Audit of Tax Relief for Deployed Operations

ADM(RS)
Assistant Deputy Minister (Review Services)
CA
Canadian Army
CAF
Canadian Armed Forces
CANSOFCOM
Canadian Special Operations Forces Command
CDS
Chief of the Defence Staff
CJOC
Canadian Joint Operations Command
DM
Deputy Minister
DND
Department of National Defence
MPAI
Military Pay Administration Instruction
MILPERSCOM
Military Personnel Command
OCI
Office of Collateral Interest
OPI
Office of Primary Interest
QA
Quality Assurance
RCAF
Royal Canadian Air Force
RCN
Royal Canadian Navy
SJS
Strategic Joint Staff
VCDS
Vice Chief of the Defence Staff
Table 1. Timeline
Date Key events
June 7, 2017
  • Enhanced tax relief announced as an initiative of Canada's defence policy: Strong, Secure, Engaged.
November 10, 2017
  • CDS/DM issues Interim Directive on "Criteria for Determining Deployed International Operational Missions for 2017."
December 2017
  • MILPERSCOM issues orders to inform CAF members of tax relief; the Royal Canadian Navy (RCN), Canadian Army (CA), and Royal Canadian Air Force (RCAF) issue further orders over the following months with information and instructions for their members.
December 2017 / January 2018
  • MILPERSCOM issues instructions to pay offices to outline the enhanced tax relief initiative and requirements for initial processing of tax relief.
  • MILPERSCOM processes tax relief for 2017 through adjustments to T4 slips.
  • MILPERSCOM processes bulk upload of members whose deployments continued over year-end in pay system to ensure they receive tax relief for the month of January.
Spring / Summer 2018
  • CAF members receive tax refunds as 2017 tax returns are filed based on adjusted T4 slips (Canada Revenue Agency administratively implements tax relief in anticipation of Royal Assent).
June 21, 2018
  • Royal Assent of legislation received.
Winter 2019
  • CDS/DM to issue Final Directive on tax relief.
Table 1 Details - Timeline 

Table 1 Summary: This table is a timeline of key events in the implementation of enhanced tax relief. It begins with the date when enhanced tax relief was first announced as an initiative in Canada’s defence policy: Strong, Secure, Engaged until the time the Final Directive is to be issued.

The table consists of 2 columns and 7 rows. The first column consists of seven key dates in the development and implementation of tax relief. The second column describes the development or implementation milestone.

Table 2. Multiple Stakeholders Are Involved
Stakeholder Role

Chief of the Defence Staff

  • Designated by the Minister of National Defence to determine eligibility for tax relief.
  • Issues directives for new operations outlining the terms of members' deployments, including the operation's eligibility for tax relief.

Strategic Joint Staff

  • Reviews eligibility for tax relief for new operations and activities, and recommends approval by CDS by including a statement on tax relief eligibility in the CDS directive for each new operation.
  • Coordinates the Operational Mission Adjudication Committee to adjudicate specific cases of tax relief eligibility.

Military Personnel Command

  • Administers military pay and provides direct support to pay offices, including payroll support, guidance, training and oversight.
  • Developed the Interim CDS/DM Directive in respect of tax relief and is responsible for coordination of the Final Directive (expected to be released in Winter 2019).

Force Employers

  • Operational level commanders responsible for the command, control and sustainment of allocated forces.
  • Include Canadian Joint Operations Command (CJOC), Canadian Special Operations Forces Command (CANSOFCOM) and allied nations.
  • Pay offices managed by force employers process tax relief for members on operations. CJOC processes tax relief for most members. Vice Chief of the Defence Staff (VCDS) pay offices process tax relief for members working with allied nations.

Force Generators

  • Commanders responsible for organizing, training and equipping forces for force employment.
  • Include RCN, CA, RCAF and CANSOFCOM.
  • Pay offices managed by force generators process tax relief for their members.
Table 2 Details - Multiple Stakeholders Are Involved
Figure 1
Figure 1. General Application of Tax Relief. * Service-specific scenarios introduce additional considerations in how tax relief is applied for CAF members deployed in different types of environments or activities..
Details of Figure 1 - Overview of General Application of Tax Relief

Summary of Figure 1: This figure describes the general application of how the tax relief period begins and ceases for Canadian Armed Forces members.

The figure consists of 2 columns and 2 rows. The first column consists of 2 boxes. The first box describes the circumstances when tax relief generally starts for a member. Below the box there is an arrow that points downward to the second box. The second box outlines the role of the pay office in this process. The second column consists of 2 boxes. The first box describes the circumstances when tax relief generally ends for a member. Below the box there is an arrow that points downward to the second box. The second box outlines the role of the pay office in this process.

Table 3. Service-Specific Application of Tax Relief
CAF Members Tax Relief Considerations

RCN

  • Tax relief eligibility for members deployed on ships is based on the transfer of operational command between RCN and CJOC. However, this transfer may occur at some time after a ship's initial departure from Canada.

