TEI comments on Canadian Tax restructuring proposals: August 1, 1997..
Congratulations on your recent appointment as Minister of National Revenue. Tax Executives Institute, Inc. (TEI) enjoyed a productive relationship with your predecessor, Jane Stewart, and looks forward to continuing its history of constructive interaction and exchange with Revenue Canada during your tenure as Minister. We also very much appreciate the time you devoted to meeting with representatives from three of the Institute's four Canadian Chapters on July 22, 1997, briefing them personally on the Progress Report on the Canada Customs and Revenue Agency. It is propitious that our letter of introduction to you should focus on such an important administrative matter as the Progress Report.
TEI is an international organization of approximately 5,000 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and the other businesses by which they are employed. TEI's members represent more than 2,700 of the leading corporations in Canada and the United States.
Canadians make up approximately 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 nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. 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 submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.
TEI has historically been 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 in 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 the 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 Progress Report of the Canada Customs and Revenue Agency.
General Comments on the Progress Report
As an organization of corporate tax professionals whose members are responsible for ensuring their companies' voluntary compliance with the nation's revenue and customs laws, TEI concurs wholeheartedly with the Progress Report's statement that:
Public confidence in the levying and collection of revenue ... is fundamental to democracy. Public compliance based on voluntary assessment lies at the heart of a sensible system of taxation.
The report also acknowledges, and we concur, that "Revenue Canada has a good record of providing citizens with a fair system of revenue administration." Every large service organization, however, must continually re-engineer its processes in order to maintain flexibility and consistently meet its customers' evolving needs. Consequently, TEI commends the Government for undertaking this broad-based review of the revenue collection system in Canada and supports the implementation of procedural steps and organizational structures that will enhance the integration, efficiency, and effectiveness of tax administration at all levels of government.
Inasmuch as many companies have recently restructured and re-engineered their work processes and workforces in order to become more efficient, TEI recognizes the difficult challenges that confront the Government in implementing systemic improvements even as the vital mission and functions of tax administration are maintained. The principal challenge is to ensure that any proposal changing the administration of the nation's tax system not only preserves, but enhances, public confidence in that system.
Since TEI members and their companies will be materially affected by any changes in the role, structure, and powers of Revenue Canada or its successor Agency, we have several specific comments on the Progress Report and, in addition, raise for discussion some issues that are not specifically addressed.
Accountability of Canada Customs and Revenue Agency
In democratic societies, checks and balances exist to limit government action to its proper constitutional sphere and purposes and to provide oversight by elected officials and legislators. In contrast, large administrative service organizations, such as the proposed Canada Customs and Revenue Agency, require clear lines of reporting and accountability, as well as a high degree of autonomy in order to achieve their mission. In some respects, the goal of ensuring adherence to democratic processes can be inconsistent with the goal of efficiency because multiple boards and bodies with overlapping or conflicting oversight jurisdiction, while beneficial in ensuring that checks and balances are preserved, can result in extremely cumbersome and inefficient procedures. Indeed, excessive oversight can hamstring the affected agency to the point of paralysis. Hence, a balance must be struck between the conflicting goals.
In reviewing the recommendations set forth in the Progress Report, TEI is concerned that there may be too many bodies with either direct oversight or indirect advisory roles. While TEI supports the Government's proposal to structure the Agency along the lines of a corporate governance model with a President (or Chief Executive Officer) reporting to a Board of Directors (with full representation of participating governmental interests on the Board), we do have concerns that separating the Minister of National Revenue from a direct role on the Board may compromise the goal of clear administrative and political accountability. We are also concerned that the limited role envisioned for the Minister of National Revenue will lower the position to a junior rank that is not commensurate with the level of responsibility involved. Hence, we recommend that the current stature of the Minister of National Revenue be preserved and that the position entail a more integrated role in the management of the Agency, for example, as Chairman of the Board. In the event that the limited role that we perceive for the Minister of National Revenue prevails, we believe the Government should instead consider having the President of the Agency report directly to the Minister of Finance.
