Tax Administration Diagnostic Assessment Tool (TADAT) Summary Report

World-Class Tax and Benefit Administration
May 14, 2018

Introduction

The Canada Revenue Agency (CRA) is responsible for administering hundreds of billions of dollars in taxes annually. The tax revenue it collects is used by federal, provincial, and territorial governments to fund the programs and services that contribute to the quality of life of Canadians. The CRA also delivers billions of dollars in benefits, tax credits, and other services that support the economic and social well-being of Canadian families, children, and persons with disabilities. It is important that the CRA can demonstrate that it is effective in achieving these goals. In the spring of 2017, the Commissioner challenged the Agency to take a courageous look at itself to ensure it is a world-class tax and benefit administration (WCTBA). This challenge would be accomplished by engaging employees on a journey, conducting a robust and comprehensive assessment, and ultimately informing and guiding future plans and decision making.

The CRA began its assessment in the spring of 2017 using the International Monetary Fund’s Tax Administration Diagnostic Assessment Tool (TADAT) as the foundation piece. Information gathering supporting the assessment occurred in the fall of 2017 through structured interviews with CRA subject matter experts (SMEs) in all branches and regions.

The TADAT was selected because it is an internationally-recognized and objective tool that assesses the health of tax administrations according to common performance outcomes. It is important to note that the TADAT identifies whether certain drivers of effectiveness are present but does not necessarily assess their effectiveness. In other words, the assessment associated with the TADAT dimensions represents the extent to which good practices are in place, but they are not necessarily reflective of the effectiveness of those practices.

This performance report is based primarily on TADAT findings, and is supplemented with evidence from program audits/evaluations, and public opinion research, thereby delivering a more comprehensive and robust performance analysis. The intent is to provide a broad perspective of Agency performance according to the TADAT Performance Outcome Areas (POAs) and their indicators. A preliminary management response is included in Annex 1. The CRA is developing more detailed responses to address the opportunities for improvement identified in the TADAT findings.

This assessment has been a collaborative process that would not have been possible without the exceptional participation and commitment of branch and regional SMEs, the CRA’s panel of senior executive advisors (SEA) and tremendous support from the TADAT Secretariat.

Background

The organizational structure of the CRA can be referred to as a modified functional model. Reporting directly to the Commissioner are the Deputy Commissioner, five operational assistant commissioners, five regional assistant commissioners and eight corporate assistant commissioners as illustrated below. The Agency delivers its services through approximately 40,000 employees located across the country in its headquarters and 47 regional offices.

The TADAT framework

The report is structured around the TADAT’s framework of 9 Performance Outcome Areas (POAs) and 28 high level indicators that are critical to understanding a tax administration’s performance. Each indicator score takes into account 47 measurement dimensions. A four-point ‘ABCD’ scale is used to score each dimension and indicator. The scoring criteria for each indicator and the methodology used to calculate dimension scores are detailed in the TADAT Field Guide, available at www.tadat.org.

• ‘A’ denotes performance that meets or exceeds international good practice. In this regard, for TADAT purposes, a good practice is taken to be a tested and proven approach applied by a majority of leading tax administrations. It should be noted, however, that for a process to be considered ‘good practice,’ it does not need to be at the forefront or vanguard of technological and other developments. Given the dynamic nature of tax administration, the good practices described throughout the field guide can be expected to evolve over time, as technology advances and innovative approaches are tested and gain wide acceptance.
• ‘B’ represents sound performance (i.e., a healthy level of performance but a rung below international good practice).
• ‘C’ means weak performance relative to international good practice.
• ‘D’ denotes inadequate performance, and is applied when the requirements for a ‘C’ rating or higher are not met. Furthermore, a ‘D’ score is given in certain situations where there is insufficient information available to assessors to determine and score the level of performance. For example, where a tax administration is unable to produce basic numerical data for purposes of assessing operational performance (e.g., in areas of filing, payment, and refund processing) a ‘D’ score is given. The underlying rationale is that the inability of the tax administration to provide the required data is indicative of deficiencies in its management information systems and performance monitoring practices.

