Section II: Analysis of program activities by strategic outcome
Strategic outcome
Taxpayers meet their obligations and Canada's revenue base is protected.
Program activity 4: Reporting compliance
Program activity description
- Verifying the complete and accurate disclosure by taxpayers of all required information to establish tax liabilities and protect the tax base through audit, enforcement, and incentive administrative activities.
Activities for enhancing compliance include: increasing taxpayers understanding of their tax obligations through outreach activities, client service, and education; identifying and addressing non.compliance through risk assessment, audit and investigation; and establishing strategic partnerships with stakeholders to leverage compliance efforts.
Planned spending
|
||
---|---|---|
960,180
|
1,101,008
|
1,055,758
|
Planned
|
Actual
|
Difference
|
---|---|---|
10,481
|
9,949
|
532
|
Expected result
|
Performance indicators
|
Targets
|
Actual results
|
---|---|---|---|
Non-compliance by individuals, businesses and registrants with the reporting requirements of the legislation the
CRA administers is identified and addressed to protect Canada's revenue base
|
Percentage of the major reporting compliance workloads completed, compared to planned
|
100%
|
Met
|
Percentage of risk-assessed activities resulting in the detection of non-compliance in International and Large Business, Small and Medium Enterprises and Enforcement and Disclosures
|
74%
|
Met
|
Performance summary and analysis of program activity
Influencing compliance attitudes
Helping taxpayers understand the positive outcomes of compliance and the negative consequences of non-compliance is important to voluntary compliance. We need to make sure that taxpayers understand their tax obligations and that they are motivated to comply. The CRA works with partners in government, the community, and industry to help taxpayers understand that paying taxes is a part of responsible citizenship and a healthy economy.
The underground economy is a particular focus of our activities to influence compliance attitudes. A Statistics Canada study Footnote 1 released in September 2012 found that in 2009, the three most significant sectors of the economy engaging in underground economy activity were construction (29%), retail trade (20%), and accommodation and food services (12%). The CRA provides outreach to businesses and individuals who may be exposed to the underground economy to help them understand the risks.
- The CRA partnered with the provinces of British Columbia, New Brunswick and Ontario to pilot the Trade School Initiative, a new educational project intended to raise awareness of tax responsibilities for students preparing for careers in the construction and renovation industry.
- The CRA's Get it in Writing campaign reminds homeowners undertaking renovation projects of the protection that a formal contract provides.
Voluntary disclosures
The Voluntary Disclosures program gives taxpayers a way to come forward and correct inaccurate or incomplete information. We offer this program as an opportunity to correct earlier mistakes and put their tax affairs in order. Taxpayers using the program have to pay the taxes owing, plus interest, but may avoid penalties and prosecution relating to the amounts disclosed. Information gained from these disclosures is helpful in identifying other taxpayers who may not have correctly identified their tax liability. During 2011-2012, we received 18.4% more voluntary disclosures, and identified over $863 million in unreported income. The surge in cases received is partially attributable to better promotion of the program, but it is also a positive sign that taxpayers are increasingly becoming aware of their tax obligations.
Complex intervention
When more serious discrepancies are identified, either through referrals from our early intervention programs or risk assessment within specialized program areas, we refer files to the appropriate centres of expertise for a more intensive review. Business analytics and risk models help to determine the level of intervention needed.
Each of the following represents one of the CRA's more intensive compliance interventions.
Risk and the audit process
Risk assessment is the foundation of the CRA's approach to addressing income tax non-compliance. Generally speaking, audit interventions are reserved for the most serious instances of non-compliance. However, a measured amount of audit resources are also invested in research audits and other compliance-related projects. These projects allow the CRA to identify emerging risks and to validate the effectiveness of our risk assessments, so that we constantly refine the strategies we use to address risk.
The Research Audit Program is a four-year project that will establish statistically valid compliance rates for various industry sectors and enable us to more accurately identify potential non-compliance in the future.
In the small and medium enterprises sector, we address common compliance issues in higher-risk sectors and write taxpayers to alert them to potential inaccuracies.
In some cases, the letters might be used to explain what type of deductions are permitted under the Income Tax Act and the type of documents needed to substantiate such claims. Businesses are then asked to review their returns and, if they have any questions or concerns, to get in touch with our office. This method of contact with businesses often leads to taxpayers amending their returns and changing their approach to future tax returns.
