1995 ANNUAL REPORT,
PROVINCIAL AUDITOR
RETAIL SALES TAX
CONTENTS
Thursday 7 March 1996
1995 Annual Report, Provincial Auditor: Retail sales tax
Ministry of Finance
Dina Palozzi, deputy minister, revenue and financial institutions
Roy Lawrie, assistant deputy, tax division
Dario Savio, senior manager, audit, retail sales tax branch
Peter Spiro, manager, economic policy
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Chair / Président: McGuinty, Dalton (Ottawa South / -Sud L)
Vice-Chair / Vice-Président: Colle, Mike (Oakwood L)
*Agostino, Dominic (Hamilton East / -Est L)
Beaubien, Marcel (Lambton PC)
*Boushy, Dave (Sarnia PC)
Carr, Gary (Oakville South / -Sud PC)
*Colle, Mike (Oakwood L)
*Crozier, Bruce (Essex South / -Sud L)
Fox, Gary (Prince Edward-Lennox-South Hastings / Prince Edward-Lennox-Hastings-Sud PC)
*Gilchrist, Steve (Scarborough East / -Est PC)
*Hastings, John (Etobicoke-Rexdale PC)
Martel, Shelley (Sudbury East / -Est ND)
McGuinty, Dalton (Ottawa South / -Sud L)
*Pouliot, Gilles (Lake Nipigon / Lac-Nipigon ND)
*Skarica, Toni (Wentworth North / -Nord PC)
Vankoughnet, Bill (Frontenac-Addington PC)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Kormos, Peter (Welland-Thorold ND) for Ms Martel
O'Toole, John (Durham East / -Est PC) for Mr Beaubien
Also taking part / Autres participants et participantes:
Erik Peters, Provincial Auditor
Clerk pro tem / Greffière par intérim: Tonia Grannum
Staff / Personnel: Elaine Campbell, research officer, Legislative Research Service
The committee met at 1004 in room 151.
1995 ANNUAL REPORT, PROVINCIAL AUDITOR
RETAIL SALES TAX
The Vice-Chair (Mr Mike Colle): I am in the committee's hands; whatever you wish. We can start in a more general area, if you'd like. One of the key areas for our requesting the Finance people to come here was to address the specific recommendation the committee made, as we wanted to check with Finance before we would proceed any further on that issue of shifting from retail to wholesale. I don't know what your desire is.
Mr Gilles Pouliot (Lake Nipigon): Whatever the committee --
The Vice-Chair: The two people coming in from Oshawa are the ones we have to speak to, unless you want to get into specific areas with the deputy minister.
Mr Pouliot: I would be happier -- the time is valuable. The storm is hardly an event. It's Canada and it's winter. In my special neck of the woods -- and I say this with the highest of respect and anticipation. It's all over the media that we leave earlier.
The Vice-Chair: There's been an accident.
Mr Pouliot: More importantly --
Mr John O'Toole (Durham East): A very serious accident.
Mr Pouliot: Oh, my apologies then. That always happens when you see this --
The Vice-Chair: It's not weather-related.
Mr Pouliot: My friend Mr Kormos has agreed to sub on the committee this morning. By reputation, he's also agreed to come out of his shell. He's maybe not all that familiar with the format.
Mr Peter Kormos (Welland-Thorold): I'm working on it, Chair. I think with the right sort of support from my fellow committee members, I may be able to overcome my recalcitrance.
The Vice-Chair: I guess what we can do is we can start with some general questions. We've got ministry people here, and hopefully the other people will be able to get through. So we'll bring the committee to order.
MINISTRY OF FINANCE
The Vice-Chair: Who we have with us is Dina Palozzi, who's the deputy minister of revenue and financial institutions. Dina, could you have the people with you identify themselves?
Mrs Dina Palozzi: Yes. I'd like to introduce Peter Spiro, from the office of economic policy, who I'm sure has been at this committee before, David Bidner, who is with the office of budget and taxation, and Denise Dagenais: tax policy people in the Ministry of Finance.
The Vice-Chair: Thanks for coming. Would you like to say a few words, Dina?
Mrs Palozzi: Other than introducing, I was intending to have Roy Lawrie, who's the assistant deputy for tax division, and Dario Savio, who's the senior manager for audit in the retail sales tax branch, with us this morning, and they will be hopefully arriving shortly.
I understand that the focus of the meeting today was for us to discuss with you the recommendation by the Canadian Council of Grocery Distributors around the issue of the appropriate point of collection for retail sales tax, basically the recommendation being that it be collected on tobacco and alcohol at the wholesale level rather than the retail system.
We hadn't come here prepared to make -- we weren't asked to make a presentation. We were asked to come here and engage in a discussion with you and answer questions, which we're prepared to do. As I indicated, Peter is well informed about issues around the underground economy generally, so we could certainly pursue that line of conversation for the next little while, and we certainly are tax policy people, have met in fact, I believe, with the council of grocery distributors and do understand -- I'm not sure if the staff here, Denise and David, actually attended the meeting, but I know the council has made representations to the ministry and we have met with them to hear their recommendations.
On your issue around alcohol, it would seem to me that you may wish to speak to the LCBO personnel or staff on that issue as well. So we're prepared to respond in whatever capacity we can this morning. We didn't intend to have a presentation ready for you but simply to be here to respond to questions.
The Vice-Chair: Okay. What we can do is we can start with the government side with a rotation of 10 minutes each.
Mr John Hastings (Etobicoke-Rexdale): Ms Palozzi, I'm wondering about your thinking regarding the comments and the specific suggestion of Peter Oliver -- I believe that's his name, the executive director of the Ontario Restaurant and Foodservices Association -- with respect to the prohibition of credit, lines of credit that a restaurant or hotel operation could institute in purchasing liquor and spirits. As I understand it now, they are prohibited from doing so.
Maybe it's a little out of your field, but I'm wondering what reservations you have about it, and how could those reservations be contained so that suggestion could see the light of day some day? Because most businesses do operate on lines of credit. I suspect it has to do with the puritan drinking tradition in Ontario, and also easier access of moneys and the underground economy and all those things, but it is a definite job inhibitor in the restaurant and foodservices industry, the hospitality industry, with many people I've talked with, particularly in the hotel industry.
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Mrs Palozzi: I'll make some comments, but certainly it's more appropriate that the LCBO would comment on that. We do know that the use of credit cards has been made available to individual purchasers, and I believe that at the restaurant level the issue is as you've described it. It's a combination of the cash-flow kind of issue in terms of being able to buy on -- are you talking about a line of credit, or are you talking about the use of credit cards at that level?
Mr Hastings: Probably more credit cards, although I would think potentially there could be a small line of operational or a monthly line of credit to people in the hotel industry and some of your larger restaurants and catering.
Mrs Palozzi: My speculation would be that it would be primarily a cash-flow consideration and past practice in terms of the structure of the selling of alcohol. It's something that I think we would need to raise further in discussion with the LCBO around their reservations about that. I'm not in a position to respond any more than that.
Mr Hastings: Could you take that specific item away and see how you could structure or overcome or have a further meeting with Mr Oliver to see how he views your reservations so that we could come up with a potential solution that both satisfies his members, I suppose, to some extent, and also satisfies and protects the integrity of the retail sales tax and all that other stuff that's associated with it?
Mrs Palozzi: I will start by raising it with MCCR, with Consumer and Commercial Relations, and proceed from there.
Mr Hastings: Because they saw it as a clear job creator in a modest way.
Mr Toni Skarica (Wentworth North): I've had a number of businesses in the restaurant industry complain to me in my riding that they're competing against the outdoor stall person, the person who has a hotdog stand and who sells a hotdog for $2. It's all cash business. That person's not paying PST. That person's not paying GST, or not collecting it, not collecting PST-GST, not paying retail taxes, not paying property taxes and that type of thing.
What's happening in my area, and I think it's probably province-wide, is that legitimate business people who are in the restaurant industry are finding that they're losing business to these people, and often they're very brazen. They're out practically less than a block away selling hotdogs and foodstuffs and that type of thing and not collecting any taxes or paying any taxes at all. You see that here in Toronto quite often. On Yonge Street you see the stalls of people selling jewellery outside the major stores, yet they're not paying any taxes at all. Is there anything being done with reference to that, what I think is a growing industry of people who don't pay any taxes at all?
Mrs Palozzi: I think when we were here in October, if I recall correctly, at public accounts, we were then dealing with the subject of the audit on retail sales tax and the whole issue of unregistered vendors. Since we were here in the fall, we had committed to increasing our personnel in the audit area, and we have taken steps to initiate that process by identifying resources from elsewhere in the ministry. Some of you may be familiar with the ads we've put in the paper. We are in the process of hiring an additional 50 auditors for retail sales tax, and looking at how we can prioritize our workload to focus on the issue of unregistered vendors, because the two components of the recommendations in the fall, as I recall, were focused on the problem of not getting to registered vendors and their compliance, but also the fact that there were a number of unregistered vendors that are doing business and aren't submitting tax.
