CONTENTS
Wednesday 8 October 1997
Case of Mr H
STANDING COMMITTEE ON THE OMBUDSMAN
Chair / Président
Mr John O'Toole (Durham East / -Est PC)
Vice-Chair / Vice-Président
Mr Trevor Pettit (Hamilton Mountain PC)
Mr Dominic Agostino (Hamilton East / -Est L)
Mr Douglas B. Ford (Etobicoke-Humber PC)
Mr Allan K. McLean (Simcoe East / -Est PC)
Mr John O'Toole (Durham East / -Est PC)
Mr John L. Parker (York East / -Est PC)
Mr Trevor Pettit (Hamilton Mountain PC)
Mrs Sandra Pupatello (Windsor-Sandwich L)
Mr Bill Vankoughnet (Frontenac-Addington PC)
Mr Len Wood (Cochrane North / -Nord ND)
Clerk / Greffière
Ms Tonia Grannum
Staff / Personnel
Mr Philip Kaye, research officer, Legislative Research Service
The committee met at 1009 in room 151.
CASE OF MR H
Consideration of the Ombudsman's case report in the matter of Mr H and the Ministry of Finance.
The Chair (Mr John O'Toole): I call the meeting to order. Just for the record, we would like the Liberal Party to be here and we'll certainly wait before we have any final decision to make sure they're here. But for the sake of other people's schedules, we have before us a report of the standing committee with respect to the matter of Mr H and the Ministry of Finance. Our researcher, Philip, has prepared a report. Does everyone have a copy? Then I will ask Philip to lead us through the report. The intention is to send it to the House.
Mr Philip Kaye: The Ombudsman's case report in the matter of Mr H and the Ministry of Finance is the third case report, or so-called recommendation-denied case, to be discussed in this committee since last November. In drafting the report on Mr H's case for the committee's consideration, I have followed the format adopted by the committee in its reports on the other two cases; that is, I first set the context for Mr H's complaint, which is Ontario's system for the collection of tobacco tax. Next, the draft explains the nature of Mr H's complaint to the Ombudsman, followed by the positions of the Ombudsman and the Ministry of Finance regarding his case, and the draft ends with the committee's decision on whether to support the Ombudsman.
The background section of the draft on page 1 notes that tobacco tax is collected from consumers by retailers who pay the tax to designated tobacco wholesalers for remittance to the ministry. Two categories of consumers do not have to pay the tax: members of first nations who purchase tobacco on a reserve for their exclusive use and diplomats resident in Ontario who acquire the tobacco also for their exclusive use. The tax-exempt cigarette stock is unmarked. Instead of a yellow tear-strip, there is a clear tear-strip.
An allocation system for the sale of unmarked cigarettes on reserves has been created to ensure that first nations consumers receive the tax exemption but that all others pay the tax. There are two levels of allocation: First, an annual quantity of cartons of unmarked cigarettes is allocated to a reserve; then, depending on the circumstances, either a band council or the Ministry of Finance may allocate this annual quantity among each reserve retailer.
Under the allocation system suppliers/wholesalers must hold permits to deal in unmarked cigarettes and are responsible for ensuring that retailers do not purchase cigarettes in excess of their allocation. This allocation system has been implemented on 33 of Ontario's 117 reserves.
Since 1992 all new dealers in unmarked cigarettes have been required by the Ministry of Finance to post security of $500,000. Statutory authority for this requirement is found in section 12 of the Tobacco Tax Act. This section provides that the Minister of Finance may demand minimum security of $500,000 from every applicant for or holder of a permit to deal in unmarked cigarettes. Section 12 also authorizes the minister to increase or decrease the security requirement.
