The Reporting Compliance program seeks to protect the integrity of Canada's voluntary compliance system by identifying and addressing the small segment of the population that does not report the correct amounts. The CRA's compliance interventions follow an escalating approach that moves from influencing compliance to enforcing it. The CRA seeks to influence compliance attitudes by increasing taxpayers' understanding of their tax obligations through targeted outreach activities, client service, and education. It also completes examinations, audits, and investigations at the domestic and international level to ensure Canada's tax laws are being followed.
|EXPECTED RESULT||INDICATOR||TARGET||2014-15 RESULTS||2015-16 RESULTS||2016-17 RESULTS|
|Reporting non-compliance is detected and corrected by targeting compliance actions through effective risk assessment||Change rate (percentage of risk-assessed audit activities that result in detection on non-compliance by individuals and corporations)||75%||76%||77%||76%|
International and large business
The CRA helps to ensure that Canada receives its share of taxes from multinational corporations, large partnerships, and trusts with complex commercial and complex financial transactions. The CRA defines its large business population as businesses with over $250 million in revenue. We enforce compliance with Canada's tax legislation by encouraging, assisting, and verifying compliance, doing this through taxpayer consultations, education, legislative reviews, and audits. Using our multinational enterprise centre of expertise in compliance management, the Agency can achieve operational efficiencies to better identify and address risks on specific files, and to ensure a more co-ordinated approach that results in better service and less burden to taxpayers.
This past year, the CRA successfully implemented a risk-based, integrated approach to international and large business audits by creating multidisciplinary teams of specialists to address complex and emerging tax issues. To better target our audit activities on aggressive tax avoidance and transfer pricing, newly-developed IT solutions allow us to assess the compliance risk of 100% of the large business population on a yearly basis. During the 2016-2017 fiscal year, these activities identified a total of $8 billion in fiscal impact.
A main focus of the Agency's international and large business compliance activities is to identify and address abusive tax avoidance. The CRA leads an interdepartmental committee that reviews files and makes recommendations on the application of the General Anti-Avoidance Rule (GAAR), an Income Tax Act provision that received royal assent on September 13, 1988. The GAAR draws a line between legitimate tax minimization and abusive tax avoidance. The GAAR's purpose is to deny tax benefits to any taxpayer where the transactions comply with a literal reading of the provisions of the Income Tax Act and the Excise Tax Act, but are not in accordance with the object, spirit or purpose of the legislation. In such cases, the GAAR may be invoked by the Minister. Between the inception of the GAAR and March 31, 2017, the provision has been applied to 1,093 files. This represents 79% of the referred files. The number of taxpayers reassessed under this provision exceeds the number of files involved, because many arrangements comprise partnerships with multiple partners, a number of related parties, or groups of investors who have participated in avoidance schemes. Of the total number of files where the CRA has applied the GAAR, 66 were appealed to the judiciary system, a number that represents 6% of the 1,093 files mentioned above.
Offshore non-compliance, involving low- or no-tax jurisdictions, continues to be a significant concern for most countries, including Canada. With the growth of the global economy, the rise of electronic commerce, and increased international trade, governments worldwide have witnessed a parallel rise in the development of complex tax schemes to aggressively avoid taxes. The use of offshore jurisdictions to conceal income results in a fiscal cost to governments and taxpayers—and reduces the fairness and integrity of the tax system. The use of aggressive tax avoidance schemes is a challenge for tax administrations around the world.
The CRA is targeting offshore non-compliance on several fronts, including through resource allocation appropriate to the type and level of risk, better access to and use of taxpayer information and third-party data, and increased international collaboration. We continue to play a leadership role in the global network of tax administrations working together to combat offshore tax evasion and aggressive tax avoidance, and to prevent high-net-worth individuals from avoiding their tax obligations. With new resources from Budget 2016 investments, and previous investments, the CRA has:
- increased the number of its auditors and enhanced its risk assessment tools to use new information and identify high-risk, wealthy individuals
- increased the number of auditors focusing exclusively on promoters of aggressive tax schemes
"The Government of Canada is taking action to crack down on tax cheats. When some choose not to pay their share [through the use of offshore accounts], it places an unfair burden on the tax system. We are sending another strong signal to tax cheats: that this behaviour will not be tolerated and they will face the full force of the law. Our Government will continue to update Canadians on these important actions to ensure a tax system that is responsive, fair and meets the needs of all Canadians."