Mr Skarica: Are they being audited now at all, even the registered vendors, the people you see on the street? How often are they audited? Because the perception of the public is they're not being audited at all and they're just pocketing the money.
Mrs Palozzi: Well, there is a cycle. We don't typically provide information on what the exact cycle is, but there is a cycle. I believe our whole audit universe is looked at in terms of we assess the risk, we assess the potential tax evasion problem that may exist in relation to that type of business and that type of endeavour, and we assign our resources appropriately. So there is a cycle and there is coverage.
Mr Skarica: Finally, my perception of Finance is that they will try to target audits to businesses where obviously you can maximize revenue. The trouble with these small vendors is that an individual vendor won't get you a whole lot of money, but if you do audits on a few of them, then it spreads around.
Mrs Palozzi: The deterrent effect, yes.
Mr Skarica: One thing I would like to ask you is, when you do start to finally audit these people, will there be some publicity that you're doing it? You're not going to get much revenue from the audits themselves; it's industry-wide that it will have an impact, I would think.
Mrs Palozzi: We do have a publicity policy, as it were, in place now in that we do publicize convictions that have been accomplished through the court system on tax cases, and we have an annual or a semi-annual tax bulletin we put out that lists the number of convictions, the amount of tax that was discovered. So we are looking at in what ways we might beef up that publicity campaign. There's always an issue of striking the appropriate balance of the effectiveness, as you say, in a deterrent way, getting the message out there that it matters, and striking that appropriate balance with other considerations. So we will be looking at that, but there is a process currently in place.
Mr Chair, I was just going to say that staff have arrived from Oshawa.
The Vice-Chair: Okay. We'll give them a chance to catch their breath here.
Mr Steve Gilchrist (Scarborough East): Ms Palozzi, in addition to the people making deputations before the committee, I've had the opportunity to talk with a number of our other members who are very concerned about the topic being discussed before this committee today. Over and above the usual suspects -- the flea markets and some other unregistered vendors that we've already dealt with -- there were a number of other categories that were brought to my attention. I was wondering what your reaction was in terms of the existing approach the ministry is taking and the potential regulatory changes that might be required if in these areas you believe your hands are tied.
One of them was coffee trucks. I certainly don't for a second mean to suggest it is a 100% certainty, but ask any policeman and he'll tell you they are, as a category, the largest contributors to the drug trade and various other illicit activities, not the least of which is a very overt campaign to do cash transactions and undoubtedly avoid the remittance of tax.
Secondly, temporary employees. I had a gentleman visit my office this past week who brought in documentation that specifically has the prospective temporary employee signing off that they understand they are contract employees and there will be no source deductions. You can bet your bottom dollar that for an individual who already knows there are no other government records being kept of their existence, there is going to be a far greater incidence of people who go the next step and don't bother declaring their income tax.
Thirdly, mail order. There is a large fishing and hunting shop in Oshawa that also maintains a mail order operation. They maintain it out of Quebec. I'm curious to know what our province is doing about assessing those goods that are consumed in Ontario even if they are sourced outside the province, and if we aren't doing something, why we're not, and what we would have to do to be able to send a letter to Barons' or any of these other companies and ask for a complete list of all of their shipments into Ontario so that we can send a follow-up letter demanding the sales tax that is rightfully ours.
I wonder if you'd share your thoughts on those various areas.
Mrs Palozzi: You've raised coffee trucks, temporary employees and mail order.
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Mr Gilchrist: Before you get to your comments, as a general concept, coffee trucks and flea markets and all the other things that we've talked about before share a common theme: the ability to have a cash transaction. Would it be appropriate to have as a regulation in the province of Ontario a requirement that there be a written receipt provided for any transaction for goods and services in this province?
The Vice-Chair: Just before you get into an answer, the time is up. Maybe as we go around they might address it through the other parties or back to the government side.
Mr Gilchrist: I'm sure Mr Pouliot would be happy to give up a minute or two of his time.
The Vice-Chair: We'll proceed with Mr Crozier.
Mr Bruce Crozier (Essex South): Good morning, ladies and gentlemen. I welcome this opportunity, at least at the outset, that we're able to talk about tax in general. My question also involves retail sales tax as well as other taxes that are applied specifically to the distilled spirits sold in Ontario. We have a problem in that the distilled spirits industry in Ontario has made a number of representations to the Ministry of Finance with regard to what's perceived to be, and I think in actual fact may be, the unlevel taxes as compared to wine and beer. This has resulted in a lucrative smuggling industry, and therefore retail sales tax would be missed on those sales.
Can you give me some historical perspective as to why there is this tax difference applied to the three areas of alcoholic beverages? And do you have any comment as to what might be done in light of the representations that have been made by the distilled spirits industry to the Ministry of Finance?
Mrs Palozzi: I'm going to see if our tax policy people are here. No, I guess they've gone. I'm unable to provide a commentary on the historical perspective about why the differences in the treatment of wines and spirits. I think one of the things we would need to have here for the committee to be helpful in the whole area of alcohol is to have someone from the LCBO at this meeting as well.
I'm sorry I can't do that for you, but I can get back to you on it. I can certainly provide you some information on it.
Mr Crozier: Just to comment, it isn't necessarily the LCBO. They're a part of it, I'm sure, but it is the Ministry of Finance that determines the tax that is going to be collected on those spirits. Certainly with regard to retail sales tax, there is a smuggling problem, and I wonder if there's anything being done in cooperation perhaps with the federal government in the area of smuggling, because it's reaching the point where it's even suggested that the smuggled spirits coming into the country are equal to or, unbelievably, may even exceed those that are sold legally.
Mrs Palozzi: Roy Lawrie is going to address that question.
Mr Roy Lawrie: Roy Lawrie, assistant deputy minister, tax division in the ministry.
With respect to the smuggling issue and in relation to the presentations that have been made to your committee that I've read, particularly from the distillers and also I think from the restaurateurs --
The Vice-Chair: The Ontario Restaurant Association.
Mr Lawrie: Yes. They talk about the gallonage tax that the LCBO collects from licensed premises on spirits in particular, but also wine and beer that's to be resold to the public. That gallonage tax is the main tax that is being evaded through smuggling, obviously. If the smuggled liquor is actually being sold and retail sales tax collected from the customer and remitted to us, then obviously it would be of concern to the Ministry of Finance. But the LCBO is the one that's really concerned about the gallonage tax they administer. So the smuggling problem is mainly one of evasion of the gallonage tax.
Mr Crozier: Well, perhaps we can pursue that at a later date.
I note from the auditor's report in the area of cross-referencing information from other sources, management information system, the recommendations are given by the auditor, which I'm sure you're familiar with. In the area of cross-referencing information from other sources, the ministry's response is: "We agree. As noted in the report, the ministry does have database matching plans." Also under the management information system, the answer again is: "We agree with the recommendation. Improvements in file selection are planned as an integral part of the new system."
I go back to my days as a internal auditor, when often the answer we would get in private industry from departments was, "We agree with you and we're working on it." Can you give us any idea as to what the plans of implementation might be? Is this the near future? Are we talking months? Years?
Mr Dario Savio: My name is Dario Savio. I'm the senior manager of audit in the retail sales tax branch. Perhaps I could give you a historic perspective in order to answer the question fully.
Database matching is a very important key element of both what we've done historically in identifying areas of non-compliance and where we propose to go futuristically. An example of what we've done in the past is obtaining databases from the liquor control board, from Brewers Retail and from the Ministry of Transportation, and we've been very successful in identifying significant areas of non-compliance with our legislation by using such third-party information.
We are currently dealing sensibly with Revenue Canada on the goods and services tax, matching our database to their database, which will not only benefit retail sales tax administration but will also, and probably to a much greater extent, benefit the administration of the goods and services tax and their attempts to increase their compliance level. That is the immediate objective that we're working towards because it would have the highest benefit both at the registration level for us and the federal government for identifying areas of non-compliance.
We are also working within the ministry system, called ITAS, which is the integrated tax administration system. We are trying to bring our databases within the ministry together, be it retail sales tax, corporations tax, employer health tax, and our motor fuels and tobacco tax databases. By providing more information to each of those branches, it will identify areas of non-compliance and incongruities between one reporting process and another. For example, with the employer health tax, if there is a significant contribution to employer health tax, meaning that there are a great number of employees within the company, there should be a correlation to retail tax sales as should show in reported sales. We see those types of benefits coming out of this.
So as far as answering the question of, "Is this long term, short term?" I would say it's currently advancing, and probably the first one that will come on, beyond the three I mentioned we already have, will be the goods and services tax database matching.
Mr Crozier: So it is probably fair to say this is ongoing?
Mr Savio: Definitely.
Mr Crozier: Yesterday in the federal budget it was announced -- I haven't had the opportunity to go through it in detail. I take it the federal government is suggesting that there be a tax collecting commission, I think is what it was called, and that the provinces, with their tax collecting facilities, might want to take part in this so there's one tax collector in the country. Do you see it that way and do you have any comment with respect to it?
