1999 Annual Report,
Provincial Auditor:Section 3.07, provincial
personal income tax revenue and related credits and
reductions
Ministry of Finance
Dr Bryne Purchase, deputy minister
Mr Patrick Deutscher, director, macroeconomic analysis and policy
branch
Mr Roy Lawrie, assistant deputy minister, tax revenue
division
Mr Tom Sweeting, assistant deputy minister, office of the budget
and taxation
STANDING COMMITTEE ON
PUBLIC ACCOUNTS
Chair /
Président
Mr John Gerretsen (Kingston and the Islands / Kingston et les
îles L)
Vice-Chair /
Vice-Président
Mr John C. Cleary (Stormont-Dundas-Charlottenburgh L)
Mr John C. Cleary
(Stormont-Dundas-Charlottenburgh L)
Mr John Gerretsen (Kingston and the Islands / Kingston et les
îles L)
Mr John Hastings (Etobicoke North / -Nord PC)
Ms Shelley Martel (Nickel Belt ND)
Mr Bart Maves (Niagara Falls PC)
Mrs Julia Munro (York North / -Nord PC)
Ms Marilyn Mushinski (Scarborough Centre / -Centre PC)
Mr Richard Patten (Ottawa Centre / -Centre L)
Substitutions / Membres
remplaçants
Mr Bob Wood (London West / -Ouest PC)
Also taking part /
Autres participants et participantes
Mr Gerry Phillips
(Scarborough-Agincourt L)
Mr Erik Peters, Provincial Auditor
Clerk pro tem /
Greffier par intérim
Mr Douglas Arnott
Staff /
Personnel
Mr Ray McLellan, research officer, Research and Information
Services
The committee met at 1045 in committee room 1,
following a closed session.
1999 ANNUAL REPORT, PROVINCIAL AUDITOR
MINISTRY OF FINANCE
Consideration of section
3.07, provincial personal income tax revenue and related credits
and reductions.
The Chair (Mr John
Gerretsen): Good morning. I'd like to call to order the
meeting of the standing committee on public accounts dealing with
section 3.07 of the 1999 annual report of the Provincial Auditor,
dealing with provincial personal income tax revenue and related
credits and reductions.
I'd like to welcome everyone
here, particularly the individuals from the ministry. We'd like
to start with a 15- to 20-minute presentation by the ministry,
and after that there will be questions from the members of the
committee. Good morning, sir.
Dr Bryne
Purchase: My name is Bryne Purchase. I'm the Deputy
Minister of Finance. Mr Roy Lawrie, is the assistant deputy
minister of the tax revenue division. Mr Tom Sweeting is the
assistant deputy minister, office of the budget and taxation. Mr
Patrick Deutscher is the director of the macroeconomic analysis
and policy branch.
I have a brief address I'd
like to read into the record here. It's my pleasure to appear
here today to address the observations and recommendations made
by the Provincial Auditor in his report on the Canada-Ontario tax
collection agreement. This is my first appearance before this
committee, and I would like to take the opportunity to say that I
have found my relationship to the Provincial Auditor, Mr Peters,
to be very positive and helpful to the ministry while at the same
time serving the interests of the Legislature. For this I am
grateful to him and would like to say so publicly.
In respect of the matter
before us, I can say that in general the Ministry of Finance
supports the recommendations made by the auditor and actions have
been taken on all of them. Action, of course, in this instance
involves intensive and sometimes protracted negotiations with the
federal government by Ontario and other provinces. However, we
believe the record shows that we can and have achieved
results.
To understand many of the
issues raised by the Provincial Auditor, it's important to
understand how the tax collection agreement works. In 1962 all
provinces, with the exception of Quebec, entered tax collection
agreements with Ottawa. Under these tax collection agreements,
Ottawa agreed to collect and administer provincial personal
income tax, to pay provinces the value of the personal income tax
assessed, and to do so free of charge.
The provinces agreed, in
turn, to impose a single personal income tax rate, calculated as
a percentage of federal tax payable, to make their income tax
acts parallel to the federal act and to provide Ottawa with the
powers necessary to administer and collect provincial income tax,
PIT.
The Ontario tax collection
agreement was signed on April 24, 1962. Over the years, the
federal government and the provinces have agreed to expand the
tax collection agreement to include a wide array of provincial
tax possibilities. For example, Ontario tax credits were
introduced in 1972-73, the Ontario tax reduction in 1975, and
high-income surtaxes, now known as the Fair Share health care
levy, in 1986.
In 1999, Ontario was making
use of a variety of tax policy instruments; for example,
low-income tax reductions, income-tested credits, high-income
surtaxes and economic development credits. Ontario also provides
PIT credits for unincorporated small businesses for certain
activities such as hiring co-op education students, unemployed
recent graduates and persons with disabilities, and supporting
child care.
Despite this increasing tax
policy flexibility, however, there were and are still many
restrictions. The only thing Ontario can change without the
federal government's prior consent is the basic rate, currently
38.5% of the basic federal tax, and that rate is only supposed to
be expressed in full or half points. In effect, the federal
government has been using its monopoly control of tax
administration to enforce what it deems to be appropriate tax
policy at the provincial level. Nor do we have much control over
federal administration. The tax collection agreement offers us no
right to require certain audit coverage targets to ensure proper
compliance. We do not even have access to the files or results on
federal audit work in provincial tax areas.
With that background, I would
like now to address the issues that the Provincial Auditor has
brought to the fore in his report.
Let me address first the recommendation that the
ministry negotiate amendments to the tax collection agreement so
that "payments of Ontario personal income taxes are remitted to
the province in the correct amount and on a more timely basis" or
that "the ministry should seek compensation for the cash flow
deficiencies for each year." There are two issues here: (1) the
timing of federal payment flows to Ontario; and (2) the use of
revenue forecasts rather than actual collection.
With regard to the timing of
payments, as mentioned by the Provincial Auditor, the federal
government announced a speed-up in the timing of PIT payments in
1998. We have now received updated data from the federal
government that indicate that the speed-up has eliminated the
cost to Ontario that had previously arisen from late timing of
payments.
However, this still leaves
the issue of using revenue forecasts to determine how much money
the federal government should transfer to Ontario in respect of
Ontario personal income taxes it is collecting on our behalf.