TEI also believes that the role of the provinces in the proposed structure should be clarified. TEI fully supports participation of provincial representatives on the Board and believe there should be, as proposed in the report, regular consultations. We recommend, however, that this consultative role for the participating provinces occur as customers of the Agency, i.e., pursuant to the "accountability session" envisioned under a federal-provincial tax collection agreement. We also believe that -- to the extent it assumes a formal policy or decision-making role rather than a purely advisory role -- the Council on Tax Administration may cloud the lines of accountability. Since we believe that the other two mechanisms, i.e., representation on the Agency Board and customer accountability input, provide sufficient opportunity for input and control by the provinces, TEI questions the need for the creation of a formal Council body. Should the participating provinces require a forum for discussion of issues of common administrative concerns, we agree that there should be continuing opportunity for informal liaison meetings.
Finally, an indirect form of accountability that is omitted from the Progress Report is the consultative process through which Revenue Canada currently obtains feedback about its performance from those most affected: taxpayers and taxpayer groups. Consequently, we recommend that the final report encourage the proposed Agency to continue many of Revenue Canada's beneficial practices, such as the solicitation of comment letters and holding of regular liaison meetings with stakeholders, that will enable the Agency to stay attuned to its customer's needs.
Policy Development, Interpretation, and Administration
The Report notes that, as an administrative agency, Revenue Canada is not generally viewed as a policymaking organization. Nonetheless, in order to ensure that proposed legislation is administrable, the Ministry of Finance often consults with Revenue Canada when developing tax policies. Indeed, tax policy proposals and legislation are often developed based on the results of Revenue Canada's compliance initiatives and audit experiences with taxpayers.
Similarly, once legislation is adopted, Revenue Canada formally and informally solicits input from representatives of the Ministry of Finance (as well as other stakeholders) on the proper interpretation and application of those laws. Moreover, Revenue Canada often issues Interpretation Bulletins that, in effect, are binding on the Government. Finally, Revenue Canada frequently develops administrative procedures and initiatives that apply complex tax laws in a manner consistent with Revenue's interpretations of the law. (For example, consider Revenue Canada's acceptance of the cost recovery method of reporting gains on the sale of shares as set forth in IT-246 or Revenue Canada's occasional (and laudable) administrative policy of "tolerance" in respect of penalties when enforcing new legislation.)
As a result, TEI would be gravely concerned if the new Agency were structured in a fashion that unduly separated the development or interpretation of tax policy from its administration. Moreover, we would be concerned should the revised Agency structure not retain Revenue Canada's current power to adopt administrative procedures that simplify taxpayer burdens in complying with complex legislation. Finally, it is vitally important that, notwithstanding the arm's-length, independent Agency structure envisioned, the Agency maintain a close, day-to-day working relationship with the Ministry of Finance as Revenue Canada does today.
The Progress Report is silent on the means of funding the new Agency. In our view, funding is a crucial element affecting the behaviour of the future Agency and, hence, that topic should be addressed in the final report's proposal. To advance that discussion, we offer the following comments.
Revenue Canada and its provincial counterparts are generally funded by direct appropriations or block grants from the respective governments they serve. While in limited circumstances Revenue Canada charges taxpayers user fees for limited and specific services (for example, to obtain an advanced tax ruling), we recommend that the general funding approach be retained in respect of the new Agency. Where a single agency is to act on behalf of multiple governmental units, some mechanism for sharing those costs among the respective government units must be devised. Under such circumstances, it may be appropriate for the proposed Agency to impose fees for services rendered to government entities. In any event, whether through block funding, fees for services, or a combination of the two approaches, the manner in which the costs are to be shared among the federal and participating provincial governments should be addressed in the Report.
