Summary of the Corporate Business Plan 2013-2014 to 2015-2016

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3 [addressing non-compliance]

[total planned spending]

[introduction]

In the previous chapter we outlined our plans for assisting taxpayers. Our tax system is based on the premise that the vast majority of taxpayers will voluntarily comply. However, as responsible administrators we must actively enforce compliance in cases where taxpayers, through neglect, avoidance, or fraud, do not meet their obligations.

The CRA identifies and addresses non-compliance through seven distinct program activities that range from automatically correcting errors on tax returns, to investigating and prosecuting taxpayers involved in tax evasion. These activities include:

• validating all tax returns;
• pre-assessing identified tax returns to correct errors before the notice of assessment is issued;
• post-assessing identified tax returns for specific elements such as tax credit claims and divergence from the third-party information that we have received;
• pursuing individuals and businesses that have not filed a tax return and registered for the GST/HST;
• reviewing, examining, and auditing tax returns for accuracy and completeness;
• collecting amounts due; and
• conducting criminal investigations and prosecutions.

Employers play an important role in supporting our tax system. They are responsible for withholding, remitting, and reporting payroll deductions. In 2011-2012, businesses collected $222 billion in source deductions payments on behalf of the Government of Canada. We direct our source deductions compliance activities toward the small minority of businesses that do not properly withhold funds to be remitted to the Receiver General. Although non-compliance rates are relatively low, the amounts at risk are significant.

"We use advanced analytics and research to improve our ability to identify areas of highest risk."

[what we want to achieve]

To identify and address that small segment of the population that does not file a return, register when required, report the correct amounts, or remit amounts due.

[strategic context]

Compliance interventions can be viewed as a process that moves from influencing compliance to enforcing it. As we move toward enforcement, our activities become more focused, targeted, and more resource-intensive. Because enforcement is expensive, we manage our compliance activities intelligently by using a risk-based approach that focuses on the high-risk cases while considering resource constraint.

business intelligence

We use advanced analytics and research to improve our ability to identify areas of high-risk. This ensures that our interventions are timed and targeted for maximum impact. For example, the Integrated Revenue Collections project is using exploratory data mining and predictive analytics to improve the collection and analysis of data. This project has allowed for the integration of business intelligence with program management at a level that was not previously attainable. The CRA will continue to improve its business intelligence tools and decision making processes through the use of these new and emerging business intelligence technologies.

These findings are giving us insights that guide our strategic approach and that sustain optimum levels of voluntary compliance. For example:

• Our research tells us that taxpayers who are installment remitters are seven times more likely to have a debt when we perform the initial assessment. Using business analytics we were able to determine that this segment accounted for more than half the T1 debt when we perform the initial assessment. Based on these findings, we developed a workload strategy to focus on this high-risk group and remind them of their obligation to remit all sums due. This has reduced the instances of unpaid taxes at the time of the assessment.
• Our new Research Audit Program is a large-scale, multi-year research project that provides baseline data on the effectiveness of our current risk models. It will also provide insight into segments of the taxpaying population of which we may have little knowledge of. Inferences drawn from this data will lead to more informed, evidence-based decision-making in the future. Over the planning period, we will begin receiving and analysing results from the Research Audit Program.
• Recognizing that employers play an important role in collecting and remitting source deductions, we have begun a four-year system redesign estimated at $15 million, which will enable the CRA to better understand employer non-compliance.

drive to electronic

As part of our drive to manage compliance more intelligently, we are pursuing strategies that use technology to the advantage of the CRA and taxpayers. One example of this is the Electronic Transfer of Accounting Data program, which allows taxpayers to share their books and records electronically with the CRA through My Business Account. This innovation means that a higher percentage of audit files will have electronic data available. Providing information electronically is often easier for taxpayers and allows us to move information quickly to where it is needed to carry out our work.