TADAT summary findings

There are a considerable number of areas that the TADAT has clearly identified as good practice. Of 28 indicators, 22 (79%) were assessed as having performance that meets or exceeds international good practice (TADAT “A” score) or is sound and healthy (“B”/”B+”). The summary results of the main strengths and weaknesses of the TADAT assessment are included in the table below, with further context provided in the accompanying text. A summary of TADAT scores for each of its 28 indicators can be found in Annex 2.

Strengths

Intelligence gathering and research

The CRA’s compliance branches gather, interpret, and use data from a range of external sources (for ex., financial institutions, other government agencies, other tax jurisdictions, studies into taxpayer perception, and topical compliance issues like the underground economy). CRA compliance branches also gather and interpret data from a range of internal sources, especially information returns, studies into taxpayer behaviour and internal research on specific industries, compliance trends, claims, and review/audit results.

Corporate risk mitigation

The process used to identify, assess, and mitigate corporate risks is comprehensive and identifies, assesses, and mitigates institutional (corporate) risks across all core business processes. This process is used to produce an annual Corporate Risk Profile which registers potential and emerging risks in the tax administration’s operational environment as well as those potentially affecting the realization of organizational priorities and objectives. A business continuity plan exists and regularly tests the CRA’s ability to respond to various disruptions through emergency response and continuity management exercises. Staff are trained on security and emergency measures with officials in mission critical roles identified across the organization. Continuity Management Coordinators across branches and regions receive additional training. Contingency plans ensure minimal risk to taxpayers even during periods of disruptions, such as benefits programs that have special arrangements for continued work during blackouts. The CRA’s corporate risk management process follows relevant International Standards Organization (ISO) and Government of Canada standards and policies.

Service channels and assistance

Taxpayers have access to information on taxes and entitlements, which is tailored to suit the needs of key taxpayer segments. The CRA provides information to taxpayers through multiple channels: its website, telephone services, teaching taxes program, the Community Volunteer Income Tax Program, correspondence, digital community outreach services, My Account, My Business Account, and its Liaison Officer service.

A variety of options are provided to taxpayers to facilitate their voluntary compliance. For the reference period used in the study (2016), nearly 75% of all payments were posted electronically through a variety of sources and just over 85% of all returns were filed electronically. The Agency also offers an Auto-fill My Return service that automatically fills returns with all the third party information in its possession. Other services offered to taxpayers to reduce their cost of compliance include simplified record keeping and reporting arrangements for small business taxpayers, as well as less frequent filing and payment requirements for small businesses. Beginning with the 2017 tax year, under a new automated service called "File My Return", low-income Canadians are also able to file their tax returns by phone.

The CRA follows the Government of Canada’s ‘digital first’ strategy, which is aligned with international good practices, by moving towards the delivery of services through digital channels. The TADAT assesses strong performance in the use of electronic filing and the use of electronic payment methods.

Accountability

The CRA has an independent internal audit function which verifies the soundness of the CRA’s internal controls, risk management, and governance framework. The Chief Audit Executive, who is the head of the internal audit function, reports directly to the Commissioner and has a secondary reporting relationship to the Chair of the Audit Committee of the Board of Management. The function produces an annual internal audit plan outlining internal control checks and information technology system audits, and provides wide coverage and scrutiny of key operations. The Agency’s internal affairs also provides assurance with a rigorous process for the investigation of wrongdoing. Furthermore, the organization and administration of the Agency is subject to the oversight of the CRA’s Board of Management, and financial statements for Agency activities and administered activities are audited by the Office of the Auditor General of Canada. In addition, the CRA conducts Annual Corporate Research, a public opinion research survey and focus group built around assessing the public’s perceptions of the Agency’s high-level reputation, services, and tax compliance activities.

Weaknesses

Registration

Tax filers increasingly use digital channels in their interactions with the CRA. More than 25 million electronic returns for individuals were submitted during the 2017 filing season.

The Agency has made the business number (BN) registration process as simple as possible, within the self-assessment system of taxation in Canada, in the interest of serving taxpayers but, as a result, some of the information used for compliance and other purposes may at times be missing or not adequately authenticated.

