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1998 December Report of the Auditor General of Canada

Main Points

29.2 The "Other Audit Observations" chapter fulfils a special role in the Reports. Other chapters normally describe the findings of the comprehensive audits we perform in particular departments; or they report on audits and studies of issues that relate to operations of the government as a whole. This chapter reports on specific matters that have come to our attention during our financial and compliance audits of the Public Accounts of Canada, Crown corporations and other entities, or during our value-for-money audits.

29.3 The chapter normally contains observations concerning departmental expenditures and/or revenues. The issues addressed generally involve failure to comply with authorities, and the expenditure of money without due regard to economy.

29.4 Observations reported this year cover the following:

• ongoing issues between Atomic Energy of Canada Limited and the government that need to be resolved;
• transparency and the government's Annual Financial Report;
• concerns about poor control over computers loaned to employees for home use;
• the urgent need for an updated long-term comprehensive plan to restore and renovate the Parliamentary Precinct; and
• fairness in the Canadian income tax system.

Introduction

29.7 Section 7(2) of the Auditor General Act requires the Auditor General to call to the attention of the House of Commons any significant cases where he has observed that:

• accounts have not been faithfully and properly maintained or public money has not been fully accounted for or paid, where so required by law, into the Consolidated Revenue Fund;
• essential records have not been maintained or the rules and procedures applied have been insufficient to safeguard and control public property; to secure an effective check on the assessment, collection and proper allocation of the revenue; and to ensure that expenditures have been made only as authorized;
• money has been expended other than for purposes for which it was appropriated by Parliament;
• money has been expended without due regard to economy or efficiency;
• satisfactory procedures have not been established to measure and report the effectiveness of programs, where such procedures could appropriately and reasonably be implemented; or
• money has been expended without due regard to the environmental effects of those expenditures in the context of sustainable development.

Atomic Energy of Canada Limited

Ongoing issues between Atomic Energy of Canada Limited and the government need to be resolved

Atomic Energy of Canada Limited and the government are working together to resolve outstanding issues, including the future of Whiteshell Laboratories and responsibilities related to nuclear waste. Resolution should provide consensus on important issues, and allow the corporation to manage its business with that consensus in mind. In our view, it is important that these current efforts succeed.

Background

29.10 Program Review recommended that the corporation focus on commercial business. As a result, AECL eliminated certain research activities not related to such commercial products as CANDU power reactors. The corporation also began a restructuring program to reduce its costs in order to allow it to continue operating with the reduced annual government funding.

29.11 While Program Review focussed on government funding of AECL, other ongoing issues remain. For each of the six years ended 31 March 1997, the auditors' reports on AECL's financial statements contained reservations of opinion because the corporation had not recorded a liability for its decommissioning and site remediation costs in its financial statements. As of late October 1998, AECL's annual report for the year ended 31 March 1998 had not yet been submitted to the Minister of Natural Resources. Finally, in Appendix D of this Report, we note that the Governor in Council has not approved AECL's five-year corporate plans for over three years. This observation describes developments subsequent to 31 March 1997 relating to some current issues facing AECL, and their implications to the corporation and to Parliament.

Issues

29.13 Some specific issues facing AECL include the following:

• The corporation needs a clear decision from the government on the future of Whiteshell Laboratories in order to complete implementation of Program Review decisions, and to manage its business effectively. To date, AECL has restructured its operations, including closure of some AECL offices, reduction of other offices, layoffs of staff, and elimination of certain research programs not linked directly to the CANDU business.

Almost two years ago, in December 1996, the government decided to find a private sector operator to commercialize the corporation's Whiteshell operations. Around that time, the government asked AECL to halt any future layoffs at Whiteshell while the commercialization proceeded. However, commercialization efforts failed, and in 1998 the corporation laid off about 250 full-time Whiteshell employees. This left approximately 330 full-time employees at Whiteshell Laboratories as of September 1998. The ultimate future of Whiteshell Laboratories remains uncertain.