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Mrs Palozzi: The intention, I believe, with the information I have to date, is that the federal government wishes to take their Revenue Canada operation now and create an agency, I think the Canada Revenue Commission, something like that, so it will be, I assume, a crown corporation of some sort, which will allow it to extract itself from the civil service rules etc, and allow for the funding of the operation in a way that enables perhaps adequate funding for some of the areas they wish to invest in, such as increased audit staff or other things.
Their proposal, in the throne speech and yesterday, essentially says, "That's the first step, then, just as we do now as a department of the government, a ministry, we want to deal with provinces" -- maybe they're indicating more aggressively now -- to enter into discussions with the provinces around what sorts of agreements to eliminate, what they call duplication of administration, and enter into discussions with the provinces around what is possible to get agreements on; for instance, we have tax collection agreements with the federal government on personal income tax. There's a range of possibilities.
Our general response is clearly one -- of course we're concerned about duplication of effort. We haven't had any indications yet about those conversations, how they will take place, where they will lead and so on, but I'm sure we will be part of those discussions.
Mr Pouliot: I listened intently to other members of the committee, who started the ball rolling predictably, methodically, with the small hot dog vendor hypothetically potentially being in default of remitting the RST, and then we moved on to Mr Gilchrist who stunned, shocked the committee by bringing the speculation to what he sees as a reality. He wasn't too concerned that some coffee trucks were sidelining for drugs, or sidelining for coffee; he seemed to be more concerned that they weren't remitting the tax. I'll ask him, off the record, whether he wished to have the sale of illicit drugs taxed in this province. Or maybe he would wish to move away, because that's quite a dilemma, from the retail sales tax and rid ourselves at the same time of the collection of that tax and go to a more fairer and a more progressive tax, that of personal income tax, where wealth, not consumption, is used as the real and true determinant.
Your text makes mention that $9 billion out of $46-47 billion, roughly 20% of what the provincial government takes in, is from the retail sales tax. Could you tell us, as an estimate, if all the eligible retail sales tax was to be collected, would we go to $11 billion, $12 billion? What is the estimated lost opportunity under RST?
Mr Peter Spiro: It's a very hard thing to estimate. It gets down to the uncertainty about the overall size of the underground economy. Estimates of that vary. Statistics Canada has estimated that it's probably in the range of 4%-5% of GDP. Others have estimated that it's as high as 20%. There is a variety of means of estimating it, such as surveys of consumers, their responses as to what they say they're doing. You can look at the amount of cash in circulation relative to what you would expect if government statistics on total GDP were correct, and from that discrepancy you can try to infer the size of the underground economy. I would say that tends to indicate probably the underground economy is in the range of 8% to 11% of GDP.
Even if you come to an estimate of what is the overall size of the underground economy as a percentage of GDP, you can't go directly from that to how much sales tax is being lost, because you don't know specifically where, in what sectors of activity that evasion is taking place. For example, in Ontario it's widely surmised that in the home renovation area there's a lot of underground activity, and that's an activity which is not legally required to pay Ontario provincial sales tax.
Mr Pouliot: Thank you very kindly. I'm very impressed. We go beyond privileged; we're blessed to have that knowledge. I'm simple folk, sir, and I will rephrase the question. Perhaps I didn't do a good job of asking the question. I apologize.
We now get $9 billion in provincial sales tax at the present rate of 8%. We estimate this. We feed the data bank this and this and this. If in a dream world, hypothetically, we got everything we are entitled to, would it be closer to $11 billion? Would it be closer to $11.5 billion, to $12 billion, to $13 billion? Does anyone have an idea? If we don't have an idea, we sure as heck don't have an idea about the size of the underground economy. How much is our lost revenue under RST?.
Mr Spiro: I guess the thrust of my answer was that there's a great deal of uncertainly about the size of the underground economy, so it would be futile to try to say whether the legally required amount of RST is $10 billion or $11 billion. There would be just no precision to that kind of estimate.
Mr Pouliot: Perhaps the focus would be somewhat clearer. The people who are in default -- for instance, a shop operator collects so much RST, has to do the remittance. I don't impute motives, say they are using it as a cash flow for their operations, but how many are in default in terms of remitting on time? What would be the percentage?
Mr Lawrie: I don't know if we actually have a percentage expressed as a percentage of active tax roll, but it's certainly true to say that our accounts receivable are rising. There are reasons for that. We're not alone in experiencing that at this particular time. The federal government is too, with GST. Their accounts receivable are rising and so are the other provinces'. I guess it's a reflection of financial circumstances, economic circumstances in the economy at the moment.
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Mr Pouliot: I'll tell you my real life. I make $42,000 at my job representing the people of Lake Nipigon. I'm a T4 person. I get a notice every year and it says "Amount due" or "Please pay." Then, being of moderate means, sometimes I really have to have another look at it because it's quite stringent, quite demanding. I make a payment to Revenue Canada and they charge me an interest rate. If I were a small business person and I was in arrears in remitting my retail sales tax -- in other words, collecting the money from the one hand and giving it to organized Revenue Ontario on the other hand -- is there a penalty? What happens to the small entrepreneur who is in arrears in the retail sales tax?
Mr Lawrie: There would be a late filing penalty, a late payment penalty if the return was filed on time but no payment made, and of course there would be interest charged. I'm not sure exactly what's behind your question.
Mr Pouliot: Let's say a person operates a car dealership, Ford, whatever; it can be any name brand. You go and buy a car from that person, so you pay retail sales tax. Let's say that person because of lifestyle, other commitments, was not in a position to remit the sales tax. Do we throw the person in jail?
Mr Lawrie: No.
Mr Pouliot: Why not?
Mr Lawrie: Our act's structured to use penalties as a deterrent: a 10% penalty for tax collected that isn't remitted, 5% for tax that's due by a taxpayer, and also an interest charged to reflect the use of the money that isn't remitted that ought to be. Collections branch follows up, arrives at an evaluation of the problem facing the particular vendor or particular taxpayer, and if there is genuine temporary trouble, in collections' view, it arranges that payment be made over time, as long as current payments are kept up to date.
Mr Pouliot: If I beat a path from my place of business to the bank, if I have good collateral I can go to the bank and get a demand-plus-one loan. How quick are we at reacting and matching so that in lieu of going to the bank and get demand-plus-one, I could possibly use in the interval to meet the payroll, let's say, the RST money to provide a cash flow so I can meet my obligation? How good are we at competing?
Mr Lawrie: Obviously, with trust funds, as RST is, the vendor doesn't actually pay the tax itself; they collect it from their retail customers and are supposed to turn it over to the government. Our collection efforts are much more stringent on such trust funds -- a commodity tax is another example: gasoline, tobacco, fuel tax -- than they are where, for example corporations tax, the taxpayer itself is paying tax due by it, the rationale being that the offence is much worse if you are, if you like, inverting the government's money to your own use than it is through perhaps not being able to pay your own taxes at this time. There is faster action on trust funds like retail sales tax collected from customers and commodity taxes than there is on other taxes.
Mr Pouliot: But you can't foreclose for arrears.
The Vice-Chair: You can get back to that a little later; there's enough time to go around. I'm wondering if Ms Palozzi would like to respond to that three-part question posed by Mr Gilchrist in the other turn.
Mr Lawrie: Perhaps I could handle Mr Gilchrist's question on what he referred to as temporary employees, and my colleague Mr Savio will respond on the other two.
This is a problem for us in the taxes we administer, in employer health tax mainly, because we don't administer income tax but there are very clear income tax implications in the situation you outlined. Yes, it is a current problem in administration of EHT, and we think it's largely because of the pretty aggressive actions by certain consulting firms in seeing that it's worthwhile fighting EHT on employment-agency-type payments, the reason being that in the Employer Health Tax Act there isn't a definition of "employment."
The issue here is differentiating in a legal sense between a contract for services, in which case EHT doesn't apply, or a contract of service, in which case EHT does apply. Because there's no specific definition for it in the Employer Health Tax Act, we rely on the common law definition. There have been several cases, and there is a basic underlying common law rationale for differentiating between the two types of contract, so we use the common law. We've got an interpretation bulletin in preparation, which we are about to issue, explaining our position to the taxpayers.
In the meantime, we have several assessments, probably well over a dozen assessments, of employment agencies on this very issue. They're at the notice of objection stage, but given the amounts of money involved, about $15 million in employer health tax currently involved, I would expect this will go to the courts and we'll get some jurisprudence.
The last thing I want to say is that part of the trouble for the dispute is that Revenue Canada, in its determination of what constitutes an employment contract, administers three different statutes: one for CPP, one for what's now called employment insurance -- it used to be UI -- and one under the Income Tax Act for employee source deductions. They've all got different definitions of what constitutes an employment contract. That is part of the problem. We don't have that particular problem. We don't have a definition in our particular statute, but this will be resolved through the courts, if not through clarification of the act.
