what future policies might be. This deficiency must be addressed.

Another contentious issue is the wording contained within proposed new subsection 163.2(10). It should not refer to a prescribed percentage, but should actually state a percentage. The characterization of inappropriate conduct giving rise to penalties should be left to the legislature. If the Department of Finance and Canada Customs and Revenue Agency are concerned that the valuations are beyond acceptable norms, they should define the norms and be prepared to support them.

Finally, let us all remember that the Canadian tax system is based on voluntary compliance. This system works well. Revenue Canada itself demonstrated in its 1997 report, "Compliance from Vision to Strategy," that voluntary compliance increased from 85 per cent in 1985 to 97 per cent in 1995. Indeed, a 1994 Revenue Canada survey of compliance in Toronto and Ottawa showed that only 40 tax preparers and fewer than 12,000 taxpayers were identified as having false statements in their returns. That represents less than 1 per cent of the tax returns filed in those two cities, representing a rather large percentage of the population in just this province. Should we perhaps consider that we might be using a sledgehammer to kill a fly with these proposals?

Should we perhaps consider that application of this legislation might damage the positive relationship Canadians view that they now have with government? Is this in the public interest? Would our citizens be better served by taxpayers avoiding the services of professionals in their financial and tax planning or reporting simply because they cannot afford to pay the cost? Over the years, a co-operative relationship has developed between the private sector financial professionals and the tax collector. We hope that this new legislation will not alter that relationship.

CGA Canada fully agrees that people who knowingly participate in fraudulent tax returns should be penalized. However, we believe that the proposed legislation needs refinement before it is introduced. CGA Canada is prepared to work with officials to ensure that the implementation of this legislation and the development of guidelines for the administration of the penalty rules do not prevent advisors such as lawyers and accountants from discharging their professional duty of acting in the best interests of clients, subject to compliance with the law and the standards of professional conduct.

Senator Tkachuk: On the subject of a prescribed percentage, what kind of percentage were you thinking of? You said it should be a prescribed or stated percentage under subsection 163.2(10). What do you think it should be?

Mr. Colby: Not being a business valuator, I would suggest that consultation should be held with people in that area of practice to best define what would be an appropriate percentage. Our point is simply that a percentage should be stated so that people know the boundaries within which they will work.

Senator Tkachuk: Can you give me an example of how a certified general accountant could be found culpable civilly and legally? Basically, you say that there are criminal penalties now for advising clients to tax evade.

Mr. Colby: That is correct.

Senator Tkachuk: In your meetings with the Department of Finance, why did they say it was necessary also to have civil penalties to correspond with the criminal penalties? Are they one and the same, or is there a lesser amount of crime?

Mr. Colby: It was not only in conversations with Finance, but with other individuals I have met with who are in the department. It is less costly and easier for them to pursue. This comes out as a simple tax assessment. When you file your tax return, you get a notice of assessment. This will arrive in the same fashion.

In a criminal proceeding, they have to go through and gather the evidence and actually build a legal case to charge the person. They must have all their information together. This is simply the levying of an assessment. Thus, it is easier and presumably more cost-effective for them, because they do not have to go through all the trouble of gathering all the information they should gather before levying such a charge against someone.

Senator Tkachuk: How will this work for the client? The way it works now is that I sign a tax form declaring what I say to be true and I file it. Then the tax department either agrees with me and takes the money or disagrees with me and reassesses. I am held responsible. If I am a business and the accountant does my tax return and my annual financial statement, usually I sign that off with a letter saying he has done this financial statement and done this tax return on the basis of information given to him and that is it. Right?

How will you get around that little problem? I do not understand. What they are saying is that you will be culpable even though are you saying this is all you have.

Mr. Colby: The legislation does provide for a defence of good faith reliance. That is typically the statement you will see on the back of a tax return that is professionally prepared. As well, the professional preparer will have their name on the back of that tax return, but they do not sign anything. I personally am not as concerned about them coming after me for someone who forgot to add something from a T4 or a T5 slip.

This extends beyond the simple preparation of tax returns. In my practice I give tax advice. As I am sure you are all well aware, not every law is black and white; sometimes there can be grey areas and there may not be a precedent in the courts. If I choose an interpretation and provide advice to a client and they rely upon that advice and subsequently the Canada Customs and Revenue Agency disagrees with that advice, it is no longer a difference of opinion. I may be subject to these penalties because, under the "indifference" provision, they may say that I showed indifference as to whether or not the law was complied with.

To give you a more simplistic example, and this actually occurred, we had a tax preparer who had a client for the last five years in Northern Ontario. This client annually got a T4 slip from his company and generally there was included in that T4 slip a taxable benefit for his automobile. In one particular year, 1998, the company erred and did not include that amount on his T4 slip. The field auditor at the time told the professional accountant, "You are lucky that these provisions are not yet legislation, because I would assess you this penalty because you should have known that that taxable benefit should have been there and it does not matter that the company made the mistake in not including it, you should have known. Therefore, you will be liable." This guy charged his client a fee for the tax return, but despite the amount of that fee the preparer would facing a minimum $1,000 penalty.

The issue of what will constitute conduct has come up at various seminars that have been held as this has been proposed. Obviously, all professional bodies are up in arms about it. You are supposed to have an auto log for the kilometres that are driven. I do not advise any of you, but I would be surprised if every person here actually kept a detailed log as opposed to some notes in their daytimer of kilometres travelled. Theoretically, the way this legislation is proposed, if I allow a client to claim automobile expenses without verifying that that log exists, I am liable to a penalty. That was actually given as an example at one seminar.

Senator Tkachuk: How will you resolve that difference? The client says, "This is what I drove." You say, "I cannot put it down." How is that difference resolved? You must rely on the client, but you are not responsible for what the client says.

Mr. Colby: That is correct.

Senator Tkachuk: Are you saying now that there will be a bit of an impasse because the accountant will say, "Sorry..."?

Mr. Colby: That may very well happen. That was the point I mentioned about people not being able to afford to have their tax returns professionally prepared. Like any business venture, there is a risk return. If I am going to risk a penalty of $1,000, will I charge $30 versus that risk? I will likely raise the fees that I charge because I will have to do more work to try to verify this information. It may very well be too expensive for that individual taxpayer to pay me to do the work that they otherwise would have done.

Senator Tkachuk: It almost seems like an audit.

Mr. Colby: To be quite frank with you, senator, what it seems like is that I become a Revenue Canada auditor, an unpaid, non-unionized Revenue Canada auditor.

As professionals, we have our own code of ethics that we hold very highly. We are already subject to sanctions within our own professional bodies for doing things that you should not do, such as being involved with deceitful statements and so forth. I would hazard the guess that the vast majority of professional tax preparers are not providing false statements. There may be honest mistakes, of course, but it comes back to the study that was done. We have 97 per cent compliance. There were 40 tax preparers between Toronto and Ottawa who were found to have included false statements. Why suddenly does there need to be this proposed legislation, which was intended to go after the tax shelter promoters? It has become so broadly worded that it encompasses everyone. Let it be narrowed down and applied just to those to whom it was intended to apply.

In regard to fraud, deceitful tax returns and tax evasion, those involved should be punished, and punished swiftly. There are already provisions to do that.

Senator Poulin: Mr. Colby, as you are probably aware, I was the sponsor of this bill. I was happy to hear you say in your opening statement that you support the bill and its intent. However, I see and hear your worries. I understand where you are coming from in terms of your worries. Your example is an interesting one, although I do not think it is in the spirit of this bill.

You said in your presentation that officials have informed you that these provisions are intended to address extreme situations of false tax claims. I believe that. Therefore, do you feel that your worries would be covered by appropriate regulation? As we know, regulations will be developed to implement this intention in practical matters.

Mr. Colby: That is one of the reasons we want an oversight committee put in place. Canada Customs and Revenue is becoming an independent agency. You have the power to control legislation that gives it powers, but not the regulations. That will be up to them. They have a vested interest in using this power to their advantage. From a parliamentary point of view, you will no longer have any control over that, which is why we feel that a provision to enshrine this oversight committee should be in the legislation. At the very least, it would provide some balance and some objective views.

Senator Wiebe: What is the vested interest that you are referring to?

Mr. Colby: Revenue Canada exists to collect as much tax revenue as it can. There has always been the feeling that a taxpayer has the right to structure his or her affairs so as to legally minimize and pay the least amount of tax possible. Thus, there are two combative or adversarial approaches. You tend to find a common medium. Within the bounds of the law, taxpayers can minimize their taxes. The tax authorities, within their bounds, collect the tax revenue. I am fearful of the auditors and Canada Customs and Revenue Agency being given powers that have a specific intent and then them going beyond that intent. The way this bill is worded I do not believe they will limit that power, at least not in the long run, to what your intentions were in bringing forward the bill. We do not have a problem with legislation that goes after tax fraud and evasion. That is a good thing. However, I am afraid that the bill as worded gives them too much power without any checks or balances.

Senator Hervieux-Payette: Could you give me the number of the clause that states that regulations will not be scrutinized by our parliamentary committee? What you say may be true. However, if that is the case, it should be specifically mentioned in the bill. I have not memorized all the clauses of the bill. How can you say that the regulations of the agency will not be submitted for our scrutiny?

Mr. Colby: It is my understanding, and I could be wrong, that because Revenue Canada will now be an independent agency that has a board of directors --

Senator Hervieux-Payette: That is just semantics. It has to be specified in the bill. Since the minister is keeping some powers for himself, the new agency is not totally at arm's length. Sometimes corporations that have commercial activities do not submit their regulations to the Senate and House Standing Joint Committee for the Scrutiny of Regulations. This is a collection agency and is very close to government. It is not at arm's length.

I should like to ensure that all of us have the right information. I presume that we will have the power to examine the regulations. If not, Mr. Chairman, we will ask for such a power.

The Chairman: It has been this committee's view, which I think is shared by everyone, that we do not agree with legislation that has this much law and that much regulation. We do not agree with that. There is a parliamentary committee that looks at regulations. By whom is that committee chaired?

Senator Hervieux-Payette: By me, Mr. Chairman.

The Chairman: We feel it is not a good enough committee because the people studying the regulations have not looked at the bill. Of course, they look at it, but they do not study it like we do. As a matter of course, we are now asking that the responsible minister, once a year, table with this committee copies of regulations that were promulgated during the year. We may not have hearings on them, but we will certainly have our staff look at them to see if there is something that sticks out that does not seem right.

Senator Kroft: Mr. Chairman, you have touched on something that I should like to follow up on in order to be absolutely certain. You are making a case to say that at least to the best of your information we better get this right now because this is the last crack we will have to look at it. After that, the regulations will be in the hands of someone who is not responsible to the parliamentary process. If that is the case, I regard it as a very serious issue. Certainly, before we go any farther with this line of argument, I think all of us on the committee would want to be satisfied on this point. I think that is what my colleague Senator Hervieux-Payette is saying as well. It is a concept I know that, collectively, we would all find totally unacceptable.