The CRA is committed to simplifying compliance requirements and minimizing the number of interactions with taxpayers. We have made it a priority to enhance our online portals. For example, Our Represent a Client portal enables tax representatives to carry out account-specific transactions on behalf of the individuals and the businesses they represent. These enhanced features make it easier for tax preparers and professionals to manage accounts and retrieve client information.

our people

Choosing the right files at the right time is only a first step to effectively detecting and addressing non-compliance. Another key element is quality assurance. To support the quality of our work, we must ensure that our people acquire and maintain the expertise to respond to ongoing developments in the tax environment. To satisfy this requirement, the CRA ensures that its people have access to relevant, timely, interactive, and accessible training and knowledge-sharing. Our approach will only be sustainable if we can make sure that all of our compliance activities are of the highest possible standard. This dual focus on effective evidence-based risk modelling and quality assurance supports our strategic direction of managing compliance intelligently.

[our core activities]

aggressive tax planning

Aggressive tax planning (ATP) is a significant compliance challenge and a priority for the CRA. The globalization of commerce and labour mobility have made offshore financial transfers and investments accessible to a wider range of taxpayers. ATP schemes are now within the reach of most taxpayers and not just businesses or high-net-worth individuals. For this reason, ATP represents a real and emerging threat to our revenue base.

These schemes can take many forms and usually involve very complex structures with both domestic and international elements. ATP schemes are arranged by tax planners and promoters for individuals, trusts, and corporations. While these schemes may have some legal basis in a technical sense, they often go well beyond what Parliament intended when the laws were passed. By finding ways around our tax laws, these schemes cause significant material risk to Canada's tax base and undermine the integrity and fairness of our tax system.

ATP schemes are complex and constantly changing. We rely on two primary tools to counter ATP. These are the knowledge and technical skills of our people and the possession of accurate and current intelligence. Our auditors are highly skilled and we support them through training and by sharing the latest information we have gathered on ATP schemes and tactics. We gather much of this intelligence by working collaboratively with other tax jurisdictions and international organizations. We engage other tax jurisdictions in bilateral and multilateral forums to improve information- and intelligence-sharing, discuss best practices, and develop strategies to address known tax havens that sometimes support ATP schemes. The intelligence we gather is also used to close tax loop-holes and strengthen existing legislation.

Our ATP strategy focuses on:

• identifying and detecting ATP arrangements early;
• publishing tax alerts and other material to encourage compliance and to deter non-compliance; and
• applying third-party penalties on promoters and tax practitioners who prepare or promote false statements about ATP.

Over the planning period, we will:

• expand our collaboration with other tax authorities and governing bodies to enhance our understanding of ATP schemes and offshore compliance issues;
• pursue opportunities for greater international collaboration in exchanging intelligence and information, such as banking and financial transaction data;
• use predictive analytics to identify areas of serious risk;
• address Registered Retirement Savings Plan schemes by developing risk assessment processes to identify high-risk cases; and
• propose legislative amendments to the Department of Finance to close loop-holes and reduce opportunities to participate in ATP schemes.

international engagement

In Canada and around the world, globalization continues to create complex and dynamic international taxation issues. Canadian individuals and businesses make international transactions worth hundreds of billions of dollars every year. Increasing cross-border commerce and the fluid and rapid movement of international capital represent significant challenges for tax administrators of all countries.

In the context of this global tax environment, international collaboration is essential to ensure integrity, compliance and fairness in the application of tax laws. Responding to changing international dynamics means we have to effectively target our engagement both bilaterally and in multilateral forums, to support the development and application of international standards in the area of tax.

Over the planning period, we will:

• support and engage with international and regional tax organizations and individual countries, to promote and influence the development and application of international tax standards and principles, and to promote compliance, and, address issues of non-compliance.

underground economy

The underground economy occurs when a transaction takes place that is unreported or under­reported for tax purposes. We are using a multi-faceted approach to build our understanding of the factors that drive businesses and individuals to participate in the underground economy.

In addition to our own in-house research and analytics, we often draw on third-party research to enhance our understanding. For example:

• The 2012 Statistics Canada report on the underground economy found that underground economic activity in Canada was equivalent to 2.3% of the gross domestic product in 2009, which was down from the 2.9% reported in a similar 1992 study. The same study also found that three sectors accounted for almost 60% of this activity.