The business number (BN) was implemented in 1994 to provide businesses with a single identifier to use when interacting with federal and provincial governments. The BN process was designed to allow businesses to provide information once to be used often by different participating government organizations, thereby decreasing the administrative burden on businesses and reducing duplication across government programs. A number of federal departments and agencies and numerous provincial government organizations have adopted the BN to deliver over 100 programs. The CRA is the registrar for all those that have adopted the BN, suggesting that these organizations place a large degree of trust in the Agency and its processes.

The Agency attempts to make the registration process for a business number simple to ensure applicants can obtain a tax number in the most efficient manner. The Agency may not follow a strict adherence to basic information requirements in support of registration with the exception of requiring a social insurance number for GST/HST applicants. Applicants may receive a business number through certain provincial and federal incorporating authorities by providing only the information necessary for those authorities, which does not necessarily include that which would normally be required to support compliance efforts.

Not having complete and authenticated information at the point of registration for all taxpayers can have a negative impact on compliance activities, and represents an increased burden at later points in the compliance process (for ex., pre-payment audit, collections, non-filer). It also means that post registration efforts to obtain missing data may require additional contacts with new registrants, thereby frustrating the original intention of a simple BN registration process for taxpayers.

The CRA continues to work with provincial partners to discuss information sharing and the need to have consistent and complete information for all parties. The Agency’s Business Number Identity Integrity Project recently assured the integrity of a large volume of registration information.

The CRA has some post-registration compliance activities in place to enhance the integrity of registration data. For example, post-registration reviews occur for certain program lines such as GST/HST. The CRA also uses a tri-lateral Business Number Strategy and Operations Committee and a subcommittee that meet regularly to discuss BN issues to identify impacts on compliance activities. Post-registration reviews and checks on the compliance implications of registration information provide some assurance that the CRA has accurate and reliable taxpayer information. However, they do not meet the TADAT standard of up-front quality assurance of registration information.

Effective compliance risk management

While the TADAT has demonstrated that the CRA undertakes intelligence gathering and research to identify compliance risks in respect of the main tax obligations, and that efforts have been identified that address compliance risks at the outcomes level (i.e. the underground economy strategy), data suggest that the Agency compliance risk mitigation strategies are largely branch-specific. While the Agency has multiple strategies around its compliance pillars (for ex., registration, filing, payment/remitting, and reporting) and segments (for ex., underground economy, large filers and offshore compliance), there is little evidence of a documented overarching compliance risk mitigation strategy. We have found little evidence that the Agency has mapped its compliance activities to the outcome levels, such as impact on taxpayer behaviour and sustained voluntary compliance. This observation is common to many large, complex tax administrations, as a single taxpayer may fulfill numerous roles within the tax world (e.g. GST registrant, small business owner) depending on the regulatory requirements being verified.

Telephone accessibility

The CRA has multiple call centres which are accessible to businesses, individuals, and benefits recipients, however, fewer than 50% of calls are answered within a two minute timeframe. A recent report by the Auditor General (2017) indicated that CRA’s success in meeting internal service standards for call wait times was achieved by limiting access to its live agents or automated self-service call center systems. When busy signals are taken into account, the CRA’s time taken to respond to taxpayer and intermediary requests for information does not meet the TADAT standard of at least 70% of telephone enquiry calls being answered within six minutes.

The CRA has launched an action plan to modernize its call centres to help address the recommendations. As such, the CRA aims to improve timely access to information through telephone enquiry services by increasing agent hours, examining wait times and considering new self-service options. These efforts aim to achieve higher accessibility and a reduced number of call attempts required to reach an agent.

With the exception of telephone services, the TADAT’s evidentiary requirements were fully met with respect to many voluntary compliance dimensions and indicators (i.e. availability of information to taxpayers to ensure they can comply with their obligations).

Public opinion research and external reporting suggests that some of the services the CRA provides in support of its voluntary compliance efforts do not meet the needs of Canadians (publications and the website lack plain language, information is not easy to locate and some of its service channels are less than satisfactory in providing the necessary access or answers to taxpayer queries). This finding points to a need to strengthen the connectedness between taxpayer feedback and the design of information products.

