Purpose

The purpose of this document is to provide an update on the Canada Revenue Agency’s (CRA's) Canada Emergency Wage Subsidy (CEWS) post-payment audit program, including results, findings, and observations with respect to the Office of the Auditor General’s (OAG) Report 10 – Specific COVID-19 Benefits tabled in Parliament on December 6, 2022. The results and related observations noted in this document represent the CRA’s position as of March 31st, 2023, and are subject to change as compliance activities progress.

Scope

This document provides a detailed overview of CEWS post-payment audits.

Post-payment CEWS Audits – Key Findings

Results of completed post-payment audits demonstrate high levels of compliance. Over 94% of amounts reviewed have been approved. Some key highlights are as follows:

• Post-payment audits completed by March 31, 2023, represent $5.53 billion of the total $100 billion in CEWS funds disbursed.
• The completed audits have identified $325 million in claims that were reduced or denied.
• There are post payment audits in progress which represent an additional $10.35 billion in CEWS claims where the CRA has determined there may be risk of ineligibility or overpayment.

In cases where adjustments are being made, these are largely due to unintentional errors and lack of supporting documentation, or where no response was provided by the employer to the CRA. Some of these adjustments may subsequently be reversed if satisfactory supporting documentation is provided by the employer during the recourse process.

In cases where penalties were applied, over 86% apply to files linked to certain third-party preparers of business subsidies which were identified through the CRA’s risk assessment process and demonstrate suspected willful and/or aggressive non-compliance. For the purposes of this report, a preparer can be defined as an individual or business filing CEWS applications on behalf of another business, or group of businesses.

The highest rate of compliance is found in the large business segment, where only 2% of the amounts audited were reduced or denied. While the smallest businesses (less than 25 employees) demonstrated a change rate of 35%, this primarily reflects adjustments to amounts paid rather than ineligibility. Nearly 40% of these cases were adjusted due to administrative issues such as a lack of supporting documentation or a failure by the employer to respond to requests for documentation by the CRA. With respect to registered charities, the non-compliance identified was largely the result of a technical determination of ineligibility. Some registered charities were found to be public institutions and therefore ineligible for the CEWS. These claims were denied in full.

The CRA did observe that there is some overlap between the payments identified for further investigation by the OAG and those identified for review by the CRA. Over 53% of employers identified by the OAG have undergone a compliance action by the CRA either through manual pre-payment verification or post-payment audit or are identified for further review as part of CRA’s post-payment audit program. Of the completed audits within this overlap (representing $3.95 billion of CEWS claims), $134.5 million of amounts claimed have been denied or adjusted. Insufficient revenue decline accounted for 14% of these adjustments.

These results support the CRA’s risk-based approach to selecting audits, which includes Goods and Services Tax/Harmonized Sales Tax (GST/HST) data along with a variety of other risk elements.

Audit Selection

Comprehensive post-payment audits are being undertaken to examine employers that warrant further review based upon risk assessment criteria. These audits entail a thorough review of supporting documentation and are carried out in accordance with audit standards, protocols, and policies, consistent with the CRA’s regular audit programs.

The audits are identified and undertaken using a risk-based approach which aligns with international best practices and existing audit programs. This ensures that higher-risk claims are addressed using appropriate compliance measures, while acknowledging principles of sound stewardship of public funds.

To identify risk, the CRA applies comprehensive risk assessment processes, using business intelligence tools and sophisticated algorithms. The algorithms take into consideration a variety of data elements, including GST/HST, payroll and income tax filing information, compliance history, accounting methodologies and business intelligence derived from CEWS claims history.

The risk assessment parameters and algorithms were applied to all CEWS claimants, including those identified in Report 10 – Specific COVID-19 Benefits, for post-payment audit identification and file selection.

Post-payment Audit Program – Phased Approach

The CRA employed a phased approach in carrying out the CEWS post-payment audit program, with the lessons learned from each phase informing the next. This approach allows the CRA the flexibility to focus on different areas as audit activities progress and business intelligence is acquired.