If you are by chance wrong and if our opportunity to review regulations and devise our own improved review of regulations is to continue, would that relieve much of your concern? You seem to be focusing very much on the point of getting it right now because this may be our last chance to deal with it.

The Chairman: That cannot be right. I believe the government has outsourced the collection of taxes. From a mechanical point of view, the basic policy and law still rests with the minister. Is that not right?

Senator Tkachuk: There is a problem there. I spoke to the bill that created the agency. I am not sure about the regulations themselves, but the minister basically has lost control of the day-to-day operations of the agency. A board of directors now runs the operations. He can only inquire about a problem. He cannot fix a problem.

It has been a concern of ours for quite some time that these agencies that are being created and these privatized, government-owned organizations sit away from ministerial responsibility. The fear is there, and I think rightly so, that the agency is now quite distanced from the minister. It is difficult to catch that once it gets out of the barn.

The Chairman: I spoke to the minister the other day. He tells me he has absolute, ultimate authority.

Senator Tkachuk: Good luck.

Mr. Mark Boudreau, Vice-President, Public and Government Relations, Certified General Accountants Association of Canada: Senator, I think my colleague was trying to make the point that the regulations will not come back here to be examined. There is nothing to say that the department has to come back to this committee, or any committee, to examine the regulations.

Senator Kroft: Unless we insist upon it.

The Chairman: There exists already a committee that scrutinizes regulations. Even if we have nothing to do with it, it has to come back to a parliamentary committee. We are saying that we are going one step further.

Mr. Boudreau: Our point is that the oversight committee, which would be made up of both government officials and representatives from the accounting bodies and the legal profession, would go a long way to addressing the concerns and ensuring that this does not get out of control, in the sense that we are truly going after those cases, as you indicated, senator, that are large fraud cases. We have already heard of field auditors threatening our members on little petty things.

The Chairman: Government officials do get carried away sometimes.

Mr. Boudreau: It is causing some of the anxiety out there. If the oversight committee is not enshrined, it could disappear over time. It could filter down that that is left to the discretion of the auditor.

In this country, there is a wonderful mix of cooperation between the taxpayer and the department. You do not want to loose that compliance. There is that risk.

If it does filter down that it is left to the individual auditors in the regions, they will use that for different reasons than were intended. That is our concern.

Mr. Colby: If I may add to that, the Canada Customs and Revenue Agency, like other taxing authorities, is like a police force. They are the revenue police. We see that most other law enforcement agencies that have powers such as those being granted to Canada Customs and Revenue Agency have separate commissions that include people from the general public to oversee and ensure that they do not abuse that power.

We have been told that there is a plan to put this oversight committee in place, but whether that committee goes in place and for how long is up to the discretion of CCRA and no one else. We are asking that that committee be enshrined in legislation, so that at least we know that there is some permanency to it and that representation from the professional bodies -- and I would think they would give nothing but positive insight into these issues -- would be allowed to consult with them before these penalties are issued. If it is going to be only in extreme situations, it will not become an overburden for that committee.

Senator Poulin: Mr. Chairman, since we will be hearing as a witness Mr. Roy Cullen, the parliamentary secretary to the Minister of Finance, perhaps we could raise with him the issue of regulations.

The Chairman: Not just maybe; definitely. You are the sponsor: you raise it.

Senator Poulin: I think that we are mixing regulations and guidelines. We will be able to make that more clear.

Senator Hervieux-Payette: We are not mixing anything. He made that assertion. I just questioned whether it is reality. This is just an amendment to an existing bill. I do not see why the whole regime would be changed, since the regulations have always been according to the Income Tax Act and have gone through our scrutiny of regulations. If we have to be specific to that, what are we asking? If we are overlooking it or not, the monitoring is important.

Mr. Colby: Perhaps I used the wrong word in describing that as a regulation, although that is still an issue that I would hope you would resolve. This oversight committee is simply something that they have told us would be put in place. It is at the whim of the department. They can put it in place, keep it for two years and get rid of it. Seemingly, no one can do anything about that.

We are asking for objectivity, because this legislation has the power to be abused. We hope it will not be. Everyone will be happy if it is not abused. However, that potential is there, and this committee seems like it would be a simple solution to helping to ensure that that does not occur.

The Chairman: Most legislation has the potential of being abused. In particular, when you are out to collect taxes, there seems to be a built-in adversarial position between the government and the taxpayer. We must guard against that as best we can without interfering with their job.

Senator Kelleher: Am I correct in assuming that your organization and the Canadian Institute of Chartered Accountants are concerned about the size or quantum of the penalties to which your members could be subject?

Mr. Colby: I cannot speak for the Canadian Institute of Chartered Accountants. They are speaking after us. However, from what I have read and from what they have said before, I think that they are in full agreement with us. The monetary penalties do not seem to be in relation to the benefit derived by the individual that would be charged.

Senator Kelleher: Is it also your concern that our penalties would be much higher than those of similar jurisdictions, such as the United States, Britain and Australia?

Mr. Colby: Our penalties would be higher. As proposed, with the $100,000 cap, our penalties would be significantly higher than the penalties imposed by those other countries. In the United Kingdom, for example, the penalty is capped at approximately 3,000 British pounds, which, depending on the exchange rate, is Can. $6,500 or $7,000. In Australia, the cap is Aus. $3,000, which is roughly Can. $2,900. In the U.S., the maximum is $1,000. Our minimum is $1,000.

Senator Kelleher: Have you brought this disparity and this concern to the attention of the department? If you have, what was their justification?

Mr. Colby: This was brought about during the meetings held in the House of Commons -- not only by our group but by other professional bodies as well. It was subject to those meetings that the $100,000 cap amendment was put in. There was no ceiling before that.

Senator Kelleher: It is at $100,000.

Mr. Colby: They have capped it at that, and we feel it is disproportionately high.

Senator Kelleher: Did they give any justification for the size of the penalty?

Mr. Colby: Not to my knowledge. At least, not to us.

The Chairman: Thank you for being with us. I wish you good luck.

Our next group of witnesses is from the Canadian Institute of Chartered Accountants. Please proceed.

Mr. Roger Ashton, Member, CICA Taxation Committee, Canadian Institute of Chartered Accountants: On behalf of the Canadian Institute of Chartered Accountants, I should like to thank you for allowing us to appear and to provide input into Bill C-25. I am a member of the CICA's taxation committee. With me today is Simon Chester, legal counsel to the CICA.

First, I should like to provide the committee with some background. The CICA, together with the provincial and territorial institutes of chartered accountants, represents a membership of over 65,000 professional accountants. Members are employed in all sizes of CA firms, in industry and in government. As well, they operate as sole practitioners throughout Canada. They are involved in a wide range of endeavours, acting as auditors, tax accountants, business valuators, tax advisors, management consultants and strategic planners, to name just a few.

The focus of my remarks today will be on the provisions contained in Bill C-25 that introduce civil penalties for misrepresentation of tax matters by third parties such as chartered accountants. The specific proposals for civil penalties that we are addressing here today were first brought forward by the government in the 1999 federal budget. The reaction of our profession was swift and strong. We were alarmed by the scope of the proposals, and immediately began to work with Finance officials to address our concerns.

We indicated at the outset our belief that civil penalties for tax preparation or for tax advice were simply not necessary. While we support penalties for tax advisors who knowingly participate in fraud, outside of the tax shelter area we see no compelling evidence that there is a problem in respect to tax preparation or advice that warrants the threat of these penalties. Our major concern continues to be the potential results, the increased compliance cost that could be incurred by Canadians and the exposure to liability for our members based on subjective standards such as indifference.

Notwithstanding our serious concerns, we saw that the government, with the weight of the Mintz committee and the Auditor General behind it, was committed to introducing civil penalties and that the penalties would extend beyond tax shelter activities. We knew there was a growing concern within the accounting profession regarding the proposed provisions. Our legal counsel had looked the proposals and considered them ill-defined and vague. We had considerable difficulty appreciating the appropriateness of a penalty that was based on a "should have known" or gross negligence concept. This would have required the adoption of uniform standards for tax return preparers and advisors, which is a monumental undertaking. Where negligence is the basis of liability, the question is not what the individual intended but, rather, whether they exercised reasonable care. It would have created a conflict of interest, because it meant that tax professionals owed a duty of care not to the client or to the profession but to Revenue Canada. We made it clear that we would not take on the role of enforcers for the Canada Customs and Revenue Agency. We saw the proposal as far too far reaching and imprecise, in effect regulating virtually all of the legitimate activities of tax professionals. We wanted to see the proposals changed so that the penalties would apply only in situations where advisors had acted intentionally.

Given that the government was intent on bringing in civil penalties, we decided to push for changes to the initial proposal to make it as specific and precise as possible. We focused on how the provisions could be narrowed to target deliberate acts, in effect addressing the intentional misconduct of individuals. The Supreme Court of Canada has noted a fundamental difference between intentional acts and negligence. We wanted to see that reflected in these proposals.

What resulted from those discussions was the gross negligence standard being replaced by a standard of culpable conduct. We think the move to culpable conduct will better focus the penalties on intentional wrongs and not on accidental failure to meet a standard of care, although some concerns still remain.

We also worked hard for a good faith defence to be included in the proposal to make it clear that tax professionals can rely on information provided to them by their clients. We do not audit information provided by our clients, and we cannot be expected to undertake massive procedures to verify the information provided by them. The good faith rule, which now extends to all activities other than excluded ones relating to tax shelters, confirms that it is the taxpayer who is responsible for the veracity of their financial information.

Finally, we fought very hard to have a central review committee put in place. We are not prepared to support the possibility of penalties being threatened or imposed by local auditors. In this regard, we note that the government has announced its intention that no penalty will be levied without having been reviewed by a central committee. We would take far greater comfort if this committee were enshrined in the legislation itself.

In the end, we think it is impossible to write legislation that, on its words alone, will satisfy the concerns of taxpayers, advisors and the government. We are appreciative of the changes that have been made to the original proposals as a result of our consultations and airing of our concerns with Department of Finance officials, but it all comes down to how the legislation is interpreted and implemented. It is now time to focus on how to narrow the application of the penalties to those situations in which they are truly warranted. The implementation of civil penalties is a crucial area, and we are anxious to learn more about the implementation guidelines and the central review committee, which will be so critical to the proper functioning of this regime.

The government has committed to consulting with the profession on the guidelines that will be developed. We hope that these consultations will begin soon. We will be at the table to ensure that the guidelines are as specific as possible. The government's expectations must be clearly outlined, and we will seek the input of our provincial institutes on any draft proposals. Likewise, we have urged the government to conduct cross-country consultations as they develop the guidelines. There are views held in the western part of this country that are somewhat stronger than those that I am expressing to you today.

How the guidelines are communicated is of utmost importance. They must be made public so that everyone under stands how the penalties will be administered. It is also crucial that guidelines be developed and published before the legislation takes effect. We have asked the government to ensure that publication of final implementation guidelines precedes the effective date of the clauses relevant to civil penalties.