Payment compliance and tax debt resolution

The TADAT recognizes that the aim of any tax administration is to attain high rates of voluntary on-time payment and low incidence of tax arrears. On time payment is a function of both a taxpayer’s willingness and ability to pay on time, and is an important performance measure for a tax administration predicated on voluntary compliance. The TADAT assesses the on-time payment rate and allows for a determination of whether the size and aging of the collectible debt is representative of good practices. Because the Agency does not report on voluntary on-time payment, and the size of its tax debt continues to grow and to age beyond the range of what would be reflective of good practice, it gets a relatively lower score on this performance area, which is explained below.

The Agency does not report on on-time payment. Payments are recorded against a taxpayer’s oldest debt within their respective accounts. While there is a simplicity to the process to ensure the oldest debt gets resolved earliest and it limits exposure to collection limitations, which represents good financial management, it may also encumber efforts to inform payment compliance outcomes. The CRA is not an outlier in this regard: the most recent edition of the OECD’s Tax Administration series indicated that less than half of administrations surveyed could provide on-time payment data for core tax types. There may be options for the Agency to estimate the rate of voluntary on-time payments for the individual income tax revenue lines.

The overall size and average age of the outstanding tax debt represents a culmination of all enforcement activities from a wide variety of programs across the Agency. The debt is projected to continue to grow and age for the foreseeable future. The outstanding tax debt reached $38 billion in 2015 and could exceed $47 billion by 2020. Even without considering the addition of new debt, approximately $2 billion in interest accumulates every year due to the size of the outstanding inventory, compounding the tax debt growth.

At 13.6%, Canada’s year-end tax debt as a percentage of total net revenue is relatively low compared to the OECD average (31.1%), but may be considered high when compared to those of other leading tax administrations such as the United States and United Kingdom. Even so, it seems that these jurisdictions may rely on write-offs to achieve TAS-reported tax debt figures compared to Canada, which does not.

As context, it could be noted that the TADAT methodology references an ideal set of circumstances that may not always reflect the reality of individual organizations. Unlike most countries, Canada has chosen to restrict collection activities during the period following the creation of the debt, as well as during appeals. During these periods the Agency encourages and assists taxpayers to self-resolve their tax debt, leading to a large amount of debt outstanding over 12 months. In Canada, the bankruptcy laws also suspend collection actions and do not offer special priorities to the Government above other creditors. Generally speaking, this explains the trends in Canadian tax debt collection referenced by the TADAT assessment.

In general, however, the growth of tax debt has been an ongoing concern, and the government of Canada recently made significant investments to address the growing tax debt and ensure the results of its compliance activities are addressed appropriately. This is evidenced by the large investment in the 2016 Canadian federal budget. This funding complements additional efforts to streamline and enhance the effectiveness of the Collections program while safeguarding client rights.

Tax dispute resolution

The Agency does not meet all of its current service standards and the TADAT standard for good practice regarding tax dispute resolution. The TADAT standard is that the administrative review stage is completed for 90% of cases within 30 calendar days. The Agency’s standard is 80% of low-complexity cases resolved within 180 days.

A 2016 Auditor General report of the CRA’s income tax objections process noted that the CRA took too long to process objections and additionally identified gaps in how the Agency measured the time taken to resolve them.

In response to the above-noted Auditor General report and the Twenty-Fifth Report of the Standing Committee on Public Accounts (PACP), the CRA implemented an action plan to address seven key areas. The goal of this plan is to improve service to taxpayers through more timely resolution of their income and commodity tax disputes.

Thematic issues

Horizontality

The CRA is a rules-based hierarchical regulatory body with an overarching compliance mandate. Its operational structure is predicated on a functional model which is used by other leading tax administrations. For efficiency and maximum effect, tax administrations are often structured to ensure there is the maximum expertise developed by the different tax administration functions. This applies both in dealing with tax issues and managing program activities to achieve the maximum functional effect with available resources. The intent of the following paragraphs is to:

• highlight issues with its application in the Canadian context; and
• stimulate a discussion on whether it continues to best serve the CRA’s needs.

