Opening Statement to the Standing Committee on Public Accounts

Canada Customs and Revenue Agency — International Tax Administration: Non-Residents Subject to Canadian Income Tax
(Chapter 7 - December 2001 Report of the Auditor General)

Mr. Chair, thank you for this opportunity to discuss our report on how the Canada Customs and Revenue Agency administers the tax regime for non-residents of Canada. Joining me at the table is Barry Elkin, the Principal responsible for the audit.

The Canada Customs and Revenue Agency reports that in 2000-01, over 1.7 million non-residents paid about $3 billion in tax on income earned from Canadian employment, contract services, investments, pensions, and other sources taxable in Canada. The Agency's non-resident enforcement activities have identified another $350 million in tax.

The Agency provides a range of services to help non-residents meet their income tax obligations. For example, it responds to inquiries, issues waivers, and establishes units that specialize in areas such as the film industry. It also runs a compliance program to verify the tax obligations of non-residents and those paying them income earned in Canada.

Our chapter made 10 recommendations aimed at strengthening the Agency's administration of the non-resident tax regime. The Agency has responded positively to our observations and recommendations.

Many parts of the Agency are involved in ensuring that non-residents and Canadians who pay income to non-residents comply with Canadian tax requirements. Mr. Chair, we found that the Agency had not assessed the overall tax amount related to non-residents that is at risk. Nor has it finished identifying the complexities of transactions and the non-compliance risks unique to this area, in order to develop a compliance strategy that would integrate the work of its various parts to achieve optimum results.

We also found gaps in the Agency's verification of the Canadian tax obligations of non-residents. For example we found that the Agency did not ask non-resident actors it had identified as likely to owe taxes to file tax returns as required for taxation years up to and including 2000.

Another example of the compliance verification gap, Mr. Chair, touches on people who leave Canada. An emigrant's final tax return as a Canadian resident is subjected to many verification checks when it is assessed. However, no checks are made to ensure compliance with the obligation to report capital gains.

We found that the Agency's data capture and data matching systems for non-resident taxes are not as sophisticated as the systems it uses to record and match domestic tax data. As a result, the Agency has been unable to make effective use of some non-resident tax data to identify non-compliance with tax withholding, reporting, and filing obligations and undertake initial enforcement activity. More efficient data matching could free auditors from many of the routine tasks of verifying that what has been reported is accurate and allow them to concentrate on taxpayers who are not yet complying.

Finally, we are concerned that some taxpayers are using the Canada-Barbados Tax Agreement to take aggressive tax-planning measures, and this is putting pressure on the Agency's enforcement capability.

Barbados does not tax capital gains, but the Canada-Barbados treaty allows a resident of Barbados to claim a Canadian tax exemption on a capital gain that would otherwise be subject to Canadian tax. The Agency has uncovered a number of schemes developed to exploit this advantage. The offshore spousal trust scheme is one of the schemes under review. The Agency has identified 53 examples of this scheme that have moved over $800 million in capital gains to Barbados from Canada. The Agency is examining this scheme to determine if it can be challenged successfully. Failing that, we encourage the Agency to seek changes to the applicable legislation or to the treaty in a timely manner to protect Canada's tax base.

As I have mentioned, Mr. Chair, the Agency has responded positively to our observations and recommendations. The Committee may wish to discuss with the Agency the specific steps it is taking to deal with the issues we raised, and obtain from it a plan that details how and when it will put these measures into action. The Committee may also want to be kept informed about the status of their implementation.

Mr. Chair, that concludes my opening statement and we would be pleased to answer your Committee's questions.