In 2011-2012, our audit programs identified over $8.7 billion Footnote 2 in non-compliance by applying a risk-based approach.
- income tax audits of taxpayers in our small and medium programs identified over $1.5 billion in non-compliance.
- income tax audits of taxpayers in our international and large-business programs identified over $5.6 billion in non-compliance.
GST/HST
Businesses can receive a refund cheque if their input tax credits are higher than the GST/HST collected. In 2011-2012, we implemented a model to improve our pre-payment review of GST/HST refunds by making sure that we screen GST/HST credits and certain debit returns consistently.
- Audit activity related to GST/HST identified over $1.1 billion in non-compliance.
Aggressive tax planning
Aggressive tax planning is a challenge that developed countries are confronting. It can involve very complex structures with both domestic and international elements. It is often arranged by tax planners and promoters for individuals, trusts, and corporations, and may have a legal basis in a technical sense, but it goes beyond what Parliament intended when the laws were passed. In general, aggressive tax planning arrangements are made for the primary purpose of avoiding taxes. Left unchecked, aggressive tax planning is a risk to the integrity and fairness of Canada's tax system.
The CRA has a multi-faceted strategy to combat aggressive tax planning. It includes using specialists at our centres of expertise, working with other tax jurisdictions and the Organisation for Economic Co-operation and Development (OECD), to share information on tax schemes, identifying legislative amendments to close loopholes discovered during audits, and working with the Department of Finance to negotiate international tax information exchange agreements.
This strategy resulted in identifying $1.3 billion in fiscal impact in 2011-2012.
Another part of our strategy involves third-party penalties to dissuade promoters from marketing aggressive tax planning arrangements. During 2011-2012, we closed a total of 17 third-party penalty cases. The total value of the penalties applied was in excess of $2.5 million.
Scientific research and experimental development
In 2011, our Scientific Research and Experimental Development (SR&ED) program provided more than $3.6 billion in tax assistance to over 23,000 claimants, an increase of $100 million over the previous year. We also ensure that businesses prepare their claims in compliance with tax laws, policies, and procedures. As a result of those efforts, we identified and addressed $425 million of non-compliance last year.
During 2011-2012, we continued to consolidate and clarify our current SR&ED policy documents and related guidance to help claimants better understand how the program works. Online public consultations ended in February 2012 and we expect to report the results in our 2012-2013 Annual Report to Parliament.
In October 2011, the Research and Development Review Expert Panel released its report to the Government of Canada on its review of federal support for research and development. The panel noted that the SR&ED program plays a fundamental role in lowering the costs of industrial research and development (R&D) for businesses, enhancing investment in R&D, and making Canada a more attractive place to locate R&D. The panel also provided recommendations to the Government of Canada on how to improve support for businesses and help them grow into larger, globally competitive companies. In the 2012 Federal Budget, informed by the advice of the Research and Development Review Expert Panel, the Government of Canada announced a number of legislative measures to simplify the SR&ED program and make it more cost-effective, and administrative measures to enhance the predictability of the program. Over the next few years, the CRA will be implementing these measures.
Underground economy
The underground economy is defined as undeclared income that is earned from economic activity that would generally be taxable if it were reported for tax purpose. The underground economy undermines the competitiveness of Canadian businesses because it offers an unfair advantage to those who don't comply with tax laws. These businesses impose a greater burden on all Canadians for funding social economic programs such as health care and education. Evidence shows that businesses participating in the underground economy also create other problems such as denying employees access to social programs like employment insurance, the Canada Pension Plan, or Quebec Pension Plan. Consumers are also affected: they have limited legal recourse for products and services provided by businesses participating in the underground economy.
We use a two-part approach to address underground economy activity. First, through our outreach efforts, we educate people and influence their attitude about compliance. Second, we use research such as the Statistics Canada study on the underground economy, to adjust how we allocate resources to sectors that show the highest risk. This Statistics Canada report Footnote 3 estimated that underground economic activity in Canada was equivalent to 2.3% of Gross Domestic Product in 2009, which was down from 2.9% in 1992.
This type of non-compliance is complex, so it is important for revenue administrations to share details about different approaches and experiences, successful or not, in dealing with these issues. The CRA continues to work with Canadian and international partners through research, information-sharing, communication, education, and compliance activities to reduce participation in the underground economy.