• Roles and responsibilities concerning nuclear waste on AECL's sites need to be clarified. Until recently, the government funded AECL's nuclear decommissioning and waste activities through annual appropriations. Now these activities are funded by a 10-year agreement whereby AECL will apply the proceeds of heavy water revenue to this purpose. If the 10-year agreement is not extended, funding is to revert to the former annual funding arrangement. AECL currently spends approximately $15 million annually on waste activities.

In 1997, AECL completed a comprehensive plan for its nuclear facilities and waste. The plan contemplates that the corporation's main research facility at Chalk River, Ontario will remain an active nuclear site for 75 years, and that waste-related activities will continue for 100 years. The corporation estimates that the current discounted cost of all necessary activities is $400 million. Because of the effect of the time-value of money over the 100-year clean-up period, actual expenditures will be higher than the discounted cost.

As noted previously, one of the areas currently under discussion between the corporation and the government is AECL's sites, including related nuclear decommissioning and waste. These discussions should clarify roles for nuclear waste at AECL's sites in the future.

29.14 Other issues facing AECL. Other issues facing the corporation include the implications for the corporation's cash requirements of a cyclical market for sales of CANDU reactors, and the generally old facilities at Chalk River Laboratories, particularly future closure of AECL's 40-year-old research reactor. This reactor is used for CANDU-related research and other scientific research.

29.15 The Crown corporation accountability framework contemplates annual government approval of AECL's plans, but this has not happened since 1994-95. The corporate plan is one of the key components of the accountability regime established for Crown corporations through the Financial Administration Act . It sets out management's and the Board of Directors' direction for the corporation and, through the mechanism for approval, provides for government capability to influence that direction. A summary of approved plans is then provided to Parliament so that all can know the corporation's objectives and its plans for achieving them. Finally, in their accountability regime, Crown corporations report annually to Parliament through their annual reports on the extent to which those objectives have been met.

29.16 AECL has submitted annual operating and capital budgets each year, and these have been approved by the government and tabled in Parliament. However, while AECL has also submitted five-year corporate plans each year, they have not been approved by the Governor in Council since 1994-95. This was also the last year for which a corporate plan summary was tabled in Parliament. There are no other situations where a Crown corporation's corporate plan has not been approved for over three years. In the circumstances, the process contemplated by the Financial Administration Act for approval and communication of a Crown corporation's strategic direction is not functioning in the case of AECL.

29.17 The lack of an approved corporate plan since 1994-95 also means that the last AECL corporate plan summary tabled in Parliament was almost three years ago, in December 1995, instead of annually as contemplated by the Financial Administration Act . AECL is changing rapidly, in response both to Program Review and the commercial marketplace. In this time of change, parliamentarians have not been informed of AECL's plans.

29.18 The relationship between the corporation, government and Parliament is not in keeping with the accountability framework set out in the Financial Administration Act . However, the government and AECL continue to discuss the future of the Whiteshell Laboratories, and the separate current discussions between AECL and the government are intended to address many of the other outstanding issues. These initiatives need to be seen through to a timely, successful resolution.

Conclusion

Department of Finance

Information for Parliament and Canadians: Transparency and the government's Annual Financial Report