Mr H's complaint to the Ombudsman is outlined at the bottom of page 2. It is pointed out that Mr H is a member of a first nation who lives on a reserve. He intended to start a business wholesaling unmarked cigarettes to first nations merchants on reserves. He was unable to post the $500,000 bond as he did not have sufficient assets off the reserve to serve as collateral. He could not rely upon his assets on the reserve as, under the federal Indian Act, such assets cannot be pledged or seized except in favour or at the instance of an Indian as defined in that act or band. The relevant provision is subsection 89(l) of the Indian Act, and that is reproduced at the top of page 3.
Mr H considers the ministry's bond requirement to be unreasonable as he intends to sell tax-exempt cigarettes only and therefore would never be holding any revenue in trust for the ministry.
The Ombudsman's position in this case highlighted what she considered to be the inequitable treatment of Mr H. In particular, she concluded that treating people who lived on reserves and who were bound by the Indian Act in the same way as those living off reserves was inequitable, and that, in the case of Mr H, such treatment was improperly discriminatory. She felt it was sometimes necessary to treat people differently to provide access to the same outcome.
The Ombudsman further concluded that the ministry's practice of requiring $500,000 security bonds constituted systemic discrimination. It meant, in effect, that no first nation individual living on a reserve and whose assets were solely on the reserve was able to obtain an unmarked cigarette dealer's permit.
The Ombudsman pointed out that the Tobacco Tax Act gave the Minister of Finance the flexibility to decide whether to require security or to set it at a level lower than what was generally required. Also, the legislation permitted conditions to be attached to the issuance of permits to deal in unmarked cigarettes. These options would be available under her formal recommendation, which appears on the middle of page 4, and that formal recommendation reads: "The Ministry of Finance reconsider Mr H's application for a wholesale dealer's permit and an unmarked cigarette dealer's permit."
With respect to the issue of tax liability, the Ombudsman explained that Mr H intended to sell unmarked cigarettes only to first nations merchants within the limits established by the quota system. In these circumstances provincial taxes would not normally be collected. She said that the bond rate for Mr H might reflect that situation and accordingly be set at zero.
The Ombudsman also referred to a ministry suggestion that tax liability might arise as a result of theft, fire or inventory accounting problems. Her response included the possibility of the ministry placing conditions on the permits issued to Mr H to reduce the risk of loss from these contingencies.
In terms of the issue of potential unlawful activity, such as sales beyond amounts specified by the allocation system or to unauthorized first nations retailers, the Ombudsman answered that any potential unlawful activity would appear to be a normal enforcement matter to be handled by the ministry and law enforcement authorities. The ministry had the option of attaching conditions to a permit granted to Mr H to address its concerns.
It was also the Ombudsman's opinion that the integrity of the marketplace was not protected by a practice which resulted in systemic discrimination. She did not believe that Mr H's case was about allowing him to gain an advantage over others; rather it was about levelling the playing field so that he could enter the marketplace on an equal footing with persons who were not subject to the Indian Act.
In terms of the role of the Indian Act, she contended that the ministry could not abdicate its responsibility to administer the Tobacco Tax Act fairly and equitably by simply leaving it to the federal government to act in this matter. She pointed to the discretion which already existed under the Tobacco Tax Act which, she said, allowed the ministry to devise an equitable solution to Mr H's situation.
There were some other matters raised by the Ombudsman. The fact that other members of first nations had inquired into wholesaling unmarked cigarettes without complaining about the security requirement did not mean that Mr H's case lacked merit. She said as well that the ministry's concern about a proliferation of wholesalers resulting from a security exemption for Mr H should not be a factor. If people were eligible for permits, then they ought to obtain them.
1020
The position of the Ministry of Finance is outlined in the draft beginning on page 6. The ministry's position held that a minimum $500,000 security requirement for new dealers in unmarked cigarettes was essential if all applicants were to be treated in a consistently fair manner and if the integrity of the tobacco tax system was to be maintained. It saw the granting of an exemption to Mr H as giving him an unfair business advantage over those who had posted and maintained the $500,000 in security. If there was to be a level playing field, with the integrity of the marketplace preserved, there had to be no exemptions.