Mr Gilchrist: Thank you, Mr Lawrie. I am genuinely pleased to hear that progress is being made on that, but I must say I'm reluctant to have courts make the legislation in this province. I think it's one of the biggest downfalls of our modern society that unelected judges are doing that sort of thing. I wonder, instead, whether we can be of some assistance in terms of crafting regulatory change or an entire new bill, if that's required, to give you that sort of definitional support. If we can avoid going to the courts, for the expense if for nothing else, and to accelerate your collections -- there are more than 15 temp companies out there, so rather than wait before we go back in and reassess all of them on the basis of a court case that could go on for many years, I would be far more eager to see us simply give you what you need in terms of the tools to deal with this very quickly.
Mr Lawrie: In response to that, obviously our main concern is taxpayers and making sure they're not in any doubt about when to pay tax and when not to. Hence, our interpretation bulletin is going to go out to them. Perhaps it would be a matter for the minister in his upcoming budget to determine whether legislation change is required, but I'm sure the minister would value the advice that came in.
Mr Gilchrist: Would it be possible to get the interpretation bulletin sent to the MPPs as a matter of course? That's something I miss since selling my business. I no longer see what the department is up to.
Mr Lawrie: Of course.
Mr Gilchrist: I appreciate that.
In terms of the mail order aspect, could somebody deal with that? I know there is an initiative at the border to collect taxes when people cross and are physically there in the presence of their goods. I'm wondering if there is a double standard for mail order, and if so, why we allow that.
Mr Savio: The issue of mail order catalogues is known to us. There is some concern there. We have been working with some members of the industry. The law in Ontario is that the consumer must pay the tax if the transaction takes place in the province. If the mail order outfit is legally located out of the province, under our current legislation we have no authority to go outside the province. We do, however, monitor the industry quite closely, because there has been a great deal of concern expressed to us to make sure there is no legal presence by the mail order firms in the province. If there is, we have actually issued assessments against them.
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You had raised one example earlier, if I understood the details, of an establishment out of Oshawa that operates a mail order firm out of Quebec?
Mr Gilchrist: Yes.
Mr Savio: Under our law, if that firm has a presence in Ontario the transaction has taken place in Ontario and the tax is collectable by them and payable to the province.
Mr Gilchrist: It's my understanding they are not asking consumers to pay the tax, so unless they are voluntarily giving up 8% of their profits, which I think we could all assume is not likely to be the case, I must infer we are not collecting the tax. I'm also aware there are at least 14 other mail order operators just in that industry alone, some of whom fall into that same category where it is a very overt means to bypass.
In fairness to them, they are in turn competing with American operators conducting mail order operations able to charge X dollars for a fishing lure without the tax. My question is not meant to beat up on an Ontario operator that tries to circumvent the law; it's meant to level the playing field so that anybody shipping a fishing lure to be used in Ontario is charged the same tax as they would be if they walked into a Canadian Tire store and bought it off the shelf. I mean, fair is fair. Is this something on which you would look to the budget or to the Finance minister, or to the Legislature, to give you the tools that would allow you, either via Canada Post or some other mechanism, to charge the appropriate tax at the border?
Mr Lawrie: It would certainly be worthwhile to talk to Canada Post because it has an existing arrangement for mail order deliveries collecting the GST. You are charged an extra $5 if you order from the States, for example, for Canada Post collecting the GST amount for the federal government. At least in theory it would be possible for the RST to be collected in the same way. The trouble with a lot of these mail order purchases is that there's not much RST involved. Clothing's quite typical of goods purchased by mail order. We've got certain exemptions -- for example, for children's clothing -- which would probably cause some trouble for Canada Post as opposed to the rules that apply for GST. However, perhaps this could be resolved.
The basic underlying principle is that a province can't levy an indirect tax, and unless there is what is called situs in Canada -- the American term is nexus -- of the seller, there is no obligation. We don't have jurisdiction over the retailer. We do, of course, try. In fact, we are very avid collectors of all mail order catalogues. We write to the out-of-jurisdiction supplier and say, "How would you like to register voluntarily for RST?" Some do; some don't. Some of them are now using post office boxes in Ontario. In fact, unless you look very closely at the small print, you don't know they're not an Ontario company. Perhaps the time has come to look at tidying up the law to see whether we can establish situs for companies like that.
Mr Gilchrist: Would a post office box not be a presence in Ontario?
Mr Lawrie: Under current circumstances, no. We have a legal opinion.
Mr Gilchrist: Really? So doing my selling via a post office box instead of doing it via a building, where I'm also paying property tax and everything else, I actually get a better break.
Mr Lawrie: That's correct.
Mr Crozier: I can certainly understand what prompted Mr Gilchrist's concern with unelected judges making decisions. As we all know, with the public service, when the court made what was an appropriate decision with regard to pensions, the government then said, "We don't like that, so we'll simply change the law," and has exempted itself, like no other group in the province of Ontario, from certain pension restrictions.
Having said that, I want to move on to a concern I have with regard to provincial sales tax on accounts receivable. As I recall, there's a 60-day period in which you have to identify accounts receivables that are uncollectible, in which case you can list those and recover the tax you remitted to the government and will not be collecting. The problem with that, and I'd like your comment on it, is that in most cases 60 days is too short a period to know whether an account is uncollectible, because many are running, as a matter of course, 30 or 60 or 90 days. Would it not be fairer that when a business declared for its financial records, for that matter, that an account is uncollectible and actually wrote it off, at that time, notwithstanding the number of days that have passed -- for customers that have been good in the past, you might even wait a year. Would the time at which they're written off not be a fairer time at which a business could identify the amount of provincial sales tax and recover it from the province?
Mr Savio: The way the system works now, it's up to the vendor to determine when the account becomes uncollectible. The vendor has the control over the determination and the time frame when it becomes recognized as doubtful. The time kicks in after he has determined it's uncollectible, so there is a fair degree of latitude for him.
Mr Crozier: I'm about five years out of date, so that's why I needed your help.
Mr Savio: We've also simplified the system for the vendor, that they can either apply for a refund or make an adjustment on their monthly return, so in essence they would have the funds available immediately.
Mr Lawrie: Subject to later audits, of course.
Mr Crozier: That's great. I appreciate that that was done. It was always a little bugbear when I was in the business.
Mr Lawrie: One thing I recall recently on that line is that I think our legislation now refers to being able to claim it for retail sales tax purposes when it's written off for financial statement or income tax purposes. But it may be appropriate in certain instances, where, for example, the customer has gone into receivership or is in fact bankrupt, that an earlier claim be made. I think we're looking at changing the practice, which we'll announce in the normal way through our guides if we feel a change is appropriate.
Mr Dominic Agostino (Hamilton East): To go back to Mr Pouliot's point, you don't have a mechanism or system at all within the ministry to do at least a best-guess estimate on the amount of revenue that may be lost, based on previous projections, what your projection would have been based on sales? There isn't any sort of mechanism within the ministry to do that?
Mr Spiro: The basic problem you have to get back to on this is an absence of information, because people are lying; when they file their returns they lie about how much they sell. What you're saying would make sense if there were some kind of central agency that knew the total amount of sales in the economy and you could then compare that to what the individuals are reporting. But where the aggregate numbers come from, they're just built up from the tax returns of individual tax filers.
Basically, if people are lying, the only way you can do that is make some kind of guess, point to each individual one and say: "How much is he lying by? How much is he understating his sales by, 20%, 50%?" You can do that by detailed auditing. If you did a saturation audit on a scientific random sample basis, you could build up an estimate. But in the absence of that, the closest you can come is to look at the discrepancy on cash in circulation. You have to realize that people, for their own financial incentive, are doing their best to hide what they're doing. They're using cash transactions; they lie to the government about how much they've sold. We're not mindreaders. We can't deduce what these people really did sell.
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Mr Agostino: On the other hand, if there was an increase in a year, a year and a half, there was some sort of modest increase or an increase in the revenue, I presume it would be just as difficult to attribute that to a crackdown on the retail sales tax or the fraud that is occurring in that area.
If we'd say next year the amount collected increased by a certain percentage, would you be able to pinpoint and say part of that is a result of initiatives to crack down? How are you going to able to gauge how successful any efforts to crack down on this type of fraud are going to be and how can you distinguish between that and growth that would have occurred or sales tax increases that would have occurred anyway?
Mrs Palozzi: You can track audit activity and what that audit activity yields.
Mr Pouliot: But that's gone down by 21%.
Mrs Palozzi: You can differentiate parts of it. In terms of your reference to a crackdown and follow-up, you can track.
Mr Agostino: So you can't tell us how much approximately is going unclaimed but you're going to be able to tell us how much may be claimed as a result of efforts to get rid of some of the --
Mr Lawrie: The problem is, even with the statistical sample of our tax roll and doing a thorough audit of that statistical sample, you can't audit the ones who aren't on your tax roll, the non-filers, so you don't get a complete picture. It would be deficient even from that point of view in getting an accurate picture of the entire underground economy.