Background

Issue

• On the domestic front, the Canadian Institute of Chartered Accountants (CICA) in 1994 initiated a research study on indicators of financial condition for the federal and provincial governments. The study suggested a general set of indicators that governments might consider using to give readers a more complete and understandable picture of financial condition. These indicators were designed to report on a government's sustainability, flexibility and vulnerability. (Definitions of these terms are found in Exhibit 29.1.) The idea was to provide information on not only the state of the government's finances through credible, reliable and understandable financial statements but also on the factors that affect those public finances. This would include key indicators of the Canadian economy, as well as benchmarking Canada's performance against that of other jurisdictions in similar economic and political circumstances.
• At the same time as the release of the first Annual Financial Report, the Minister of Finance began appearing before the House of Commons Finance Committee to seek its input into the Budget process. To accompany that appearance, he also began tabling a fall Economic and Fiscal Update document. Since then, that documentation has gone through a number of changes to try to make it more informative to Canadians. In fact, much of the information the CICA study suggested is already currently available publicly in a variety of documents like the fall Economic and Fiscal Update. The challenge now is to make this important information more readily accessible and more widely used; in other words, to make it more transparent.
• The recent report of the Task Force on the Future of the Canadian Financial Services Sector declared, ``Disclosure governs what information is provided. Transparency is concerned with the clarity of that information: how understandable it is to the consumer." We share the Department's goal of providing ordinary Canadians with simple access to useful information about the government's financial condition, and believe the Annual Financial Report can and should play an important role in this regard.
• Others beyond Canada's borders also see the need for better financial information. As part of its emphasis on good governance, the International Monetary Fund has been stressing the need for improved transparency in budgetary operations through its Code of Good Practices on Fiscal Transparency . The United Kingdom, too, has moved in this direction with its new Code of Fiscal Responsibility. As Mr. Gordon Brown, Chancellor of the Exchequer in the United Kingdom, reported to the Commonwealth Meeting of Finance Ministers in Ottawa in October 1998:

Greater openness in procedures as well as in the dissemination of information will not only reduce the likelihood of market corrections by revealing potential weaknesses at an earlier stage but will generate a better understanding of the reasoning behind decisions and encourage better decisions and wider support for the policies.

All of these calls for more complete disclosure by national governments are based on the understanding that inadequate official financial information can undermine sound economic performance.

• And finally, as stated in the chapter of this Report titled Matters of Special Importance:

The recent Asian financial crisis attests to the importance of transparent, fair and complete information on the financial condition of governments. The International Monetary Fund identified lack of transparency as a contributing factor to that crisis. .... Understandable, timely reporting of useful information contributes to better performance, by supporting informed decision making and exposing the activities of government to the discipline of public scrutiny.

This in no way implies that the Canadian economy or government finances are comparable with the Asian economies. Nevertheless, this concern for transparency has sparked the current Minister of Finance to call for better and more complete reporting by financial institutions internationally. His argument is simply that better and more timely information would reveal potential weaknesses earlier and lead to corrections before crises developed.

Conclusion

Industry Canada and Natural Resources Canada

Concerns about poor control over computers loaned to employees for home use

Background

29.24 In the case of Industry Canada, although records are not up-to-date, we estimate that as many as 1,000 of the Department's 4,900 employees have taken computer equipment home; at least 800 employees of Natural Resources Canada have done the same. Although some of these computers are used for approved teleworking arrangements, the vast majority have been provided as a second computer at home, in addition to one at the office, to enhance productivity. While we have not looked at the situation in every federal department and agency, there are indications that the loan of computers is widespread throughout the government.

29.25 Government policy specifies that when these computers are no longer needed to do work at home, they are supposed to be returned to the department and sent to the Computers for Schools program after being declared surplus. Computers for Schools, a partnership formed in 1993 by Industry Canada and Telephone Pioneers, is a program administered by Industry Canada and delivered in co-operation with provincial governments, businesses and volunteer organizations. Computer equipment donated by the private and public sector is collected, refurbished and distributed to schools and libraries across the country for free.

29.26 The inspection and repair of donated equipment take place in regional workshops operated by volunteers from the Telephone Pioneers, a volunteer group of employees and retirees of the telecommunications industry, and other program partners. Support from these companies includes space for warehousing and repair operations and, along with other private sector partners, they assist in many other ways such as shipping equipment to school boards.

29.27 The program challenge is to place 250,000 used and refurbished computers in schools and libraries across the country by the end of March 2001. According to the program's figures, a total of 78,000 computers since 1996 have been donated by the federal and provincial governments and the private sector and shipped to schools as of August 1998. Program managers advise that Industry Canada is the fifth largest donor of computers among federal departments. The program expects to ship an increasing number of computers to schools in the next two years in order to achieve its target.

