Anticipated Result: High levels of compliance are achieved and non-compliance is identified and addressed

The CCRA's compliance measures for filing, registration, and reporting indicate continued strong overall performance for 2003-2004 (Exhibit 6). It is our view that quality service and processing returns efficiently contributes to these strong levels of voluntary compliance. There will be some instances, however, where individuals and businesses fail to comply with Canada's tax laws whether intentionally or not.

The CCRA delivers a wide range of programs to ensure that Canadians pay their required share of taxes and to protect Canada's tax base. The robust set of checks and balances that we have put in place allows us to target our compliance and enforcement activities towards areas of highest risk and to minimize the compliance burden for individuals and businesses. These checks and balances address inappropriate tax remittance and facilitate early detection of reporting errors. They include both preventive and detective controls, such as source deductions, information slip matching, and compliance research, as well as audits, examinations, and prosecutions. Figure 4 illustrates the key elements of non-compliance with tax obligations.

Figure 4 Compliance Measures

We rely on information from our compliance programs and other indirect means to make a qualitative assessment of reporting compliance. Our judgement is that, while non-compliance is material, it remains relatively low, in line with prior years and comparable to other OECD countries.

Employers have a significant responsibility to promote compliance. They are responsible for payroll deductions, remitting to us those amounts that are deemed “in trust for the Receiver General for Canada”, and for reporting employment-related earnings to the Government of Canada. Almost 1.5 million employers withheld and remitted some $162.6 billion in source deductions in 2003-2004, or more than 85% of gross receipts for personal income tax. While voluntary compliance among employers remains high at approximately 90% for meeting their obligations to withhold and remit payroll taxes, we assessed close to an estimated $1.25 billion in 2003-2004 in outstanding payroll taxes through our Payroll Trust Accounts Program, an increase over 2002-2003 of $175 million in assessments.

Through our T1 matching program, amounts reported by individuals for a wide range of income and deduction items (such as wages and interest income) are compared to the amounts reported on third-party information slips. Compliance with respect to these items remains high overall and, for the minority of taxpayers who make reporting errors, the matching process allows us to effectively identify and correct these errors. This year, we assessed $184 million in taxes under the program.

The CCRA maintains an active program to identify taxpayers who do not comply with the legislation governing filing and GST/HST registration. In 2003-2004, this program identified over three-quarters of a million individuals and businesses that were not in compliance with their filing and registering requirements (Figure 5).

Figure 5 Non-Filers and Non-Registrants identified

The CCRA targets the largest share of its compliance activities on areas of high risk, a strategy designed to make the administration of the tax system more effective, ensure the recovery of the appropriate amount of tax, and impose a smaller burden on compliant taxpayers. We believe that our targeting is largely effective. For example, for key credit and deduction items not subject to third-party reporting, we conduct random verifications to assess compliance risks and to guide our targeted validation activities. Based on the 2002 tax year, overall compliance for these items remained high at 89.9%, a result which is comparable to last year.

CCRA audit and review activities related to reporting compliance are supported by sophisticated computerized risk assessment systems that examine all individual and corporate income tax filers, as well as all GST/HST accounts. Those tax accounts that display characteristics suggestive of non-compliance are flagged and their relative risk is used as a criterion for prioritizing further compliance actions. Figure 6 demonstrates that, for 2003-2004, the percentage of tax accounts flagged as having substantive risk remained relatively constant for corporate tax filers, while there was a marginal increase for self-employed individuals to 29%, and a marginal decrease to 17% for GST/HST accounts.

Figure 6 Estimated Percentage of Business Accounts Deemed to be at Substantive Risk of Non-Compliance

We are continually working to ensure the effectiveness of our risk assessment systems. In 2003-2004, we implemented 21 new criteria for identifying non-compliance and refined several others. In addition, we produced two reports demonstrating the effectiveness of the national risk assessment system in flagging high risk files for individual and corporate income tax filers. Based on the information from the 2000 taxation year, audits of highest risk returns had significantly higher average levels of non-compliance detected than audits of low risk returns, by a factor of 4.4 times for individual and 4.3 times for corporate tax filers. Similarly, for our Processing Review Program, the adjustment rates for targeted reviews stood at 26% compared to 14% for random reviews. These studies indicate that our targeting criteria are effective in differentiating risk.

We audit all types of tax returns. High risk returns and complex files are given closer scrutiny when selecting our audit workload, and their coverage rates are significantly higher. A study completed in 2003-2004 showed that, for returns of corporate income tax filers, the highest risk taxpayers were 10.4 times more likely to be selected for an audit than those taxpayers that were identified as low risk.

We use audit coverage rates as part of managing our programs. The rates vary depending on the risk and the taxpayer population under consideration. Since 2001-2002, additional funding from the Government of Canada has allowed us to gradually increase the number of audits we complete. While we reviewed more files than originally planned this past year, overall we fell short of our commitments to the Government of Canada for audit coverage rates (see Figure 7 and Figure 8), mainly due to increases in the taxpayer populations. Adjusting for population growth, we met our targets for all areas except corporate files in the small and medium sector.

Figure 7 Audit Coverage Rate – Large Business

Figure 8 Audit Coverage Rates – Small and Medium Business and GST/HST Files

In November 2003, the 17^th Report of the Standing Committee on Public Accounts recommended that the we summarize recent initiatives and pilot projects designed to strengthen the compliance and enforcement activities of the CCRA. Accordingly, we report that we have instituted a more stringent registration process and enhanced review and analysis to ensure the validity of new registrants. Furthermore, 147 additional auditors were hired to review GST/HST claims before payments are issued.