—The Honourable Diane Lebouthillier,
Minister of National Revenue
The Agency is committed to developing predictive and strategic analytics solutions to generate business intelligence. The CRA analyzed 48 offshore jurisdictions as part of its efforts to prioritize countries based on the risk they pose of being havens where taxpayers could conceal income to avoid their tax obligations. Of the 48 jurisdictions reviewed, 21 were identified as high-risk and are considered jurisdictions of concern for Canada. We have adopted a proactive approach of analyzing all international electronic funds transfers by targeting four jurisdictions or financial institutions of concern each fiscal year. As of March 31, 2017, the Agency has:
- analyzed over 41,000 electronic funds transfers worth over $12 billion
- sent over 4,500 nudge letters to taxpayers
- completed or initiated audits of 121 taxpayers
The Agency also finished a study of offshore audits completed between 2014 and 2017 in order to identify tax schemes, financial and non-financial transactions, or taxpayer behaviours related to offshore non-compliance. The study's research identified at least 10 typologies that will contribute to our understanding of some common methods used by Canadian taxpayers to conceal funds offshore for the purpose of avoiding taxes.
The CRA is continuing in its efforts to detect and deter those who help to promote aggressive tax planning or abusive tax avoidance schemes. Between April 1, 2003 and March 31, 2017, the Agency has levied over $262 million in third-party penalties against promoters and tax preparers who advised their clients to participate in aggressive or illegal tax arrangements, plans or schemes. We currently have ten promoter audits underway.
Since the CRA began identifying tax scheme promoters and their schemes, 933 promoters and 154 tax schemes have been identified. In 2016-2017 we identified 6 promoter tax schemes, 1 of which was identified at an early stage. Identifying tax schemes at an early stage means that the CRA is aware of the scheme before tax filing and proactively disallows payments. This ensures that taxpayers meet their filing obligations up front and thereby results in significant savings as the work of auditors, collection officers, appeals officers and the tax court are minimized.
Implemented in January 2014, the CRA's Offshore Tax Informant Program offers financial compensation to individuals who provide information about major cases of offshore tax avoidance that lead to the collection of tax owing. From the inception of the Program in 2014 to March 31, 2017, the Agency has:
- received 1,028 informant calls and 435 written submissions regarding possible cases of offshore tax avoidance
- initiated audits of 227 taxpayers
- assessed over $1.6 million in federal tax and foreign-reporting penalties
THE PANAMA PAPERS
On April 3, 2016, the CBC published a story concerning the leak of 11.5 million documents from a Panamanian law firm, Mossack Fonseca, relating to the offshore financial affairs of numerous prominent individuals worldwide. Prior to the leak, the CRA had already started work related to potential Canadian clients of Mossack Fonseca. The leaked data was downloaded and over 3,800 records were found to have a Canadian link. More than half of these records are associated to suspected Canadian promoters. The CRA is reviewing all of the records.
In addition, the CRA is working closely with its domestic and international partners to share findings on the Panama Papers and is committed to supporting any ongoing international audit or investigation, where warranted. For example, in January 2017, through the OECD's Joint International Task Force on Shared Intelligence and Collaboration (JITSIC), the Agency participated in the largest ever simultaneous exchanges of information under treaty.
A Canadian financial institution was reported to have used the services of Mossack Fonseca to set up over 350 offshore corporations for its clients. The CRA requested and received information from the financial institution on over 300 of the corporations. The CRA reviewed the information and it appears to be primarily related to non-residents of Canada. From all the information, the CRA identified over 3,150 offshore entities with over 2,360 possible beneficial owners. The CRA reviewed and risk-assessed over 1,300 of these possible beneficial owners.
As of March 31, 2017, there are 122 audits underway. Several criminal investigations are ongoing, which involve participants and facilitators. In addition to these, the CRA identified 64 other files for review to determine links to offshore files or transactions and assessment potential.
Offshore Compliance Advisory Committee (OCAC)
In April 2016, the OCAC—an independent committee composed of experts with significant legal and tax administration experience—was created to advise the Minister of National Revenue and the CRA on the CRA's strategies to combat offshore tax evasion and avoidance. The OCAC published a report on December 5, 2016, concerning the Voluntary Disclosures Program that contained a number of recommendations that touched on the issue of offshore non-compliance.