29.28 An important effect of the program, beyond the obvious benefits of increasing the ratio of computers to students in our schools, is that equipment that no longer has value for governments and businesses gains a second life in a classroom.

Issues

29.30 We examined the relevant policies set by the Treasury Board Secretariat on materiel management as well as the computer equipment management policies and practices of two departments: Industry Canada and Natural Resources Canada.

Policy framework

29.32 Once recovered, equipment that is no longer needed or is not cost-effective to repair can be declared surplus. Normally, surplus materiel is auctioned off. However, the policy requires departments to donate surplus computer equipment to the Computers for Schools program.

29.33 Departmental policies for loan of equipment. We looked at the policies of two departments: Industry Canada and Natural Resources Canada. Both departments advised us that by allowing employees to take home spare computers, managers have found an economical way to increase productivity.

29.34 According to Industry Canada's policy, computer equipment no longer required by a responsibility centre can be borrowed for specific work-related activities at home. The Department also lends equipment to help employees improve their computer proficiency. Employees must have the loan approved by the designated managers who are responsible for ensuring that loans of equipment are justified. All microcomputer equipment in employees' homes is supposed to be recorded in the department's central asset management information system.

29.35 Natural Resources Canada does not have formal departmental policy or procedures for the loan of computer equipment to employees, and there is no corporate inventory. The Department is organized into five sectors, with each one managing its own assets. Some sectors have a policy on loaning microcomputers, others do not. Where policies exist, they are similar to those of Industry Canada in that employees are allowed to take computer equipment home for work-related or training purposes. One sector has a list of borrowed equipment; the other four expect individual managers to keep track of computer loans.

29.36 In our view, Industry Canada has clear and simple policies for managing this equipment across the Department, while Natural Resources Canada does not. Natural Resources Canada is in the process of developing an asset management policy that will include microcomputers.

Weak departmental control practices

29.38 At Natural Resources Canada, individual managers are expected to develop their own controls for computers; there is no departmental system. We looked at the practices of two managers, and found that, while their procedures were different, loans were approved by the appropriate person. Neither manager required that the reason for the loan be explained on file.

29.39 Inadequate records. We are also concerned that both departments have inadequate records of computer equipment on loan. Our review of Industry Canada's records indicates that they are out-of-date. We found that the Department does not have adequate information on how much equipment is loaned out to employees and how much has been returned. The Department was implementing a new asset management system, planning a physical count of all equipment and piloting tighter control procedures at the time of our audit.

29.40 Some sectors within Natural Resources Canada were able to provide us with lists of loaned equipment; others have no single list but have loan approvals on file. However, without a reasonably current inventory of all computer equipment against which to compare, we were unable to determine whether these lists, together with the approvals on file, provided a complete record of equipment on loan. The Department was also implementing a new asset management system at the time of our audit.

29.41 As a result, we are concerned that this may lead to situations where employees:

• are borrowing equipment for other than work-related reasons;
• have more than one computer from the department at home;
• do not return equipment when leaving or transferring within the public service; and
• return equipment, but it is not recorded in the inventory system.

Impact on Computers for Schools program

29.44 Weak control over microcomputers may have resulted in fewer useful computers being donated by the federal government to the program. We found that the federal government has donated almost 80,000 computers in total to date. However, one third were found to be missing key components such as the processor, memory or the hard drive. The program was able to salvage many of these computers, but the rest were of no use. In the case of the two departments we audited, we were unable to determine why components were removed from some of the computers donated to the program. Departmental officials explained that some components were probably retained for the purposes of repairing similar computers, but they do not keep records. In our view, and in the view of the departments we audited, the removal of computer components should be for valid reasons.