The CRA led the task group that produced the ‘Reducing opportunities for tax non-compliance in the underground economy' report for the OECD Forum on Tax Administration. The report was prepared to help revenue administrations advance their thinking and practices about identifying and handling risks related to the underground economy and electronic payment systems, and to promote discussion and knowledge-sharing on these important issues.
- In 2011-2012, we audited 10,627 underground economy files.
- 80% of the files audited resulted in a tax assessment.
- These audits identified $513 million of unreported income with an associated fiscal impact of $260 million.
Enforcement
The Enforcement program undertakes audits and criminal investigations of those suspected of deriving income from criminal activities and of those who evade taxes.
The CRA addresses these cases of deliberate fraud and in some instances refers cases to the Public Prosecution Service of Canada. Taxpayers may face penalties, court fines, and up to five years in prison.
In 2011-2012, the program conducted 819 enforcement audits that resulted in finding $67.4 million of additional taxes owing. A total of 137 taxpayers were convicted of tax evasion or fraud, and 24 individuals received prison sentences.
The courts imposed $6.4 million in fines and 36 years of jail sentences. In addition, 120 income tax and GST/HST investigations were referred to the Public Prosecution Service this past year. Some results are lower than those of previous years because the files are more complex and require more resources to complete.
We issue news releases about convictions on tax evasion to local, regional, and national media to demonstrate that there are consequences to non-compliance and to help maintain public confidence in the integrity of Canada's self-assessment system. In 2011-2012, the CRA distributed 175 news releases on convictions to generate articles and broadcast news topics.
Lessons learned
The CRA implements robust checks and balances that protect Canada's revenue base from intentional and non-intentional non-compliance. We met or mostly met all of our performance measures for addressing non-compliance. The CRA's graduated approach to early intervention, complex intervention, enforcement and payment of tax debt has proven to be efficient and effective. Our enforcement actions identified $14.1 billion of non-compliance. We continued to work with Canadian and international partners via research, information-sharing, communication, education, and compliance activities, to reduce participation in the underground economy. The CRA led the task group that produced the ‘Reducing opportunities for tax non-compliance in the underground economy' report for the OECD Forum on Tax Administration. The report was prepared to help revenue administrations advance their thinking and practices about identifying and handling risks related to the underground economy and electronic payment systems, and to promote discussion and knowledge-sharing on these important issues.
In 2012-2013, we will focus on higher risk cases. We will also continue to employ a suite of interventions allowing us to address non-compliance as early as possible while imposing the least level of burden on the taxpayer.
Indicators
|
Target
|
2009-2010
|
2010-2011
|
2011-2012
|
Rating
|
---|---|---|---|---|---|
Percentage of cases resulting in a change
|
|||||
International and large business program
|
90%
|
95.7%
|
93.7%
|
87.4%
|
Mostly met
|
Small and medium-sized enterprises
|
75%
|
81.1%
|
80.3%
|
75.3%
|
Met
|
Underground economy
|
75%
|
78.9%
|
78.4%
|
79.8%
|
Met
|
Fiscal impact
Footnote 1
generated per audit
FTE ($
million)
|
|||||
International and large business
Footnote 2
|
$2.7
|
$3.5
|
$2.9
|
$2.8
|
Met
|
Small and medium-sized enterprises
Footnote 3
|
$0.35
|
$0.40
|
$0.39
|
$0.45
|
Met
|
Other audits
|
$0.39
|
$0.40
|
$0.42
|
$0.39
|
Met
|
Overall
|
$0.9
|
$1.15
|
$1.02
|
$1.01
|
Met
|
Volumetrics
|
2009-2010
|
2010-2011
|
2011-2012
|
---|---|---|---|
Fiscal impact
Footnote 1
|
|||
International and large business ($ billion)
Footnote 4
|
$7.0
|
$6.1
|
$5.6
|
Small and medium-sized enterprises ($ billion)
Footnote 4
|
$1.6
|
$1.5
|
$1.5
|
GST
/HST for
ILB and
SME ($ billion)
|
$0.7
|
$0.7
|
$1.1
|
Other audits ($ million)
|
$599
|
$626
|
$543
|
Overall fiscal Impact ($ billion)
|
$9.9
|
$8.9
|
$8.7
|
www.cra.gc.ca/annualreport
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