Audit of Tax Relief for Deployed Operations

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Timeliness

The majority of members tested for 2018 had tax relief applied or terminated within a month of the start or end of deployment.

• For 21 members, tax relief was processed over a month after start or end dates, resulting in pay adjustments up to several months after the effective dates to retroactively correct the tax deducted from pay.

Expectations for timeliness of tax relief have not been defined.

• Some organizations process tax relief on a delayed or periodic basis as a matter of practicality but these expectations have not been communicated to members.
  • For example, the RCAF processes tax relief on a quarterly basis for members assigned to sustainment flights. The RCAF has issued supplementary direction to address these scenarios.
• Unique application scenarios for particular organizations or activity types contribute to differences in the timing of pay processing for tax relief.

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Timeliness – Recommendations

ADM(RS) Recommendation

4. It is recommended that SJS, in consultation with MILPERSCOM, coordinate with force generator and force employer organizations to develop targeted tax relief guidance and communicate service expectations for their pay offices and members outlining unique application scenarios in terms of start and stop dates and timeliness of processing.
   OPI: SJS
   OCI: MILPERSCOM, VCDS, CJOC, CANSOFCOM, RCN, CA, RCAF

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Monitoring and Oversight

Monitoring programs for tax relief have not been established.

• A strategy for monitoring of tax relief is not yet in place. Monitoring may include ongoing and periodic reviews to ensure the continued integrity of benefit administration.
• Considerations may include elements such as automated controls or exception analysis on anomalous transactions, reconciliation of deployed members with related data, and confirmation of deployed members by force employers.
• The Quality Assurance Program for Regular/Reserve Member Pay (developed by MILPERSCOM in August 2016) does not include tax relief in its scope or risk assessment.
• Instructions and checklists for Staff Assistance Visits and Staff Inspection Visits do not currently include consideration of tax relief transactions.

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Monitoring and Oversight (p.2)

Reporting on tax relief has not been fully developed.

• The tax relief benefit provides broad discretion to the Minister of National Defence or designate in the determination of eligible missions. Proactive disclosure of tax relief as part of a broader reporting strategy would improve transparency over the application of this benefit.
• The Interim Directive requires the submission of an annual report to the Minister of National Defence to list the missions determined to be eligible for tax relief. The requirement does not include reporting on other elements which may improve transparency and regular review of mission status such as the number of members receiving tax relief, their location, the nature of their activities or the tax revenue foregone.
• An updated list of eligible missions and activities is also needed to provide an authoritative reference to members and pay offices, and to improve visibility in the application of tax relief.
• Some tax relief transactions were processed using generic mission codes in the pay system. While not affecting the calculation of tax relief, this may impede the analysis and reporting of tax relief information, and may affect other benefits and entitlements (for example, catch-all "other" codes that are used for several different missions).

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Monitoring and Oversight – Recommendations

ADM(RS) Recommendations

5. It is recommended that MILPERSCOM, in consultation with SJS, force generator and force employer organizations, develop and implement a strategy to monitor tax relief. Key considerations include the following:
   • Development of automated controls and templated reports for analysis and validation; and
   • Inclusion of tax relief as part of existing monitoring programs for military pay.
   OPI: MILPERSCOM
   OCI: SJS, CJOC, CANSOFCOM, RCN, RCAF, CA, VCDS
   
6. It is recommended that SJS, in consultation with MILPERSCOM, develop and implement a strategy for reporting on tax relief to ensure continued transparency. Key considerations include the following:
   
   • Reporting periodically on the tax relief provided, including the missions eligible, number of members affected and the resulting fiscal impact; and
   • Making available to pay offices and to CAF members a list of all missions (unclassified and classified) authorized for tax relief.
   OPI: SJS
   OCI: MILPERSCOM

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Conclusion

DND/CAF has made substantial progress to implement tax relief to members on deployed operations. This is particularly notable considering the complexity of related processes, multiple stakeholders and the timelines involved.

Tax relief tested was appropriately administered to provide benefits to eligible members. It was generally accurate and, for the majority of cases, processed in a timely manner.

Additional work is needed to ensure a fully functioning control framework to promote consistency in application, communicate expectations, improve transparency, and establish monitoring controls and oversight. Consideration should be given to the following elements:

• issuing a Final Directive on tax relief, including a statement of policy objective or intent;
• reviewing tax relief transactions processed as part of initial implementation;
• providing clear and specific instructions to pay offices;
• communicating service expectations to members based on unique application scenarios;
• implementing mechanisms for ongoing and periodic monitoring; and
• reporting on authorized missions and tax relief activity.