As important, we recommend that the final Report reject outright two forms of Agency funding that might be proposed. Specifically, the use of "bounty hunters" and the imposition of "audit fees" should be eschewed. Under the bounty hunter approach, the Agency might partially or fully fund itself by keeping a percentage of any revenues assessed. Such an approach, however, will engender taxpayer suspicion and cynicism about the professionalism and impartiality of the Agency's auditors, increase the scope and magnitude of audit controversies, undermine the independence of the appeals process, and generally diminish taxpayer confidence in the administration of the tax system. As the Progress Report acknowledges, "any changes in the administration of the nation's taxes must give first priority to the preservation and enhancement of public confidence." Hence, the Government should spurn funding proposals based on a bounty-hunter approach.
In addition, under the "audit fee" approach, which some provinces refer to as a "user fee," a charge is imposed (based on either a flat fee or hourly charge) on taxpayers for the "privilege" or "service" of being audited. Taxpayers who are selected for audit already bear substantial costs in order to comply with auditor information requests. Ensuring compliance with the tax laws, however, is a general governmental function and TEI believes that the cost of that function should be borne by all taxpayers. As with the bounty-hunter approach, the audit fee funding approach would generate considerable ill-will because taxpayers (i) have no say in the audit selection process, (ii) are allowed minimal input to the scope of audit procedures employed, (iii) are not permitted to control the manner in which the audit procedures are conducted, and GO can not effectively monitor or control auditor behavior or efficiency. Nonetheless, the taxpayer is expected to pay for the audit "service" regardless of the efficiency (or inefficiency) of the auditor. In effect, the audit fee is a disguised "penalty" imposed on taxpayers selected for audit. (As under current laws, where a taxpayer negligently or wilfully fails to comply with the tax laws, the Agency will be able to assert appropriate penalties.) As the Report notes, ensuring compliance with the nation's tax laws is a vital governmental function -- one that benefits all taxpayers -- and, consequently, one that TEI believes should be funded from general revenues.
Critical Success Factors
TEI recognizes that a reorganization of the national tax administration inevitably involves balancing complex trade-offs among a number of competing interests. In order to weigh the various factors affecting the decisions, the decision-makers should adopt benchmarks that they believe are indicators of a successful reorganization. Indeed, we believe it likely that the Government has already developed a series of benchmarks or guideposts that will define whether its goals in the reorganization have been achieved. Hence, we recommend that these critical success factors be explicitly stated for public examination.
One key indicator for taxpayers will be a reduction in aggregate federal and provincial compliance, recordkeeping, and administrative burdens. For example, TEI would be pleased if the new agency were to administer additional tax regimes, such as Ontario and Alberta corporate taxes. We recommend that the report include such taxpayer-favorable outcomes as a goal for the Government.
During the meeting with TEI members on July 22, you requested the Institute's views on several specific issues implicated by the Progress Report. We believe our submission responds to those matters, but recapping briefly, TEI believes:
* Revenue Canada (or its successor Agency) should continue to be represented by a Minister in the Cabinet;
* The Minister should be appointed as Chairman of the Board of the Agency; and
* The position of President (or Chief Executive Officer) of the Agency should be separate and distinct from that of the Minister. The position requires the full-time effort of a highly trained professional.
In addition, you inquired whether the Institute supports the creation of a steering committee to provide guidance on the transition of Revenue Canada from its existing structure and reporting relationships to the new arm's-length Agency structure. While the full scope of the functions and duties of the steering committee is not yet known, the Institute wholly concurs with, and fully supports, the creation of such a committee. Moreover, should we be provided the opportunity, we shall be pleased to nominate a member or members of the Institute to serve on such a steering committee.
If you should have any questions about the Institute's comments, please do not hesitate to call either J. Raoul Gratton, Jr., Vice President of Canadian Affairs at (514) 848-8374, Alan Wheable, chair of the Institute's Canadian Income Tax Committee at (519) 663-1623, or Munir Suleman, chair of the Institute's Commodity Tax Committee, at (416) 866-4698.
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|Date:||Sep 1, 1997|
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