Culture plays an important role in the achievement of goals, objectives, strategies, and outcomes. Peter Drucker, a famed social ecologist, once said “culture eats strategy for breakfast,” meaning that if an organization’s strategy or its goals do not align to its culture, culture will always win out. In the CRA’s Service Culture initiative, it was identified that our organizational structures, processes, and tools are seen as hindering service and innovation – with silos undermining collaboration.

A functional model is designed based on areas of functional expertise which can be likened to specialist enclaves, (for ex., returns processing, audit, collections, and appeals). The functional model defines and limits how organizations do things in spite of how they might want to do things.

The productivity of functional units is typically defined in terms of functional outputs (for ex., number of phone calls received and resolved, amount of assessed revenues, number of audits, and number of registrations). The findings of the TADAT suggest that the areas identified as those where there is room for improvement at the Agency are some of those where there is a preponderant focus on reporting on efficiency or output measures rather than on the downstream outcomes achievement. The evidence suggests that the Agency is doing a good job of identifying compliance threats and developing mitigation strategies within each of its enclaves. However, those results do not necessarily align with the achievement of the Agency’s outcomes. Examples that point to a lack of horizontality within a functional model are the lack of compliance outcomes data, lack of overarching compliance strategy, lack of integrated whole-of-taxpayer view, and growth in appeals inventory and the increase and age of a tax administration’s debt.

The issue of horizontality is not new, as it was raised previously in a 2007 study by IBM which reported:

In addition, the CRA Corporate Risk Profile has identified horizontality as a moderate risk in that the CRA may not be flexible enough to manage the functional interconnectivities (corporate functions, program functions, and regional operations) brought about by the changing nature of business.

The Audit, Evaluation and Risk Branch (AERB) identified eight risk drivers that are reflective of a lack of horizontality (numbers are the numerical identifiers of risks as assigned by AERB in the Corporate Risk Profile).

Performance management

The TADAT found deficiencies in a number of areas related to performance management. For example, the Agency does not track on-time payment information and the on-time filing rate is based on a metric that does not consider the expected filing population. This information is important to a tax administration predicated on voluntary compliance; it ensures that the relative success of its efforts to support voluntary compliance can be measured and monitored accurately. The Agency has also employed performance metrics for appeals and call centre accessibility that external audits have found to be wanting in terms of clarity; the same might be found of compliance activities that measure tax earned by audit, numbers of audits, and time to resolve a file, for example.

Performance measurement is complementary to horizontal performance, as the right “whole-of-Agency” measures may incite “whole-of-Agency” performance. Reviewing performance measurement from the perspective of ensuring meaningful and clear performance metrics that address whole-of-agency objectives is therefore worth considering.

Conclusion

The TADAT is the first component of the WCTBA assessment framework on which the initiative is reporting. It has identified several good practices for which the Agency should be proud. It has also identified areas for improvement. While the results of the TADAT indicate that the Agency is positioned in the top tier of tax and benefit administrations, the assessment process is not yet complete. Additional elements of the WCTBA assessment regarding people, innovation, and benefits administration will be integrated.

These results have been circulated across the Agency to refine the interpretation of the results. Agency management has responded to the results of the assessment. We will continue to gather feedback as well as engage key stakeholders to determine how the assessment results resonate with them.

Annex 1 – CRA management response

The CRA embarked on a journey to ensure it is world-class tax and benefit administration that supports the economic and social well-being of Canadians. A key element of the CRA’s journey is a comprehensive and objective self-assessment, using a basket of tools, to help us identify our strengths and opportunities for improvement. The CRA’s application the International Monetary Fund’s Tax Administration Diagnostic Assessment Tool (TADAT) as a foundational component of its self-assessment has been useful to diagnose its health by examining the extent to which it has implemented tested and proven approaches applied by a majority of leading tax administrations.

We are proud that the initial findings of the TADAT, which provide objective evidence of world-class performance in 22 of the 28 indicators it assessed. We will celebrate this success!

As expected, the TADAT also identifies some areas that warrant attention to ensure we are world-class. Given the scope and importance of topics addressed by this assessment, development of responses requires careful consideration and internal discussions that will take time. With this in mind, we undertake to work collaboratively to develop responses to inform and guide Agency decisions and plans into the future.