As I mentioned, we are also anxious about the workings and composition of the central review committee. We want to see this committee comprised of senior level officials with substantial experience who are centred in Ottawa. Since everything hinges on this committee, we would like to know more about how it will function and we wish to be consulted on its design and method of functioning. We will also be pushing to have non-government representation on this committee. We believe that such representation is essential to assure a well-rounded analysis of any particular factual situation. While taxpayer confidentiality is a sensitive area, there is ample precedent for this type of approach in other areas of the tax administration, which preserves confidentiality.

We still have concerns about the quantum of the civil penalties, despite the fact that an amendment to Bill C-25 has placed a cap on the penalty for tax preparers. A cap of $100,000, plus gross entitlements, bears no resemblance to the fee for the professional services provided. The taxpayer's penalty under proposed new section 163.2, which is imposed on them where they seek to reduce their tax, relates to their possible gain -- the tax to be saved. However, the tax professional's gain will never be more than their professional fees. The cap has been set so high, in relation to the range of fees charged in the marketplace, that it simply does not address our concerns. We propose that the penalties be less severe, since there is no proportionality between a tax professional's possible gain and the professional's exposure to liability under this penalty.

In relation to penalties under subsection (4), we believe the penalties should be capped at $5,000. Such a penalty would still be significant, given that the vast majority of taxpayers who use tax preparation services pay fees of less than $1,000. This capped penalty would also conform to similar penalties in Britain, Australia and the U.S.A., as you have just heard from the previous witness. We do not believe that Canada's tax advisors are so much less professional than their overseas colleagues as to need a vastly tougher sanction.

We have been told that the government expects there to be no more than a dozen civil penalty cases arising in any year. Despite this assurance, there are still considerable fears and concern within the CA profession that that will not be the case. If not applied properly, the penalties could result in a change in the way that the profession delivers its services, resulting in increased costs to our clients -- Canadians.

There must be cautious and judicious use of these new civil penalties. The government has stated that its civil penalties are to be applied only in the most egregious cases. If there is even the slightest suggestion that civil penalties are not being reserved for such instances, that they are being used as a threat, we will make our concerns heard loudly and clearly in Ottawa. We do not think it is in anyone's interest to require our profession to institute new and costly procedures that would affect professionals and clients alike when the government has stated that very few cases should attract civil penalties.

Senator Tkachuk: I ask the same question that I asked of the previous group of witnesses. When filing a tax return where the individual or the officer of the business is normally held responsible for its content, it is signed and out it goes. If something is wrong, it goes back to the individual who signed the tax return. What happens when you are asked for advice on a particular issue and you say, "Well, the law is a little fuzzy on this, but let us try it and see what they say." Would you be free to give that kind of advice, which I think is legitimate to give?

Mr. Ashton: There are many circumstances on a day-to-day basis that conform broadly or narrowly to the type of example that you just gave. There are many circumstances under which the application of the tax law in a particular instance with respect to a particular expense or transaction is just simply not clear. We would have to believe that there was a reasonable position that could be taken on the interpretation of the law or on the interpretation of the relevant facts that would justify our support -- the inclusion of a claim for deduction or the non-inclusion of revenue or whatever the situation was -- before, under our professional code of conduct, we would be associated with the return. We would provide advice to the client and let them know that the matter was unclear but that there was a filing position with respect to the item, and we would let them make the decision as to whether they wanted to take the more aggressive or more conservative position. We would pursue it according to their direction, because it is the client's tax return and they sign it. We would prepare it in the manner that they ultimately instructed us to use, provided that we did not know it was false or misleading and provided that there was some reasonable basis for the position being taken.

Senator Furey: Would taking indifference out of the definition of culpable conduct and giving it is own specific definition correct that problem? If so, how would you define indifference?

Mr. Ashton: It is a very vague and undefined standard. We would not try to define it. In the letter we sent to your chairman in advance of our appearance here, our recommendation was that it be removed. The other two standards relating to wanton disregard and mens rea or intent are sufficient for the objectives that Canada Customs and Revenue Agency and the Department of Finance have. We would eliminate it rather than try to define it.

The Chairman: Mens rea is criminal intent.

Mr. Ashton: Being a humble accountant, perhaps I should not use legal terms in the presence of lawyers, but to me it means a guilty mind.

The Chairman: It means criminal intent.

Senator Furey: Rather than try to define it, you would be happier just to see it removed.

Mr. Ashton: Yes. Our recommendation is to remove it.

Mr. Simon Chester, Legal Counsel, Canadian Institute of Chartered Accountants: Our position is that all of the words associated with culpable conduct mean knowingly or virtually knowingly, and "indifference" is somehow in a different category. What constitutes indifference may vary according to the circumstances. In Senator Tkachuk's example, it could be said that the tax professional was indifferent because they did not give the benefit of the doubt to the Canada Customs and Revenue Agency in the interpretation of an ambiguous position. In those circumstances, it is better to eliminate it because it sticks up oddly -- it does not fit with the rest of the definitions.

The Chairman: Stupidity is not a crime.

Mr. Chester: It is not, yet.

Senator Wiebe: In the case that you give, could the accountant not write to the department to ask for their interpretation of that prior to giving his advice?

Mr. Ashton: At the moment, yes. There is a procedure whereby one can get a technical interpretation from the department with regard to their views as to the application of the law in a particular circumstance. Their views tend to be a little bit biased toward the Crown. However, to get such an interpretation in writing, or formally, takes several weeks, if not months. It is not practical in the course of preparing the tax return, when the client has come in with the information and there are only four or five weeks until the filing deadline, to have that kind of recourse.

Obviously, in the course of providing advice we look for authority to see whether the issue has been considered and what the Canada Customs and Revenue Agency's or the court's views might be that would bear on the matter. Despite that, there are many circumstances where the issue is simply not clear.

Senator Wiebe: You said that the $100,000 cap is too high, but that cap does not necessarily mean that every time someone is charged the fine will automatically be $100,000. The fine would follow the severity of the offence. An accountant could provide advice with all due care and diligence and still make a mistake from lack of knowledge or lack of understanding of what the ruling would be. Would that fact not have an influence on what the penalty would be? If he were found wrong, the fine would not necessarily be $100,000. It could be a mere $1,000. There seems to be some concern that every fine will be $100,000 and that because of that you cannot afford it and those costs must be passed along to the clients.

Mr. Chester: The problem with the cap is that this is not like a criminal penalty in which a judge assesses the seriousness of the offence and then decides on the quantum of the penalty. When you actually look at subclause 50(1) of the bill, it is a little complex, but the relevant part is subsection 5 of the proposed new section 163.2 in the income tax provisions, which have been amended by the House of Commons Standing Committee on Finance. It says that the penalty will be the lesser of the taxpayer's penalty and the total of $100,000 and the person's gross compensation.

In a situation where the taxpayer is perhaps attempting to save more than the $100,000 figure, the combination of those two provisions means that the penalty will automatically be prescribed at the lesser of the taxpayer's exposure and $100,000 and the gross entitlement. In a situation where the taxpayer's exposure is higher, the $100,000 will follow automatically. Granted, it is the lesser, so if the taxpayer's exposure under subsection 163(2) of the Income Tax Act, which is 50 per cent of the tax owing, is lower than the $100,000 fee, then we obviously follow that logic and the penalty would be lower.

In this situation, it is not really being applied in the same way a criminal penalty would be, looking at the circumstances of the case; it is being applied as a civil administrative penalty. The tax professional will be served with an assessment and that assessment will be calculated mathematically. The formula is in the statute. Simply putting a cap on that at $100,000, given the market circumstances of the professional fees associated with tax preparation, strikes us as being overkill. It is overkill when you look at what is happening overseas, as well.

Senator Wiebe: Has there ever been any consideration or is it available for professional liability insurance?

Mr. Ashton: That issue has been examined, and whenever we have asked the question of the insurers they have come back and said, "No, it is not covered." When you have been determined to have engaged in culpable conduct, that typically is an action on the part of the individual that is beyond the scope of normal responsibilities and therefore is not covered by errors and omissions type of insurance. There may be some doubt, but in general terms we are working on the assumption that there is no liability insurance the way that professional indemnity policies or corporate policies regarding officer errors and omissions are presently drafted. Do you agree, Mr. Chester?

Mr. Chester: That is correct.

The Chairman: Our next witnesses are from the Canadian Tax Foundation. Please proceed.

Mr. Robin J. MacKnight, Director, Canadian Tax Foundation: Mr. Chairman, Mr. Brian Carr appears with me. He is one of the incoming governors. The Canadian Tax Foundation represents all tax practitioners across the country, whether they are accountants, CAs, CGAs CMAs, lawyers, economists, academics or government revenue officials.

In a departure from the norm this afternoon, both Mr. Carr and I are tax lawyers. We have both practised law for over 20 years. Thus, we have a slightly different approach to this issue.

The Canadian Tax Foundation is not a lobby group. It is an impartial, member-funded, tax and public policy research organization. Our stated intention is to create and maintain the best possible tax system for Canada: one that is fair, transparent, efficient and certain. We strongly believe in the need to maintain the integrity of the Canadian tax system. Our concern today is that the proposed civil penalty provisions meet none of those goals. Consequently, we feel that the integrity of the tax system is at risk.

Let me give you four examples. First, these proposals create a criminal type of offence in the guise of a civil prosecution without introducing the corresponding rights of the accused, the assessed tax advisor, against self-incrimination. That is not fair. Second, these proposals create conflicts of interest between advisors and their clients, increasing the compliance burdens and the costs. That is not efficient. Third, these penalties could apply in situations where there is neither abuse nor harm to the tax system. That is not certain. Fourth, these proposals create a type of criminal offence without resort to Parliament; that is the valuation regulations that were discussed earlier. That is not transparent.

We agree with the submissions of the other parties that you have heard this afternoon. A copy of our submission to the minister has been given to the clerk of this committee. In fact, all of the points that we raise in our submission have been covered by the other presentations you have heard. Instead of covering familiar ground again, we will reiterate four points and then we would be pleased to respond to your questions. As I noted, Mr. Carr and I have slightly different perspectives on these issues and we may be able to add different points of view.

Our four recommendations are these: First, enshrine the review committee in the legislation. You have heard that in every other presentation and we strongly endorse that. Second, delete the indifference paragraph in the definition of culpable conduct. That was the point Mr. Ashton just made. Third, make the penalty applicable only where tax advice has been given and applied producing abuse to the tax system. Finally, remove the power to delegate the definition of offensive valuations. We strongly feel that if you are planning to create a criminal sanction, the only body that is entitled to create that criminal offence is Parliament, not the government bureaucrats, nor regulation. This matter should be discussed on the floor of House of Commons.

The Canadian Tax Foundation has a 55-year history of working cooperatively with the Department of Finance and with Revenue Canada and now the Canada Customs and Revenue Agency. We look forward to continuing that cooperation by participating in the design and the operation of the review committee and in doing anything else we can to ensure that our tax system is fair, transparent, efficient and certain.