The OCAC's report is available on the CRA's website: http://www.cra-arc.gc.ca/gncy/ocac-ccoe/menu-eng.htmlvi
- We completed 8,925 international and large business audits which include 6,545 aggressive tax planning audits and 223 offshore audits
- Our international and large business audit activities identified almost $8 billion in fiscal impactFootnote 1, including $1.8 billion from our efforts to combat aggressive tax planning
- We levied more than $194 million in transfer-pricing penalties
- We levied approximately $44 million in third party penalties
- We received 841 calls and 110 written submissions through our Offshore Tax Informant Program
- We received more than 13.9 million reports of electronic funds transfers over $10,000
The CRA continues to play a leadership role on the international stage. For example, the CRA is leading efforts to strengthen tax administration capacity in developing countries through its membership in the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA), particularly through our sponsorship of the FTA Capacity Building Network and the deployment of the Global Knowledge Sharing Platform. Within the OECD's FTA, the CRA's Commissioner sponsors the Large Business and International Programme, where the CRA is co-ordinating work to support the OECD and the Group of 20 Base Erosion and Profit Shifting (BEPS) Project.
The CRA also participates in the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), a network of tax administrations from over 37 countries. The JITSIC offers a platform to enable its members to collaborate within the legal framework of effective bilateral and multilateral conventions and tax information exchange agreements—sharing their experience, resources, and expertise to tackle the common issues they face. This ongoing collaboration is a key part of the CRA's work to develop strong relationships with the international community, to help the Agency refine the world-class tax system that benefits all Canadians.
Base erosion and profit-shifting (BEPS) refers to international tax planning arrangements used by multinational enterprises to unduly minimize their taxes. For example, some enterprises shift their taxable profits away from the jurisdiction where the underlying economic activity has taken place to avoid paying what they would otherwise be obliged to pay. The Government of Canada, through the CRA, is firmly committed to protecting Canada's tax system and revenue base, and has implemented—or is implementing—measures that have been agreed to as necessary standards under the BEPS project. The following are some of the key measures that Canada has undertaken.
As part of the BEPS project, Canada—along with many other jurisdictions around the world—implemented rules to require country-by-country reporting on business structures and global operations of large, multinational enterprises, in order to enhance transparency and identify transfer-pricing and base-erosion risks. Canadian legislation was enacted in December 2016 that requires large Canadian enterprises with multinational business operations and annual revenues of €750 million or more to file country-by-country reports. Specifically, Canadian-based multinational enterprise groups must provide information about their global allocation, by jurisdiction, of key variables for their group, including revenue, profit, tax paid, stated capital, accumulated earnings, number of employees and tangible assets—as well as the main activities of each constituent entity of the multinational enterprise group—using a common template, referred to as the country-by-country report.
Within each participating jurisdiction, country-by-country reports are designed to provide information about the global activities of a corporate group. The information will give participating tax authorities a clearer picture of where the operations of the group in their jurisdiction fit into the group's global operations. This will enable tax administrations to better assess high-level transfer pricing and other risks related to base erosion and profit shifting. Beginning in 2018, participating OECD countries will exchange with each other the country-by-country reports filed in their respective jurisdictions. The CRA is ready to start the country-by-country report exchange in 2018.
In early 2017, the CRA published the new country-by-country report form and, in March 2017, produced a technical guidance document on country-by-country reporting to provide support to those multinational enterprises affected by the new filing obligations.
Other BEPS measures:
- The CRA has begun to exchange with other tax administrations tax rulings that could give rise to BEPS concerns. As part of the effort to counter harmful tax practices, the exchange of rulings helps to ensure that revenue authorities are not granting to taxpayers non-transparent rulings that guarantee favourable tax treatment for a transaction. During 2016-2017, the Agency exchanged over 630 tax rulings from other jurisdictions.
- Canada requires taxpayers, as well as promoters and advisors, to disclose specified tax avoidance transactions to the CRA.
- Canada is well engaged in dispute resolution and the implementation of BEPS Action 14 that provides for a minimum standard on resolving matters under the mutual price agreement procedures contained in the OECD Model Tax Convention.
- The CRA is applying revised international guidance on transfer pricing by multinational enterprises. These guidelines provide an improved interpretation of the requirement in the tax laws of Canada—and those of most other OECD countries—that transactions between entities of a corporate group in different jurisdictions should be priced as if they were arm's length transactions.
OECD Common Reporting Standard
The automatic exchange of information with respect to financial accounts held by non-residents—under the framework of the Common Reporting Standard developed by the OECD—is an important tool to: promote compliance; combat international tax evasion and aggressive tax avoidance; and ensure that taxpayers are reporting their income from all sources. To strengthen its efforts to combat international tax evasion and aggressive tax avoidance through enhanced sharing of information between tax authorities, the Government of Canada adopted legislation in December 2016 to bring the Common Reporting Standard into force in Canada as of July 1, 2017. Adoption of the standard will allow for Canada's first exchanges of information with other countries in 2018. To date, more than one hundred jurisdictions have committed to implement this standard.