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Annex A—Management Action Plan

ADM(RS) uses recommendation significance criteria as follows:

• Very High—Controls are not in place. Important issues have been identified and will have a significant negative impact on operations.
• High—Controls are inadequate. Important issues are identified that could negatively impact the achievement of program/operational objectives.
• Moderate—Controls are in place but are not being sufficiently complied with. Issues are identified that could negatively impact the efficiency and effectiveness of operations.
• Low—Controls are in place but the level of compliance varies.
• Very Low—Controls are in place with no level of variance.

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Annex A—Management Action Plan (p.2)

Eligibility of Missions and Members

ADM(RS) Recommendation (Low)

1. It is recommended that MILPERSCOM ensure the approval and issuance of the Final Directive on tax relief, which should include a clear statement of the intent of the benefit.

Management Action

The Final Directive is being finalized and will include a statement of the intent of the benefit. The goal remains to issue a CDS/DM Directive on tax relief by Winter 2019.

OPI: MILPERSCOM
Target Date: March 31, 2019

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Annex A—Management Action Plan (p.3)

Accuracy

ADM(RS) Recommendation (Moderate)

2. It is recommended that MILPERSCOM, in consultation with force generator and force employer organizations, confirm the validity and accuracy of the members without cease dates in the pay system that were processed as part of the initial implementation of tax relief.

Management Action (to be revised by MILPERSCOM as applicable)

A query was done in the Central Computerized Pay System to determine those members who had tax relief implemented on the initial load effective January 1, 2018, and who still had tax relief running with a cease date of December 31, 9999 in which we identified 19 members. There have been 12 members that have already been resolved and there are currently 7 outstanding members that still need to be resolved.

The members' pay offices will need to be contacted to confirm the dates of members' tax relief, and then cease the tax relief transactions accordingly. The outstanding accounts should be taken care of by the end of 2018.

OPI: MILPERSCOM
OCI: VCDS, CJOC, CANSOFCOM, RCN, CA, RCAF
Target Date: December 31, 2018

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Annex A—Management Action Plan (p.4)

Accuracy

ADM(RS) Recommendation (High)

3. It is recommended that MILPERSCOM publish and communicate administrative instructions to all pay offices including instructions for data entry of tax relief in the pay system, and clearly communicate acceptable supporting documentation.

Management Action (to be revised by MILPERSCOM as applicable)

This will be actioned by Military Pay Procedures Compliance when the Final Directive is written. If the Final Directive is written by early 2019 it is estimated that the Military Pay Administration Instruction (MPAI) could be published by end 2019. 

The MPAI will include the following clearly defined types of information: appropriate documentation required to support tax relief, pay system instructions, definition of key dates and monitoring procedures.

Military Pay Administration Officer/Pay Manager will be responsible to run the applicable Report Management Distribution System report for Tax Relief monthly, ensure the listed personnel are still entitled to the benefit, and take action where necessary.

OPI: MILPERSCOM
Target Date: December 31, 2019

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Annex A—Management Action Plan (p.5)

Timeliness

ADM(RS) Recommendation (High)

4. It is recommended that SJS, in consultation with MILPERSCOM, coordinate with force generator and force employer organizations to develop targeted tax relief guidance and communicate service expectations for their pay offices and members outlining unique application scenarios in terms of start and stop dates and timeliness of processing.

Management Action (to be revised by SJS as applicable)

In consultation with MILPERSCOM, force generator and force employment organizations, SJS will coordinate efforts to ensure the development of tax relief guidance and service expectations targeted to CAF pay offices and members to account for unique application scenarios in terms of start and stop dates and timeliness of processing, in keeping with the letter and spirit of the Income Tax Act, Treasury Board compensation principles and the CAF Final Directive on Income Tax Relief.

OPI: SJS
OCI: MILPERSCOM, VCDS, CJOC, CANSOFCOM, RCN, CA, RCAF
Target Date: Tax relief guidance and service expectations to be developed and issued to pay offices and members by March 31, 2020.

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Annex A—Management Action Plan (p.6)

Monitoring and Oversight

ADM(RS) Recommendation (High)

5. It is recommended that MILPERSCOM, in consultation with SJS, force generator and force employer organizations, develop and implement a strategy to monitor tax relief. Key considerations include the following:
   • Development of automated controls and templated reports for analysis and validation; and
   • Inclusion of tax relief as part of existing monitoring programs for military pay.