This issue could be resolved, as the auditor has suggested, by
moving to a system whereby the federal government transfers
amounts as they themselves receive payments rather than on the
basis of the forecasted amount. The ministry agrees that the
advances in information technology may make it possible for the
federal government to base its payments to Ontario on actual
income tax collection. Accordingly, the ministry is currently
actively pursuing this issue with the federal government,
including the question of whether estimation of revenues
generally results in lost revenue for Ontario.
Let me now turn to the
related matter of interest penalties and bad debt. Under the tax
collection agreements, participating provinces are paid on the
basis of tax assessed, not actually collected. As a result, the
federal government absorbs any bad debts arising in respect of
provincial tax. In return, the federal government is allowed to
keep any interest and penalties levied in respect of the
provincial tax.
As noted in the auditor's
report, the ministry estimates that at present the federal
government may be benefiting from this arrangement by
approximately $50 million a year. Since 1997, the ministry has
been pressing the federal government to collect the data
necessary to determine the actual amount of any benefit.
Therefore, I can only say that we agree with the auditor that the
federal government should collect the required data to determine
if there is an ongoing federal benefit, and that amendments to
the tax collection agreement should be considered if this is the
case.
Let me turn now to the matter
of audits. As noted in the auditor's report, and as I have
already noted, under the current tax collection agreement, the
ministry has no right to establish minimum audit requirements or
to receive information by which we could monitor Revenue Canada's
performance in ensuring adequate compliance. Consequently, the
province cannot be assured that the declaration of payment of
personal income taxes, to which the province is entitled, are in
the correct amount. The ministry agrees that the recommendation
has merit, and we are pursuing it as well with the federal
government.
Turning now to the similar
issue of related credits and reductions. The report recommended
that more doubtful provincial property and sales tax credit
claims be audited by Revenue Canada in order to reduce the
incidence of false or inaccurate claims, and that a random sample
from the remaining tax credit claims be audited.
The province has long
recognized that the audit coverage of provincial tax credits is
inadequate and has been working with the federal government since
the early 1990s in an attempt to increase the audit coverage to
5% from its current level of 2%. In 1993, the province conducted
a pilot project in which we conducted our own audits of property
and sales tax credits. Although the project was a success, the
federal government refused to allow Ontario to continue the pilot
project since Revenue Canada felt that there was a potential for
taxpayer confusion, with more than one tax administration
responsible for personal income tax.
In response to our complaint,
CCRA has now conducted a random sample of audits for the 1998
taxation year. The ministry is awaiting the results of the sample
in order to review the compliance rate of the property and sales
tax credit program. Also, in September 1999, the ministry entered
into negotiations with the CCRA to increase the audit coverage of
property and sales tax credits from 2% to 5%.
The CCRA has recently
provided the ministry with a written cost estimate of slightly
over $1 million to provide an additional 3% level of audit
coverage. With the results of the CCRA survey, we can determine
the exact business case for the additional expenditure, and the
increased audit coverage could be in place for the 1999 taxation
year.
The ministry has also acted
on the auditor's recommendations concerning audits of
labour-sponsored investment funds and eligible small businesses.
Four additional auditors were hired in early 1999. The ministry
is on track to meet the 1999-2000 program goal of having each
LSIF audited at least once every two years and every small
business audited at least once.
Since April 1999, field
audits have been completed on five LSIFs and 97 small businesses.
The ministry has further developed its annual certificate of
compliance reporting procedures for all registered LSIFs by
supplying LSIFs with information from the ministry's database.
Each fund is required to reconcile those figures and, where
discrepancies exist, provide the ministry with reconciling data.
As well, the CCRA conducted a review of potentially invalid
claims in the summer of 1999. Of the 1,750 potentially invalid
claims for the 1996 taxation year identified by the ministry, 952
were determined to be valid by CCRA. Reassessment notices were
issued by CCRA for the remaining 978 claims, totalling over
$400,000 in September and October 1999. From now on, each year
the ministry will be able to identify those claims with a high
probability of being invalid and will forward this information to CCRA within six
months of receipt of each taxation year's data from CCRA.
I want to assure the
committee as well that the ministry is acting on the
recommendation to explore with the CCRA options to improve
verification of Ontario tax reduction claims to ensure that
Ontario tax reductions are only provided to eligible individuals
and in the correct amount. In September 1999, the ministry began
negotiations with the CCRA to this end. Verification of claims
could be accomplished by computer matching of data from various
sources such as T1 and T1C information, the federal child tax
benefit program, the Ontario child care supplement program and
both federal and provincial disability programs. The ministry is
currently awaiting CCRA's response.
Finally, let me turn to the
auditor's recommendation that the ministry determine whether the
benefits under the tax collection agreement outweigh the
restrictions and consider renegotiating the tax collection
agreement in line with provincial interests.
As I have attempted to
indicate in my remarks, we are in a state of almost continuous
negotiation with the federal government on this matter. We can
point to a number of accomplishments; for example, increased
flexibility in the existing tax-on-tax system by the addition of
a number of tax credits in the check-off box, the speed-up of
federal payments in respect of Ontario personal income taxes, and
the improved audit of Ontario tax credits and labour-sponsored
investment funds. Recently, the CCRA has proposed what it refers
to as a new management framework agreement that includes some
aspects of performance reporting, not that those are necessarily
wholly acceptable to us at this stage.
Perhaps the largest single
accomplishment is the agreement by which the federal government
will allow the provinces in the tax collection agreement to move
to a tax-on-income system. This will provide substantially
increased policy flexibility to the provinces which choose this
option. The government of Ontario has already indicated its
desire to have a personal income tax system designed to meet
Ontario's specific needs. Since the auditor's report was
prepared, the government has announced its intention to move to a
tax-on-income system.
Although we have made a lot
of progress, the job is not finished, and the minister and the
Ministry of Finance are continuing to press Ontario's case with
the federal government on a number of fronts; for example,
improved auditing of the Ontario tax reduction and personal
income tax returns, ensuring that Ontario is not put at a
disadvantage by the policy on interest penalties and bad debt,
and, above all, ensuring tax policy equality for Ontario; that
is, equality with the federal government.