Mr Savio: There are a number of indicators we would look at. For example, we track revenue per hour. We track number of audits that we've conducted and how many have resulted in a change in assessment. Theoretically, as the number of audits conducted generate reassessments, that would show that non-compliance is going up. If that peaks and dips, then that would indicate that the level of non-compliance, because of various administrative presences, would affect that.
The other point on gauging the underground economy, this is a concern not only for us but also for Revenue Canada and the IRS. It's not a precise science. Everyone is trying to come to terms with the actual measurement of it. We have signed a memorandum of understanding with Revenue Canada because of our concern and their concern, trying to gauge the level of the underground economy. That is one of the commitments we have made to each other, that we will look at trying to come to terms and measure the extent of it.
Mr Agostino: Just to wrap up, I find it somewhat surprising that we seem to have at least an art that finance develops in, for example, when it comes to talking about fraud in the welfare system. Although 3% to 4% is the fraud that is acknowledged, at least as seen through the system, the government is content, however, to estimate a much higher number based on whatever calculation they pull out and Finance is able to say, "Here's what we think in the minister's office we can say to the minister as to how much we believe is lost in welfare fraud." We don't seem to have much of a problem to come up with those numbers that are much higher than the actual numbers are, but we seem to have a hell of a time trying to come up with the sales tax. I just find that a little interesting, to say the least, and a little bizarre.
Mr Savio: I would think, not to get on a tangent on the welfare system, but there you are dealing with a known quantity, you have 100% of the universe that you can measure, whereas the tax administration elements of the underground economy are not part of the universe. So we're trying to extrapolate, based on known registrants, what the activity of non-registrants is and that's where we get into --
Mr Pouliot: Whatsoever. I can't understand that, but anyway.
Mr Kormos: Chair, briefly, and I know you won't recall this because my tirades in this regard preceded your being sent to Queen's Park, they were with respect to things such as the way orange juice would be profiled here at Queen's Park. Petty? You bet. But I come from a part of the province where apple farmers and grape growers are desperate to see their product consumed by Ontarians, and it used to really rot my socks that here in the Legislative Building we'd be profiling non-Ontario produce, Anita Bryant having become irrelevant since and certainly not helping the issue.
But I noticed today, believe it or not, this carbonated natural spring water that we're providing here at the Legislative Assembly comes from Piedmont, Quebec. Again, I have no quarrel with Quebec or any of its produce, but here in the provincial Legislature you'd think -- and I can tell you that from my very own part of Ontario down in Niagara region there are sources of bottled water --
Mr O'Toole: You shouldn't drink it.
Mr Kormos: I'm not drinking it, but there are sources of bottled water. I would expect that producers -- we're talking here about issues very relevant to Ontario's economy -- there are producers here in the province of Ontario who would dearly love to see their product, be it spring water or carbonated water, consumed at Queen's Park. I just raise that with you. I think the issue is really quite symbolic in terms of a government in Toronto that indicates that it's manufactured in Toronto.
Mr Pouliot: I thought the head office was in Atlanta.
The Vice-Chair: I guess we go from Coca-Cola and then the coffee from Brazil and this could go on forever here.
Mr Kormos: No, no, no, but, Chair, if you think you can --
Mr Pouliot: Brooke Shields will call you this evening.
Mr Kormos: Chair, if you think you can dismiss that in the face of the farmers and the producers that come from Niagara region, you're sadly mistaken. They're concerned about these sort of things, as concerned as wine producers are about Air Canada selling French wines.
In any event, having said that, and I really say that in seriousness and I'm not trying to be merely provocative, I'm interested, though, in what seems to be a really circular sort of argument here. You talk about things that are tantamount to counting the towels in a house of ill repute to determine the extent of trade, and what the income indeed was over a period of time, a most unscientific exercise at the very best -- perhaps some use no towels, perhaps some use two or three -- so in itself a very imprecise exercise.
I'm old enough to remember the origins of retail sales tax in the province, with the Conservative government of course, and reflect on the fact that it's the most regressive of taxes. First of all, how much does it cost to collect the PST that's collected now? What is the cost, and I suppose this again is akin at least to counting the towels, because if I'm going to ask you how much it costs to collect the uncollected tax, it's going to be hard to determine that, because we don't even really know what it is yet, so how can we talk about how much it costs.
In view of that, why aren't we taxing those things? As far as I'm aware -- and I'm from Welland -- taxation has two primary purposes: one is to raise revenue, the other is to regulate consumption or a particular activity, and that's the rationale for things like gasoline taxes, for instance, sin taxes, tobacco, liquor, among other things.
Why are we taxing things that cannot be effectively taxed and why aren't we taxing things like wealth, by way of imposition of a wealth tax which seems to be reasonably readily ascertainable, recognizing of course that some people are still going to be inclined to keep their money under their mattress, but the vast majority of people are going to have -- because you see, gasoline tax is relatively easy, because it's monitored. It goes through a regulatory system, it's sold through the pump. Liquor taxes, tobacco taxes are relatively easily monitored.
Once this government introduces video lottery terminals, short of the corruption and illegal operation of terminals that is going to accompany it, by and large, the technology is such that, as compared to the old days when laundromats and any coin-operated equipment was difficult to tax because it was difficult to monitor the flow of money, it wasn't metered -- why are we pursuing areas of taxation that in themselves do not control activity or are difficult to generate revenue because of the difficulty of taxation?
If the motive is to control activity, then I understand we've got to focus on that, if we have a real commitment to controlling that particular activity. Why aren't we taxing the things that reflect truly the wealth of a particular taxpayer and those things which can be fairly monitored or effectively counted?
Mr Lawrie: Could I just answer part of your question at least? The administration of retail sales tax on an estimates basis costs $40 million a year. The reason I say "estimates basis" is that currently in the estimates there is no provision made for rental, for use of government buildings, so there's nothing in there in respect of overhead for buildings. That works out to roughly 33 cents for every $100 collected. For example, GST is very much higher than that, I think largely as a result of having a very much larger tax roll and a very much larger refund operation. Their costs are about four times what ours are.
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The Vice-Chair: Mr Pouliot.
Mr Kormos: One moment. That was a response to part of my question.
Mr Spiro: You could write thousand-page books on the other part, but basically the purpose of taxation is to pay for the cost of running the government and you have a variety of taxes, you have a mix of taxes. We have taxes on income, we have taxes on sales of various things. In some instances, as you mention, there are sin taxes that are specifically meant to deter a particular kind of activity. But economists generally recognize that there are advantages and disadvantages to all kinds of taxation. Among other things, for example, with wealth tax, certainly for some people it's easy to measure their wealth. It's also easy for them to move it out of the province.
Mr Pouliot: Oh, yes.
Mr Kormos: Frank Stronach is a master.
Mr Spiro: That's just an example. Again, with income tax --
Mr Kormos: He's a good one, isn't he?
Mr Spiro: With income tax, there's a difference between retail sales tax and income tax. Income tax has a more direct effect on the incentive to work, on the degree to which people are willing to work in the legal labour force and so on. So it's generally felt that you ought to have a mix of taxes in order to level out the various pros and cons of different kinds of taxes.
Mr Pouliot: Thank you very much. A thousand pages -- the book I would write would only have two words and no one would read it. One would be "use" and the other "abuse." But if we could spend more than a thousand pages tracking or tracing the K.C. Irvings of this world, as a simple person, I'm intrigued and fascinated by the ability of one to go to the south, to the sunny climes -- it was only lately that I've learned how to spell Liechtenstein -- to be a Canadian when it serves your purpose and, as a matter of convenience, to stop being a resident when it serves a greater motive and fulfils a greater motive and serves a definite purpose and establish a trust company in the United States, then buy long-term bonds in Canada and have to divvy those coupons clipped by the trust company and remitted. It's quite intriguing and it calls for good reading.
On the number of audits, I have two questions. You mention that the Provincial Auditor review of coverance since 1988-89 discovered that while the number of auditors has remained relatively constant, the number of audits has decreased by 21%, and then we lose relevance to my question because we see yet the vendors, the client groups have increased by 10%. If you have the same number of auditors, why, in a broadly summarized form, have the number of audits decreased by 20% -- 21% in fact?
Mr Savio: There are a number of reasons, but the most evident one is if you look at the change in number of audits resulting in assessment. Very simply, if you have a great number of audits where there is no reassessment, the hours expended to conduct that audit are generally quite low. Whereas if the number of audits go up --
Mr Pouliot: More complex.
Mr Savio: -- they become more complex, to use your word. They take more time and that shows in the Provincial Auditor's report, that while the number of audits have gone down, the amount of tax identified per audit has gone up significantly.
Mr Pouliot: My last question is, we notice in the paper, the Globe and Mail has a financial section, the Report on Business, and it, as a mandate, reports to us periodically what they get from StatsCan, the number of personal and mostly small and medium-sized business bankruptcy, which they say when it comes it to us, the small consumer, that we're paying for the excesses of the 1980s and then our plastic obligations are at an all-time high, but they also point to a record high number of bankruptcies for small entrepreneurs.