Conclusion

• computer equipment be loaned to employees only for truly work-related reasons;
• responsible managers always approve the long-term removal of government property from departmental premises;
• equipment not be loaned to employees indefinitely;
• equipment be returned when it is no longer being used for work-related activities;
• departments and agencies consider setting recall dates coinciding with the nature of the work being done at home; and
• control over computers at homes of employees be improved and the inventory records kept up-to-date.

Public Works and Government Services Canada

There is an urgent need for an updated long-term comprehensive plan to restore and renovate the Parliamentary Precinct and for a non-partisan advisory body to assist Parliament and the government by providing advice on the plan and the priorities of work (see photograph)

Roles, responsibility and accountability for actual and planned expenditures totalling hundreds of millions of dollars continue to be complex and unclear. No one organization has overall responsibility for the Parliamentary Precinct. The Senate and the House of Commons should reconsider our 1992 recommendation to establish a Parliament Buildings Council.

Despite assurances to the Treasury Board over the last three years that it would submit a revised long-term plan, Public Works and Government Services Canada (Public Works) has not yet sought approval of an updated comprehensive long-term plan for the Parliamentary Precinct. Because future projects are inextricably linked, there is a pressing need for an approved long-term strategic plan that articulates the program's objectives, scope and cost.

Background

29.48 In our December 1992 Report to the Senate and the House of Commons on Matters of Joint Interest, we made several observations and recommendations aimed at assisting Parliament and the government to make decisions about the maintenance and improvement of the Parliamentary Precinct buildings. Specifically, the report noted that:

• roles and responsibilities for the Parliamentary Precinct were complex and needed to be clarified and rationalized;
• progress on making and implementing plans for renovations and capital improvements for the Parliamentary Precinct had been slow; and
• better reporting of costs was needed.

29.50 According to Public Works documents, the Department spent about $183.5 million on asset and accommodation improvements during the period 1992-93 to 1997-98. It also spent an average of about $25.6 million annually, including payments in lieu of taxes, to operate and maintain the Parliamentary Precinct.

29.51 Major projects completed since 1992 include conservation of the Peace Tower, rehabilitation of the 1910 wing of the East Block, repair of the south façade of the Centre Block, masonry repairs throughout the Precinct, and construction of the Centre Block two-storey underground utility and storage facility.

Issues

29.53 According to Public Works officials, the 1992 long-term construction program was developed with early input of the accommodation and functional requirements of the House of Commons, the Senate and the Library of Parliament. Furthermore, the physical condition of the assets within the Precinct was much worse than preliminary investigations indicated. In addition, accommodation and functional requirements have changed over this period. Security requirements are being re-considered and information technology requirements are adding increasing pressures.

29.54 In June 1995, Public Works informed the Treasury Board that it would submit an updated long-term plan at an appropriate time. In March 1997, Public Works informed Treasury Board that it would be submitting, later that year, a revised LTCP identifying overall program cash flows and funding requirements to fiscal year 2010-11. The plan would also include additional funding requirements for furniture, fixtures and equipment for all future projects. A preliminary profile of the revised LTCP noted that the cost of major capital projects (over $1 million) would total approximately $750 million from 1992-93 to 2010-11.

29.55 On 23 September 1998, the Minister of Public Works and Government Services reported that " the currently forecast cost to complete approved restoration and renovation projects is $423,324,102. " The report, however, was not intended to provide the estimated costs to fully restore and renovate the Parliamentary Precinct and to fully address the accommodation, security and information technology needs of parliamentarians, staff, visitors and the media. According to Public Works working documentation, the cost both of approved projects and of those yet to be approved could total about $1.4 billion over the period 1992-93 to 2012-13.

29.56 Requirements of the plan. Public Works policies and good building management practices require that asset management plans be prepared and kept up-to-date for each asset. The plans should identify the life cycle costs of operating, maintaining and, in some cases, preserving the asset. We noted that these plans have not been fully prepared for all Parliamentary Precinct buildings. Public Works officials informed us that there are additional reports on specific aspects of each building and that this information needs to be consolidated into the updated long-term plan.

