The policy that allowed former prime minister Brian Mulroney to pay taxes on only half of the $225,000 he said he received from German-Canadian businessman Karlheinz Schreiber was a standard practice at the time, a federal inquiry heard Thursday.

But Christiane Sauvé, of the Canada Revenue Agency, told the Oliphant inquiry in Ottawa that the “50 per cent policy” of the voluntary disclosure program has since been changed.

Sauvé said that the voluntary disclosure program allows individuals to pay outstanding taxes and avoid penalties. The benefit to the agency is that it reduces administration costs and allows the agency to get back monies it may not have been able to retrieve.

In order to be eligible, disclosure has to be voluntary, verifiable and the taxes have to be paid, Sauvé said. She added that the taxpayer could not currently be under criminal investigation by the tax office or the RCMP.

Although Mulroney’s case wasn’t specifically referred to at the inquiry Thursday, Sauvé said that under the program in 2000, taxes were calculated by dividing the declared income by two if the source could not be verified or checked.

The automatic 50 per cent policy has since been discontinued and each file is treated on a case-by-case basis, she said.

Earlier this week, the federal inquiry revealed that an agreement reached between Mulroney’s tax lawyers and federal and Quebec tax authorities meant Mulroney paid taxes owed on $112,500, not the $225,000 he claimed he received from Schreiber.

Tax lawyer dealt with issue, Mulroney says

Mulroney said his tax lawyer dealt with the issue and that he had no involvement in the arrangement his attorney made with tax officials.

The Oliphant inquiry is looking into three cash payments Mulroney received from Schreiber at three hotels in Montreal and New York between 1993 and 1994.

Mulroney said he considered the money a retainer and that according to his understanding of tax laws, he did not have to pay taxes until that income was declared.

Mulroney said he waited until 1999 to pay the taxes because it was at that point that he ended the retainer with Schreiber after Schreiber was charged in Germany with tax evasion, fraud and bribery.

Schreiber has said he paid Mulroney $300,000 to lobby domestically on behalf of Thyssen Industries, a German company that wanted to build a light-armoured vehicle plant in Bear Head, N.S., and obtain a contract to sell military vehicles to the Canadian government.

But Mulroney has said he was paid $225,000 in three instalments and that the money was payment for his efforts to promote the vehicles internationally. He has denied it was for any domestic lobbying work, which would have violated Canadian lobbying rules.

Mulroney testified that he first raised the issue of these vehicles with Zhu Ronji, then the Chinese vice-premier, during a meeting in 1993. The meeting would have taken place months after he received his first cash payment from Schreiber.

Ambassador says he didn't hear of proposal

Mulroney said the purpose of the meeting was not to try to sell the government the vehicles but to “begin the process of sounding out” whether China, a permanent member of the UN Security Council, would support the idea of standardized equipment for peacekeeping missions.

Mulroney said Chinese officials seemed to be in general favour of the proposal.

But Fred Bild, the former Canadian ambassador to China from 1990 to 1994, told the inquiry on Thursday that he never heard about the proposal and the embassy never heard about it.

Bild said the Chinese government would most likely have contacted the embassy to inquire about the proposal even if the proposal was a vague idea.

“The more vague it was, the more questions they would have had,” he said.

Bild made the same claims in a joint investigation by CBC News and the Globe and Mail in 2008.