In conclusion, I welcome the
report of the Provincial Auditor, which highlights the importance
of the work that the Ministry of Finance has been doing over the
past many years and is continuing to do to improve the tax
collection agreement that Ontario maintains with the federal
government. All of these matters are a matter of negotiation with
the federal government. These negotiations are ongoing and
sometimes protracted, but we are, after all, dealing with a
single entity that supplies its services to the government of
Ontario. But we will continue to work to ensure that Ontario is
not put at a disadvantage by our tax collection relationship with
the federal government. Thank you very much.
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The Chair:
Thank you very much, Mr Purchase. We have about 18 minutes left
for each caucus before the noon-hour recess. We'll determine at
12 o'clock whether we want the delegation to come back this
afternoon at 1:30. Today we're starting off with the NDP.
Ms Shelley Martel
(Nickel Belt): Thank you for coming today. Let me start
at the end and then work back.
The Minister of Finance
certainly said to the finance and economic affairs committee that
he was looking for a tax system to meet Ontario's needs. Could
you explain to the committee, in terms of what the minister
envisions in this regard, what concrete changes would have to be
made to the tax agreement to allow that to happen-specific
amendments or enforcement of what is already there or items that
may not clearly be enforced, in your mind, with respect to what
Ottawa is doing.
Dr Purchase:
The specific ideas that the minister may have with respect to how
the government will utilize its powers under the new
tax-on-income arrangement, I can't, of course, divulge. That's
for the minister to tell you when he feels it's appropriate.
I can tell you, however, that
under a tax-on-income arrangement, it will be open to the
province to determine its own tax brackets, its own rates within
those brackets, and it will have the power to have a set of
refundable or non-refundable tax credits. We'll move from a
single percentage rate calculated on basic federal tax to a much
more fulsome policy flexibility with respect to the tax system in
Ontario.
Ms Martel:
If the overall agreement was due to be renegotiated in 2001, as
the committee was led to understand this morning, has the
minister entered into those negotiations now with the federal
government with respect to the changes Ontario would like to
see?
Dr Purchase:
We have been in constant negotiation, not on the details of what
we would like to see necessarily at this stage, but certainly in
preparation for that.
Ms Martel:
You mentioned earlier the issue around the delay in payments,
which the auditor pointed out was on average 20 months after all
of the income tax was received by Revenue Canada. It has now been
changed, and if I heard you correctly there certainly has been a
speed-up of payments. What would be the delay now in our
receiving a final accounting?
Dr Purchase:
The final accounting for the year? We're still operating on the
basis of federal forecasts. They still pay us on a forecast
basis. What we have achieved, compared to the prior payment
basis, is a speed-up when they deliver the money. But because
we're working on the basis of forecasts, the numbers can still be
wrong.
Ms Martel: On average it was 20
months. What has that dropped to now in terms of when we receive
it?
Dr Purchase:
Patrick?
Mr Patrick
Deutscher: In terms of the final lag between the
settlement, between the federal government and their payment to
us, or after they've made their initial round of estimates based
on their forecasts, that really hasn't changed. It would still be
at the present time the same for the lag between the closing of
that tax year and the final receipt of money by Ontario. So at
present it's still unchanged. Unless we went to a
collection-based system, that really wouldn't be affected.
Dr Purchase:
If I could, the improvement we have accomplished here is simply
that their payments start earlier. But again, as I say, it's
based on a forecast; it's not based on actual collections. The
auditor has recommended that we look at moving to an actual
collections basis. As I indicated in my remarks, we're certainly
doing that to determine the advantages to Ontario of moving
there. What it would do is simply remove the whole question of
forecast. If we went to an actual collections basis, we wouldn't
have to worry about forecasts, and it would become academic about
bad debts versus penalties. There are some very significant
positives, but there are also some negatives to moving to a
collections basis, and we are trying to determine the net
advantage to Ontario of doing it.
Ms Martel:
Can I ask how the ministry is proceeding to make that
determination?
Dr Purchase:
We're trying to track down exactly what it would mean. Right now
the big advantage of getting money on the basis of a
predetermined payment schedule is that you know exactly when the
money is coming to you. It's still based on a federal forecast of
what is owing, but at least we know when it's coming, and there
are certain cash management implications of that. If we move to a
collections basis, the money will be a lot more variable when it
comes, and that increases our cash management problems. So we
have to take into account the fact of getting the money in a
nice, even, steady, predictable flow versus getting the money in
a very uneven, unpredictable series of monthly payments.
There are also some
administrative costs to employers to implement a
collections-based system, because they have to identify for
Revenue Canada the kind of monies that would be payable in
respect of their employees in Ontario versus their employees
across the country and so forth. There are a number of issues,
and we're trying to review a catalogue of all the issues and then
review each one. Then we'll present a recommendation to the
minister in this regard.
Ms Martel:
Actually, at this point the onus is on Ontario to make a
determination of which direction you want to move in, and then
you can go to the feds to proceed with further discussions.
Dr Purchase:
We're constantly in discussion. Even though we find them very
difficult to deal with-after all, there's no other supplier here;
we're just dealing with them-it's not particularly acrimonious.
We do talk to them regularly about our needs and about what they
can and cannot do. This is a continuous, ongoing negotiation, as
it were, and we're actively involved in that right now on this
issue.
Ms Martel:
Can you comment on how simple or how difficult it is to receive
information from the federal government and what kind of response
you get from the feds when you try to provide input? For example,
if you look at the forecast, the auditor has told us that the
federal government bases its forecasts on a number of indicators
which may or may not be particularly relevant to Ontario, and
there's no obligation for you to sign on or sign off. The federal
government can continue with its forecasts whether or not Ontario
likes that.
When you get a forecast now,
or in the past, what has the ministry done with that? Have you
tried to make changes, have you approached the federal government
or have they dismissed you? What route have you taken when you
got a forecast you may very well disagree with?
Dr Purchase:
I'll ask one of my colleagues to respond to that.
Mr
Deutscher: In general, I would say that I have never
known the federal government to make a change to their forecasts
on the basis of provincial comments. We do engage in discussion
with them in various forums, but I have never, ever seen them
make a change to their numbers. That being said, they are in the
same boat as other forecasters, looking well into the future when
people do their tax returns. It's not my sense that there's
anything particularly malicious in what they're doing, but they
have made big forecast errors.