• Phase 1 commenced in August 2020, using a combination of risk-assessment and random selection from the claimant population to assist the CRA in better understanding the risks, gauging the level of non-compliance, validating the effectiveness of existing pre-payment validation criteria and obtaining feedback from auditors and employers. The risk-based approach to file selection included pre-payment verification findings and advanced business intelligence tools.
• Phase 2 commenced in November 2021 and targeted the highest risk claimants by using enhanced risk assessment algorithms and lessons learned from Phase 1 completed audits. Phase 2 is ongoing, with additional files being selected based on business intelligence, referrals, and enhanced risk-assessment algorithms to ensure the CRA focuses its audit resources on the claimants who demonstrate the highest level of risk for non-compliance.

Post-payment CEWS audits – Segmentation

The following chart outlines the composition of the CRA’s segmentation of the CEWS claimant population:

Post-payment Audit Results

As of March 31, 2023, the CRA has completed 2,515 audits representing $5.53 billion of CEWS claims. These files were selected for audit as they demonstrated a higher risk of non-compliance. Of the $5.53 billion, $325 million (5.9 %) were denied or adjusted. There are 2,014 audits in progress, representing an additional $10.35 billion in CEWS claims.

Overall, CEWS post-payment audits have found that most employers have applied the rules correctly and have made every effort to comply. Some employers, while eligible, simply did not understand all of the rules and made honest mistakes when filing their applications.

The vast majority of penalties applied (86% or $12.2 million) relate to preparer-linked files. See “Preparer-linked Files” section below for additional information.

Table 1 below provides results of post-payment CEWS audits undertaken by the CRA.

The CRA is finding that the vast majority of applicants correctly applied and met the revenue drop requirements for the CEWS. The most common adjustments were administrative in nature, relating to payroll issues and calculation errors, as well as instances where the employers failed to provide supporting documentation to the auditors.

Table 2 below provides the distribution of change audits based on the reason indicated within the audit case.

More than a quarter of the adjustments outlined above reflect changes made due to a lack of supporting documentation or no response provided by the claimant. Non-compliance cannot be assumed for employers who failed to provide the necessary supporting documents at the time of the audit, as the appropriate supporting documentation may subsequently be provided by a claimant who exercises their recourse rights.

Table 3 below provides post-payment audit results to date, categorized by the claimant segment.

Preparer-linked Files

The CRA is pursuing employers that are suspected of willful and/or aggressive non-compliance, including certain third-party preparers of business subsidy claims who may have promoted and assisted in breaking or bending the rules and knowingly facilitated the production of inaccurate or willfully non-compliant claims.

As of March 31, 2023, over 1,700 CEWS high risk preparer-linked claimants have been identified and will be reviewed by the CRA for potential denial or adjustment. These claimants represent total claims amounting to $186 million for CEWS. It should be noted that although this report focused on CEWS results to date, many of these preparer-linked claimants also applied for the Canada Emergency Rent Subsidy (CERS) which have been identified for review.

Of these files, the CRA has completed 257 audits representing $31.5 million of CEWS claims of which $29 million were denied or adjusted. There are 321 audits in progress representing an additional $23.2 million in CEWS claims. Table 4 below provides the audit results specifically related to these preparer-linked files. This is a subset of the total audits presented in the preceding section.

The rate of adjusted or denied amounts in this preparer-linked claimant segment demonstrates the highest risk of willful and significant non-compliance. As a result, adjustments are expected to continue to be significantly higher for this identified risk segment.

Key observations about this high-risk group are as follows:

• The vast majority (84%) of files fall within the smallest business segment
• The majority (94%) of the audits have resulted in an adjustment, with 92% of the claim amounts being denied
• Some reasons why adjustments were made include:
  • claims made for fictitious employees;
  • non-compliant and/or inactive payroll accounts being used; and
  • previously inactive businesses activated for the purpose of making ineligible CEWS claims.