29.57 Because future projects are interrelated, there is a pressing need for an updated and comprehensive long-term plan for the Parliamentary Precinct. The approved plan would facilitate a well-ordered, logical development of the Parliamentary Precinct. For example, although Public Works has secured Treasury Board approval to renovate the West Block, the budget did not account for the potential changes to clients' requirements for committee rooms that will be decommissioned during the West Block renovations. According to Public Works officials, a decision is also needed, for security reasons, on the location and design of a loading dock for the West Block before the building can be occupied. In 1996, Public Works acquired the United States Embassy building, which may be added to the Parliamentary Precinct. However, the building's future use has not yet been determined.

29.58 The plan also needs to address issues such as space standards for members of Parliament, ministers, senators, Parliamentary Precinct staff, and the media; their proximity to the Hill; and other related issues such as security, parking and visitor services. Without an updated long-term plan, resources cannot be allocated and managed in a cost-effective manner. The approved plan would establish a baseline for measuring and assessing the program's progress.

29.59 Roles and responsibilities. We noted that roles and responsibilities continue to be complex and unclear and we are concerned that our 1992 recommendation to establish a Parliament Buildings Council has not yet been implemented.

29.60 Sound project management principles require that roles and responsibilities of key participants be clearly defined and documented, normally in a memorandum of understanding or a project charter. We noted that these formal mechanisms had not been in place for projects completed to date. We were informed that although there is extensive consultation regarding project requirements, the House of Commons and the Senate generally do not formally "sign off" their statements of requirements.

29.61 Public Works officials also informed us that it is complex to co-ordinate and reach agreement on common requirements for the House of Commons, the Library of Parliament, the Senate and their staffs. They believe that potential cost savings may be realized through better co-ordination of requirements and sharing of facilities and systems. A first step has been taken with the Parliamentary Precinct Information Technology Program Charter signed in December 1997 by Public Works, the Senate, Library of Parliament and the House of Commons. Public Works officials believe that further savings may be achievable through a co-ordinated overall study of such things as the House of Commons and Senate committee room requirements. Exhibit 29.5 illustrates a case of the difficulty in co-ordinating and reaching agreement on requirements.

Conclusion

29.63 This is an opportune time to update the long-term plan to restore and renovate the Parliamentary Precinct. The comprehensive long-term plan needs to include guiding principles to address the accommodation, security and information technology requirements of parliamentarians, staff, visitors and the media. We reaffirm our view that a non-partisan co-ordinating Council is necessary to review the plan for the development of the Parliamentary Precinct. The appointments to the Council should be made in a manner that is transparent, equitable, and enhances the independence of the body. For example, it could be composed of eminent Canadians, with input from all parties. It is important that such a council be established sooner rather than later and that it review the plan before it is submitted to the Treasury Board.

29.64 We plan to monitor the work on the Parliamentary Precinct and report to Parliament, as appropriate.

Public Works and Government Services Canada response: The Parliament Buildings are a unique heritage resource, as well as an important national symbol of Canada. These buildings are also the centre of parliamentary operations and a venue for celebration.

A long-term capital plan for the Parliamentary Precinct has been in place since 1992. The plan included many projects now completed such as the conservation of the Peace Tower, the renovation of the 1910 Wing of the East Block, the construction of the Centre Block Underground Services facility, urgent masonry repairs, etc. The current 1992 long-term plan covers the period until 2003-2004.

Public Works and Government Services Canada is currently developing a further plan for the period beyond 2004 until 2007. The overall plan will be updated regularly in accordance with a long-term planning framework that will provide a forum for stakeholders (Senate, Library of Parliament, House of Commons, National Capital Commission, Federal Heritage Building Review Office, and Treasury Board) to provide their input into the development plans for the Parliamentary Precinct.