CA

  • CA members typically follow the general application for tax relief, where the change of operational command coincides with the departure from and return to Canada.

RCAF

  • RCAF members assigned to sustainment flights do not involve a change of operational command, but are eligible for tax relief upon departure from and return to the Wing of Assignment.

CANSOFCOM

  • Commences upon departure from Canada; ceases upon return to Canada. As CANSOFCOM is both a force employer and force generator, there is no transfer of operational command.

Personnel not force generated from Canada

  • Commences upon departure from assigned base in allied nation following transfer of operational command to the force employer; ceases upon return to assigned base and transfer of operational command back to the force generator.

VCDS Out-of-Canada Programme

  • CAF members performing activities under Operation ORION are determined to be serving on an eligible mission for tax relief. Eligibility for each member is assessed and recommended on a case-by-case basis by VCDS and SJS for approval by the CDS.
Table 3 Details - Service-Specific Application of Tax Relief 

Table 3 Summary: This table describes service-specific tax relief considerations in key circumstances where Canadian Armed Forces members may be deployed.

The table consists of 2 columns and 6 rows. The first column lists the six circumstances where CAF members may be deployed. The second column describes specific tax relief considerations for each circumstance with respect to eligibility and timing.

Table 4. Audit Objective, Criteria and Scope

Objective

To assess if enhanced tax relief is applied to eligible missions and members for the correct amount and at the right time in accordance with policy and directives.

Criteria

  • Tax relief was provided for eligible missions and activities (2017, 2018).
  • Tax relief was provided to eligible members (2017, 2018).
  • Tax relief benefit was accurate with correct start/stop dates without exceeding thresholds (2017, 2018).
  • Members received tax relief on a timely basis (2018: January 1 to April 30).
  • Processes are in place to adequately sustain tax relief (2018).

Scope

  • Includes: Processes and transactions for the tax relief benefit from January 1, 2017 to April 30, 2018.
  • Excludes: Processes for pay and allowances not specific to the tax relief benefit (e.g. delegation of authorities, pay system controls, pay processing controls); costing of tax relief.
Table 4 Details - Audit Objective, Criteria and Scope

Table 4 Summary: This table describes the audit objective, audit criteria and scope and explains the rationale for the audit.

The table consists of 2 columns and 2 rows. The first column explains the audit objective. The first row describes the five audit criteria. The second row explains the audit scope inclusions and exclusions.

Table 5. Summary of Findings
Tax relief benefits tested were provided to eligible members on eligible missions. Considering the scope of work, extent of stakeholders, and tight timeframes, benefits were generally processed in an accurate and timely manner. To ensure the ongoing integrity of the benefit, improvements are needed to define and meet service expectations for members and instructions to pay offices, and to develop and implement monitoring and reporting strategies.

Eligibility of missions and members

  • Criteria for determining eligibility have been developed.
  • The Directive could serve to further reinforce the intent of the tax relief benefit.
  • Tax relief was provided only for authorized eligible missions.
  • Tax relief was provided for eligible members.

Accuracy

  • Tax relief benefits tested were generally accurate.
  • A limited number of transactions processed as part of the initial implementation of tax relief may contain errors.
  • Requirements for supporting documentation are unclear.
  • Start and stop dates for tax relief were applied inconsistently by pay offices.

Timeliness

  • The majority of members tested for 2018 had tax relief applied or terminated within a month of the start or end of deployment.
  • Expectations for timeliness of tax relief have not been defined.

Monitoring and oversight

  • Monitoring programs for tax relief have not been established.
  • Reporting on tax relief has not been fully developed.

● Processes generally in place and operating effectively / ◐ Some deficiencies or areas for improvement /○ Processes to be developed or implemented

Table 5 Details - Summary of Findings

Table 5 Summary: This table provides a summary of the audit observations for each of the five audit criteria.

The table consists of 2 columns and 6 rows. The first row consists of an overall assessment for the audit. The first column provides a symbol to describe if there is a process in place and operating effectively, an area of improvement was noted, or a process has yet to be developed or implemented. Each audit criterion is assigned one of the three symbols depending on the status of the finding. The second column describes in further detail the audit findings for each of the five criteria. The last row provides a legend to the symbols used.

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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.

Expectations for timeliness of tax relief have not been defined.

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Timeliness – Recommendations

ADM(RS) Recommendation

  1. 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.

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Monitoring and Oversight (p.2)

Reporting on tax relief has not been fully developed.

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Monitoring and Oversight – Recommendations

ADM(RS) Recommendations

  1. 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

  2. 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:

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Annex A—Management Action Plan

ADM(RS) uses recommendation significance criteria as follows:

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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)

  1. 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)

  1. 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)

  1. 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)

  1. 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)

  1. 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

Sample composition

Tax relief transactions processed by:

CJOC    43
CANSOFCOM   11
RCN   17
CA    2
RCAF  13
Out-of-Canada      
programme    5
91

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