Potentially ineligible CEWS claims linked to this high-risk segment continue to be reviewed and audited as the CRA’s post-payment compliance actions progress. It is anticipated that additional amounts will be assessed, and gross negligence penalties applied to these claimants, where appropriate. Third-party penalties may also be considered and applied to the preparers who knowingly engaged and facilitated these activities.

Observations related to Auditor General Report 10 – Specific COVID-19 Benefits

Overview

A significant percentage of employers (39%) identified by the OAG as requiring further review are employers with fewer than 20 employees, representing 4% ($426 million) of payments. Although these small businesses represent a large volume of the claimant population, their claim amounts are comparatively very small.

Approximately 1% of employers identified by the OAG are found in the largest business segment with over 1,000 employees, representing close to 30% ($2.9 billion) of total CEWS payments identified.

Table 6 below provides the composition of the 51,049 employers identified by the OAG by employer size.

Key Findings

As noted previously, 53% of employers representing 78% in CEWS claim amounts identified by the OAG as requiring additional review have undergone a compliance action by the CRA either through manual pre-payment verification or a comprehensive post-payment audit, or have been identified for further review as part of CRA’s post-payment audit program.

Of those identified for review, there is significant coverage of the largest employers:

• Employers with 500-4,999 employees: 86% have either undergone a compliance action or have been identified for further review by the CRA.
• Employers with over 5,000 employees: 100% have either undergone a compliance action or have been identified for further review by the CRA.

Table 7 below provides the intersection between employers identified by the OAG and those identified for compliance action by the CRA.

Table 8 below specifies the type of compliance action taken with respect to the 27,144 employers identified by the CRA’s risk-assessment model.

As of March 31, 2023, the remaining 23,905 employers identified by the OAG as requiring additional review have not been selected for post-payment audit based on the CRA’s risk assessment criteria. However, they may be selected for audit should risk be identified in the course of other compliance reviews.

Table 9 below provides the composition of these employers and their associated claim amounts.

Of these 23,905 employers:

• 42% fall within the smallest business population (less than 20 employees), representing approximately 2% ($200M) of payments recommended for further review by the OAG.
• The remaining 58% fall into segments that have demonstrated compliance in completed audits to date (see “Table 11 - Change audits identified in Report 10 by number of employees” below).

Table 10 below provides the post-payment audit results of those employers identified by both the CRA and the OAG, and the additional files that were only identified by the CRA.

The results of the post-payment audits conducted on employers identified by the OAG demonstrate a high level of compliance in the large business population. The most frequent adjustments in change audits were a result of calculation errors (44%). Additionally, only 14% of the files changed were primarily due to insufficient revenue decline. These results also support the CRA’s risk-based approach to selecting audits, which considers GST/HST data along with a variety of other risk elements.

Table 11 below provides an overview of CRA’s post-payment audit results, by employer size, for the claimants that were identified by both the OAG and the CRA.

Conclusion

The CRA results to date confirm that there is a high level of compliance in the CEWS claimant population (over 94%) as the majority of adjustments made have related to calculation errors and lack of documentation rather than confirmed ineligibility. The CRA’s risk-based approach to file selection, which considers a variety of elements, has been shown to be an effective method of identifying potential non-compliance, specifically with respect to cases of suspected willful and/or aggressive non-compliance.

Through risk assessment and internal leads, the CRA has identified claimants that are suspected of willful and/or aggressive non-compliance, including certain third-party preparers of potentially ineligible business subsidy claims. The CRA will continue to pursue all identified cases of aggressive non-compliance.

As stated in the Report 10 – Specific COVID-19 Benefits, a more definitive estimate of payments made to ineligible recipients and amounts to be recovered by the government will only be determined after the Agency has completed post-payment audit activities.