The ministry did not agree that its treatment of Mr H was improperly discriminatory nor that its policy constituted systemic discrimination. It explained that a requirement for security, applied consistently and equally to all people wishing to engage in the wholesaling of cigarettes, was necessary for reasons of tax administration. It was the most economical and practical way to administer the tobacco tax system and the best way to prevent the erosion of tax revenues.
The ministry stated that any discrimination arising in this case did so as a result of a federal statute, the Indian Act, over which it had no control.
In terms of tax revenues, the ministry described its security requirements as helping it to fulfil an important responsibility, safeguarding the province's revenues in this regard.
The ministry listed five ways in which tax revenue could be lost to the province, even by a dealer in unmarked cigarettes who sold only to first nations retailers on reserves: Sales could be made to retailers above quantities specified by the allocation system; sales could be made to unauthorized retailers; sales could be made to retailers on reserves which were not under the allocation system, but in quantities so large that the intended diversion of the unmarked cigarettes to the taxable market was unquestionable; poor record-keeping could make it virtually impossible to determine whether the eventual consumer was entitled to the tax exemption; and thefts and unaccounted-for sales could conceal the diversion of unmarked cigarettes to the taxable market.
The ministry explained that without security it had no recourse against a dealer in unmarked cigarettes who permitted abuse of the tax exemption for first nations consumers. But with security it could assess the dealer for the tax associated with any significant amount of unaccounted-for, unmarked stock. A security requirement could also act to deter unlawful activity by dealers in the first place.
When it comes to the role of the Indian Act, the ministry commented that Mr H's case raised questions regarding the role of that act which could only be addressed by the federal government. As mentioned earlier, the ministry pointed to the Indian Act as the source of any discrimination arising in this case.
The ministry was also concerned that if Mr H were to be exempted from the security requirements, the result might well be a proliferation of wholesalers, with serious implications for the costs of administration and the risk of revenue losses. Further inquiries had been made by other first nations people interested in wholesaling unmarked cigarettes who had not objected to the security requirement.
The ministry further pointed out that the attachment of conditions to a permit should not be viewed as an alternative to the posting of security; rather security was necessary as a means of enforcing the conditions.
The draft ends with a statement as to the committee's decision and that statement reads: "After considering the submissions of the Ombudsman and the Ministry of Finance, the committee has decided not to support the Ombudsman's recommendation."
The Chair: Thank you very much. I open the floor to any members of the committee if they have any points or questions for Philip.
Mr Len Wood (Cochrane North): Is this the substance of what would be submitted to the Legislature?
Mr Kaye: Yes, it is and, as I said at the beginning, this is the format that the committee adopted with the other two case reports or recommendation-denied cases that came forward to this committee, that the committee reviews the positions of the Ombudsman and the governmental organization and then states its decision. This would be the actual format of the report.
The Chair: That's really what this meeting is today, to agree on this report or disagree and again present the -- Mr Parker.
Mr John L. Parker (York East): Just to be clear, as I understand it, we are not here to discuss the merits of the decision. The decision is a matter of history at this point. We're here to discuss whether this report, as drafted by Philip, accurately reflects the proceedings and the decision. Am I right in that?
The Chair: Precisely.
Mr Parker: So we're really here in judgement of Philip, not in judgement of the case.
The Chair: I'd like to thank Philip because I think the report is a complete recapturing of the essence of that discussion and the arguments put forward. Anyone else?
Mr Dominic Agostino (Hamilton East): I wasn't here for the previous discussion, but certainly I respect the independence and the professionalism of the legislative research department and our staff here who provide information. I was not privy to the actual meeting itself, but I have a great deal of faith in the staff who pull this together, the legislative researcher.
The Chair: Perhaps the clerk or the researcher could tell us who the members were. The members who attended that meeting will be listed, by the way, in the final committee report to the House.
Mr Trevor Pettit (Hamilton Mountain): That being the case, Chair, I move that the report be adopted and that you as the Chair be authorized to present the report to the House.
