Canada Customs and Revenue Agency: second progress report.

On April 17, 1998, Tax Executives Institute submitted the following comments to Revenue Canada on the Canadian Government's proposal to restructure the tax agency and establish the Canada Customs and Revenue Agency. The Institute's comments took the form of a letter from TEI President Paul Cherecwich, Jr. to Herb Dhaliwal, Minister of National Revenue. The comments' preparation was coordinated by J.A. (Drew) Glennie of Shell Canada, Limited, who is TEI's representative on the Steering Committee advising Revenue Canada on the creation of the new agency, as well as by Alan Wheable of Canada Trust and Munir A. Suleman of The Bank of Nova Scotia, who are the chairs of the Institute's Canadian Income Tax and Commodity Tax Committees, respectively. TEI's previous comments on the Canadian Government's efforts to restructure Revenue Canada were reprinted in the September-October 1997 issue of The Tax Executive.

Thank you for your letter responding to comments made by Tax Executives Institute, Inc., in respect of the First Progress Report on the Government's proposal to establish the Canada Customs and Revenue Agency (hereinafter "the Agency"). In addition, under separate cover we received the Second Progress Report on the Agency and the accompanying Proposed Legislative Framework. In response to your invitation for TEI to comment on the Second Progress Report, I am pleased to submit the following.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle TEI supports efforts to improve tine tax laws and their administration at all levels of government. As a key stakeholder of Revenue Canada, we are pleased to respond to the invitation to comment on the Second Progress Report of the Canada Customs and Revenue Agency as well as the Proposed Legislative Framework for the Agency.

Discussion

In our comments on the First Progress Report, we commended the Government for undertaking the herculean task of reviewing the entire structure of the revenue collection and tax administration system in Canada. Moreover, we voiced support for the goals and objectives espoused in the report. While we expressed some reservations about the structure and accountability of the agency, we endorsed the broad conceptual outline of the Agency as well as its governance and operating models.

Since filing those comments, there have been a number of developments that demonstrate the Government's deep commitment not only to the concept of the Agency, but to the consultative process through which the concept has been refined from a visionary idea to a workable blueprint for action.

From our review of the Second Progress Report and Proposed Legislative Framework, we are pleased that the Government has incorporated many of the suggestions and recommendations made by TEI (and others) in respect of the Agency. Specifically, the Agency has been strengthened by retaining Ministerial-level accountability, by streamlining the Agency's governance (for example, by eliminating the provincial oversight board initially proposed), and by ensuring that the ties and coordination that currently exist between the Department of Finance, which is responsible for developing tax policy, and the Agency, which will be charged with administering the tax laws, will be preserved and enhanced. Finally, TEI is pleased to have participated in the ongoing consultative process through the participation of its representative to the Agency Advisory Committee, J.A. (Drew) Glennie, a member of TEI's Calgary Chapter.

The Proposed Legislative Framework released in conjunction with the Second Progress Report provides a broad overview of the Agency's proposed objectives, structure, management, governance, and operations. In general, we believe that the Report and Framework are sound and provide a solid and workable foundation for the next steps. Hence, we believe the Government should continue the process it has begun and table the proposed Agency legislation for consideration by Parliament. The Report and the Legislative Framework understandably omit many details that the legislative package will flesh out. Thus, although we remain supportive of the Agency concept, we at this time decline to endorse the proposal outright.

Our caution stems from several sources. One is that it is difficult to gauge how, for example, the restructured Agency will provide tax guidance to taxpayers, conduct its field audit work, resolve audit controversies with taxpayers through an independent appeals process, or resolve instances of double taxation that might arise from conflicting interpretations where provincial taxes are administered by the Agency. We recognize, however, that it is premature to expect detailed proposals addressing such down-to-earth concerns. Hence, we wish to adopt a wait-and-see approach in respect of the legislation on some issues.

Another, more specific source of caution was identified in our prior comments. The Legislative Framework states that the Agency must develop an annual business plan that addresses various strategies the Agency will employ to attain its objectives. We agree that the Agency should establish an annual business plan to guide its actions. One subject that the Agency must discuss, however, and which the legislation will presumably address in detail, is so-called fee strategies. Since the Legislative Framework includes an extensive discussion of"user fees" -- from which one might conclude that the Agency will be empowered to expand the frequency and scope of "user fees" beyond that now utilized by Revenue Canada -- we shall restate our concerns.

We agree with the Proposed Legislative Framework insofar as it states that user fees are justifiable and appropriate in certain limited circumstances (e.g., where a taxpayer desires to obtain an advance ruling). We also recognize that the Government does not by its proposal endorse a proliferation of user fees. Nonetheless, as noted in our August 1997 letter, TEI would object strongly to the Agency's being empowered to implement certain types of user fees. Specifically, we recommend that the legislation explicitly preclude the Agency from imposing "audit fees" on taxpayers (as some provinces currently do). Moreover, the Agency should also be precluded from paying fees to private contractors to conduct tax audits, especially those calculated by reference to the amount of taxes assessed or collected. In other words, "bounty hunters" should be eschewed because the governmental audit function should not be outsourced.

Audit fees imposed on the taxpayer whose books are being examined are repugnant because few taxpayers voluntarily incur the "service" of being audited. As important, audits are a core public service function, the costs of which should be borne by all taxpayers through governmental appropriation rather than through "user fees." Hence, the current practice followed by some provinces in imposing audit fees should be rejected as inappropriate for the Agency.

The employment of private-sector contract auditors should be eschewed because providing profit incentives for auditors will likely lead to abuse of taxpayer rights and also substantially increase the scope and degree of tax controversies. Contract auditors compensated by way of contingent fees are especially prone to abusing taxpayers because their self' interest lies largely in proposing large adjustments rather in determining the correctness of the taxpayer's reported liability. In addition, employing private-sector contract auditors will likely increase the risk of disclosure of confidential taxpayer information. Hence, we recommend that the legislation specifically preclude the Agency from employing private-sector contract auditors.

We note that the response to question number 11 in the Questions and Answers released with the Legislative Framework suggests that the use of user fees will generally be limited. TEI prefers to see a more explicit disavowal of both audit fees and contract auditors.

Conclusion

Overall, TEI believes that the creation of the Agency will substantially increase the efficiency of tax administration in Canada. As a result, we support the introduction of a complete legislative package to implement and empower the Agency. We look forward to continuing the consultative process and will provide the Government with additional comments upon our review of' the enabling legislation for the Agency.

TEI's comments were prepared under the aegis of the Institute's Canadian Income Tax and Commodity Tax Committees, whose chairs are Alan Wheable and Munir Suleman, respectively. If you should have any questions about the submission, please do not hesitate to call Mr. Wheable at [phone], Mr. Suleman at [phone] or J. Raoul Gratton, Jr., TEI's Vice President for Canadian Affairs, at (5141 848-8374.