Management Action

This will be actioned in part by the Military Pay Procedures and Compliance Quality Assurance (QA) Section. As per Pay Solutions, Tax Relief does not have a specific code on which to draw from for the random sample of pay transaction both High and Low Risk. (This is how the QA Program currently works). Therefore, annually it is suggested that the QA section have a special project to run the Tax Relief transactions for the year and randomly review the transactions based on stated criteria as per the Tax Relief MPAI (yet to be written). The QA section may require more resources to complete the review. The QA section is in its infancy so manning requirements long term have yet to be determined in relation to taking on additional special projects on an annual basis.

The Pay Offices currently run a monthly Report Management Distribution System report and review all of the transactions to ensure that members listed are still entitled to the tax relief benefit and take action when required. At this time the Military Pay Administration Officer (MPAO) would notice any unusual transactions and could refer to the paperwork submitted. This is where true problems are picked up quickly.

Tax Relief is reviewed as part of the Staff Assistance Visits (SAV) and Staff Inspection Visits (SIV) conducted by the Level 1 SAV Teams and DMPAP SIV Teams. The tax relief transaction is supported by a voucher (CF442) which is currently reviewed as part of the pay files.

OPI: MILPERSCOM
OCIs: SJS, CJOC, CANSOFCOM, RCN, RCAF, CA, VCDS
Target Date: December 31, 2019

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Annex A—Management Action Plan (p.7)

Monitoring and Oversight

ADM(RS) Recommendation (High)

6. It is recommended that SJS, in consultation with MILPERSCOM, develop and implement a strategy for reporting on tax relief to ensure continued transparency. Key considerations include the following:
   • Reporting periodically on the tax relief provided, including the missions eligible, number of members affected and the resulting fiscal impact; and
   • Making available to pay offices and to CAF members a list of all missions (unclassified and classified) authorized for tax relief.

Management Action (to be revised by SJS as applicable)

To ensure continued transparency and awareness of program costs, SJS will report annually on income tax relief.

SJS will meet the reporting requirement, currently in accordance with the Interim Directive, to annually produce for the Minister of National Defence, a list of all international operational missions that have been approved for the purpose of income tax relief.  Additionally, SJS will work with MILPERSCOM to determine and report annually to the Minister, the total cost of the program, by either actual costs based on individual benefits received (if feasible) or by accurate estimation based on data from the Canadian Forces Tasks, Plans and Operations system and the Cost Factors Manual.

To ensure that pay offices and CAF members are aware of which missions have been approved for the purpose of income tax relief, SJS will provide MILPERSCOM a list of all such missions, while respecting the security requirements of classified operations, for MILPERSCOM's subsequent distribution as appropriate. Additionally, as soon as practicable after approval, SJS will advise MILPERSCOM of all new missions that have been designated by the CDS for the purpose of income tax relief.

SJS will ensure any further requirement for standing or ad hoc reports are met in a timely manner.

OPI: SJS
OCI: MILPERSCOM
Target Date: March 1 (annually, commencing in 2019), list of all eligible missions in the previous calendar year to the Minister of National Defence and MILPERSCOM, plus figures on program costs incurred over the previous calendar year to the Minister of National Defence. Immediately upon notification, list of new missions approved by the CDS for income tax relief to MILPERSCOM.

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Annex B—Sampling Methodology

• Tax relief was provided to 8,831 members in 2017. Between January 1 and April 30, 2018, tax relief was provided to 5,157 members.
• Audit procedures were performed on a non-statistical sample chosen judgmentally of 91 tax relief transactions posted in the pay system from January 1, 2017 to April 30, 2018. The sample was chosen judgmentally to ensure inclusion of all environments which play a role in processing pay. Tax relief transactions could be for tax relief for the start of a deployment, termination of a deployment, a combination of both or an adjustment to a previously recorded transaction amount.
• Most of the sampled tax relief transactions were processed by pay offices managed directly by CJOC. The remaining samples were processed by force generator pay offices.
• 52 of the 91 samples reviewed were for deployments that began in the 2017 calendar year. The remaining 39 samples were for deployments for the period from January 1 to April 30, 2018.
• Testing was extended to validate both start and stop dates in cases where supporting documentation was provided. Both start and stop dates of the deployment were examined in 72 of the 91 samples. For the remaining 19 samples, only the start of the deployment was examined as the members' deployment extended beyond the testing period.