The Chair: Motion by Mr Pettit.
Mr Agostino: Just to get a clarification, by presenting it we are not necessarily suggesting we agree with the contents, in the sense of the decision. All we are suggesting is that the report itself accurately reflects the meeting that took place. I just want to clarify that that is really what we're voting on, not whether we agree or disagree with the decision in front of us.
The Chair: That's right.
Mr Pettit: That decision is already made.
The Chair: We have a motion before us. Any other questions or comments? Being none, I'll call the question. Those in support? It's carried unanimously.
No other business for this meeting?
Mr Len Wood: Chair, I just would like to make the committee aware of a serious situation that is developing with the restrictions that have been put on the Ombudsman's budget, the 20% reduction. We're now seeing the effect of that where the northeastern Ontario office will be closed as of Thursday. During its closure period, one staff is going to be laid off.
Mr Pettit: What office?
Mr Len Wood: The office in Timmins, which will mean that temporarily they will have to go to Sault Ste Marie, which is about 400 miles away. Some of them will be referred to Sudbury and, in the long run, I guess, over a period of the next few months, the services that were being given in Timmins will end up in Thunder Bay. I just wanted to raise that with the committee because I understand that a press release will be coming out today or tomorrow to that effect.
Mr Agostino: Just a question to follow up on the concerns that Mr Wood has expressed: Would there be merit in asking the Ombudsman to come in front of the committee and explain to us what impact these cuts are having on her ability to carry out her job as Ombudsman in Ontario? I think that would make a better insight for all of us to understand what this is doing and what benefits or negatives there are to the changes that have occurred. I'd be happy to move that we ask the Ombudsman to appear before the committee to give us an overview of the impact the budget cuts may be having on her ability to carry out the job of Ombudsman of Ontario.
The Chair: We have a motion before us. Any questions or comments on Mr Agostino's suggestion that we request the Ombudsman to appear before us and respond to the request for budget cuts, and the implications?
Mr Len Wood: I agree with it. I think it would be a good suggestion. I can recall, I guess it's less than a year ago that we had a partial discussion on what the effects of downsizing and a cut in her budget would mean. I know we don't have any control over that, but --
The Chair: That's a very good point, Mr Wood. I would refer us to the special report that was just submitted which more or less examined whether the Ombudsman should review the budget with this committee. I think that was one of the concerns, was it not, in that special report?
Mr Kaye: Right.
The Chair: It has never really been formally recognized that this committee has any role with the office with respect to budgets. I'm not trying to confound the issue here but that is rather controversial, how much actual input this committee has with respect to her budget or the role of the budget.
1030
Mr Douglas B. Ford (Etobicoke-Humber): If we're going to review that, I'd like to see the last three-to-five-year operating budgets that this Ombudsman has had, her office, and we could check on that and see why the reduction and if it's feasible to operate that office with a 20% reduction. It's only good business sense to find out what has happened previously.
The Chair: Clerk, would it constitute a huge problem if we had just the final statement page on the Ombudsman's budget? There must be a year-over-year over the last five years showing --
Clerk of the Committee (Ms Tonia Grannum): I could put that as a request to the Ombudsman and see if she would respond.
The Chair: If she's interested in attending.
Mr Pettit: Does this indeed come under our jurisdiction? If it doesn't, I would propose that the clerk or someone --
The Chair: We have a motion before us now. Mr Agostino has a motion.
Mr Pettit: But it may be academic, could it not?
The Chair: Perhaps we could ask a question of the researcher to clarify if this is in fact consistent with the role of this committee.
Mr Kaye: There are two issues. When it comes to the estimates of the Ombudsman's office, this has been a controversial issue where the committee has recommended that it be given authority to review the estimates of the office. The Ombudsman opposes that, favouring a continuing role for the Board of Internal Economy. On the other hand, under the existing standing orders the committee does have the responsibility to review the annual report of the Ombudsman, where she, in her most recent annual report, does make reference to the effects of the budget cuts. In terms of the committee's existing authority to review the annual report, there is an opportunity to look at budgetary matters, but when it comes to formal authority over the estimates process, it does not currently have that power.