Dr Purchase:
If I could, forecasting is not an exact science. After all, we're
asking people to tell us what the future is going to be. No
matter how you cut it, that's what it's all about. Needless to
say, people will have different estimates of what the future is.
But I think the real issue here for us is that when we go to the
federal government, they run the tax collection system and we
have to complain long and loud and hard to get them to listen to
us. It's as simple as that. They might say, "Yes, that's very
interesting, but we're accountable, we're in charge and
goodbye."
1110
Ms Martel:
Do you see any of that changing with the establishment of the new
agency to collect taxes? My second question would be, what kind
of input has Ontario had in the establishment of that agency and
the technology that might be used in any of the details which, in
effect, could make things better than they seem to be now?
Dr Purchase:
I think there are some benefits from the establishment of a new
agency. Perhaps they're not near what one could have hoped for.
From our perspective, the way we would like them to act would be
like any other supplier to us in the private sector, wherever
they are, and be responsive to customer needs and desires. We
just want them to act like they were actually in a business and
doing what we ask them to do. But I don't think we're near that at the present time,
notwithstanding that I think they are trying to make more efforts
in that regard than they have in the past.
My own experience with these
issues goes back 25 years. This has been an ongoing struggle for
Ontario-and the other provinces involved also feel the same
way-with the federal government in respect of the tax collection
agreement to get them to make changes. They only do so with great
reluctance, it seems to me. On the other side of this, as I said
in my remarks, I think this government has been an important
part-perhaps the most important part-in the achievement of a
rather remarkable breakthrough, the movement to a tax on income
system. That is something we've been trying to get for years, and
they did it.
Ms Martel:
Let me ask about the interest payments that Ontario has not seen.
The auditor made it clear earlier that we now have the picture
for 1998, although I don't have the actual figure for the
underestimation in millions of dollars. Do you have that figure
for the 1998 tax year?
Dr Purchase:
I'm sorry, could you repeat that?
Interjection: About $110
million.
Ms Martel:
I'm working from the auditor's report, which listed the
underestimation of revenue forecasts and the associated interest
costs. It only went from 1995 to 1997, and outlines the tax year
and the underestimation by the federal government of what revenue
should flow to Ontario. In terms of where we were when this audit
was completed, the auditor estimated that we had lost interest
payments on the order of about $189 million. With the new figures
for 1998, we should be closer to about $300 million in lost
interest as a result of when money actually flowed to
Ontario.
My question is, what kind of
discussions have you been having with the federal government
around that interest cost? Clearly that's a fairly significant
amount of money that Ontario should otherwise be entitled to.
Dr Purchase:
That's part of our ongoing discussion with them about monies owed
to us. Certainly in respect of all these years, we are continuing
to discuss interest costs with both the CCRA and the Department
of Finance.
Ms Martel:
Do you make some kind of formal claim to the federal government
with respect to interest lost? Do provinces do that?
Dr Purchase:
We haven't recently done that, but I believe there was a formal
claim at one time. But we haven't recently, mainly because we are
constantly addressing this issue. We are now engaged, if you
like, so we don't send rockets every once in a while to get their
attention. We have their attention on the issue and we continue
to discuss the issue with them.
Ms Martel:
Pursuing the issue around audit requirements and essentially the
monitoring of compliance, can you give this committee some idea
of what you would like to see with respect to what the federal
government provides you in terms of information with respect to
audit requirements, coverage etc?
Dr Purchase:
Maybe I could ask Mr Lawrie to respond to that.
Mr Roy
Lawrie: The CCRA has proposed what it calls a management
framework agreement with each of the provinces under which it
plans to provide certain performance indicators for its
administration of provincial income tax. We see that as an
opportunity, in negotiating that agreement, to put in some of the
information that we require to do what the Provincial Auditor has
suggested.
Ms Martel:
Can you elaborate on what that information is?
Mr Lawrie:
So far, they've signed one with Nova Scotia. I think that's the
first and only one to date. We have a first draft from them and
we should shortly be providing our input into that; we want some
changes to it. I believe that all of the other agreeing provinces
are also negotiating the framework at the same time as us. So it
will take some time.
Ms Martel:
Just so I'm clear, the framework agreement would involve audit
coverage?
Mr Lawrie:
It can involve things like that. If you like, it sort of sets the
scene, puts in place all of the old exchange-of-information
agreements, memoranda of understanding etc between the provincial
tax administrations and Revenue Canada, identifies the CCRA as
its successor and proposes meetings to discuss how provincial
income tax is being administered, a sort of report card, if you
like, by way of information on certain indicators which will be
discussed with the provinces.
Ms Martel:
The deputy had told us earlier that you have a figure now for a
fee, I think it was in the order of $1 million, for the federal
government to do increased audits, to move from 2% to 5%
coverage. Was it a $1-million cost? Just so I'm clear, that was
for audits of property and sales tax credits? Have you made a
formal decision that you pay that fee in order to get that
increased coverage?
Mr Lawrie:
We're likely to make that decision very soon. The federal
government provided that estimate to us just under two weeks ago.
We'll be responding to them very shortly, and the likelihood is
that we'll take them up on it.
The Chair:
Thank you very much. That's the 18 minutes. The government
side.
Ms Marilyn Mushinski
(Scarborough Centre): The Provincial Auditor has talked
a considerable amount about the amount of money that's not only
being delayed in being returned to Ontarians and their
communities, but my understanding is that there's a considerable
amount of money that's never returned by the federal government
in the whole field of interest and penalties. While our
government has been setting some pretty forward-thinking tax
policies, like the OTR, I'd be interested in knowing exactly how
much the Ontario government has been shortchanged by the current
tax arrangement with the federal government since 1995, which was
when we were first elected. Do you have that information?
Interjection: Back to 1990.
Ms Mushinski: Well, I'm interested
in the track record for our government.
Dr Purchase:
We can get that information for you. I think we have several
years.
1120
Ms
Mushinski: OK. Now, my understanding is that Mr Eves, at
the beginning of the standing committee on finance and economic
affairs, discussed the government's desire to implement a
made-in-Ontario tax-on-income system, and you alluded to it in
your opening remarks. Could you tell this committee how such a
move to a tax-on-income system will assist in resolving some of
the problems that have been identified by the Provincial
Auditor?