We use research findings such as these to build our strategic approach to the underground economy and support our resource allocation decisions. We are also engaging in research, audit, and outreach projects to identify and target regional underground economy risks.

Innovative techniques and strategies are being used to address the underground economy. The CRA continues to evolve its communications strategy, using a mix of education and outreach activities to make Canadians aware of the negative impacts of the underground economy. One example is a letter-writing campaign targeting sectors of high underground economy risk to proactively encourage compliance.

Over the planning period, we will:

• continue to focus our underground economy audit resources on the construction, hospitality, and retail trade sectors;
• explore new measures to support our efforts to combat the electronic suppression of sales in the retail and hospitality sector;
• establish specialized regional audit teams to target underground economy risks that may be unique to specific regions; and
• collaborate with other federal agencies and departments, levels of government, and tax administrations to exchange information and identify best practices.

large business compliance

Large businesses contribute greatly to the Canadian tax base. Our approach to this sector is an example of how we are moving toward managing compliance more intelligently and supporting our Vision 2020 agenda.

We have refined our risk-based approach to large businesses and have divided it into five risk segments. In practice, this means fewer interventions for low-risk segments and, therefore, less of a burden on them. We will focus our resources instead on higher-risk segments, which will see increased scrutiny from us. This approach is a more efficient and intelligent approach to addressing non-compliance.

Over the planning period, we will:

• consult with large corporate entities to obtain their feedback on the new approach; and
• develop a Compliance Assurance Review Framework for low-risk segments.

small and medium enterprises

The CRA will improve the quality of the audit interventions for small and medium enterprises (SME). Our goals are to create greater consistency in audit file-selection, to focus on high-risk files, to increase the capacity to accumulate and use business intelligence, to improve the quality of the audits, and to enhance the identification of auditor training needs. This will be achieved in part through Business Intelligence and Quality Assurance initiatives.

Over the planning period, we will:

• centralize audit workload selection under a new Business Intelligence and Quality Assurance structure in the CRA's regions;
• explore opportunities to use technology and expand workload functions to enhance support of electronic commerce audits;
• strengthen our audit quality review and quality assurance processes; and
• lighten the compliance burden on small businesses by supporting government initiatives such as the Red Tape Reduction action plan.

"We are moving towards improving the quality of our audit interventions for small and medium enterprises."

tax intermediaries

Research shows that 67% of small and medium enterprises use tax intermediaries. This suggests that intermediaries can play a significant role in addressing non-compliant behaviour.

Tax intermediaries provide a critical link between the taxpayer and the CRA because they are the first point of contact for the majority of businesses when they interact with the CRA. Businesses rely on the knowledge and professionalism of these intermediaries to address their tax obligations.

Internationally, tax administrations are moving to recognize, support, and monitor the role of these important players in the tax system.

Over the planning period, we will:

• consult with key stakeholders to develop a more effective strategy to engage tax intermediaries.

[other activities]

In addition to implementing these new initiatives in the planning period, we will:

• improve how efficiently we manage tax debt by better understanding taxpayer behaviour and compliance risks;
• focus on GST/HST compliance; and
• use litigation and legislation to deter tax avoidance and evasion.

[conclusion]

Our tax system is based on the principles of self-assessment and voluntary compliance. This system depends in large measure on taxpayers knowing that our system is fair and equitable and that non-compliance is not tolerated. If we look internationally, we can see examples of how the revenue base can erode rapidly when citizens lose faith in their tax system. For this reason, the CRA will continue to address non-compliance proactively and vigorously, by improving business intelligence to identify and deal with those who attempt to undermine our tax system by not paying their fair share. We will also focus on ways to simplify compliance requirements and support efforts to reduce red tape so that it is easier for taxpayers to comply. As always, the success of our efforts will be supported by the capability, drive, and determination of our employees. In this way, we will maintain the trust of taxpayers and strengthen the integrity of our tax system.

[our performance indicators for addressing non-compliance]

We will use the following indicators to help measure our success in better detecting and addressing non-compliance. We will also use qualitative indicators to provide a comprehensive understanding of our results.

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