The Chair: We have a motion before us by Mr Agostino requesting the presence of the Ombudsman. Any further comments?
Mr Agostino: I'll just follow up on Mr Ford's point. Any of those questions obviously could be asked as well.
Mr Ford: I'd rather have the financial reports than have the person here, and we can review those reports and make a determination on those reports. If there are any deficiencies in those reports, then we could have the person here at that time.
The Chair: It's a fair request and the clerk has made it clear that she will, in speaking with the Ombudsman's office, make that point.
Mr Parker: I am not enthusiastic about pursuing a meeting for the purpose of examining only one particular aspect of the financial situation affecting the Ombudsman. If we are to go down this path, I think it would be fair for this committee to do a thorough examination of the Ombudsman's budget and that would, as Mr Ford suggests, involve a thorough analysis of budgets over the course of some years to give us the context to understand the suggestion that is currently being made about changes to the current year's budget.
I don't think it's useful to anyone to look into one particular element of that picture without the whole picture available for scrutiny and analysis and context. If what is suggested is a thorough analysis of the Ombudsman's budget, I am open to suggestions along those lines. If what is suggested is an inquiry into one particular aspect, then I'm less enthusiastic in supporting the request.
This whole issue of the Ombudsman's budget was considered at length by this committee over the course of the last -- what is it, Len? -- five years of the committee as currently constituted. I guess we've just gone through a change, so not the currently constituted committee but the committee as constituted a couple of weeks ago and dating back to 1992 under the previous government, when the Ombudsman committee of the Legislature conducted a series of inquiries and discussions regarding the rules affecting the conduct of the Ombudsman's office and the relationship between the Ombudsman's office and this committee.
As you suggested in your comments, Mr Chairman, that resulted in a report that was tabled before the Legislature this fall containing a series of recommendations, some of which touched on this very subject we're discussing now. That is merely a report of the committee. It has not been adopted by the House, it has not been debated by the House, and none of the recommendations in that report has followed any further course in terms of rule changes or amendments to legislation or regulations or anything of that sort.
But this committee as a body has spoken unanimously on the subject and, on this particular aspect, the point made in the report has been a wish for greater openness, greater accountability, greater opportunity to inquire into financial and budgetary matters in respect of the Ombudsman's office. If the suggestion is to act on that recommendation and to pursue questions of that sort, then I think that is consistent with the view that the committee has expressed in the past and I would not want to stand in the way of that. But if it is merely to look at one question without looking at the broader context, then I can't support the motion.
The Chair: Very good. I just want to be clear. If I could have the clerk read back what the motion said, I think that would answer some of our questions.
Clerk of the Committee: Mr Agostino moved that we request that the Ombudsman appear before the committee to discuss her current budget in regard to budget cuts.
Mr Agostino: Basically the impact on her ability to do the job.
The Chair: Do you wish to respond to Mr Parker's point? What he's suggesting is, if we're going to look at the budget, if you look very narrowly at just the method of implementing the reductions, would we as a committee like to examine options, whether to close a field office or conduct business in another way, through video, whatever? That could become very free-ranging. If we only, as Mr Parker is suggesting, restrict it to these are the actions taken because of the reduction --
Mr Agostino: What I'm concerned about is the ability of this office to operate under its budget restrictions. Frankly, we don't have the power to change. I understand that. I'm not suggesting we be given that power. But certainly as a committee where the Ombudsman deals with us, I think we have a responsibility if the Ombudsman comes forward and says: "Here's what I'm limited to doing. Here's what I can and what I can't do."
While the Ombudsman is here, the members of this committee have many opportunities to ask all the questions they want about previous budgets and so on. That's part of the whole thing obviously and it's not going to be limited to simply this year's budget. If someone says, "What was your budget five years ago and what did you do with it?" that's a fair question that the person should answer.