Dr Purchase:
There are many potential advantages. One is that it provides the
government of Ontario the opportunity to have different brackets.
There are currently three federal tax brackets. If Ontario wished
to have different tax brackets, then it could do so. We can have
a different-
Ms
Mushinski: Before you go any further, I'm not completely
familiar with how that could be established. Could you enlarge on
that for me?
Dr Purchase:
Rather than have me do it, I'm going to turn to the expert, which
would be Tom Sweeting, to describe that to you.
Mr Tom
Sweeting: In terms of the establishment of a
tax-on-income system, currently when Ontarians calculate their
Ontario income tax, basically what they do is go through a
process to calculate federal tax. How much is your taxable
income? There's a calculation to go through for how much is your
taxable income. There's a series of tax brackets applied to it.
On the first amount of taxable income, you pay this amount; on
the next amount, you pay this amount. You calculate a federal
liability. There are certain federal credits that are deductible.
There's a credit for a basic personal exemption. There are
credits in respect of spouses and those kinds of things that then
reduce the tax liability. It creates an amount that's called
basic federal tax. Then Ontario comes along and applies a
percentage to that number that is owed to the federal
government.
Under the tax-on-income
regime that the minister has indicated Ontario wishes to move to,
essentially that calculation of taxable income would be the same.
You'd calculate how much your taxable income is. Then you'd
calculate what your federal tax is, using brackets and rates set
federally. Then you'd calculate what your Ontario tax will be,
using brackets and rates set by Ontario. Then you'd take an
amount off the federal tax for credits that they have determined
are appropriate for personal exemptions, spouse etc. You'd take
an amount off the provincial tax in a similar way in the amounts
that the provincial government has determined would be
appropriate to take off, and then you'd sum the two together to
pay your tax.
Ms
Mushinski: Obviously the provincial government would be
better off with having that flexibility, is what you're
saying.
Mr
Sweeting: The provincial government would be better able
to set tax burdens for Ontario purposes that were consistent with
the needs of Ontarians and the objectives of the government.
Ms
Mushinski: I think Mr Maves has some questions.
Mr Bart Maves
(Niagara Falls): During your presen-tation, I thought
you mentioned that the payments from the feds had actually been
sped up. Did I hear that right? Does that mean there is no longer
that same 20-month lag, or is it still a 20-month lag in
payments?
Dr
Purchase: There are essentially two issues that I tried
to put. There is the fact that the federal government uses
forecasts to determine our payments. Because they use forecasts,
there is a final reconciliation ultimately. That's the 20-month
lag. There is another issue; that is, in terms of their schedule
of payments, they pay us every month, four times a month.
In terms of that schedule
of payments, we've determined that if they sped up those
payments, they would reduce the interest loss we were incurring.
That's a separate matter from the other forecast matter. We have
not resolved that issue. That continues to be an outstanding
issue vis-à-vis the federal government. Given that we accept
their forecast, and there's not much we can do about it, the fact
of the matter is that they improved their payment schedule for a
given forecast, and that reduced our interest loss associated
with them.
Mr Maves:
Following on that, then, have you at the ministry specifically
sought from the federal government compensation for this cash
flow deficiency, and if so, what's been their response?
Dr
Purchase: Yes, we've continuously tried to get
compensation for this, so far without success. I should point out
that the forecast thing certainly in recent years has worked to
our disadvantage. But in the early 1990s it worked to Ontario's
advantage; ie their forecasts were overestimates of the amount of
money actually owing. It's only been in recent years, where their
forecasts have proved to be underestimates of the amount of money
owing, that the disadvantage or the burden of advantage has
shifted.
Mr Maves:
Do you have estimates of what the advantage for Ontario was in
those years?
Dr
Purchase: In the early years, yes, we do. From 1990 to
1994, Ontario was overpaid by $3.3 billion, with estimated
interest savings of about $469 million. Currently, with the years
that we have-
Interjections.
Dr
Purchase: This was a period, as you know, when the
economy was declining dramatically and revenues to the government
at the time were falling dramatically. The federal government had
a more positive estimate of what was going to happen than what
really did happen.
From 1995 to 1997, there
was $2.1 billion in underpayments from the federal government
relative to what actually was owing. We estimate interest costs
associated with that to be $189 million. So when we make the
final determination for 1998, we would add that, presumably.
Mr Maves: As I understand it,
within the agreement, the federal government agrees to absorb bad
debts, debts they can't collect. None of those estimates include
bad debts. My understanding from the Provincial Auditor's report
is that we have no idea of the amounts of that bad debt. Is that
still the case or is there going to be a process by which we can
find that out?
Dr
Purchase: Maybe I could turn to Mr Sweeting again to
respond to your questions.
Mr
Sweeting: We have had a lot of discussion with the
federal government around the issue of bad debts versus interest
and penalties. There has been information exchanged around this.
Essentially, it's not information that's easily accessible by
CCRA; they don't actually carry information of that fashion. It's
something that they have been going and trying to extract slowly
to try and help grapple with this question. The federal
government disagrees with our view. The auditor expressed in his
report that the Ministry of Finance is of the view that we are
short in the order of $50 million. There's that much more
interest than there is money lost through bad debts. The federal
government doesn't agree with that. We are currently debating
with them the proper basis for assessing that. Without getting
into a lot of detail, we believe it's important to use tax year
information; they've been providing information on a fiscal year
basis, which lines things up differently. So we're still in the
process of trying to come to some sort of suitable estimate from
our standpoint that's consistent with the tax year information.
We talk to them regularly, we ask for information and we are
still trying to gain sufficient information on a tax year
basis.
Mr Maves:
Have you been able to put a guesstimate on it?
Mr
Sweeting: Well, $50 million is our guesstimate
currently, in terms of what we believe is the excess of interest
and penalties over bad debt.
1130
Mr Maves:
No, no, I'm sorry. I meant a guesstimate on the bad debt.
Mr
Sweeting: On the bad debt itself, I'm not sure.
Interjection.
Mr
Sweeting: I'm told it's a net basis, the amount of bad
debt itself versus the amount of interest and penalties.