Senator Hervieux-Payette: You say that you would like to have the definition in the law rather than by regulations. Can you tell me where in the act that is?

Mr. MacKnight: It is subsection (10), I believe, to do with the prescribed percentage of evaluation.

Senator Hervieux-Payette: Just give me a moment while I locate the section.

Mr. MacKnight: It applies in subsection 163.2(10).

Senator Hervieux-Payette: Can you give me the page of the bill?

Mr. MacKnight: I am using a different version than you are. I am using the CCH special report. It is on page 207.

Senator Hervieux-Payette: I have the bill as passed by the House of Commons.

Mr. MacKnight: If it helps, it is in clause 70 of the bill.

Senator Tkachuk: What are you asking, senator?

Senator Hervieux-Payette: The definition he would like to see in the bill. You say it is clause 70 regarding proposed new section 285.1?

Mr. MacKnight: Clause 70 of the bill. The prescribed percentage applies in paragraphs (a) and (b) of subsection (10). It relates to a statement of value. We feel that if the government is concerned that valuations are excessively high or unduly low they should state the percentage, because the result of being offside the valuation will give rise to quasi-criminal sanction. The only body entitled to create quasi-criminal offences is Parliament.

Senator Hervieux-Payette: In principle, I agree with you. I want to know how it is applied there. Anyway, the clause would be invalid and then we would have to correct it later on. That is why I want some clarification.

In our bill, it is page 103, for my colleagues.

Who normally evaluates the property or the service? I want to see how it applies in reality. If it is a piece of art, you go to specialized people who say, "This painting is worth $100,000."

Mr. MacKnight: You go to experts. Depending on the property, you could go to anyone. If it was a piece of art, you might go to two or three art dealers and ask for their views and take the average of the three. If it was a piece of property, you might go to a real estate agent or a real estate appraiser. If it was a business you were valuing, you might go to a chartered business valuator. Depending on the funds available to undertake the evaluation, you might go to any number of different experts.

Senator Hervieux-Payette: What is the role of the accountant regarding "stated value"? Does the client say, "Here is my assessment of the stated value"? What would the accountant ask a client? Do they ask for the certificate or the expert assessment written on paper by people qualified to do it? What is the normal practice?

Mr. MacKnight: The practice would vary. I do not know if there is a normal practice, because the situations where this provision could apply are so numerous. It is not restricted to accountants. It is not restricted to business valuators. It could be anyone who provides an opinion.

Let me give a simple example. At age 55, the owner of a small business wished to retire and wanted to undertake an estate freeze. As part of the estate freeze we needed to determine the value of the business so that we could create the appropriate size of freeze shares and issue new shares to family members and employees. We would normally go to a chartered business valuator and ask them to undertake a value of that business. If we were acting for a large company, that would not be a big deal because there would be funds available. If we were acting for the corner hardware store in Brampton, they might not have the funds available to go to a chartered business valuator, so instead they might go to their local accountant, who could be a CA, a CGA, a CMA or none of the above. It could be just someone who has traditionally done their bookkeeping and their books and records. They might go to a real estate agent, because some real estate agents feel they can value businesses. The small-business owner would come up with a value and give that value to us. We would prepare the necessary legal documentation to effect the estate freeze.

Why would Revenue care about that? If we said that the value of the business was only $60,000 and in fact it was $150,000 and if we issued common shares to the children, we would be conferring an economic benefit on the children. That should be reflected in the tax system. That is not an appropriate course of conduct.

If we were doing a deal with a bank that was foreclosing on a piece of property, we might undervalue the property for some particular reason, because we had tax losses, to use them up.

It would depend on an infinite variety of circumstances when valuations come into play. That is why there is no normal circumstance and there is no normal person who would give the valuation.

If the concern is that valuations can be so significantly skewed, either high or low, pick a number and then let the professions live with that number. Do not let that number be variable without open debate. Do not let some people -- anonymous people within the department -- make recommendations for regulations that can change that number all of a sudden without it coming back onto the floor of the House of Commons, because we are dealing with quasi-criminal legislation here.

Senator Furey: If you are saying that the section will be fixed by fixing a number, how can you say that it is unconstitutional because it is quasi-criminal? It is either constitutional or it is unconstitutional.

Mr. MacKnight: I did not say it was constitutional or unconstitutional. I am saying that, if you are going to create quasi-criminal legislation, the appropriate body to define that legislation is the House of Commons.

Senator Furey: You cannot fix it just by setting the percentage in this section, can you?

Mr. MacKnight: Yes, you do. Under subsection (10), where you exceed, where you are outside the range, you are presumed guilty of culpable conduct, whether you are high or low, depending on the circumstances. If you are outside the range, you are offside. That creates the culpable conduct, which gives rise to the penalties.

Senator Hervieux-Payette: Do you have a more specific suggestion? Do you have amendments you would like to suggest? I understand you are not happy with the wording. You say it is too broad and can lead to much abuse. How would you be more specific? Do you have recommendations for the committee?

Mr. MacKnight: I have a personal view, but the appropriate body to contact would be the Canadian Institute of Chartered Business Valuators.

My concern is that you do not want that range to be so narrow, because valuation is an art. You can have two people look at the same piece of property and have radically different views of it. You want to have a fairly wide range, maybe 25 per cent, plus or minus.

Senator Oliver: What did you expect in coming before this committee today vis-à-vis this piece of legislation? Are you satisfied with it? If not, are you here suggesting amendment? What are you saying?

Mr. MacKnight: No and yes. No, we are not satisfied with this legislation. Yes, we do have suggestions on amendments. This would be one of them.

You have heard from other bodies on the other three amendments as well, enshrining the review committee in legislation. Mr. Colby had some proposed wording for that. I would only add the Canadian Tax Foundation as a professional body.

Senator Oliver: When you appeared before the House of Commons, did you make those same proposals there? The letter you sent us was sent to the Honourable Paul Martin in February of this year, and this is June. What happened to that letter?

Mr. MacKnight: We got a response from Canada Customs and Revenue Agency saying they were not even remotely interested in our suggestion on the independent review committee. Unfortunately, we were not able to appear before the Commons committee because we had other commitments in Western Canada. This is our first public crack at this legislation.

Senator Oliver: You know that the House of Commons has recessed for the summer and that we are winding down?

Mr. MacKnight: Yes, I do.

Senator Oliver: I am just putting things in perspective.

Mr. MacKnight: I understand.

Senator Tkachuk: Now, that is not our point of view. It is more the concern on that side of the table. We could not care less whether this must wait until fall, so you know where the blame lies.

Mr. MacKnight: We understand, but we fully agree with Mr. Ashton's comment. We have heard the assurances from the officials at the Revenue agency and we will be watching. We have already heard stories that the guidelines and the assurances made by the Revenue agency have not been honoured. We have already heard stories of field auditors saying that, had this provision been in force, they would have applied it. We will be monitoring this carefully and Canada Customs and Revenue Agency will hear if we hear horror stories.

Mr. Brian R. Carr, Canadian Tax Foundation: This is one of the areas where the lawyers have the most concern. Supposing that a client of is reassessed and the advisor also acts for the client in the tax appeal. The auditor then says, "Well, I think this is a case where the advisor is guilty of culpable conduct." Immediately there is a conflict between the advisor and the client, so the advisor can no longer act after that. It is a real concern of the bar that the agency will use this as a bargaining chip in order to say, "If, in fact, you do not accept our settlement proposal, we will reassess you, the tax advisor." That is one of the real concerns of the bar.

Senator Tkachuk: They will do that. Why wouldn't they? It is what they do.

Mr. Carr: You can appreciate the difficulty that that creates for the members of the bar.

Mr. MacKnight: The other concern is that, once that threat is on the table, the reputation of that advisor is now at risk. As was pointed out by one of the prior witnesses, once that is on the table, the reputation of that professional has been irreparably damaged.

It is interesting that there is a proposal on the table here to raise the standards of conduct for the tax practitioners, but there is nothing comparable to raise the standard or accountability of the Revenue agency officials. There is such accountability in other jurisdictions.

Senator Oliver: Do you refer to the United States?

Mr. MacKnight: No, I refer to Ireland.

Mr. Carr: We have another concern about this legislation being quasi-criminal without the criminal protections. If these procedures were used, the agency would simply issue an assessment against an advisor and would start a proceeding. The advisor would have to appear at an examination for discovery where that advisor would have to answer all relevant questions dealing with the matter. He or she would have no ability to refuse to answer questions, no ability simply to be quiet on them. If the matter then proceeded to trial, the advisor would have to go first and present all the facts relevant to the case. In contrast, in a criminal procedure, the advisor would not be subject to an examination for discovery and would not have to divulge any information and would not have to testify in court.

You have here a very simple procedure from the perspective of the agency: in effect, to use what is quasi-criminal legislation to prosecute advisors where those advisors do not have the protection of the criminal legislation.

The Chairman: You said there was no counterpart on behalf of the tax collectors to adhere to certain standards. Is that what I heard you say?

Mr. MacKnight: That is correct.

The Chairman: In the last year, the U.S. Congress has been going at this hammer and tongs, and they do not seem to have achieved anything. How do you suggest that should be handled?

Mr. MacKnight: I am not sure. I think we should look at the experience in other jurisdictions. In fact, I will put in a quasi-commercial plug here. We will be discussing this as one of the major issues at our annual conference in September. Members of both the Department of Finance and the Revenue agency will be speaking on this topic.

The Chairman: Are you speaking in relation to this bill or to the overall problem?

Mr. MacKnight: We are dealing with a number of topics, but this particular civil penalty provision will be one topic of extensive discussion.

The Chairman: Is it really part of a larger problem that tax people tend to harass taxpayers?

Mr. MacKnight: I have heard anecdotal evidence of that. I do not know how much credence I give it. Certainly, you hear stories among certain groups; I do not know how best to describe them. The de-tax movement, for instance, promulgates stories about harassment by revenue collection officials. I am not sure how credible some of those stories are, but there are probably good examples out there of horror stories.

Senator Oliver: Do you hear them in your practice?

Mr. MacKnight: Yes, I experience them occasionally, but thankfully very rarely. When egregious conduct on the part of a Revenue agency official does come up, there are procedures within the Canada Customs and Revenue Agency administration for lodging complaints and seeking redress, but it is all very informal.

Senator Tkachuk: I have a hard time understanding why you need this little piece of legislation here.

Mr. MacKnight: So do we.

Mr. Carr: We agree with you. We have been arguing that for eight months.

Senator Tkachuk: I want to clarify this for my arguments later on. I want your opinion on this. What if a client is falsely counselled by an accountant or a lawyer to do something to get around a requirement? He might say, "Well, it is against the law but we will do it anyway." Or perhaps the client does not even know it is against the law, but the advisor wants to look good to the big client. The false tax return is filed. Then what happens? First, the client goes to jail or is heavily fined. Can the client not also sue the advisor for the bad advice?