What I'm concerned about is what Mr Wood has suggested. Some of the concern we have heard is that we may be limiting the ability of what is really an independent office to do the job that the office is legislated to do. I think there is some flexibility and the background report from the staff could address many of Mr Ford's points as well as it's submitted to us when the Ombudsman is here.
Mr Parker: Rather than haggle it out here, I'm going to suggest that this matter be referred to the subcommittee to consider as a point of further business to bring before the committee. Maybe in that context all the wrinkles could be worked out and the various angles considered.
The Chair: Procedurally then, Mr Parker, we would have to withdraw the motion or vote it down and it could be ordered as business for the subcommittee.
Mr Parker: I'm happy either way.
The Chair: I'm going to call the question on the motion that has been read, which is to summon the Ombudsman to discuss the impacts of budget reductions. All those in support? Those opposed? That's defeated.
Mr Parker: Could I suggest that the question be referred to the subcommittee to consider further?
The Chair: I see that as appropriate and I ask the clerk to follow up and call a subcommittee meeting. I'm not sure who the members are, but I'm sure you do. What's convenient would be when we're called back, I gather, in November.
Mr Pettit: Is Mr Parker's suggestion a motion? Do we have to vote on it or is he just suggesting that you refer it to the subcommittee? Does that not have to be presented as a motion also?
The Chair: No, I think it's just directing the clerk to convene a meeting. I would say, though, in summary, it is a very good question. It is a question in the broader context of looking at the special report. I would say, Mr Agostino, if you are your party's rep on the subcommittee, that's a very good report.
Mr Agostino: I was going to ask the clerk if I was.
Clerk of the Committee: I believe we need a motion to replace because we've got new members.
The Chair: Could we do that today?
Clerk of the Committee: We could do that today, if you'll just give me five minutes.
The Chair: Okay. I would ask anyway, Dominic, that you be given access to a copy of that because it's a report that goes back, as Mr Parker said, to 1992, and many members -- Mr Wood would know too because he has participated in that over a couple of different governments. It was really three governments that wrestled with the existence of this committee and its duties to the House and to the committee process. Mr Wood, perhaps you'd like to comment.
Mr Len Wood: I wanted to raise that as a matter of information. When there's more information available -- and we're not going to be able to meet on subcommittee probably till the middle of November. By that time, there might be more information available on the justification for why the Timmins office was closed compared to one in Sudbury, Sault Ste Marie, Thunder Bay or any other community, the number of cases that are there, the whole broad picture. I just wanted to raise the fact that that is --
The Chair: It's a very appropriate question.
Mr Len Wood: For me or anyone on the committee to say to her at this point in time, "You must keep the office in Timmins open and close some other office or lay off some other staff instead to meet your budget reductions," I think would be very inappropriate because I don't have all the information about it.
The Chair: I'm going to leave it with the clerk that we convene a meeting in November and she'll determine at that time who the members of the committee are. That'll be a good starting point.
Mr Pettit: I think she knows.
The Chair: You're for your party.
Mr Len Wood: I'm probably the one.
The Chair: Yes.
Mr Len Wood: It's not only that reduction I disagree with. I disagree with the fewer politicians, the fewer school boards and the fewer municipal politicians. There are a lot of reductions out there.
Mr Parker: That's why you're over there and we're over here.
The Chair: That's a fair comment, though.
Mr Pettit: I'd like to move that the membership on the subcommittee be amended by substituting Mr Agostino for Mr Hoy and Mr Wood for Mr Marchese. I believe that you, Chair, and Mr Parker are already members and so would remain.
The Chair: Yes.
Mr Pettit: That would make up the new subcommittee, so that's what I'm moving.
The Chair: Moved by Mr Pettit that these are the new members of the subcommittee. All those in support? That's carried unanimously.
Thank you very much. We'll see you in November.
The committee adjourned at 1043.