Mr Maves:
OK, I understand. You spoke in your presentation about
restrictions that the federal government places on Ontario with
respect to our government's tax administration and tax policies.
Can you elaborate on some of those restrictions they've put
on?
Mr
Sweeting: Sure. Certainly the history of this government
looking to make changes to its income tax system has found
situations where the federal government has refused to implement
moves that the government felt were appropriate. The government
was elected in 1995 with a structure for a fair share health care
levy, which was a very particular way of generating additional
revenue from high-income taxpayers as a compensation for
elimination of the employer health tax on the first $400,000. The
federal government would not implement the structure that was
proposed and as a result a compromise structure had to be
determined in order to do that.
Quite recently, for
example, we've been in the process of looking to produce a more
explanatory statement for taxpayers about their tax and their
Ontario tax burden and how that's changed over time as a
supplement and complement to the information received through the
notice of assessment process that you get when you get back, in
most people's case, your refund or your information from the
federal government when you file. We haven't been successful in
getting that implemented in a way that would be appropriate,
despite the useful information that it would be for
taxpayers.
Certainly the last budget
announced Ontario would be looking to introduce a tax credit to
provide benefit with respect to stock options earned by certain
kinds of employees. The federal government has told us at the
staff level that would not be something they would implement
through the tax collection process. So we have a history of
difficulties.
As the deputy pointed out,
they have adopted certain kinds of credits and there have been
things added to the tax system that benefit Ontario taxpayers
that weren't there before. But all of those had to be approved by
the federal government. Ontario cannot simply say: "I'd like to
have that. Put it on." It has to be approved.
Mr John Hastings
(Etobicoke North): My first question, Mr Purchase, would
be, what is the difficulty we have had with the source and scope
of the estimates the feds provide us that you or your staff have
experienced? Is it the range?
Dr
Purchase: Typically in recent years the estimates have
proved to be underestimates, and there's not much we can do about
it. It doesn't really matter what we think. As Mr Deutscher was
saying earlier, it's not his experience, and he's had more recent
experience than mine, or longer experience than mine recently,
that they ever change in response to what our views are. It comes
back to this fundamental question of forecasts. It's tough. We
can have duelling forecasters here. Often people have quite
legitimately different perspectives on what might happen. As long
as we rely on forecasts, we will never resolve this. We will go
on fighting with them. It would be an unusual situation that we
would have the exact same forecast.
I don't know all the
details, maybe Mr Deutscher does, about how the federal
government does its personal income tax forecasts. Quite frankly,
I can say I have many years' experience in forecasting, and even
if I did, I could probably have quite a continuing debate with
just about any economist or you name your forecaster about these
things.
The real resolution might
be in moving to an actual collections-based system. If the other
parts make sense to us, the great advantage of that is that this
will remove once and for all this irritant. This continuing
argument that goes back and forth between officials about
forecasts will be over,
and maybe there will be a great saving just from that alone.
Mr
Hastings: Does this go back to the root cause of the
original 1962 tax agreement and the lessons we've learned over
the years regarding that particular document and all the changes
that have been made? Do you see us moving, sometime in the next
century, to a new agreement that will deal with these issues in a
way of integrity and get them off the table so you can get on
with the problems we have in other areas?
Dr
Purchase: Yes, sir, I do. Again, I'm quite heartened.
We've come a long way since 1962. I think in 1962 there was a
very different federal attitude towards the provinces. I think
the federal government takes the province of Ontario and the
other provinces much more seriously now than it did in the 1960s.
The Ontario government spends over $60 billion a year; we only
get $5.6 billion or thereabouts from the federal government.
That's a very different situation today than it was in the 1960s.
I think that's beginning to be reflected in the attitudes of
federal officials and the federal government generally towards
Ontario. So I believe that we're on the right track towards
getting more co-operation.
Mr
Hastings: Another question I'd like to pursue is, and we
may have to deal with it this afternoon, to what extent has the
ministry looked at the Quebec experience in terms of how they've
gone about collecting their own taxes? Tax on income? Are there
significant advantages you see in the proposal we have, and how
does it differ or is it similar in terms of the downsides as
well?
Mr
Sweeting: I could certainly speak from the standpoint of
tax policy and tax policy flexibility. We have looked often at
the Quebec situation. Quebec in effect has had tax on income
since the 1950s, the system that we're looking to move to as a
province and how they've been able to set their own brackets,
their own rates. They are able to do more than tax on income
would allow. They actually have a full partnership in that they
can also determine how items will be brought to tax, which is not
something the federal government is currently offering. But it
has been indicated that from Ontario's perspective we should be
moving to a system that does allow full partnership of the
provinces with the federal government.
Quebec has utilized its
flexibility to do a variety of things. Its brackets are different
than ours are now. It has made choices about how it wants to
distribute its tax burden, and it can do it a lot more directly
and straightforwardly and clearly than we're able to do and have
been able to do historically in Ontario. They haven't chosen, to
be frank, to set taxable income much different from what's set
for federal purposes. But they've had the ability over time to
make that determination and decide if the federal definition is
appropriate or not, and that's again something that hasn't been
available to Ontario. So what's being offered under the latest
round of negotiations with the federal government moves us
towards Quebec's situation but doesn't get us all the way to that
situation.
Mr
Hastings: Does it have to be tied in to a new tax
agreement, or can we work out something on our own situation,
aside from the existing tax or proposed tax agreement?
1140
Mr
Sweeting: There would have to be a new collection
agreement to govern the specifics of the arrangement. The tax
collection agreements-actually the federal government has one
with each province-are quite similar in their structure. But
under the new arrangement, that effectively has to be authorized
through Ontario legislation that will reflect the policy
intention the government comes to with respect to how it wants to
tax in the tax-on-income regime, and authorize the continued
collection under the basics of the new tax-on-income arrangement.
The agreement will be improved and, as the deputy said, there are
a number of other areas we would hope to see improve within the
tax collection agreement as well.