In the pecking order, Harry and Jane Smith operate a small store. They underestimated their cash flow and they're on the hook. They go bankrupt. You are on the creditors' side by way of your RST, the retail sales tax. Then Gilles and Jane Lunchpail paid from their labour, handed it to them. Where are you in the pecking order? Because I, Joe Citizen, sure want to get my pound of flesh out of those people. Do banks get paid first? I don't know.
Mr Lawrie: Yes.
Mr Pouliot: Okay.
Mr Lawrie: There was a change in the federal Bankruptcy Act a few years back and we lost our preferred creditor status that we used to have; all provincial crowns did. There is a remedy to that which we have implemented. In the case of our tax debtors, if we register personal property liens or real property liens, it gives us back secured creditor status and we've in fact implemented that through changes that were made two or three years ago by the former government.
There's one additional thing I would like to add to my colleague's answer to your first question. The social contract legislation of course did affect the number of available hours the auditors had to conduct audits. Previous to the social contract, they were given an option of getting paid overtime or getting equivalent time off. Under the social contract, their getting paid overtime option is taken away --
Mr Pouliot: Oh, I see.
Mr Lawrie: -- which results in an overall less amount of available audit time, therefore fewer audits with the same number of auditors.
Mr Pouliot: Okay. Thank you. Now that the social contract is about to end --
The Vice-Chair: Okay.
Mr Pouliot: No, no. Excuse me.
Interjections.
The Vice-Chair: You'll get another opportunity, Mr Cleary. Mr O'Toole.
Mr O'Toole: Thank you very much for being straight out. You've answered some of my questions, but I do want to go back to a general kind of feeling that the present tax rate or levels of the tax or presence of tax. Is this serving some form of driving the whole tax system underground, objectively? Like the more we tax and audit and regulate, is that what's driving the economy underground, or is that a misrepresentation?
Mr Spiro: There is some evidence from econometric studies that higher tax rates lead to increased evasion. Again, looking at the indicator I mentioned before, the amount of cash in circulation above and beyond what you would expect based on the amount of reported expenditure, there is a positive correlation between that and tax rates.
Mr O'Toole: Could I turn that into an assumption that if you were to lower the tax, you may increase your revenue? That's an important fundamental theory or theme, both for the province and indeed for the country, to look at: by reducing rates of tax that you will indeed increase revenue. Could you comment on that and the experience in the United States and perhaps --
Mr Spiro: There's a well-known Laffer curve theory that suggests that, and it would certainly be true that if you were in a situation of extremely high tax rates one could conceive of that being the case.
The empirical evidence for Canada and the United States suggests that we're not quite there yet, and there are of course a variety of issues around that. It's not just the evasion. You also have the effect of tax rates on incentives to work on consumer spending, on economic activity in general. When you run an income tax change through standard econometric models for example, they do tend to show that you have a fairly substantial effect on overall economic activity. Some of them will show that after a lag of about five years for all levels of government in Canada as a whole, because of the stimulus to economic activity when you cut taxes, you do end up with as much revenue as you had before, but the problem of course is that it's shared among the different levels of government, so if just one government cuts taxes -- for example, if the Ontario government cuts taxes, the Ontario government isn't going to get all that extra revenue. A large chunk will be shared by the federal government.
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Mr O'Toole: Yes. It's shared in an unusual spreading in the economy, and really that's a fundamental theme within our particular party's position. I would contradict what you say. I think the information that I read says that we're the highest-taxed jurisdiction in the world or one of them.
Mr Spiro: We are the second-highest personal income tax rate in North America, but we're still quite a bit lower than many other countries.
Mr O'Toole: Of the retail tax and the other taxes we're --
Mr Spiro: Even when all those things are taken into account, we're well below the highest-taxed countries in Europe.
Mr O'Toole: When you look across the whole spectrum of the levels of tax and perhaps the employer-based taxes, do you see that as a prohibitive aspect of growth or a barrier to growth in the economy?
Mr Spiro: That's right. Payroll taxes, in general, are found to be --
Mr O'Toole: Are a disincentive.
Mr Spiro: That's right -- are found to be one of the major disincentives.
Mr O'Toole: In fact, it's probably the emergence of the underground economy, whether it's in temporaries or contract employees, the more the tax that's imposed on the employer, whether it's through direct linkage to workers' comp or whatever kind of tax or cost, they're inhibitors to growth. They drive the economy underground.
Mr Spiro: Definitely. Again it's the two aspects. There's the one that's the underground and also the fact that companies that operate legally and pay whatever tax they're required to, for them it's a disincentive to hire workers because --
Mr O'Toole: You mentioned that the drywallers or the home renovation group seem to be one of the most active underground. If they were above ground, they'd almost be out of business because of the rates of WCB, employer health tax, all the rest of the kind of regulatory regime that is a disincentive. It's by design and by regulation, not just in the tax sense, and I'm perhaps being unfair because you're in the tax area, but I'm trying to make it clear that that's indeed why I ask it in a question. But do you see the non-compliance going up? Has that been a phenomenon over the last number of years?
Mr Spiro: Again, these econometric estimates that look at the discrepancy between cash in circulation and what you would expect if reported economic statistics are correct and what you're actually seeing, do indicate that the underground economy has grown.
Mr O'Toole: So that those are some reasonable assumptions I've made.
In response to some of the comments by the auditor's report, there was one that suggested perhaps you spend a fair amount of time on the large catchments, the large and medium-sized businesses. They account for perhaps 50% of the total revenue on that RST stuff. The fastest-growing segment, we're all told, is the entrepreneurial sector. The big business, the Magnas etc are a thing of the past. Technically, their employment rolls are going down. What strategy have you got in place to deal with the small or medium-sized businesses?
Mr Savio: As far as the large vendors, they currently contribute 58% of the retail sales tax revenue and we apply 50% of our --
Mr O'Toole: Resources.
Mr Savio: Actually if I could go back, the coverage level on that population is about 50%. Our resource base is somewhat less than that. We are currently in the process of recruiting additional auditors, and the vast majority of auditors who are being hired will be dealing with the small vendors.
Mr O'Toole: That's really responsive to -- some of the themes within the auditor's report suggest that -- I believe what he was saying is that there's more compliance in the large, formalized organization. Would that be a fair --
Mr Savio: It depends how one measures compliance. Perhaps the nature of compliance differs from one to another. A very simple error with the senior corporation could result into millions of dollars, so it depends. If you consider that complying or not, then fine.
Mr O'Toole: With all the electronic abilities today, electronic audits and looking at the regulations that you would be regularly updating, and I can understand that if you miss 0.5%, you're going to lose a lot of revenue.
But I guess really the point I'm trying to make is that everything I see, a rising underground economy, an unregulated-type portion of the economy that's being driven by the needs of individuals taking responsibility for their lives today, I believe that the greater amount of resources should be spent in exactly the reverse area. Because of the small, unregulated sector growing rapidly, I think we need to get a handle on it seriously because large corporations are downsizing. When they're downsizing, they need to have clear guidelines and you need to do audits for sure, random, statistical kinds of things that tell you whether that sector's in line or not, that's sufficient, but you're spending 58% of your resources in a sector that has a tradition of performance. You know where the non-conforming groups are.
Mr Savio: Actually 58% of the revenue is derived from the larger --
Mr O'Toole: How much are the audits? I thought you said 50% of your audits --
Mr Savio: No, less than 50% --
Mr O'Toole: Oh, really.
Mr Savio: -- of our resources, and that is based on historic numbers. We are currently in the process of recruiting auditors, which will result in our resources aimed at the larger vendors probably being in the neighbourhood of about 30%.
Mr O'Toole: Again, in response to the Provincial Auditor the government took the initiative to entitle you to employ another 50 auditors, I think it was. Where are you in that process? I think you've answered part of it. Where will that resource be allocated?
Mrs Palozzi: We have in fact placed ads, following a government process internally. I think about a month ago they appeared in the government Topical and it takes a little while to embark on the recruitment process. Dario might be able to --
Mr Savio: If I could give you a little more detail. We had started recruitment within the government. It's a restricted competition at this point in time. Of 168 applications we received, we're interviewing 86 people and we were three quarters of the way through the competition process and then the strike commenced, which means we had to stop the competition.
Mr O'Toole: It stopped a lot of things.
Mr Savio: It stopped a lot of things, yes. As soon as the strike terminates, we will commence our process for the finalizing --
Mr O'Toole: That's the internal process.
Mr Savio: Yes. We expect that we will recruit probably a third of the number of auditors internally, hopefully more. Then the plan is to go outside.
Mr O'Toole: You'll be allocating those in some proportion to this new entrepreneurial sector to get it more in line, I gather.
Mr Savio: That is the strategy, that the 50 auditors who are being recruited will all be put to work on the small vendor population.