Revenue Canada

Fairness in the Canadian income tax system

During the course of our work, we came across two situations that raise concerns about the fairness of the Canadian income tax system. Although these two situations do not involve significant tax leakage, they do affect certain individuals in a significant manner. We believe that over time they have the potential to erode the confidence of taxpayers in the fairness of the Canadian income tax system.

Deficiency in the matching program for personal income tax returns

Background

29.66 To understand the issue, we examined a sample of 1996 income tax returns that included Old Age Security (OAS) pension income on which tax had been deducted. In about four percent of the cases reviewed, we found that taxpayers had understated the taxes deducted at source on their OAS pension income on their income tax returns. The average amount of unreported tax deducted at source was $1,865. In all these cases, Revenue Canada's processing program did not detect or correct these taxpayer errors and the taxpayers ended up paying more than their fair share of taxes.

Issue

Conclusion

Department's response: Revenue Canada places a very high priority on the fairness of the Canadian taxation system. The Department is committed to seeing that Canadians pay their fair share of income tax, no more and no less. Revenue Canada's ``Fairness Initiative", which was launched by the Minister in March of 1998 and involves a wide range of consultations with action plans, is one method of ensuring that we fulfil this commitment.

For the specific issue cited, 95 percent of Old Age Security (OAS) recipients do not have tax deducted at source. For the remaining five percent of cases, where tax is deducted, the Department has procedures in place to detect situations when a taxpayer has neglected to report both OAS income and taxes deducted. We acknowledge that a small percentage of understated tax deductions currently go undetected. The Department will place a priority on finding a solution to this problem through better training of volunteers (who assist seniors in preparing their income tax returns), general education, and system improvements. The Department is confident that these actions, in conjunction with our continual improvement processes, will address this deficiency.

Transfer of pension funds outside Canada without withholding taxes

Background

29.70 Reciprocal transfer agreements are agreements between the Government of Canada and other employers whereby employees may have their pension plan contributions, plus the matching employer contributions and interest in respect of immediately prior service with one employer, transferred either from the federal government to another employer or vice versa. The purpose of these agreements is to facilitate the mobility of persons between the Government of Canada and other employers.

29.71 In 1991, Pension Reform was introduced and income tax rules for registered pension plans were changed. All pension plans were required to comply with the new rules in order to maintain their registered status.

29.72 In 1995, the Treasury Board Secretariat notified international government-sponsored organizations that it would no longer recognize the reciprocal transfer agreement if the organizations' pension plans were not registered with Revenue Canada. As many organizations did not wish to amend their plans, the Secretariat considered their agreements as no longer valid and notified the organizations of its decision. However, as a result of a reciprocal agreement with one of the organizations, we noted that pension funds totalling $500,000 were transferred out of Canada by public servants over three years without the normal withholding tax. The Secretariat advised us that it kept the agreement active because it had received information suggesting the foreign plan was still registered with Revenue Canada.

Issue

29.74 Pension benefits paid to a non-resident by a Canadian registered pension plan are subject to Canadian withholding tax. However, the current agreement makes it possible to transfer funds from a registered Canadian pension plan to a foreign pension plan and avoid Canadian withholding tax. We are concerned that the registration of foreign plans may be used in tax schemes designed to transfer pension funds out of the country on a tax-free basis.

Conclusion

Department's response: The objective of reciprocal transfer agreements is to facilitate the movement of employees' service from one registered pension plan to another. Such agreements are common in both private and public sector registered pension plans.

The plan in question is one of five foreign plans that were registered prior to the 1992 pension reform. In 1992, new rules restricting the registration of foreign plans were introduced as part of pension reform. These new rules called into question the registered status of these plans. As it was not until June 1996 that regulations were passed to deal with Canadians participating in unregistered foreign plans, Revenue Canada waited for the passage of the 1996 regulations before examining the registered status of these plans.

At this time, Revenue Canada is taking steps to ensure that the rules are applied uniformly to all foreign plans. If the plan is to maintain its registered status under the new rules, one of the registration requirements is that funds must be held in Canada.