Mr Gerry Phillips
(Scarborough-Agincourt): I am very interested in this
subject for a couple of reasons. One, as you know, is that I kind
of deeply resent the fact that we the public don't get what I
regard as necessary information on our revenues, and the solution
to this would be helpful in that. The second is that, as I listen
to the debate, my conclusion is that it has cost Ontario $300
million in lost interest over the last five years and the federal
government has been unwilling to co-operate with Ontario in
resolving this issue. It's a substantial issue, involving a lot
of money, that has to be resolved.
I want to pursue what
Ontario has done, because I see that there will be a public
debate on this, perhaps having the federal agency in to discuss
it. First, one way of partially solving this would be to change
the revenue estimates the federal government provides to you. I
gather from your comments that you have said to the federal
government when they sent you these revenue estimates, "We
disagree with these, we think you are low and we believe we
should have a higher revenue estimate." You have communicated
that to the federal government, and they have simply said: "No,
we're not going to accept your view on it. We're going to use our
estimates."
My question is to confirm
that has happened in the last two or three years: You have taken
the federal estimates and said, "You're wrong," you have sent
them a letter or communicated to them that they are wrong and
they have ignored it. The second part is that it may be useful
for the committee to see that correspondence, to see what
communication they have ignored.
Mr
Deutscher: That was probably my comment. There are no
letters. It is strictly in regular meetings with the federal
government that a discussion takes place between the federal
government and all the provinces.
Mr
Phillips: So for something that's worth $300 million,
you wouldn't have said to them, "We think you're wrong for these
reasons and we are requesting that you increase your estimate"?
You have not documented that with the federal government?
Dr Purchase: No. There is an
exchange of correspondence between the deputy in Ontario, as I
recall, and the federal deputy at various points, and with the
minister constantly raising the issue with his counterpart, Mr
Martin. This has been very much and constantly under discussion
and review with our federal counterparts.
Mr
Phillips: But, Deputy, are you telling the committee
that you have told the federal government you disagree with their
estimates over the last two to three years, that you believe they
have estimated low and you've quantified that for them? I just
want to be sure that-
Dr
Purchase: No, what we have done is said repeatedly that
they owe us money in respect of past underestimates.
Mr
Phillips: With all due respect, Deputy, you're not
answering the question. We understand they send you the estimate
three times a year. Have you informed them when they sent you the
estimate that you disagree with it, that you think it's too low
and should be a much higher number?
Dr
Purchase: No, I have not done that in my year there. I
haven't done that. As I say, our forecasters are meeting
constantly with the federal government and exchanging views on
forecasts.
Mr
Phillips: Correct me if I'm wrong, but you do have an
opportunity to tell them they're wrong. I would have thought that
if you thought they were wrong you could say: "Listen, we told
them every year for the last three or four years that they're
wrong and they owe us more money. Their estimates are low." But
you have not told me that you may in hindsight have said, "You
owe us more." I would have thought that when they sent you those
estimates you would have communicated to them that you believed
they were incorrect, but you haven't done that.
Dr
Purchase: I haven't done that directly.
Mr
Phillips: I assume you're speaking on behalf of the
ministry.
Dr
Purchase: I'm saying that if you are asking me to say to
you that I have written a letter to my federal counterpart-
Mr
Phillips: No. I'm asking, on behalf of the ministry, has
the ministry officially told-
Dr
Purchase: My understanding is that Mr Deutscher just
answered your question; that is, he has regularly raised the
issue.
Mr
Phillips: OK, fine, thank you.
You have said you believe
the solution would be that they remit the money to you on
collection. Once again, I assume you have made the case in
writing to them about wanting the money remitted on collection,
you have made the arguments why you want that and they have
responded to you saying, "We are not going to do that."
Dr
Purchase: No, what I said in my remarks on the matter of
collections is that we are discussing the issue with them. Before
we make a formal request of the federal government to change
fundamentally, we want to make sure we fully understand the
implications for ourselves. I tried to point out in an earlier
question that there are some issues associated with that. For
example, there are some additional burdens in reporting
arrangements that would be borne by employers, and there are cash
flow implications for the province of Ontario. There are some
advantages.
But I also said that I
agree it does seem to be one way of cutting through this Gordian
knot of forecasts. As I pointed out to the committee, and as we
pointed out to the auditor, there was a situation in the past
where the federal forecasts were overestimates of what was owing
to us. Currently there are underestimates. They will come back
and tell you: "We overpaid you one time, and we underpaid you
another. There probably is a balance."
All I'm saying is that it's
true, it's a fact, and that it looks like we could put this
behind us and solve the whole thing if we went to a collections
basis. But I can't make that determination until I know exactly
the full implications.
Mr
Phillips: My problem, Deputy, is that I came into this
session thinking that the dastardly federal government won't do
what Ontario wants them to do. They consistently provide a
low-ball estimate on the payments and ignore the advice of the
provincial government and the provincial government has asked
them to move to a collection basis and they have steadfastly
refused, and neither of those things has happened.
Dr
Purchase: No, we have not asked them to move to a
collections basis. What I have said is that I agree with the
Provincial Auditor that we should look at this possibility and
that when we have finally determined that this is the best way
for us to go, at that point we will ask them to move to a
collections basis.
Officials have had, and
maybe can describe for you, discussions with the federal
government. We think it's technically feasible, but a final
determination hasn't been made.
Mr
Phillips: You can understand the difference between my
perception coming in and what I'm hearing now, which is that the
provincial government hasn't done either of the things I've said:
blasted the federal government for an estimate we disagree with,
or asked the federal government to move to a collection
basis.
I want to just update
myself-
Dr
Purchase: If I could repeat, we have repeatedly and
vociferously said to the federal government that they owe us
money in respect of recent underpayments. I don't think we've
misled anybody about the fact that we have aggressively pursued
this issue with the federal government. What we haven't yet done
is say to them, once and for all, that we want to move to a
collection basis.
1150
Mr
Phillips: It might be helpful, if it's possible, to get
that communication where you've said to the federal government,
"We think you are negligent in paying us our money."
Dr
Purchase: I don't know. Some of that involves
correspondence between ministers. I'm not going to make a commitment that I can
produce that for you. You have my word that it takes place, but
I'm not necessarily going to produce all the correspondence for
you. I can assure you and members of the committee that letters
have gone from both the deputy minister in Ontario and from the
minister, and that every time the ministers of finance meet, or
many times in my experience of 15 months or so when they have met
either formally or informally, or on the telephone, issues like
this arise.