The tax gap represents the difference between the tax that would be paid if all obligations were fully met in all instances, and the tax actually paid and collected. As part of the Agency's efforts to crack down on tax evasion and aggressive tax avoidance, the CRA is undertaking tax gap estimation research to encourage an open and transparent discussion of this issue.
On June 30, 2016, the CRA published two papers related to tax gap studies. The first was a conceptual study on the tax gap, while the second paper, prepared by the Department of Finance, contained an estimate of the tax gap related to the goods and services tax/harmonized sales tax (GST/HST). A third study examining the individual income tax gap in Canada was published on June 6, 2017.
Research on various aspects of the tax gap will help to inform the CRA's analysis of the many factors giving rise to non-compliance and provide insight into the work being done to combat non-compliance. The CRA is also collaborating closely with its international partners, academics, and other tax experts. In this context, the CRA, in collaboration with the Canadian Tax Foundation, held a conference in Ottawa on June 6, 2017 with experts, international public sector officials, and tax practitioners, on tax gap estimation. The conference focused on challenges and approaches related to tax gap estimation. The perspectives shared at this conference will promote the sharing of best practices in order to find the most effective approaches to estimating the tax gap. In addition to the conference, the CRA hosted a workshop on June 5, 2017 with international tax authorities to discuss respective approaches and challenges. The Agency has committed to publishing additional papers on various aspects of the tax gap over the next two to three years.
Criminal Investigations Program
The CRA's Criminal Investigations Program enforces the legislation administered by the Agency by detecting and addressing tax evasion and fraud. The Agency investigates suspected significant cases of tax non-compliance and recommends such cases for criminal prosecution. To enhance public awareness and encourage voluntary compliance, we also publicize the results of court convictions and certain high-profile investigative actions to warn Canadians of potential fraudulent schemes.
When egregious non-compliance is identified, the CRA takes the appropriate corrective measures to deter tax evasion and protect the Canadian tax base. We investigate suspected cases of tax evasion, fraud, and other serious violations of tax laws and recommend to the Public Prosecution Service of Canada (PPSC) those cases where a criminal investigation has been carried out and where evidence accumulated indicates guilt beyond a reasonable doubt. On conviction, tax evaders face court fines and jail time, in addition to having to pay the taxes they tried to evade, plus interest and penalties.
Tax crimes continue to evolve in their level of sophistication and complexity, making the job of combatting them very challenging. In response to this challenge, the CRA has: adopted a more strategic approach to file selection; expanded its partnerships with key stakeholders, such as the PPSC and the RCMP; and continued to develop and foster a workforce with the technical expertise to address complex cases of tax evasion and fraud, aligning staff competencies with criminal investigations skills sets.
During the year, the CRA continued to ensure that the most serious cases of tax evasion were investigated for possible criminal activity. Early involvement of the PPSC in investigations meant that the quality of cases referred for criminal prosecution remained high. Meanwhile, in order to improve the Agency's ability to identify and address serious cases of international tax evasion, the CRA strengthened its engagement with the OECD, as well as with Canada's tax treaty partners. Between April 1, 2011, and March 31, 2017, the CRA convicted 43 taxpayers with offshore links of tax evasion, involving $34.8 million in federal taxes evaded, court fines of $12.8 million, and 734 months of jail time.
Throughout 2016-2017, as part of the Agency's ongoing efforts to strengthen its criminal investigations function, we:
- implemented a prioritization and governance framework to ensure criminal investigative resources are focused on the highest threats to the integrity of Canada's tax system
- engaged in-house legal counsel to inform decisions relative to case-specific files as early as possible, by identifying and resolving legal issues
- enhanced our intelligence capacity by seeking information from the Financial Transactions and Reports Analysis Centre of Canada on all criminal investigation cases
- addressed new and ongoing policy and procedural issues relating to digital evidence through the creation of the National Forensics and Informatics Working Group
- implemented changes to our forensics and informatics function to enhance our ability to process digital evidence
- developed a robust communication work plan that complements the Agency's compliance communications strategy
In support of the Government of Canada's commitment to crack down on tax evasion and aggressive tax avoidance, throughout 2016-2017 the CRA placed more emphasis on investigating:
- promoters of sophisticated tax schemes and/or aggressive tax planning aimed at defrauding the Government of Canada
- significant and/or material cases with an international tax evasion element
- significant and/or material cases involving income tax and/or GST/HST evasion, including cases involving the underground economy
- financial crime cases investigated jointly with the RCMP, other domestic law enforcement agencies, and our international law enforcement partners
- From April 1, 2016, to March 31, 2017, working with the CRA's Criminal Investigations Program, federal prosecutors achieved an 89% conviction rate
- During this same period, the work of CRA criminal investigators led to the conviction of 37 taxpayers for tax evasion, involving approximately $32.7 million in federal tax evaded, and more than $10 million in criminal fines imposed. The courts sentenced 24 taxpayers to prison terms totalling 50.5 years.