Mr. MacKnight: Yes. Absolutely.

Senator Tkachuk: The client can get redress and report the advisor to the professional association. Perhaps the advisor's licence would be pulled. There are so many penalties out there for doing these bad things. They want to charge you a $100,000 fine.

Mr. Carr: Let me give you a less egregious example. A recent case went to the Supreme Court of Canada. The Tax Court of Canada found in favour the taxpayer. The Federal Court of Appeal reversed that decision and found in favour of the department. Supposing we froze the frame at that stage. The notes put out by the Department of Finance say that if you were to counsel someone contrary to a decided tax case you would be guilty of culpable conduct for offering advice that was inconsistent with what a court had said. Freezing the frame there, if the department proceeded to court, they would argue that you are guilty of culpable conduct. The Supreme Court of Canada said that the taxpayer was right and obviously the advisor was not guilty of culpable conduct.

Some of these areas are very fine and not based on blatantly wrong counsel. The courts have shown that we deal with grey areas. Yet the Department of Finance would say that, if you were to tell a client that the position of the agency, as decided perhaps by the Tax Court of Canada, was incorrect and would not stand up before the Court of Appeal, they would say that you were not entitled to give that advice and that you were guilty of culpable conduct for doing so.

Mr. MacKnight: That is notwithstanding that the Revenue agency has been known to ignore decided cases in their interpretation and application of the Income Tax Act.

Mr. Carr: Of the last 20 cases that went to the Supreme Court of Canada where taxpayers appealed, the taxpayers won 19, so it is not as if the agency is always correct. In fact, their success rate at the Supreme Court of Canada is very low.

Mr. MacKnight: It is interesting that in other jurisdictions, notably the United States, they have penalties for outrageous tax advice -- perhaps we would call it extremely aggressive tax advice -- but they do not call it culpable conduct or misrepresentation. They use the term accuracy-related penalties, and the penalties are not outrageously large.

The Chairman: Is that not really semantics?

Mr. MacKnight: No, it is a difference, because in the United States the accuracy-related penalties require the advisor to have undertaken an analysis of the situation and to have applied professional judgment and to have determined that, in the opinion of the tax advisor, there was a reasonable case for filing in a particular way. Where they are filing against a known position of the IRS or against a decided case, they are required to identify that on the tax return. Once it has been identified on the tax return, everyone is off the hook. That is considered full, true and plain disclosure to the tax authorities. We do not have anything comparable to that here.

We frequently have situations where cases are distinguished because of differences in facts, particularly in areas like real estate development or in what are considered tax shelters or in cases of reasonable expectation of profits. You can find lots of cases going in each direction. Our job is to apply our professional judgment: In this particular case, is it more likely that you will land on this side of the line or on that side of the line? The problem with culpable conduct is that, because that line is so wide, the question becomes whether you will land on the line half the time. Our concern is that if you land on the line, you are considered offside.

Senator Poulin: Mr. MacKnight, you represent 8,000 professionals who deal with income reporting; is that correct?

Mr. MacKnight: That is correct.

Senator Poulin: When I studied this bill, to me it did not refer to the cases that you are referring to. You use the American terminology of accuracy-related errors, whereas the whole intent of this bill is to look at extreme situations, and once you look at extreme situations, you look at the amount of the cap. It is the same message: it is a very high cap, but we want to deal with extreme situations so that the responsibility is shared in those extreme situations.

Mr. MacKnight: But shared by whom?

Senator Poulin: By the professional and his or her client.

Mr. MacKnight: I do not think the legislation accomplishes that. I do not have any difficulty with your statement, but I do not think the legislation accomplishes that. The legislation is quite encompassing and it covers many situations where there might be an error in judgment, but we all make those. We should not be penalized for an error in judgment, for making an honest mistake.

To go back to Senator Tkachuk's comment, if you tell someone to take a filing position knowing it is false, then, yes, you should be subject to penalties. However, let us take the situation of someone asking, "Should I deduct this expense related to my hobby farm?" There are many hobby farm cases -- it is a very grey area -- and you exercise judgment and you come down on this side of the line or that side of the line. That is what tax practitioners get paid to do. However, that is not culpable conduct. We might be wrong. A court might find us wrong.

We have to remember that, in the first instance here, it is a Revenue auditor that is making the determination that someone has been guilty of certain conduct, and then it goes into the courts, and once it is in the courts, it is public. There was a recent case dealing with Ms Gernhart and access to information, and certain provisions of the Income Tax Act were struck down and it was affirmed by the Federal Court of Appeal that tax litigation is public. There is no way that you can keep this secret. There is no way you can hide the fact that a practitioner has been assessed for something that the Revenue agency thinks is egregious, and if that practitioner is ultimately vindicated, they have no remedy. They cannot rebuild their lost reputation. They cannot sue the Revenue agency for the loss of their business and their livelihood.

Senator Poulin: Therefore, your real worry is with respect to the application and the process?

Mr. MacKnight: Absolutely. We, like the other groups ahead of us, are resigned to the fact that this train is coming down the tracks. We just want to have a seat in the locomotive to help drive it.

The Chairman: That is very well said. Thank you, gentlemen.

Honourable senators, we now have appearing before us Mr. Roy Cullen, Member of Parliament and Parliamentary Secretary to the Minister of Finance.

Please proceed, Mr. Cullen.

Mr. Roy Cullen, Parliamentary Secretary to the Minister of Finance: Mr. Chairman, with the exception of three measures, all of the components of this bill were announced in the 1999 budget. I do not need to remind you that the tax relief measures that were announced in the 2000 budget in February will be contained in separate legislation. Our focus today is on the 1999 budget.

[Translation]

In keeping with the government's commitment to providing on-going tax relief -- beginning with those Canadians most in need -- there are three general tax relief measures in this legislation. Subject to this bill being enacted, all took effect on July 1, 1999.

[English]

First, the bill increases the amount of income that Canadians can receive tax free. Although the 2000 budget increases this tax-free amount further, as I just indicated, that measure will be part of another bill. Second, the supplement to personal amounts provided for low-income taxpayers in the 1998 budget is extended to all taxpayers and increased by a further $175. Third, the 3 per cent general surtax is abolished for all taxpayers.

A number of measures improve both the fairness and the operation of the tax system. Let me briefly summarize them. To address situations where income is diverted from high- to low-income earners, usually family members, to avoid tax, Bill C-25 introduces a special tax aimed specifically at structures designed to split income with minors. This tax will apply to certain income of individuals aged 17 and under.

[Translation]

Retroactive lump-sum payments are currently taxed when they are received even though a significant portion may relate to prior years. The resulting tax liability may be higher than if the payments had been made, and taxed, as the income arose. A special relieving mechanism will now compute the tax on qualifying retroactive lump-sum payments of $3,000 or more in a given year.

[English]

To reduce the tax burden on Hutterite colonies, income can now be allocated to each spouse in a family.

Two new civil penalties can be imposed on third parties who make false statements for tax purposes. One relates to the tax shelter and other tax-planning arrangements. The second concerns advising or participating in a false tax filing. I know that the members of the committee have been interested in this particular topic. I will provide several brief comments.

First, any decisions at the local tax office that would involve any action in terms of a third party could not be instituted at the regional tax office level. It would have to come back to the head office for review. In fact, the Revenue agency put out a clarifying statement on October 19, 1999. It is quite a long statement. Perhaps I could give it to the clerk and it could be read into the record. The statement basically says to remind staff that they should not, under any circumstances, speculate on the application of the penalty until it becomes law and until the Parliamentary guidelines are in place. The statement goes on to say that once Finance has finalized legislation, the consultations will be started. They are committed to ensuring that the guidelines will result in a fair administration of the proposed third party legislation. There is to be no action taken by local tax officers.

The other question, which I think was raised by a witness or more than one witness, was the notion that someone from outside the Revenue agency would be part of the advisory panel. We have looked at that quite extensively. It raises a couple of quite serious issues in our view. First, the committee would be looking at specific tax returns, so it raises privacy issues. How can you have external advisors part of that process? Second, it would be somewhat unprecedented for a committee such as this within the Revenue agency to have external advisors as part of that process. Having said that, the guidelines that will be developed will have significant input from and consultation with experts from the law societies, the CICA, other professionals and other stakeholder groups to ensure that the guidelines are fair and reasonable.

When an individual dies and leaves RRSPs and RRIFs not to a surviving spouse but to dependent children, they, not the deceased's estate, will be responsible for any resulting income inclusions. This measure is of a relieving nature due to the low income tax rates provided for low-income individuals.

The medical expense tax credit is being extended to cover the care of people with severe disabilities living in a group home, therapy for those with severe disabilities, and tutoring for the learning disabled. As well, talking textbooks for people with perceptual disabilities who attend educational institutions will now qualify as eligible equipment for persons with disabilities.

The manufacturing and processing profits tax credit is being extended also to corporations producing electrical energy for sale or steam for use in such production.

[Translation]

Corporations faced with multiple taxation years being re-assessed at the same time are often caught in situations where taxable refund interest relating to one taxation year is calculated in favour of the corporation over the same period for which non-deductible arrears interest relating to a different taxation year is calculated against the corporation. Under a new relieving mechanism, corporations can request that the underlying overpayment and underpayment amounts be offset for interest calculation purposes.

[English]

In addition, LSVCCs will be encouraged to focus more on small business investments. The surcharge on large deposit-making institutions is being extended to October 31, 2000, and a new rule will ensure that hiring a Canadian firm to provide certain investment services for a non-resident does not mean that the non-resident is carrying on business in Canada.

[Translation]

Moving on, there are three non-budget measures in this legislation.

First, the federal government's tax-sharing agreements with self-governing Yukon First Nations will come into force once this bill is passed. This means that the federal government will then vacate 75 per cent of its income tax room on settlement lands for the Yukon First Nation governments to occupy.

Second, the income of the trust established by the federal, provincial and territorial governments to provide compensation to hepatitis C victims is exempt from income tax.

And third, cash demutualization benefits will be treated as dividends and subject to the low-dividend tax rate.

[English]

Honourable senators, this is but a brief summary of the measures in Bill C-25. All of these measures have been designed to improve tax fairness and the operation of the tax system.

[Translation]

I, along with the officials who are present today, look forward to answering your questions.

[English]

Senator Tkachuk: I have a number of questions. What were the three measures that were not announced in the 1999 budget?

Mr. Brian J. Ernewein, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance: Are you referring to other items that were announced by press release?

Senator Tkachuk: I am referring to Mr. Cullen's statement that, with the exception of three measures, all the components of this bill were announced in the 1999 budget. What were the three measures that were not announced in the 1999 budget?

Mr. Cullen: The three measures were demutualization measures, the hepatitis C, and First Nations tax issues.

Senator Tkachuk: Would the provisions under 163.2 have been announced in the budget?

Mr. Ernewein: Yes, they were. That section was part of the 1999 budget papers.