Mr
Phillips: I hear your answer.
On the status of the Canada
Customs and Revenue Agency agreement, has Ontario made any
agreements with the agency? Are we in the midst of negotiations
with them? Where does that stand?
Dr
Purchase: We have not formally negotiated a new
arrangement. I think there are some sub-arrangements that you do,
Roy. Do you want to address that issue?
Mr Lawrie:
When the CCRA came into existence, it took over all the existing
agreements that the province had with Revenue Canada. Since that
time, they have suggested and indeed sent us very much a first
draft, a sketch if you like, of what they call a management
framework agreement. This would basically set out the
relationship between provincial tax administration and the CCRA
and would also provide for certain information, particularly
about personal income tax and how the CCRA collects and
administers it, to be given on a periodic basis to the province
and for regular meetings to take place between tax executives of
the CCRA and of the province to discuss the results of the CCRA's
administration of PIT.
I think the ball's in our
court, actually. We are due to send them back our suggestions for
some of the things we'd like to see in the agreement. But I have
to emphasize that the agreement is only with respect to
information; it's not with respect to the province being able to
direct the CCRA to do more audits of a particular kind of
taxpayer, because under the tax collection agreement that's the
sole prerogative of the federal government. So it's an
information agreement only.
Mr
Phillips: But is this the opportunity for us to resolve
the outstanding issues, if we believe we should be paid on
collection, that we use this opportunity; if we believe that we
need more audits, that we put that in? All of these things, it
seems to me, if they're going to be handled by this agency and
we're signing an agreement with them, we should be incorporating
these things.
Dr
Purchase: What we have moved into a model of is
improvements by degrees, I guess, in which we get one thing at a
time. We haven't yet achieved the stage where we can say: "Let's
get it all right now. Let's sit down and have the entire thing
negotiated." We tend to make progress, as I say, by degrees. We
get one agreement, and then we work on another issue. The federal
government hasn't offered us an opportunity to sit down and do a
comprehensive "Let's rewrite the entire thing."
Mr
Phillips: Have we asked them for it?
Dr
Purchase: We're not even sure that that's necessarily
the best way to proceed at the present time. As long as we're
making progress on individual items, which I believe we are, then
I don't know that it's worth it to sit down with them and say,
"Let's have everything on the table," at the present time.
Mr
Phillips: I have trouble accepting that. If this is a
new agency being set up with a new board, the auditor has
indicated $300 million worth of lost money for the Ontario
taxpayer and we've got what you regard as serious problems, I
would have thought this is the perfect opportunity, not something
that we would put on the back shelf and deal with somewhere down
the road.
Dr
Purchase: Again, the approach that we have taken to date
is-we are in continuous negotiations, but it's not like a labour
negotiation in which you're sitting down and saying, "Here's the
entire range of issues, and we're going to resolve them all in
this one negotiation." It just doesn't work out that way. We
resolve them sequentially. We are constantly in negotiation about
everything, but we only make progress by degrees on any specific
issue.
The Chair:
You have one more minute.
Mr
Phillips: I'm not sure how to proceed because we're in
public accounts, but I guess we have a difference of opinion. I
think that when we're setting a new agency up, a new board, we
want to set the ground rules, it's the perfect opportunity. If
these things are as serious to the provincial government as they
appear to be, my belief is that somehow or other we have to find
the vehicle that we get this thing off on the right foot and not
institutionalize problems. I realize the minister, you and the
ministry feel that it's appropriate to proceed this way, but I
think we're missing the opportunity. I choose to at least
question if not disagree with you on that.
We have to sign an
agreement with them? We have to put in legislation dealing with
it?
Mr
Sweeting: Yes, certainly to do with the structure of the
tax system under tax on income, and there is officializing
through the tax collection agreement process. So there is
legislation and signatory elements associated with implementing
tax on income.
The Chair:
OK, that's it. The auditor wanted to make one comment with
respect to a comment that was made.
Mr Erik
Peters: I would like some clarification of taking over
the contract. Just to clarify, we discussed the CCRA in the audit
community, and there was one statement made to us that's slightly
at odds with what was said here. The statement was made that the
actual agreement continues to be an agreement between the two
governments and that the agreement with the CCRA would be an
agreement to administer that tax agreement. The statement that
there is actually an agreement between the province and the CCRA
only pertains to the administration of what would actually be an
agree-ment between the federal government and the province of
Ontario. Is that your understanding?
Dr
Purchase: Yes, Mr Peters, that's correct. If we're
talking about the tax collection agreement, we don't really
negotiate with the CCRA; we negotiate with the Department of
Finance. But on a lot of technical matters, effectively, we're
talking continuously with the CCRA as well; for example, Mr Lawrie would be dealing
with technical people on the matter of audits and so on and so
forth. We don't go through the Department of Finance to get down
to that level of detail.
On the matter of policy, it
is clearly federal policy to provide this service to the
provincial government only if you comply with certain fundamental
rules that they set vis-à-vis the tax collection agreement.
These rules are not rules that are written into the Constitution.
The province of Ontario has every right in law to have any tax
system it pleases with respect to the provincial income tax. It
is not a question of us not having the legal authority; it's just
that, as long as we use the federal administration, these are the
rules that are going to apply.
The Chair:
We had a request earlier as well, Dr Purchase, with respect to
whether you would be prepared to table a copy of the 1962
agreement together with any amendments thereto. This was a
request that was made at the in camera session.
Mr
Sweeting: I don't think that should be a problem. We
should have that for sure.
The Chair:
That can be done? OK, thank you. Then we stand in recess until
1:30 this time.
Mr Maves:
Chair, I don't think we have any further questions; I don't know
if the other members do.
The Chair:
You don't have any further questions, Ms Martel? No. The
government?
Mr Maves:
We have no further questions.
The Chair:
The Liberal caucus? No. OK.
Ms
Mushinski: I move adjournment.
The Chair:
We can move adjournment, but we have to give some direction to
the researcher with respect to the items. Do you want to deal
with that on an in camera basis very quickly before we
adjourn?
The public session is
adjourned until tomorrow morning at this time. If the members
could just stay for a few minutes.
The committee continued
in closed session at 1202.