- In addition, there were:
- 335 cases referred for criminal investigation
- 123 search warrants executed
- 32 files where criminal charges were laid under the Income Tax Act, Excise Tax Act, and/or Criminal Code
- 12 investigations resulted from joint-forces operations with law enforcement agencies
Small and medium enterprises
The CRA strives to make it easier for small- and medium-sized businesses to comply with Canada's tax laws and make it more difficult for those who choose not to be compliant. Our aim is to administer Canada's tax system effectively and reserve the more costly traditional audit and enforcement interventions for areas of greatest risk.
The CRA further developed its innovative approaches to promote compliance this past year through the expansion of its Liaison Officer Program, as well as through increased engagement with industry associations. The Liaison Officer Program provides small and medium enterprises with information, tools, and in-person support to help them navigate the tax system, understand their rights and obligations, and assist them in correctly calculating their taxes. During 2016-2017, we increased the service coverage of the program, which now operates in each tax services office across the country.
Building on positive feedback from taxpayers who completed a survey following a visit, the Agency expanded the program during 2016-2017 to include support for new businesses and to make information on GST/HST available. We also launched a pilot in the greater Montréal and Toronto areas for a new assistance request option known as Liaison Officer Assistance Requests (LOAR). LOAR provides taxpayers in the pilot cities an additional way to contact the Agency to request the assistance of a liaison officer rather than wait for the CRA to reach out to them. We also expanded our service offerings under this pilot to include group seminars.
Meanwhile, the Agency took additional steps in implementing another innovative approach to promoting compliance within specific industry sectors as part of its Industry Campaign Approach. In 2016-2017, we launched our second campaign aimed at communicating sector-specific tax information to businesses to help them meet their tax obligations. This campaign focused on the cattle ranching and dairy farming sectors, as well as the child daycare services sector. Engagements with industry associations in these areas involved the identification of tax concerns specific to each. We also sought input from these sectors about what information we should include in various communications products that the Agency plans to mail to businesses in 2017-2018.
The CRA is in the eighth year of using letter campaigns to promote compliance with Canada's tax laws and more accurate filing. During 2016-2017, the CRA sent letters to more than 30,000 taxpayers to encourage them to self-correct in situations where an adjustment to their taxes may be warranted. The letters focused on three types of transactions where reporting errors often occur: consecutive rental losses, consecutive business losses, and rental property dispositions. In addition to explaining ways they could correct past errors (for example, through filing an adjustment request for an individual income tax and benefit return), the letters provided individuals and small business owners with other information to help them meet their tax obligations.
One area of focus in relation to compliance has been the real estate sector. With increased media attention and interest in the CRA's real estate compliance activities, the CRA launched a webpage during the year that identified and discussed the key areas of compliance risk within this sector of the economy. Information on the Agency's compliance activities was also outlined on this webpage. In particular, the latest cumulative quarterly results for Ontario and British Columbia were posted related to CRA audits in process and the dollar totals of additional tax identified through audit. Meanwhile, the Agency formed a Real Estate Task Force to ensure consistency in how we manage real estate issues and our real estate non-compliance activities. The Task Force is promoting a horizontal approach to dealing with underground economy issues in the real estate sector by bringing together expertise from across the Agency.
The CRA regularly consults with taxpayers to help identify opportunities for service improvements and to explain our initiatives. In fall 2016, consultations were held with small and medium businesses and accountants in 18 cities across Canada, including northern communities. The CRA's 2017-2019 Serving You Better action plan contains over 50 action items that will improve services for small and medium businesses.
The Serving You Better consultations included the following key elements:
- an in-person consultation session facilitated by CRA senior officials to hear first-hand what the business community wants and needs the most;
- interactive external online consultations using a new tool called CRA Engage to generate discussions and comments;
- in-person and online consultations with CRA employees to seek ideas for improvements from those who deal directly with and provide services to small and medium enterprises; and
- enhanced partnerships with key external stakeholders, such as the Canadian Chambers of Commerce and Chartered Professional Accountants Canada, to host and recruit participants for consultations.