Senator Tkachuk: How was that announced? Was it these papers, or was there an explanatory note?

Mr. Ernewein: I cannot see the front of your book.

Senator Tkachuk: It is called "Legislative Proposals -- Explanatory Notes Relating to Income Tax." This is the one that comes with the bill.

Mr. Ernewein: It was originally announced in the 1999 budget, in February of 1999, and found in the 1999 budget plan. Legislation to implement that was released in draft form in September of 1999. It was further included in the formal legislation introduced in the House of Commons in December of 1999.

Senator Tkachuk: We have had a number of people come before us. You probably were all here earlier when we had all the submissions.

Mr. Cullen: I was not here, but others were, I think.

Senator Tkachuk: We had representation from the chartered accountants. Also, we had a brief from the Canadian Association of Municipalities. There were quite a number of people interested in section 163.2.

What was the original intent or reason for putting this into the act, considering their concerns that criminal penalties already exist? Furthermore, there are penalties imposed by the professional associations themselves. They can also be sued if they supply false or wrong information to a taxpayer. What is this all about? What is this proposed section to do?

Mr. Cullen: You mean that we did not have before?

Senator Tkachuk: Yes.

Mr. Ernewein: We have, under the Income Tax Act, a variety of penalties that can apply in certain circumstances when taxpayers or others file false statements or make false statements in relation to tax matters. With respect to taxpayers themselves, criminal penalties can apply and civil penalties can apply. Either course of action can be pursued depending on the gravity of the offence and the circumstances.

In the context of those who advise taxpayers or are working or providing information relating not to their own taxes payable but in relation to another taxpayer, criminal penalties can currently apply. There are, however, no civil penalties that generally parallel those that can apply to the taxpayers. That gap was noted on a number of occasions. I think it was noted by the Auditor General. I believe it was noted by the public accounts committee in one of its reports. It was noted by the technical committee on business taxation. All of them recommended that the gap be filled.

Senator Tkachuk: Is the civil action that can be taken redundant to the criminal action?

Mr. Ernewein: It is an alternative.

Senator Tkachuk: I see. Who decides?

Mr. Ernewein: In terms of assessing the penalty in the first instance, it would be the Revenue agency. In terms of the ultimate decision, it might well be a court, if the taxpayer were to challenge it.

Senator Tkachuk: I may be wrong, but were the people concerned about this not more concerned about tax shelters than about whether a person is properly filling out the forms for their car depreciation or expenses? Is that not more what you were concerned about originally? Is that not why those other people, including the Auditor General, suggested that we have this legislation?

Mr. Ernewein: Yes, I think that was among the concerns. It may well have been in some cases. I do not recall well enough the various reports on an individual basis to say whether tax shelters were the only or primary reason for the recommendations in those various reports. However, speaking from our perspective, we were not sure we understood, once we were taking on the exercise of filling this gap, why we would not provide for the application of civil penalties even where it was not in the context of a tax shelter. For example, where someone was making false statements on behalf of a single client, it might not fall under the rubric of a tax shelter, yet it still raises the same concerns for the tax system. It occurred to us that it was appropriate.

Senator Tkachuk: Who would be making false statements? The third party?

Mr. Ernewein: The advisor, perhaps, or the tax preparer.

Senator Tkachuk: Would that person not already be likely to suffer other actions, either under the Criminal Code, lawsuit by the taxpayer, or loss of the right to practise accounting or to be a CGA? Would all that not happen to that poor person if he lied on a tax return?

Mr. Ernewein: It is possible that other consequences could arise from it, but it is not necessarily the case.

Senator Tkachuk: I would be very surprised if it were not necessarily the case.

Mr. Ernewein: A tax preparer who is not a member of any professional body would not be covered by that. There may be circumstances where the taxpayer would not be able to sue because he was somehow complicit in the action.

Senator Tkachuk: Would the taxpayer not then be liable?

Mr. Ernewein: Possibly.

Senator Tkachuk: Well, either they are or they are not. I am just asking.

Mr. Cullen: The distinction here is that this is a third party remedy under civil law that could involve H&R Block and all those tax preparers. It could involve anyone involved in assisting in the preparation of a tax return. Even if some of the discussion had its origins in tax shelters, I think one must reach the obvious conclusion that this type of activity would certainly not be limited to tax shelter type plans. It is evident over a wide spectrum of tax preparation, tax planning, et cetera.

Senator Tkachuk: Have you ever been to H&R Block? Have you ever used it?

Mr. Cullen: I am a CA myself, so I usually do it on the computer.

Senator Tkachuk: At H&R Block, you go in with your papers. They sit down, and 15 minutes later you are out the door. It is $30 or whatever, and you are out the door. Usually that trained person is just doing it temporarily to help a person to fill out and understand all that stuff that you put in the tax return. Surely you will not say that she will sit there, meeting the person for the first time, and develop some kind of a criminal conduct that you would send your tax department after.

Mr. Cullen: That is one of the reasons for the indifference clause. In terms of culpable conduct, the indifference clause is important. If information that would indicate that a tax return is fraudulent -- and I will use that term -- comes to the attention of a person who is preparing or assisting with the preparation of a tax return, that tax preparer is not allowed under these provisions to be totally indifferent and say, "Oh, so your income is totally under-reported. Well, I have a busy day, so we will just get on with things."

Senator Tkachuk: Do you think H&R Block would jeopardize their whole business by doing stuff like that?

Mr. Cullen: I used H&R Block as an example. It could be anyone advising or helping to prepare a tax return.

Senator Tkachuk: As a parliamentarian, are you not concerned, first, that the measures under this act are rather draconian, and, second, that as parliamentarians we have a responsibility to protect citizens from the bureaucracy, not to increase the power of the bureaucracy over the citizens?

Mr. Cullen: Senator, this is defined as culpable conduct, and it has three components. The first is tantamount to intentional conduct; in other words, someone working with a taxpayer deliberately fills out a fraudulent tax return. Frankly I do not have a lot of sympathy. The second component is indifference. In other words, the taxpayer says, "Here are my receipts, but they are all bogus." The tax preparer responds, "Oh, okay. I will fill it out anyway." I do not have a problem with that. Third is wilful, reckless or wanton disregard of the law. I do not have a problem with that.

Senator Tkachuk: Who decides that?

Mr. Cullen: The guidelines will be developed with professionals and, like many things, will evolve over time in terms of jurisprudence and how the Revenue agency applies it.

Senator Tkachuk: All the things you mentioned are already covered by other aspects of the Criminal Code or the ethics of the professions. Surely if an accountant or certified general accountant did any one of those three things and their professional body found out, because that is how the income tax people find them, they would be thrown out of the profession.

Mr. Robert D. Brown, Clifford Clark Visiting Economist, Department of Finance: You are quite right that anyone dealing with these things might well be found subject to penalties in other places. The points are, first, that advisors are not necessarily members of professional bodies. They can be operating on their own. Many of them are. Second, at the moment, the only thing an advisor could be charged with is a criminal offence under the criminal sections of the act, and that involves a very high standard of proof and is only used in the most serious and difficult of situations. As recommended by the Auditor General, by the public accounts committee and by the report of task force on business taxation, it was felt necessary to broaden the law to introduce a civil penalty for those people who assist others in culpable conduct in relation to returns.

Senator Furey: Everyone we have heard from today, the accountants and lawyers, are all concerned that the inclusion of indifference in the definition is way too broad. How do you respond to that?

Mr. Cullen: As I said earlier, I think the indifference test is really a necessary component. Each of the three tests reflects a different aspect of the type of conduct to which civil penalties have been applied to taxpayers, and there are some key cases we could cite, such as Venne and Mallick. The indifference test concerns a person who passively participates in non-compliance with the tax law. In other words, the advisor does not care that the client is making a false statement with the advisor participating in the filing of a tax return. In comparison, the wilful or reckless test is primarily directed to a person who actively disregards the law. In other words, the advisor knows the law and decides to prepare a false statement that the client uses in filing his or her tax return. In our view, the indifference test and the wilful or reckless conduct test are complementary and deal with passive versus active culpability.

The example I gave earlier was that you are helping someone prepare a tax return and they tell you clearly that this is a fraudulent tax return or they give you enough information that you can conclude that quite simply. Is that then not just as bad as participating in the preparation of a fraudulent tax return? What is the difference, senator?

Senator Oliver: A number of the people who appeared before us talked about judgment calls on valuations, where they must use their judgment, professional or otherwise, in determining what value to place on something for the taxpayer. That is where they did not want to get caught.

Mr. Cullen: There are many judgment calls in the preparation of tax returns and tax planning.

Senator Oliver: The valuation of a particular asset.

Mr. Cullen: Yes. Under this test, culpable conduct means more than just making an error in judgment. It means deliberately misstating an asset or a valuation when there is enough information available that a reasonable person would know that that valuation is not appropriate.

I cannot tell you that all these areas will become absolutely crystal clear once the law is passed -- they will not, and you know that as well -- but I can tell you certainly that the intent is not to track down people who are making reasonable judgment calls in light of all the information available to them. That is part and process of doing tax returns and good tax planning.

Mr. Brown: Valuations are always the subject of opinion and debate, but the legislation does contain a clause that states that when the individual has an opportunity to show that the statement was made in good faith and was reasonable, in that case he would not be found guilty or subject to a penalty.

Senator Tkachuk: My supplementary is in relation to a question that you answered regarding the budget of 1999, and you said that this legislation was in the budget. Could you go to the 1999 budget plan, pages 206 and 207, where they talk about the act itself? It says:

The penalty will apply to a person who makes (or participates in the making of) a statement or omission that the person knows or would have known, but for circumstances amounting to gross negligence, is a false statement or omission that may be used for tax purposes by or on behalf of another person in a return, form, certificate, statement or answer filed or made by or on behalf of that other person.

The interesting part here is that it says that "the penalty will be the greater of $1,000 and 50 per cent of the amount of tax sought to be avoided or refunded." The second part of it is that Revenue Canada would have the burden of proof of establishing the facts necessary to apply the civil penalties. Could you explain that and reconcile it with the bill itself?

Mr. Cullen: In terms of the gross negligence, the culpable conduct definition replaced the gross negligence liability standard originally proposed in the 1999 budget plan, and that was done at the urging of and with the agreement of the joint tax committee of the Canadian Institute of Chartered Accountants and the Canadian Bar Association. Its concerns include getting rid of the word "negligence," which is found in the phrase "gross negligence." The use of the terminology "culpable conduct" was based on consultation post the budget.

With respect to the burden of proof and penalties, perhaps Mr. Ernewein can answer.

Mr. Ernewein: First, in terms of the burden of proof, the general statement that the burden of proof is on Revenue Canada applies. That is found in the existing law and applies to this post penalty as well. In terms of the penalties, I am not sure if I am clear on the question.

Senator Tkachuk: The penalty will be the greater of $1,000 and 50 per cent of the amount of tax sought to be avoided or refunded. That is a little different from the $100,000.