Mr O'Toole: Good. I appreciate that because I think if we all work together, you want to avoid the whole thing of being a kind of a regimented regime and prohibitor. Do you facilitate new business in any way through getting them started through the maze of tax collection, retention, remittance?
Mr Lawrie: Yes, we do. We used to have a program that we would like to renew called the new vendor assistance program where in the first year of a new business, because we have roughly through retail sales tax 60,000 of them a year, we found when we had the resources to run that program before -- they weren't audits. They were friendly service visits, "Are you having any problems with retail sales tax?" and perhaps giving them copies of the guides that explain some of their questions. They do get a kit when they register and depending upon the nature of the business, the kit varies, but it's helpful to talk to a live person rather than sometimes reading our publications or even lifting the phone.
Our plans are to see if we can arrange this jointly with the federal government with respect to, they have the same problems with GST. If we're able to hold these visits and exchange results of these visits, we both thereby gain leverage. In other words, we're not duplicating going to the same business twice, once for GST and once for RST.
Mr O'Toole: Okay. I have a couple of quick ones if I have a minute.
The Vice-Chair: The time is up. You're beyond your time. The Provincial Auditor, Mr Peters, would just like a point of clarification.
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Mr Erik Peters: Just in order to help out Mr Savio and Mr O'Toole regarding the questions, some of the statistics you just gave us pertain to the new regrouping of vendor categories that you have. Is there any statistic that you could help us out with? For example, at the time we did the audit we felt that the large and medium vendors made up 50% of the revenue base and the small vendors 50%. You're now talking about 58% being the large and medium vendors. Hopefully, this afternoon we will be in a position that the committee will write its report and I think it would be worth while if we had agreed-upon statistics on that. Would you have a listing or could you walk us through those stats?
Mr Savio: I don't have a listing, but a point of clarification is that when you conducted your audit, we had the A, B and C vendor categories. We have redistributed those three into two, the A and B. The former C category was redistributed, so that some that were previously considered small vendors have been moved up. That's why there would be a discrepancy of the 8%.
Mr Peters: Right. It's just something perhaps for the researcher to bear in mind when we write the final report, because the numbers do come out different now.
Mr Crozier: You've been very helpful this morning, folks, but I guess there's one main reason why you were brought here -- and I'd like your comments -- and that is the suggestion that retail sales tax be collected at the wholesale level, more particularly where it comes to the spirits and tobacco and that we then might, if I may suggest, recover or better control our collection of taxes if it were done at that level rather than retail. I'd like you to take your time to comment on that, please.
Mrs Palozzi: Roy's going to address that question.
Mr Lawrie: First of all, I think you have to differentiate between tobacco and alcohol, the reason being that, as from its name, obviously retail sales tax varies with retail price. The problem with alcohol is that depending upon the nature of the establishment, exactly the same drink can have radically different prices. So quite apart from constitutional problems in collecting a retail tax at the wholesale level, you've got real revenue problems in determining what an appropriate rate of tax at the wholesale level would be in order to approximate what you currently have.
Looking at, on the other hand, the tobacco, we're aware of course of what Nova Scotia has done and we're aware of the problem of unlicensed wholesalers of tobacco products, which I think the grocers' association pointed out could be causing significant tax leakage. We're looking at the various options that are available to us. Certainly one of those options would be to change the law in the manner that the association recommended to you, as Nova Scotia has done it. It would be successful probably in eliminating some of the leakage from retail sales tax. The trouble is that when you move tax liability from one tax to the other, there are always effects that you didn't anticipate. It could actually give us problems in leakage in tobacco tax too.
That's one of the things that we want to look at from an administrative point of view, and of course tax policy people want to make sure that fits in with their overall strategy for the budget, but I guess if the committee wanted to support that recommendation from the association, the Treasurer would be grateful for the advice.
Mr Crozier: Gosh, I was hoping for a much longer answer than that, because I'm starting to run out of questions. I appreciate what you say about the wide variety in prices when it comes to liquor. It's my understanding that cigarettes vary somewhat but not to the same degree.
Mr Lawrie: No, not to the same degree.
Mr Crozier: So it isn't as simple as somehow statistically taking some sort of average and saying that if we apply that at a certain level, we'll end up with the same amount of revenue. It isn't quite that simple, I take it?
Mr Lawrie: Not quite. Obviously, for any province there's always a concern that any tax that you levy be constitutional; ie, not be considered to be an indirect tax. The advantage of, for example, increasing the tobacco tax rate in order to recoup retail sales tax revenue on cigarettes, if cigarettes were to be made exempt from RST, the advantage of using the Tobacco Tax Act is that there have been court cases that have held that the particular way we administer tobacco tax does make it a direct tax, whereas I'm not sure that -- in fact, I am sure that we haven't had any case support levying retail sales tax at the wholesale level, that that would be a direct tax. So there would be dangers there quite apart from the issue I talked about before, which is a big retail price variation on the same drink, depending upon the establishment.
I should point out that my colleague just reminded me that we did, and the tax policy people also came along with us, meet with the National Association of Tobacco and Confectionery Distributors, which I don't think you've had in front of you. They made exactly the same suggestion as the Canadian Council of Grocery Distributors. We met with them and listened to their concerns in detail.
Mr Crozier: Having listened to those concerns, though, these are the conclusion you've come to?
Mr Lawrie: Obviously, this is one of the options that's open to the minister in his 1996 budget if he so chooses. There may also be enforcement options too, for obvious reasons. I'd rather not discuss those just now.
Mr Crozier: It's okay with me.
Mrs Palozzi: I'm sure it is.
Mr Crozier: When a subject like this is discussed, when a suggestion like this is made from the industry, notwithstanding what this committee might recommend, isn't that something you still, in the normal course of events, would look at and if there is a better way to do it, the suggestion then would come through the ministry?
Mr Lawrie: Yes. Within the ministry, the normal course of events on a problem like this that comes to their attention would be that the tax policy people, who consider recommendations to the minister in the way of changes to tax legislation, would ask us to quantify the problem, if we were able to, from operations, from tax administration, and to give a recommendation. As I said, we have already met with a different association which drew the same problem to our attention, and obviously things have taken their normal course inside the ministry.
Mrs Palozzi: I think that within the ministry we are always responsive to meeting with organizations that have issues like this, and as part of the annual budget process we do look at what the major issues are and what the options are in solving them. I think what you've heard today is that certainly this is one of the options, but also, as in every option we examine, there are always the pros and the cons in terms of other implications -- unintended, unforeseen implications etc. So it's something that, if the committee wishes to recommend it, would certainly be taken as advice and as part of the process.
Mr Crozier: I appreciate that. Certainly there is a whole range of issues that I'd like to discuss with respect to retail sales tax harmonization with the GST outside, maybe in a less political forum, because somewhat like my colleague here, I'm a simple person and it seems to me that with all our expertise we should be able to figure these things out and get them under way. So maybe some time later we can talk about those issues.
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Mr Pouliot: You have mentioned, sir -- and I can appreciate the feeling; I make a living, at least now and then -- some events, including the social contract. I need your help. Under the social contract, there were the same number of people employed but they were working fewer days, so if we go to full-time equivalent there were fewer people. That had a small impact. It was not catalytic, it was not the make or break, because the response here indicates that between 1988 and 1989 it's been predictable. It's been an ongoing problem which was not addressed. Add to it the complexities that things were changing and so on. So it's a matter of components bringing it to the catalyst. It's not one item, it's several things: more pressure --
Mr Lawrie: There are several reasons. I think Dario referred to some of them in his reply. There are several things that can influence doing fewer audits with the same number of auditors. A reduction in the amount of available audit time is one of them, and I pointed out social contract. There's also the issue of travel time for auditors and the Hayford decision in labour law, which also reduced the amount of available audit time because of that particular change and the way we had to apply the contracts.
There are other things. For example, introduction of new technology can make the auditors more efficient. It can work the opposite way. Changes in the law can result in longer audit time being taken per case, which would also explain why there are fewer audits done with the same number of auditors. There are a number of factors that can be involved. We haven't done a study as to exactly how many. We are aware of some of the factors, and I've listed all that occurred to me at the present time.
Mr Pouliot: There's an irony. I know it's much easier, with respect, for me to say this, that all in favour that you need -- probably need more -- the regime of the day, the present government, has said, "Okay, we know that. We need the revenues," fairly acutely, big time, "so we'll hire 50 more people."
I read in the paper not too long ago that the other end is going to kneecap -- I mean is going to chop -- 20,000 people. I'm still trying to reconcile that. In fact, it's so difficult that in terms of the civil service, it's about one fifth. Somebody said -- I would never say this; I was upset when I heard it -- it's the closest thing, thinking of the worst, to economic cleansing that society, the civil service, has ever experienced. I was upset when I heard that and I told the person there's a better choice of words, but never the less, I thought I would share that with you. I mean, that's the kind of impact that it is having.
More to the point here, you have 50 more people coming in. Will they be short-term? You blend this with a new system, and the last time you were here you informed us, told us about the, if not the capability, that you were still searching as to what application the real world, how better efficient will we be with the new system. Can you share some more about the new system now? It's been a couple of months.