Building on our efforts to improve services for taxpayers, the CRA continued to enhance the My Business Account and Represent a Client portals during 2016-2017 by launching the Audit Enquiries feature in two phases. The first phase, introduced in May 2016, allows businesses who are under audit (and their authorized representatives) to send secure electronic enquiries to Agency auditors. The second phase, introduced in October 2016, gives our auditors the ability to initiate electronic communication with businesses under audit and send attachments (for example, letters or audit working papers) electronically and securely. These initial enhancements, which have been well received, affect corporations, their corporation income tax returns, and their GST/HST returns.
In March 2017, the Agency further improved its service for small and medium enterprises by:
- launching a survey to give small and medium enterprises the opportunity to provide feedback on their audit experiences and to offer ideas about how the CRA could improve its audit process
- introducing process changes to improve the timeliness of clearance certificates and to better engage with legal representatives
The CRA continues to identify and address high-risk sectors of tax non-compliance in its efforts to combat the underground economy (UE). In 2016-2017, the Agency completed the second year of its three-year UE strategy, which is based on three themes:
- refining the CRA's understanding of the UE
- reducing the social acceptability of participating in the UE
- deploying a range of initiatives to promote compliance and reduce participation in the UE
Given the diverse nature and many components of the UE, the CRA employs a horizontal, Agency-wide approach in its compliance efforts. The scope of the work we undertake to combat the UE includes communications, education, audits, and collections activities. Our work on the UE also involves doing research, identifying non-filers, and obtaining data from third-parties to enable the identification of under-reported income. To identify trends and areas where the risk of non-compliance is present, we also work with various stakeholders through provincial and territorial roundtables and working groups that focus on research, data sharing, and exploration of how new business models (for example, the sharing economy) may affect tax compliance.
The CRA also works closely with industry associations to gain insight into trends within the UE. The Minister of National Revenue's Underground Economy Advisory Committee comprises representatives from the business community, tax professions, and academia. Committee members offer advice to the Minister on current trends, help the CRA identify emerging risks, deepen the CRA's understanding of taxpayer compliance behaviour, and contribute to the development of innovative compliance tools. In 2016-2017, two meetings of the Committee were held, during which the CRA shared approaches we are considering for our next UE strategy. We sought Committee members' views on the potential of each proposed approach in regard to their effectiveness and the degree of administrative burden each might impose on tax-compliant businesses.
One area where the CRA has experienced especially strong results in combatting underground economic activity is through expanded use of the unnamed persons requirements. These requirements allow the CRA to identify both non-filers and unreported income. Through a court order that requires a business or organization to provide the CRA with documents or information about one or more persons, the Agency is able to acquire data that can help it identify a taxpayer or group of taxpayers who might be non-compliant. In 2016-2017, the CRA continued to issue unnamed persons requirements to obtain third-party information about persons working in sectors of the economy with the greatest potential for non-compliance.
During the reporting period, data analytics continued to be a useful means to find and address underground economic activity. The advanced data analysis techniques that we employ allow us to study industry trends, anticipate taxpayer behaviour, and predict the industry sectors in which tax non-compliance is more likely.
The Agency made further use of its specialized team approach in those sectors of the economy that are currently at highest risk for participation in the UE. Our underground economy specialist teams, located across the country, have special advanced training in identifying unreported and under-reported income; their work is focused on those files where the risk of unreported income is greatest.
Communication and education remain key pillars of the Agency's efforts to reduce participation in the UE and promote compliance. During 2016-2017, a number of external communication initiatives and products were launched by the CRA in an effort to bring awareness to the risks of participating in the UE. As part of an advertising campaign on the risks of supporting contractors who operate in the UE, a comprehensive online toolkit was produced for our industry partners involved in the battle against the UE. The toolkit contained promotional material for dissemination, such as videos, posters, and sample social media messaging (for example, sample UE-related tweets).
At the same time, a new UE Communications Working Group, with external stakeholder participation, was created to help populate the toolkit and circulate and publicize the promotional items more widely. The following are two samples of the kind of material included in the toolkit that were specifically designed to be disseminated through tweets:
These are two examples of images the Canada Revenue Agency includes in tweets to warn Canadians about the perils of the underground economy and why written contracts or receipts for work should always be obtained.
These are two examples of images the Canada Revenue Agency includes in tweets to warn Canadians about the perils of the underground economy and why written contracts or receipts for work should always be obtained.
A number of UE-related webpages on Canada.caii were created during 2016-2017— including one about accommodation sharing—as well as a refreshed website to house our ongoing "Get it in Writing" campaign. The "Get it in Writing" campaign, launched in March 2015 in partnership with the Canadian Home Builders' Association, focuses on the demand side of the underground economy and seeks to raise awareness of the non-tax-related risks that homeowners face when they choose not to enter into a written contract for home renovation work.
