OTTAWA - Brian Mulroney ended up paying income tax on only half the $225,000 he received from Karlheinz Schreiber to lobby for a controversial armoured vehicle project, a public inquiry heard Tuesday.
  
And that was despite the fact the former prime minister didn't report the revenue to federal and Quebec tax collectors until early 2000 -- more than six years after Schreiber handed him the first payment.

Mulroney testified Tuesday that he  didn't know any of the details at the time the 2000 agreement was negotiated on his behalf by tax lawyer Wilfrid Lefebvre of Montreal.

Guy Pratte, counsel for Mulroney at the inquiry headed by Justice Jeffrey Oliphant, insisted his client got no special treatment and merely benefited from standard tax assessment rules in force at the time.

Oliphant couldn't help observing, nevertheless, that the net effect was to allow Mulroney to cut his tax bill in half by waiting six years to file, instead of declaring the money as soon as he got it.

"Mr. Lefebvre negotiated a pretty good deal here," said the judge. "The tax authorities were probably so happy to get the money they agreed to that."

None of it means Mulroney did anything wrong, Oliphant was quick to add.

"A deal was concluded with the tax people, both federal and provincial, and this is the result of the deal. Period."

Mulroney has acknowledged he received three cash payments of $75,000 each from Schreiber, a German-Canadian businessman, during a 15-month period in 1993-94 after he stepped down as prime minister.

In return, Mulroney was to help promote the so-called Bear Head project, a proposal by the German firm Thyssen AG to set up a plant in Canada to build and export armoured military vehicles.

Mulroney says he treated the money he got from Schreiber as a retainer for future services, meaning the revenue didn't have to be reported right away and taxes could be deferred until later.

In the meantime, he says, he kept two-thirds of the cash in a safe in his Montreal home and one-third in a safety deposit box at a bank in New York City.

Documents tabled Tuesday show that Mulroney eventually disclosed the full $225,000 to the federal and Quebec revenue departments, spreading it over three years at $75,000 a year.

But under the deal worked out by Lefebvre, the taxable income was reduced to $37,500 a year for three years, or a total of $112,500.

Pratte said it was common practice at the time, at least in cases in Quebec, to tax just 50 per cent of the overall total in so-called voluntary disclosures, the filing method used by Mulroney.

Essentially, such disclosures allow people to declare previously unreported revenue and negotiate a settlement with the tax man.

Pratte didn't elaborate on the precise procedures followed in 2000, but there likely will be further testimony on the subject later this week when officials of the Canada Revenue Agency appear before Oliphant.

Mulroney, for his part, said he took no personal role in the negotiations over how much he should fork over to federal and provincial coffers.

"I referred the matter to my tax advisers," he said. "They resolved the matter with the government of Canada and the government of Quebec.
  
"And after their discussions and negotiations, all I was advised of was that the matter had been resolved and that certain monies were to be paid, and the cheques were issued. That was the extent of my involvement in it."

Mulroney has testified he took the money from Schreiber to provide a "watching brief" on various business matters, including the Bear Head project.

He says his plan was to try to persuade the United Nations to buy Thyssen vehicles for peacekeeping. With that in mind, he sounded out leaders in China, Russia and France on the concept in 1993, '94 and '95.

Schreiber says he expected Mulroney to lobby the Canadian government after he left office, something that could have put him in breach of federal ethics rules for former politicians.

He also claims the total he paid to Mulroney was $300,000, not the $225,000 reported for tax purposes.

Mulroney testified Tuesday that he decided to end his business dealings with Schreiber -- and to report his past income for tax purposes -- after Schreiber was arrested in 1999 in Toronto on a warrant issued by German authorities.

They have been trying ever since to get him extradited from Canada to face criminal charges.

The arrest convinced him he "wasn't dealing with the man I thought I was," said Mulroney. And he acknowledged it also raised the prospect that Schreiber could try to stir up trouble over the previously unreported cash payments.

"A guy that was charged in Germany with bribery, fraud, corruption and income tax evasion was no child in this league," said Mulroney.

"I felt this was the beginning of a threat  . . . and I figured it would be inappropriate for me to continue a formal association with him in terms of the retainer."

While Mulroney's lawyers filed for voluntary disclosure and negotiated with tax officials, long-time Mulroney friend and former prime ministerial aide Fred Doucet tried another track.

Doucet has testified he met with Schreiber in late 1999 and early 2000 to try to find out what he would say about his business dealings with Mulroney if he ever had to describe them in court.

Doucet also drafted a memo in February 2000 outlining the financial dealings between Schreiber and Mulroney as he understood them. His version of events supported Mulroney's claim that he had lobbied internationally but not domestically.

The memo also put the payments delivered by Schreiber at $250,000, a figure neither Schreiber nor Mulroney now says is correct.

Mulroney said Tuesday he didn't bother to correct Doucet on the figure because the memo was only a draft, not a formal legal document.