In addition to these improvements to our administration and enforcement of the GST/HST, we recognize that the criminal economy—such as organized crime, including drug dealing, and money laundering—has evolved to become more sophisticated, diversified, and internationally focused. Based on police and other law enforcement reports, this sector is known to be substantial in size, representing a potentially large revenue loss to the Government of Canada. Under our Special Enforcement Program, the CCRA conducted 1,100 audits in 2003-2004 of taxpayers suspected of earning income from the illegal economy. These audits resulted in the identification of $55.9 million in additional tax owing.

Tax fraud and evasion represent the most flagrant instances of non-compliance with tax statutes. During 2003-2004, 214 income tax and GST/HST investigations were referred to the Department of Justice for prosecution, compared to 198 cases in the previous year. As a result of referrals to the Department of Justice (current and previous years), 223 cases resulted in convictions for tax evasion or fraud in 2003-2004. The courts imposed $11.6 million in fines and 42.5 years of jail sentences. These convictions related to revenue loss of $15.8 million. We obtained convictions in 96% of cases prosecuted. In addition, the Ministère du Revenu du Québec, acting on our behalf, referred 31 GST investigation cases for prosecution and, based on these and previous year referrals, Quebec courts convicted individuals and businesses in 66 cases, and levied $2.1 million in fines. Quebec GST convictions related to revenue loss of $3 million. Court results are publicized in local, regional and national media to communicate the consequences of fraud committed against the Canadian public and to maximize the deterrent effect of these prosecutions.

The CCRA identifies issues and makes recommendations to the Department of Finance for legislative changes to reduce risks relating to non-compliance. For instance, in 2003-2004, we contributed to the development of proposals towards introducing new legislation limiting the tax benefits of charitable donations made under tax shelter and other arrangements.

To reduce risks of non-compliance, the CCRA provides businesses with support and tools to comply with tax legislation. Large corporations involve many controlled companies and foreign affiliates; they engage in transactions that require highly complex interpretations of law. The CCRA also provides support to large corporations through the use of audit protocol agreements, participation in which remained almost constant through 2002-2003 and 2003-2004.

Transfer pricing is a major component of our complex international workload and deals mostly with large corporations. We address the elements of risk in transfer pricing by focusing on industry specific issues; offshore transactions; valuation of intangible assets, loans and financing; and the restructuring of entity operations to push profits out of Canada. By applying CCRA resources on files with highest risk, we assessed close to $1.1 billion in 2003-2004 in tax from adjustments in international transactions, including transfer pricing.

In addition to addressing the compliance challenges resulting from open global markets and new technologies—which support capital mobility—we developed an e-commerce compliance strategy scheduled for implementation in 2004-2005. This past year, we completed 155 audits of small and medium-sized businesses operating over the Internet to better understand the e-commerce environment, and to increase our ability to assess and address the risks of non-compliance in this sector. The key findings of the first phase of this initiative indicate a need for additional CCRA audit activity focused specifically on businesses transacting business over the Internet, as distinct from those who advertise on the Internet.

In June 2002, the 23rd Report of the Standing Committee on Public Accounts recommended that the CCRA report the number of completed treaty negotiations; the number of treaties that require further negotiation; and the total amount of non-resident income tax collected and the total un-assessed non-resident income. Accordingly, we report that, as of March 31, 2004, Canada has 81 tax treaties concluded by the Department of Finance and in force in 2004. Eight treaties have been signed but are not yet in force; 20 are under negotiation or renegotiation. The amount of tax-at-risk in cases currently under review involving the use of offshore tax planning arrangements is estimated at $537 million. In addition, the most recent figures show that approximately $3.75 billion in tax was paid by non-residents of Canada on income earned from Canadian contract services, investments, pensions, disposition of taxable Canadian property, and other sources taxable in Canada.

Overall, our programs to address non-compliance resulted in a total fiscal impact in 2003-2004 of $10.2 billion (Figure 9). These results exceeded our commitment of $8.5 billion to the Government of Canada by 20%. We estimate that approximately 16% of this amount will be subject to appeals and another 6% will be uncollectible.

Figure 9 Total Gross Fiscal Impact of 2003-2004 Tax Compliance Activities

Total fiscal impact includes federal and provincial tax (participating provinces only), federal tax refunds offset or reduced, interest and penalties, and present value of future tax assessable. International tax programs also generated protective assessments of $445 million in 2003-2004 that are not included in the total fiscal impact.

* Other Audit Programs includes Tax Avoidance, International Tax Programs, Tax Incentives and Investigations.

In their May 2004 release of Guidance Note: Managing and Improving Tax Compliance, the OECD recommended the application of a Compliance Measurement Framework (CMF) to provide a systematic approach to monitoring and measuring compliance. The CCRA had already begun to do this, having developed and pilot tested a CMF in 2003-2004 to analyze and monitor compliance indicator data. During the pilot year, we identified, tested, and refined 150 compliance indicators and established benchmark values for a core set of them. A new database management system, the Compliance Measurement Information System (CMIS), was released in October 2003 to capture and store information required for the annual reporting of compliance indicators. By the end of the fiscal year, 97% of the data for three previous years had been collected, and is now being analyzed and validated.

We recognize that today's economy reflects an increasingly complex and sophisticated world, so we began a thorough internal review in 2003-2004 to examine our approach to compliance. This review aims to identify the CCRA's key compliance priorities, develop effective compliance strategies, and identify the actions necessary to ultimately improve compliance. In addition, this may help us address observations made by the Auditor General of Canada report on the CCRA's Audits of Small and Medium Enterprises, where it was noted that the CCRA should ensure that all threats to the tax base were identified and considered in a consistent manner to support our allocation of available resources.

Date modified:

2004-10-28