Mr. Ernewein: Yes, thank you.

Senator Tkachuk: Why is that?

Mr. Ernewein: That is as a result of representations we received since the budget went out in 1999.

Senator Tkachuk: Who would have said that we should lift them to $100,000 and forget that part?

Mr. Ernewein: It is not lifting them, it is capping them. If you have, for example, $1 million of tax at stake, the original budget proposal would say that you are liable or exposed to liability for a fine of up to 50 per cent of that amount, or $500,000. The revised proposal would say that the maximum you are entitled to as a penalty under this heading is $100,000, plus any fees you charged. It is actually a relieving measurement.

Senator Hervieux-Payette: It is the first anniversary of a question that was not answered and I should like to make another attempt to perhaps educate the Department of Finance on the impact of the demutualization. In your statement you say that you were very generous. Now that the revenue is treated as dividend, everyone is a winner. I should like to give you the example that I submitted to your department and that I am still discussing with your department.

If you are a senior and you have the full Canada pension and the full supplement, your revenue is likely around $10,000 for the whole year. You are over 70 years old, you receive your letter from your mutual company and you are the lucky winner of the policy that you have that you paid for when you were working some 20 years ago. You have paid so that when you are dead someone will be able to pay for your funeral. You then receive, by the gracious act of the government, $2,000. The next year, the $2,000 will be deducted from your revenue. You will be rich for one year and you will go from $10,000 to $12,000. In the following year you will go from $12,000 to $8,000 because the whole amount will be deducted. I am using gross figures because this is not exactly the way it is, but you can be sure that many senior people will suffer stress, have financial difficulty, and are living well under the poverty line.

I have submitted that to your department, and I have discussed that with the Department of Human Resources Development, which is administering the pension plan. I am asking you to make the effort to understand that this should be treated like the hepatitis C payment. It is a one-time payment with no responsibility on the part of the individual. They receive a cheque that, if they cash and spend, will cause them to be living in real poverty the following year. It seems that no one has thought about that.

My information is that 200,000 seniors are affected by that, albeit not with the same amount of money. I am asking you why this caveat has not been considered by the department. You are taxing money on which people have already paid tax. For all the beneficiaries of the demutualization, you are taxing every dollar they will receive, for which they have already paid a premium over a number of years. It is already a rip-off to the ordinary citizen, and in this case it is even worse because then you are collecting taxes on people who cannot afford it. We talk about removing the 3 per cent on people who make good salaries. I am talking about the small people who are not working for the Department of Finance.

Mr. Cullen: Senator, the hepatitis C program is basically a program to compensate victims for some extraordinary circumstances in which they found themselves and to try to repair some of the damage. It is different, I would submit, from someone getting a demutualization dividend, which is somewhat of a windfall gain.

Senator Hervieux-Payette: When you are making $10,000 a year, if you receive a benefit will it be a windfall gain?

Mr. Cullen: It is income. I hear what you are saying, but it is a windfall income gain that otherwise you would not have had.

Senator Hervieux-Payette: They have not chosen that, though. It is being imposed on them. When I look at the definition here in the clause about the company, it states:

139.1(5) ...where an insurance corporation makes, at any time, a public announcement that it intends to seek approval for its demutualization, the fair market value of ownership rights in the corporation is deemed to be nil throughout the period that

(a) begins at that time; and

(b) ends either at the time of the demutualization...

The corporation per se does not suffer any taxation. However, the individual at the end of the line, who will never understand that bill, will be penalized. I am talking about people who have no voice and who have no lobby in Ottawa. I have tried for 12 months to make someone understand that this is a one-time payment. They have nothing to do with the demutualization process. In fact, they are beneficiaries of nothing, because the only thing that will occur is that when you are over 70 and you do not have proper education you will cash the cheque and you will suffer. The only thing they can do is put the cheque in their bank account and wait until next year to make sure that they can pay for their rent and their food. This is the bear minimum on which you can live. Why is no one is paying attention to that?

Mr. Cullen: If you have written to the department or the minister, we could check that out.

Senator Hervieux-Payette: I have not had any good answers. They are working on it.

Mr. Cullen: You are aware that a policyholder could take the shares and sit on the shares?

Senator Hervieux-Payette: Do you know someone who is offered shares at age 75? Do you know of someone who would take shares when you are living in poverty and you have only $10,000 a year? Most of these people are on GIS. We are not talking about large sums of money here. The proposal I made -- and the chair is aware of this -- was to have $2,000 that would be not taxable for everyone living at the poverty line.

The Chairman: I understand your frustration completely. It is hard to get answers, but how does it apply to this bill?

Senator Hervieux-Payette: It says on page 45 of the bill:

(10) Where, in connection with the demutualization of an insurance corporation, a stakeholder receives a taxable conversion benefit (other than a specified insurance benefit), the stakeholder is deemed to have acquired the benefit at a cost equal to the value of the benefit.

Mr. Cullen: Considering that is something they would not have had anyway, they could take the shares and cash them in when their income is lower. I hear what you are saying.

The Chairman: How much money do you have to make in Canada so that you actually do not pay income tax? I thought people making $10,000 or $12,000 did not pay tax.

Senator Tkachuk: It is a little over $7,000.

Mr. Cullen: That is the basic personal exemption.

Mr. Brown: For seniors, it would be in excess of $12,000.

The Chairman: You are saying that under that example there would be no tax?

Mr. Brown: Yes. That is correct, if the income is $12,000. Essentially, the problem arises because the GIS is income-tested. When you have income in year one, your GIS amount is reduced in year two because it is always based on the previous year. I recognize that that is a significant problem. However, it is not, in a narrow sense, an income tax problem, it is a problem with the GIS supplement.

Mr. Ernewein: To add to that, I do not think it is an issue related exclusively to demutualization benefits. If someone makes $10,000 in demutualization benefits versus $10,000 by virtue of working part time as a retiree, that $10,000 of wage income certainly has the effect that you describe with respect to GIS and possibly other means-tested programs.

Senator Hervieux-Payette: It is the same thing. I am talking about a bill that affects 200,000 people. This clientele is not necessarily very knowledgeable about income tax measures. Even with regard to the GIS, they apply once and think that everything will continue forever. They may be living in a senior citizen home with only $100 pocket money left over every month on a yearly basis. That amounts to $1,200. They receive $1,200, so the next year they will not have enough money to buy Kleenex or clothing.

I have submitted this question to you, to your Department of Finance, and to HRDC. HRDC has said that it will be treated as a dividend so that they will not lose more than they have received. I said, "Great victory. They will not lose $2,500 if they were only receiving $2,000." I am asking you to reconsider this so that when we make the next changes on it this will not be promulgated, because it does not make sense.

As far as I am concerned, we are here to protect the small people. You can compare a once-in-a-lifetime measure to any other thing, but when you are inheriting something it is on a one-to-one basis and not on a public policy basis like this one. It does not affect hundreds of thousands of people at the same time. This is a public measure and it seems that this clientele doesn't have any lobby. They certainly do not have the Canadian Tax Foundation to make representations on their behalf, and this should be addressed.

This totally escaped the House of Commons. I have discussed this situation with some MPs and they all agree with me. I have talked to the two departments and I am still corresponding with your department. My last letter is from this week. I am appealing to your sense of humanity that it does not make sense to penalize so many people by a measure that benefits only the people who have money.

Mr. Cullen: I hear what you are saying. You are speaking very eloquently on their behalf. I will certainly undertake to follow up the points you have raised with the department and with the minister and get back to you through the chair to see if there is anything constructive that could be done to deal with this.

Senator Poulin: I would like to follow up on what Senators Oliver and Tkachuk have raised in terms of concerns, Mr. Cullen, that were raised to us by the professionals that appeared before us as witnesses.

There seems to be a strong recognition that the different changes that Bill C-25 brings about increase fairness in the overall tax system and it is good news. On the other hand, the professionals who are involved as service providers for the reporting of income are worried now about the capacity of decisions to be made by Revenue Canada for responsibilities and shared responsibilities. What I am reading and hearing from the professionals is that it will finally change the practice of the profession itself and, because of increased liabilities, it could have an impact of increasing fees for clients. I know, Mr. Cullen, you have two hats. You are both a member of Parliament and parliamentary secretary to the Minister of Finance. You are also a professional of the tax system. You could respond to us in terms of these worries that your professional colleagues have.

Mr. Cullen: Yes. The application of these rules will have to be handled very carefully and very wisely by the Revenue agency. What we are asking professionals to do is nothing more than what their own professional bodies are asking them to do. I looked at the culpable conduct definition very carefully. As a professional, I do not have any difficulty with that; in fact, I would feel negligent if I did not comply with the culpable conduct rule.

Thus, I know there are sensitivities, and it will change to some extent the way tax practitioners do their work, and maybe for the better. Again, we are dealing with a small percentage of individuals who would ever be party to transactions like this. The honest and good tax professional will not be bothered by this, in my opinion. I think it could change practice for the better. If it inculcates a stronger sense of responsibility on the part of some, that could be a good thing.

This bill will change things, but I think for the better.

Senator Poulin: There seems to be a worry about the level of the decision maker in the department. In answer to a question by my colleague Senator Tkachuk, you said the Customs and Revenue Agency will decide. Could you be more specific?

Mr. Cullen: If someone in a regional office of the Revenue agency has reason to believe that one of the provisions of this proposed act, this culpable conduct test, has been breached, it would have to be reported to Ottawa. An advisory group of senior departmental officials will look at the particular circumstances against a set of guidelines, which will be worked up and developed with tax professionals and other key stakeholder groups. That particular case will be measured against those guidelines. Only if there seems to be a deficiency in relation to those guidelines would someone in head office in Ottawa decide to institute an action in terms of proposed legislation.

Senator Poulin: What would be the process, because concern was expressed about "the process"?

Mr. Cullen: I will ask others to comment, but I know that they had urged the government at the House of Commons committee, as well, to set up an advisory group that would involve outside experts. We went back to the department and looked at it very carefully. The problem that it poses is that, in terms of the individual taxpayers that are being reviewed, if there are outside panellists severe privacy issues will ensue. Also, in the way that Revenue Canada has operated historically, it would be unprecedented to bring in outside panellists to arbitrate or rule on specific taxpayer issues.

A taxpayer who is charged under one of these provisions will have all the recourses that are normally available to anyone within the Income Tax Act, the various mechanisms that currently exist.

Senator Poulin: One of the worries that was expressed is that once they are accused, and it is therefore public information, even though it is a civil suit, they feel that if they are found not guilty the loss to their professional reputation would probably be irreparable. What is you opinion in that regard?

Mr. Cullen: That is why it is so important that the process be tightly controlled and actions only instituted if there is clearly a breach of the culpable conduct test based on guidelines that will be freely available to all professionals.

