15 November 1996 Ministerial Letter 9624938 - AUDITOR GENERAL'S REPORT ON FAMILY TRUSTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

MINISTER/DM'S OFFICE 96-03966M, 96-04870M, 96-05037M, and
ADM'S OFFICE 96-1013D

RETURN TO RULINGS, 15TH FLOOR, 25 NICHOLAS ST.

PENDING

November 15, 1996

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letters of May 22, June 19 and 28, 1996, concerning family trusts, contacting a Revenue Canada employee and taxes on cigarettes, respectively. I am also responding to your letter of June 28, 1996, addressed to Pierre Gravelle, my Deputy Minister, regarding an article in Maclean's magazine on the role of Revenue Canada.

With respect to your request for information about the two family trusts that were referred to in a recent Auditor General's report, the confidentiality provisions of the Income Tax Act prevent me from discussing the specific cases contained in that report. However, I would like to explain that the Act currently provides that any individual or trust residing in Canada who owns taxable Canadian property may leave Canada without having to pay capital gains tax at the time of departure. The capital gains tax, which has been in effect since 1972, is paid when the former resident actually sells the taxable Canadian property. The application of this law is affected by Canadian tax treaties with other countries.

The role of Revenue Canada is to administer and enforce the Income Tax Act as passed by Parliament, while the Department of Finance is responsible for tax policy and any proposed changes to the Act. The concern raised in your letter on the taxation of family trusts that left Canada was one of several tax policy issues included in a recent Auditor General's report. Those issues were considered by the House of Commons Standing Committee on Finance in its report released on September 18, 1996.

Although the committee found that the specific cases referred to in the Auditor General's report were in accordance with existing provisions of the Act, the committee's majority report recommended that changes be made to the Act to address the tax policy issues. The Department of Finance responded to those recommendations on October 2, 1996 by announcing draft amendments to the Act, which, when enacted, will be effective as of that date. As a result, all emigrants from Canada, including trusts, will pay capital gains tax on any capital gains that have accrued in Canada up to the time of departure. Exceptions to this rule will include gains that accrue on Canadian real estate and Canadian business property, which can always be taxed when they are ultimately sold.

XXXXXXXXXX

was unable to return your telephone calls and discuss your concerns with you before early July as he was absent from the office.

I would like to explain that Revenue Canada recognizes the importance of providing accurate and efficient service to the public. In this regard, the Department is committed to providing the best possible service that is effective and responsive to the needs and expectations of our clients. I apologize for any inconvenience you may have experienced as a result of the delay.

Your letter of June 28 states that a friend of yours purchased a carton of cigarettes in the state of Idaho for approximately $16 and paid $35 in excise duty and tax, provincial sales tax and Goods and Services Tax at the border. These levies are applied according to tax policies determined by the Parliament of Canada and the Government of British Columbia to pay for social programs and to reduce the national and provincial debt. The lower price for a carton of cigarettes in Idaho reflects differences in tax policy between Canada and the United States.

You also have concerns about the price difference between cigarettes purchased in Western and Eastern Canada. As you are aware, federal tobacco taxes were reduced in 1994 as part of the federal government's Anti-Smuggling Initiative. In addition to a reduction of $5 per carton of 200 cigarettes, the federal government made a commitment to match reductions by provincial governments in excess of $5 per carton, dollar for dollar, to a total maximum reduction of $10. These reductions were offered to all provinces because tobacco smuggling, while most acute in Eastern Canada, was becoming a national problem requiring a national solution. Cheap contraband cigarettes were becoming readily available, which not only reduced tax revenues but was contrary to the federal government's health policy objectives to reduce tobacco consumption, particularly among youth. As well, organized crime was becoming more heavily involved in illegal sales and distribution of contraband tobacco. These problems required immediate action and the federal government's approach was as cost-effective a method as possible.

In addition, you ask how much the Government's efforts to curtail tobacco smuggling have cost Canadian taxpayers from the beginning of the Anti-Smuggling Initiative, that is, February 1994, to the end of 1995. The Budget Plan lists the cost for the 1994-95 fiscal year as $540 million, which includes: $300 million in lost revenues from the federal tax reduction, $150 million for the inventory rebate for vendors holding tax-paid inventory (a one-time cost), $160 million from enforcement and health education and a gain of $70 million from the surcharge on tobacco manufacturers' profits for the federal health education program. Estimates for the 1995-96 fiscal year reduce the impact to $160 million. The 1996-97 estimates further reduce the cost to $20 million. These estimates appear to be on track and the Anti-Smuggling Initiative seems to be highly successful. Costs have been reduced each year as a result of the impact on those involved in the illicit sale of tobacco.

In your letter of June 28 to Mr. Gravelle, you seek an explanation of the role of Revenue Canada as the country's chief tax collector. Since Confederation, the Department has been responsible for collecting revenues for the federal government; initially customs and excise duties and taxes, and then individual and corporate income taxes. For many years, the Department has also been responsible for collecting various revenues for certain provinces. Compliance with Canada's tax legislation and regulations is promoted by providing quality service and responsible enforcement. Successful collection of the revenues owed to the federal and provincial governments ensures that the Department is able to carry out its pivotal role in redistributing social benefits to Canadians through the tax system.

I wish to thank you for expressing your concerns on these matters.

							         Yours sincerely,

							         Jane Stewart, P.C., M.P.

Catherine Bowen
957-8585
October 16, 1996
962493