When individuals and businesses engage in activities to avoid their tax responsibilities—such as when they deliberately take steps to conceal all, or part of, their income—they place an unfair burden on law-abiding Canadians. The CRA is committed to ensuring a level playing field for all Canadian taxpayers and will continue to develop, enhance, expand, and employ whatever strategies and methods could best detect and curtail participation in the underground economy.
- We completed 27,417 small and medium enterprise audits
- We issued 30,222 letters through the Office Audit Letter campaign and Industry Campaign Approach to help taxpayers comply
- We made 8,581 liaison officer visits to small businesses
- Our small and medium enterprise audit activities identified $1.6 billion in fiscal impact
The CRA's goods and services tax / harmonized sales tax (GST/HST) compliance programs are designed to ensure GST/HST registrants comply with reporting requirements and to identify and address noncompliance. To accomplish this, we employ a risk-based, balanced approach involving not only audits, but also education and targeted communication.
Funding from Budget 2016 will have a significant impact on the Agency's ability to ensure compliance with GST/HST requirements. Over the next five years, the CRA will be hiring more auditors, and will also be acquiring and making use of enhanced technology and business intelligence tools, to identify and profile questionable or abusive GST/HST schemes. The use of technology and business intelligence will allow the Agency to develop and enhance its risk assessments. For example, risk assessment models will generate automatic alerts, prompting the CRA to review more carefully both pre-assessments and post-assessments of GST/HST returns and GST/HST rebate claims. This will go a long way to preventing the potential issuing of unwarranted GST/HST refunds. Looking ahead, our use of business intelligence tools will give us the support necessary to respond to emerging abusive GST/HST schemes, allowing us to update and modify risk assessment models and profiles in a timely manner.
GST/HST non-compliance in the real estate sector
Risks of GST/HST non-compliance in the real estate sector have remained high, especially in the "hot" real estate markets of Vancouver and Toronto, where economic factors increase the risks. The non-compliance risks include:
- unreported GST/HST on flips or assignment sales of new or substantially renovated property;
- unwarranted/unqualified GST/HST new housing rebate claims; and
- unreported GST/HST on the fair market value of new residential rental properties.
In 2016-2017, the Ontario and Pacific regions increased concentration of their audit resources on real property transactions in the Greater Toronto and Vancouver areas. The results of these initiatives have indicated substantial non-compliance within the real estate sector of the economy. Meanwhile, on the following web page the CRA provides updates on the results that it is achieving in combatting real estate non-compliance: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/does-canada-revenue-agency-address-non-compliance-real-estate-sector.htmlviii.
From April 2015 to March 2017:
- The CRA completed over 1,400 GST/HST audits in Ontario and British Columbia related to real estate transactions and, from these audits, assessed over $84 million in GST/HST owing.
CAROUSEL / MISSING TRADER SCHEMES
In a carousel scheme, a fake supply chain is created by a group of GST/HST registrants who work in collusion. Within the fake supply chain, the same goods are sold over and over among the registrants. At one point during the purchase and sale of goods, at least one of the registrants involved in the scheme collects the GST/HST, but then does not remit the tax to the Government (the so-called "missing trader").
Carousel / missing trader schemes have been a problem within other value-added tax jurisdictions and have become an issue in Canada in recent years. The CRA continues to improve its processes to detect and prevent these types of GST/HST refund arrangements.
This is an image of a circle/wheel designed to show how one type of so-called carousel (or missing trader) scheme might work. In the middle of the circle is an abstract image of a carousel/merry-go-round with dollar signs on the posts where the mechanical horses would normally be.
On the outside of the circle there are various images to illustrate aspects of the carousel scheme, and these include boxes of merchandise, a van transporting cargo, and a hand carrying paper money.
The explanation of the process involved in a carousel scheme begins in the top left corner of the circle, where there is a sentence which reads: First, the registrant (Company X) purports to import goods, usually working with a network; no GST/HST is paid.
The explanation of the carousel/missing trader scheme process follows a clockwise motion around the circle/wheel, and the second sentence explaining the process reads: The goods do not exist and are stated as intangible (film rights) or intangible (computer chips).
Continuing in a clockwise direction, the next sentence reads: Fictitious invoices and bank statements are created to give the appearance that transactions are occurring and that HST/HST is being charged.
The fourth sentence explaining the carousel process states: Company X (the "Missing Trader") disappears without remitting the GST/HST collected from the "transactions".
Following a clockwise direction around the circle, the fifth piece of text explaining the carousel scheme process reads: The last company in the network claims to export the goods to offshore companies at 0% GST/HST.
The sixth sentence in the carousel scheme circle states: Requests for millions in GST/HST refunds are filed by companies involved in the scheme for taxes "paid" to Company X.