Mr. Brown: There are essentially three internal appeal mechanisms that are available. The process is that the taxpayer or the third-party advisor can deal with the section chief in the field to make representations. The section chief feels that he must support the assessor and the issue then goes to head office. The advisor then has an opportunity to make a case to the advisory committee in head office. If the matter goes forward at that stage, in effect, an appeal can be taken to the courts. That automatically moves the issue to the legal branch. The aggrieved party has an opportunity to consult with that branch before the issue gets into court and before there is any publicity about it.

I might say that I have been in professional practice for over 40 years. I was concerned with these provisions when they were first introduced. A number of changes have been made over the course of the last year, in consultation with many people, and what were introduced are the issues or the processes that have been described to make sure that the procedures we are putting in place do respect the rights of advisors.

The Chairman: Will you undertake, Mr. Cullen, to send me a letter indicating that once a year regulations that are passed that are relevant to this bill will be tabled before this committee?

Mr. Cullen: That is correct. Yes, I will do that.

The Chairman: Is it agreed that we move to clause-by-clause consideration of Bill C-25?

Senator Poulin: I move that we complete clause by clause regarding Bill C-25.

Senator Tkachuk: Could we have a discussion on clause 163, which seems to be cause for concern, not only on our side but also on the government side, from what I gathered from the questions. Perhaps we can have a discussion, as to what we may want to do with that particular clause or what we may want to put in our report.

Senator Oliver: You are referring to the civil penalty section?

Senator Tkachuk: Yes, clause 163.

Senator Poulin: Did you not find the answers given by Mr. Cullen satisfactory?

Senator Tkachuk: No.

Senator Poulin: Are you referring to what Mr. Cullen spoke about with regard to the worry that was raised by some witnesses regarding indifference?

Senator Tkachuk: Yes, clause 163(2).

Senator Poulin: You are referring to the part that reads, "... shows an indifference as to whether this Act is complied with...", correct?

Senator Tkachuk: Yes.

Senator Poulin: I was satisfied with Mr. Cullen's answer.

Mr. Cullen: If I could, Mr. Chairman, just maybe to expand. The proposed legislation will change the way tax practitioners operate. If you leave the indifference or the more passive section out, you will find that it will change negatively to that extent. People who are inclined to do this will move to a more passive-type format with their tax advisors. They would look then to not engaging in an active way their tax advisor but to sanction the passive acceptance of various information. There would be an opening that I think could be exploited.

Senator Tkachuk: The income tax law is currently administered without this proposed act. Surely, we have not seen a huge amount of evidence from you or anyone else, or in any of the papers, that shows that there is a tremendous amount of income tax evasion taking place with the compliance of advisors, which would be people of your profession, sir, and also the certified general accountants and the legal profession. We have not seen that kind of evidence to show that this would be a huge problem that could not be attended to by other laws already on the books.

We have laws against the very things that you argue for in clause 163(2). There are criminal laws; there are civil suits that can be applied by clients; there is dismissal from practising their profession, and all the rest of it. They do not have to be part of this.

Mr. Cullen: In part, senator, we are responding to the Auditor General's critique, admittedly, initially in the context of tax shelters, but also the Public Accounts Committee and other groups that highlighted the fact that there is participation, not only by professionals, but by tax preparers, and some of them would fail this culpable conduct test. As a result of that, as taxpayers, we all end up paying more tax, to compensate for those who are not paying the tax they are responsible for paying.

Senator Tkachuk: I do not want to continue the meeting, but the argument you used as to why this thing should remain the way it is is that you would not be able to attend to these matters. I may have grown up in a little town in Saskatchewan, but I believe that the reason the tax department would know there is a problem is because of the tax file they received. If they receive a particular tax return, they know that the person who sent the return has a problem, and they also know if there is a culpable act by the tax preparer, which can be attended to by the laws presently on the books. What has this got to do with that?

Mr. Cullen: Senator, would you agree that there is a sizeable underground economy? The estimates of the underground economy are in the range of 6 per cent. The underground economy has often been discussed in the context of the GST, but, of course, if you are not paying GST, you are not paying income tax. The amount at stake here could be quite sizeable.

Senator Tkachuk: We are ready for clause-by-clause, Mr. Chairman.

Senator Poulin: I have a few questions. You raised, Senator Tkachuk, the fact that we have concerns. I found that it was very important to raise with Mr. Cullen very clearly the concerns that we heard from the professionals. They were extremely good witnesses. We heard from a variety of professionals.

I would like to continue in the vein that you started at clause 163(2), if you do not mind.

Senator Tkachuk: You said you had no concerns, so we are ready for clause-by-clause, Mr. Chairman. I do not understand what the problem is. You are the one who suggested this. You said you had no concerns.

We are ready to go, Mr. Chairman.

Senator Poulin: I should really like to hear --

Senator Tkachuk: Question.

Senator Poulin: It is up to you to decide, Mr. Chairman, but I should like to hear Mr. Cullen specifically.

The Chairman: Obviously, they have brought in extra members, figuring we will have a big fight. There is nothing I can do about that. Sure, let's go to clause-by-clause. I do have a right to vote.

We have a motion to complete clause-by-clause study. All in favour?

Senator Poulin: Agreed.

Senator Tkachuk: Do you want to do the whole bill, Mr. Chairman?

The Chairman: It is up to you.

Senator Tkachuk: It is up to you. You are the Chairman.

The Chairman: You are the ones asking the questions.

Senator DeWare: Do you want to do it together or separately?

Senator Tkachuk: It does not matter.

Senator DeWare: You have a list there, Mr. Chairman. You say, "Shall the title carry? Shall clause 1 carry?"

The Chairman: We can do it in one of two ways.

Senator DeWare: I watched on CPAC one night the Banking Committee just agreeing to let it go.

Senator Wiebe: It is my understanding that we can deal with this bill clause by clause. Is that correct?

The Chairman: Yes.

Senator Wiebe: I certainly hope that that is the case because I have three or four questions I would like to ask on each clause of this bill. I hope that the witnesses will stay to answer some of those questions for me.

Senator DeWare: You cannot do that on clause-by-clause study.

Senator Wiebe: I would hope each clause would be explained as we go along, and if there are amendments moved to the clause it would allow debate on that clause.

Senator Tkachuk: That has been done. Either call the vote or --

Senator DeWare: The witnesses cannot be involved in clause-by-clause study.

Senator Tkachuk: We are ready to go. Do you want to move the title? It is your bill.

The Chairman: All right. Bill C-25, an act to amend the Income Tax Act, the Excise Tax Act, and the Budget Implementation Act, 1999. Shall the title be postponed?

Senator DeWare: Yes.

The Chairman: Shall clauses 2 to 69 of the Income Tax Act carry?

Senator Poulin: Agreed.

The Chairman: Shall clauses 70 to 72 carry, of the Excise Tax Act?

Senator Tkachuk: No.

Senator Poulin: Yes.

Senator Tkachuk: No.

The Chairman: We say yes, so it is five to five.

Senator Tkachuk: The bill fails.

The Chairman: Well, okay.

Senator Wiebe: Is the lunch in the room next door available for everyone? Let's go and have something to eat.

The Chairman: Wait. We have to continue.

This is the last time you will do this to me. Remember that.

Senator Tkachuk: I didn't do anything.

The Chairman: Oh yes you did. You bushwhacked us, and that will never happen again.

Senator Tkachuk: I didn't bushwhack you.

The Chairman: You think you're a wise guy, and you are never going to get away with it again.

Senator Tkachuk: Chairman, this is --

The Chairman: Don't expect one iota of cooperation --

Senator Tkachuk: Chair, this is a democratic process.

The Chairman: I understand.

Senator Tkachuk: You had four members here. I counted. It is your whip's job to deliver them here. It's not your job; it's not my job. This is a very important bill to the government, as far as I understood. We have some problems with this bill. I enunciated those problems. The government decided that it wished not to deal with these problems. Therefore, we are dealing with them, and we have a right to do that. We have a right to do that.

The Chairman: If there's a stalemate, what happens? I don't know.

Senator Tkachuk: The bill fails.

The Chairman: It is not defeated.

Mr. Gary Levy, Clerk of the Committee: Status quo.

The Chairman: It is the status quo. It will have to come up again.

Senator Tkachuk: You have to report the bill defeated.

The Chairman: No, I don't. It is not defeated. It is a stalemate; it is even.

Senator Tkachuk: Not on a tie.

The Chairman: Why?

Senator Tkachuk: The bill fails on a tie.

The Chairman: Where does it say that?

Senator Tkachuk: In the rules.

The Chairman: What rules?

Senator Tkachuk: It is in the Rules of the Senate. A bill does not carry when it is a tie. You know that, Jack.

The Chairman: We will have to take an adjournment and check it with the law clerk.

Senator Tkachuk: Well --

The Chairman: I have a right to ask for some legal advice, don't I?

Senator Tkachuk: Are you adjourning the meeting? Are we done for the night?

The Chairman: We will adjourn for 10 minutes and see if we can contact the law clerk and find out what we can do about it. You cannot stop me from getting legal advice. I do not know the answer.

Senator Tkachuk: The clerk should know the answer.

The Chairman: He does not.

Senator Tkachuk: Yes, he does.

Mr. Levy: I would have to check. I believe that it is the status quo.

The Chairman: His advice to me was that a tie is the status quo.

Mr. Levy: In a vote in the chamber, this is the case.

The Chairman: We will adjourn for a half hour and see if we can find some kind of advice.

Senator DeWare: It is in the rule book, Chairman. Do you have a rule book with you? Check the rule book.

Rule 96(1) says that in committee a tie vote is lost.

Senator Tkachuk: A tie vote is lost. You have to report the bill, Chairman. If you want to adjourn the meeting, we are ready to go home.

Senator DeWare: Rule 96(1) reads:

A question before a select committee shall be decided by majority vote including the vote of the chairman. When the votes are equal, the decision shall be deemed to be in the negative.

That is on page 102, Mr. Clerk.

Senator Poulin: Is that rule for the full chamber?

Senator Tkachuk: In committee.

Senator DeWare: In committee.

Senator Tkachuk: There is nothing further to discuss.

Senator DeWare: It says "A question before a select committee" and we are a select committee, right?

Mr. Levy: We would like to take a few minutes.

Senator Tkachuk: Clerk, it is in the rule book.

Senator Furey: What is the problem with adjourning for 10 minutes and checking with legal counsel? What is the problem with that? Why do you have a problem with that?

Senator Tkachuk: I do not have a problem with that. I know what the rule book says.

Senator Poulin: Let's all go for coffee.

Senator DeWare: It is on page 102, rule 96(1).

Senator Poulin: Let him check.

Senator Tkachuk: What do we have?

The Chairman: We have a half-hour adjournment.

Senator Tkachuk: A half hour?

The Chairman: Yes.

Senator Tkachuk: As far as I am concerned, it is over.

Senator DeWare: The rule is very clear.

Senator Tkachuk: The rule is very clear, Clerk, Chairman. It is very clear.

The Chairman: I guess we will have to fight about it tomorrow.

The committee adjourned.