Mrs Palozzi: You had a question about, will they be permanent or will they be temporary, the additional resources. The additional resources are permanent; we're not intending to hire on a contract basis or short-term basis. So it's as permanent as anything is. If you're referring to the computer system --
Mr Pouliot: Yes.
Mrs Palozzi: -- the systems development, I think perhaps Dario could talk about that a little more. We talked about ITAS, which was the integrated tax administration system, and development of criteria in terms of audit selection. So if you could comment, Dario, please.
Mr Savio: There are many elements to the system. ITAS is the main system and our main focus right now, because it will give us the greatest benefit by economies of scale and bringing various databases together will also help on tax administration and enforcement. That is proceeding. There are also other systems that I alluded to briefly in response to Mr Crozier, and that is on the audit side of comparing databases, that they are systems unto themselves.
So as far as quantifying how much better it is now than last November, I would think it's a continuing process, but it would be difficult to give a percentage of how much advanced it is from last November to now.
Mr Pouliot: The role of our Provincial Auditor, as he often reminds us, is of the need to continuously strive to become, through being judicious, more efficient, and then the mandate is supposed to find itself. As a result, you would naturally get better value for your dollar, value for money.
Looking at the guidelines, listening to the auditors and to our colleagues, it's ongoing -- exciting, challenging times. You have the traditional cycles. You have the restructuring, if you wish, revolution -- not much to compare it with -- and then you have an imposed timetable. It's happening so quickly, so it's not easy on the digestive or assimilating process. We were used to good years/lean years. It was a lot simpler then, it seems.
The first thing we should do, through your expertise and dedication, is get the money that is owed us as a province, as a jurisdiction. All the tools should be made available, because you indicate that for so many audits you more than earn the expenditure, if you wish, although when we say this I'm not so sure this kind of comment is entirely valid; I would have to figure things. It assumes you've got quite a potential to earn your keep and to do more so.
How much impact -- it's only philosophical -- has, let's say, a negative drag in the economy? When things go bad, of course the sales are not as much so the volume of receipts is not as great, but is it more difficult to collect taxes? I'm just going to mix it in this bouillabaisse, in this potpourri.
Last week -- well, the first day of this week too -- our colleagues and I listened to people, and the week before that too. Every time we talked about or asked questions about the underground economy: "Taxes. If taxes weren't as high, I wouldn't respond to the invitation. I wouldn't be seduced at the table of sin," if you wish. When you start digging a little more and you say, "If there were no taxes, would you do it?" The response was, not in the exact words, but, "If I could get it for a better price." You're almost to the point where you say, "A buck, a buck, a buck." If I'm in the province of Alberta, where there's no retail sales tax, hence we can forget about harmonization and broadening the tax base of GST -- maybe in my second life -- if somebody comes in and cleans your apartment now and then, there's no retail sales tax on this. Is it the same number of people who pay by cheque or pay by cash in Alberta to get their kitchen restored as in Ontario? Do you know the answer? Wherever you can get a better price.
The convenience of tax seems to have vanished. Nobody remembers that any more. It's not to avoid the taxes that we went to the United States in droves; it's because you could get a better deal. When the exchange rate in the real world got between 38% and 40%, it almost completely stopped, because then you really had to look at where you're going to make a buck.
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You're not asked to comment, because your duty is to collect taxes, but I came here with one head when we started to talk about the underground economy, and I'm afraid I'm going to come out of here with three heads. They've dimmed the lights, they've spooked themselves. They allowed themselves the convenience of saying, "Taxes, taxes, taxes," and I don't think that's entirely fair to our government today. The thing is to come up with a mechanism of fair play.
The Vice-Chair: Okay, we'll stop there.
Mr Pouliot: It's my time, sir.
The Vice-Chair: I didn't want to get you off on that tangent about being fair to the government.
Mr Hastings: My question relates to how the ministry deals with sales tax on products being imported or equipment being imported from our neighbours. I understand that the importer is responsible for the payment of the retail sales tax on materials and products imported from our American neighbours.
I had a meeting with a gentleman last September regarding this issue, because as I understand it, the American corporation refuses to pay the sales tax on the export of the product. I may be completely off base on this. It's a highly technical issue. Whether that's true or I'm off base, let me know. My bigger question deals more with what kind of tax treaties or tax agreements on a provincial-interstate basis we have with our American neighbours when it comes to these kinds of issues on the other side. Do we have specific tax agreements whereby the American company exporting that farm or construction equipment would be responsible? Do we have a vice versa agreement on the other side of the coin, and if that's so, are they actually enforceable under the tax treaty with the US, basically?
It's a big issue and very complex to me, but this gentleman was saying he's paying his share but he knows of numerous companies going the other way, not just in his sector, where we are paying. Could you clarify this?
Mr Savio: I could take the first part of that question. Retail sales tax is a consumption-based tax, so it's where the consumption takes place that the tax is exigible. In the situation you cited, someone importing a product to Ontario for their own consumption is responsible for accounting for the tax to the province. For example, if a corporation imports goods into Ontario -- a piece of furniture, say -- the onus is on them to account for the retail sales tax to the ministry. So it's not levied by vendors in other jurisdictions.
Mr Hastings: The same applies in reverse, then, does it?
Mr Savio: If it's sold from Ontario out, depending on the legislation of the jurisdiction, the onus would be on the importer in that jurisdiction to account for the tax.
Mr Lawrie: But there's no RST levied on an export sale, if that basically is what your question is. It's up to the other jurisdiction to collect its own sales tax.
Mr Hastings: He went into great detail about your tax auditors going around to the farm and construction equipment supply companies, that they were now requiring -- I wish I had the material with me -- to collect retail sales tax on the service, the repair to the equipment, say, a backhoe. What was the other point he tried to raise with me? It's eluding me right now when I want the brain to function. Oh, I know what it was.
This applies to car dealerships as well, as I understand. You take your car into your dealership for repair and you get an alternative vehicle for the day. Our ministry is now advising car dealers, and this particular person, who had to use an alternative backhoe for that particular day, to pay retail sales tax on the vehicle while it is out because it's considered a service, the use of an alternative commodity, however you want to describe it. A lot of dealerships have stopped doing that because it only makes them less competitive. It's technically feasible to do and you're doing it, but they were thinking it's going a little beyond the requirement of the regs.
Mr Savio: It's not a tax on service because that nature of service is not taxable. What it is is the own-use of the equipment, and the dealer is responsible for paying tax on own-use of the equipment.
Mr Hastings: Is this making them uncompetitive? I guess that's a question I leave with the deputy for a broader issue.
Mr Lawrie: I can answer the second part of your question, which relates to, as I understand it, exchange of information or arrangements, treaties, with other jurisdictions. Basically, as I recall, we've only got one on sales tax with a US state, and I think the state is Ohio; that was fairly recently negotiated. That covers a lot of our taxes, and basically it's an agreement for exchange of information. As far as I know, we haven't exchanged any yet, we've just put the agreement in place. It would also cover things like gasoline fuel tax, tobacco, a number of our other taxes.
It's not usual for us to have retail sales tax exchange agreements with US states, basically because there doesn't appear to be much demand either way for that and because some of the individual states have constitutional barriers against entering into that type of arrangement with a non-US administration, which obviously makes it impossible.
We have reciprocal agreements for exchange of information with all other provinces and the two territories. Information is regularly exchanged under those agreements, provided for in the Retail Sales Tax Act.
The type of cross-border situation you're talking about also occurs between provinces. Normally what will happen is that, based on complaints, another administration, Manitoba or Quebec, say, will say to us: "We've got several complaints that there have been sales into our jurisdiction. Could you send an auditor out to take a look and give us information so we can levy on our own residents the sales tax they should have voluntarily declared themselves?"
We've obviously got de minimis rules. We don't go after every nickel-and-dime sale, but for significant sales we do provide that information to other jurisdictions we've got an agreement with, and they provide it to us too. It's part and parcel of monitoring cross-border sales.
Mr Hastings: On a broader final issue, I wonder if this cross-border, transborder issue in terms of application of retail sales taxes, how ours applies, is competitive in terms of job creation. I wonder if that's an issue you could take a look at, Mrs Palozzi, for further study.
Mrs Palozzi: Yes, it's a broad question in terms of isolating that as a contributor or non-contributor to the competitiveness question.
Mr Hastings: I don't think it's ever been examined before.
The Vice-Chair: Our time is up. I want to thank all of you for coming and sharing with us your expertise on a broad range of subjects. It has been helpful. As you know, we're about to consider our report this afternoon for submission. I just remind members of the committee that that's what we'll be doing in closed session. You've got a copy of the document before you. Perhaps we'll begin at 2 o'clock with a backgrounder from Mr Peters to put us back to the rationale for having these meetings.
Again, thank you very much for helping us out in this undertaking, which, as we know, is quite complex.
The committee recessed at 1200 and continued in closed session at 1400.