Finally, the last piece of text in the carousel scheme process states simply "Repeat", signifying that the process outlined in the six sentences described before begins again.
The Agency has continued to focus its attention on point-of-sales audits to ensure businesses using electronic point-of-sale systems are accurately reporting GST/HST. These audits are also designed to detect electronic sales suppression (ESS), or "zapper", software, which selectively deletes or modifies sales transactions in point-of-sale systems (for example, electronic cash registers) and business accounting systems, leaving no record of the original transaction. Tax on the revenues earned in those transactions is therefore not reported or remitted to the CRA. The use of ESS software contributes to the underground economy and hurts all those businesses that comply with the law.
On January 1, 2014, new legislation introduced civil penalties for using, possessing, acquiring, manufacturing, developing, selling, possessing for sale, offering for sale, or otherwise making available ESS software. To ensure that all stakeholders knew about the new legislation prior to enforcement of the new monetary penalties, a public awareness campaign was conducted up until August 31, 2014. Since the end of the campaign, the Agency has applied ESS penalties in eight cases and is in the process of proposing these penalties in two more.
In addition to taxes, interest, and penalties assessed, users, manufacturers, and sellers of ESS software may also face criminal prosecution that can lead to court-imposed fines and possibly jail time.
- We completed 69,956 GST/HST audits and examinations
- The additional fiscal impact of our GST/HST audits was over $2.6 billion
- We reviewed approximately 242 identity-theft cases and closed 114 GST/HST accounts before any unwarranted GST/HST credit returns were filed
- We reviewed 39 GST/HST accounts involved in carousel / missing trader schemes and were able to assess $56 million, an amount that also includes gross negligence penalties
Scientific research and experimental development
The CRA provides tax assistance and investment tax credits to Canadian businesses as an incentive to conduct qualifying industrial research and development activities and film or video production activities in Canada. Of note is the fact that the Agency's Scientific Research and Experimental Development (SR&ED) Program is one of the largest government programs to support research and development in Canada, significantly advancing one of the Government's key strategic priorities. Through the SR&ED Program (and the Film and Media Tax Credits Program), the CRA ensures that all claims comply with applicable legislative requirements and government policies. The Agency also ensures that applicants have the information and timely services they need to access investment tax credits and that the tax credits or cash refunds are delivered in a prompt, consistent, and predictable manner.
We process approximately 21,000 claims every year under the SR&ED program. Meanwhile, approximately 6,500 claims are processed each year for the Film and Media Tax Credits Program.
In 2016, the Agency launched two services to give businesses, especially small and medium-sized enterprises, a degree of certainty about their eligibility for SR&ED tax incentives before filing a claim.
- A pre-claim consultation service began in June 2016 and provides potential SR&ED tax credit claimants with an evaluation of whether their research and development work would generally qualify as scientific research or experimental development under the Income Tax Act. The service is provided only at the request of the potential claimant and is based on the information that the claimant provides.
- In August 2016, a pre-claim review process was launched. This service gives claimants, on request and before a claim is filed, a determination of how much research and development work undertaken by the claimant would be eligible under the SR&ED program, and what specific expenditures would qualify for the SR&ED tax credits. Unlike the pre-claim consultation service, the pre-claim review involves an analysis of the extent of the work conducted by the potential claimant.
Over the course of the year, the Agency was involved in outreach activities with other government organizations and key industry associations to increase awareness of the SR&ED program. With respect to other government organizations, a strategy was developed to identify and engage those who serve a client base that might be eligible for, and benefit from, the SR&ED tax incentives. In this regard, engagement and partnerships were advanced with Export Development Canada, the Canadian Intellectual Property Office, the Natural Sciences and Engineering Research Council of Canada, and the Industrial Research Assistance Program of the National Research Council (NRC). The strengthened partnership with the NRC's Industrial Research Assistance Program resulted in joint CRA-NRC presentations that provided participants with clear and detailed information about what the SR&ED program offers.
The CRA considers large SR&ED claims to be those where the expenditures claimed are greater than $10 million. Each year, large claims make-up less than 1% of all SR&ED submissions, yet they account for more than 50% of all expenditures claimed program-wide. As large claims represent a significant proportion of spending on SR&ED in Canada, the CRA has now developed additional claim review procedures to improve the review process for this important segment of the program. These changes will help ensure that the review of these more complex files is done in a timely, consistent, and predictable manner.
- Our SR&ED program provided more than $2.7 billion in investment tax credits in support of industrial research and development
- Total dollar fiscal impact for SR&ED was $349 million
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