Contract Payment Reporting System Program Evaluation Study


Executive summary

This report presents the findings of Phase 1 of the evaluation of the Contract Payment Reporting System (CPRS), an initiative of the Canada Revenue Agency (CRA) to address activity in the underground economy in the construction and home renovation sectors by promoting voluntary compliance and providing a basis for strengthening the administration's enforcement programs. The purpose of this evaluation was to address the implementation of CPRS by focusing on the concept and design, effectiveness of implementation and the early impacts on compliance. A Phase 2 evaluation is intended to explore program effectiveness in more depth and alternative delivery mechanisms that might provide greater cost-effectiveness.

The CPRS is, for the most part, fully operational and is supporting operations to address tax compliance issues in the construction and home renovation industry. CRA managers and staff involved in the CPRS program fully support the program. Construction companies and construction associations are less supportive but this is largely attributable to their perception that the program is not effective in addressing the underground economy in their sector, a perception that is not supported by performance statistics.

Program results achieved to date are significant and strongly support continuing the program. The program has resulted in over $650 million in tax assessments over the last four years. Results have been especially notable in the identification of sub-contractors who failed to file tax returns. However, results to date in the audit program suggest a need for a review of the CPRS audit program to ensure that it is achieving acceptable results in addressing the underground economy. The most significant benefit of CPRS was expected to be its impact on voluntary compliance. This impact has not yet been measured and effort is required to determine levels of voluntary compliance and the impact of CPRS on taxpayer behaviour. CPRS is useful in addressing underground economy activity where recorded transactions and audit trails exist in the contractors' books and records. There is general agreement within the industry and the Agency, however, that it is not effective in that segment of the underground economy where transactions are purposefully hidden by both the contractor and sub-contractor to circumvent tax laws and other legal obligations (commonly known as the 'cash' economy). This segment is addressed by other elements of the Agency's underground economy strategy.

Notwithstanding the positive results that have been achieved to date, changes to the design and administration of the program would improve its overall effectiveness. Design concessions made to minimize administrative burden on the industry, in order to gain the support of the industry have, in fact, adversely impacted the administration and effectiveness of the program. Optional filing periods make it more difficult and less efficient for the Agency to identify non-compliant behaviour with respect to the filing of tax returns and the reporting of income. The provision of information slips to taxpayers is a key feature of third-party reporting systems designed to promote voluntary compliance. This requirement is missing from CPRS and is likely detracting from the strength of the program in this area. Finally, the exclusion from the program of the retail home renovation sector within the industry, which has grown significantly since the introduction of CPRS, is creating perceptions of inequity within the industry and is potentially resulting in significant tax leakage.

Administratively, the program was implemented with limited automated support resulting in process inefficiencies. Performance measurement and compliance research supporting the program are underdeveloped and are required to ensure that CPRS results are monitored and that administration of the program is modified as required. The Agency does not yet have a program in place to verify the accuracy of the CPRS information returns that have been filed and as a result there is no assurance that contractors are fully and accurately reporting payments made to sub-contractors. As well, the Agency has not adequately employed the penalty provisions with respect to the timely filing of CPRS returns, which is serving as a disincentive for contractors to file returns on time or at all. Finally, the industry's lack of knowledge of the results of the program detracts from their support for the program and is a disincentive to their voluntary compliance with CPRS requirements.

A phase 2 evaluation was planned to focus on program results in relation to costs, the approach and coverage for achieving tax compliance, and alternative program delivery mechanisms to achieve objectives. In recognition of the positive results achieved to date, and the fact that many of the issues identified for examination in Phase 2 have already been addressed, or will be addressed in other Agency studies, it is recommended that Phase 2 be cancelled and that further work focus on a detailed follow-up of the implementation of the recommendations included in this report.

Introduction

This report presents the findings of the initial evaluation of the Contract Payment Reporting System (CPRS) that was introduced to address activities in the construction and home renovation industry. It does not address the government contracting portion of CPRS, and references within this report to CPRS refer only to the construction industry portion of the program. This is the first of two evaluation studies identified in the evaluation framework approved by the Internal Audit and Program Evaluation Committee in June 2003. The purpose of this evaluation was to address the program's implementation by focusing on the CPRS concept and design, effectiveness of implementation, and early compliance results. Phase 2 of the evaluation is intended to concentrate more on program results in terms of impacts as well as opportunities for improved or alternative ways of achieving objectives.

Background

The construction industry stands out as one of Canada's major industries. According to recent Statistics Canada estimates 1 , there are approximately 266,000 construction businesses in Canada with revenues in the vicinity of $135 billion. According to the Construction Sector Council 2 , the industry has more than 20,000 general contractors and 108,000 trade contractors, and one in seventeen Canadian workers earns a living in the construction sector. The size of the average construction firm is quite small, however, with 95% of the firms having fewer than 10 employees. In 2003, the annual GDP growth rate in the construction industry was 4.5%, outstripping the national rate for that year of 1.5%. During the same year, the industry's employment growth rate was 4.3% while the national rate was 1.9%.

As a result of continuing concerns about high levels of non-compliance, and consequent loss of tax revenue in the construction industry, CPRS was introduced in 1995 on a voluntary participation basis. The 10% voluntary participation level was considered too low to be effective, resulting in the introduction of mandatory reporting in the February 1998 federal budget. The mandatory CPRS was planned for implementation on January 1, 1999. The CPRS is one of a number of activities developed by the Canada Revenue Agency (CRA) in its multi-dimensional approach to support taxpayers in meeting their tax obligations and to deter taxpayers from participating in the underground economy. The objective of CPRS is to assist the tax administration in addressing activity in the underground economy in the construction and home renovation sectors by promoting voluntary compliance and providing a basis for strengthening the administration's enforcement programs. Under CPRS, individuals, partnerships, and corporations whose primary activity is construction, are required to report annually their payments to sub-contractors for construction services to the CRA. The information received is matched against data maintained by CRA to identify those who have not filed tax returns or have under-reported their income. The biggest expected benefit of the program was an increase in the level of voluntary compliance in the industry. It was also envisaged, however, that the integration of third-party information into CRA's risk assessment systems would enable the CRA to better target non-compliance and initiate appropriate enforcement actions.

In the February 1998 federal budget, the government also announced the introduction of a related initiative, a payment reporting system whereby contract payments made by federal departments, agencies, and crown corporations for services rendered are also required to be reported to CRA. The scope of this evaluation study did not include the federal reporting system.

In order to implement CPRS, together with the reporting system for federal government contracting, Treasury Board approved funding of $30 million annually, of which approximately 85% 3 supports the construction industry portion of CPRS. The Agency expected “assessments” for both the federal and construction portions of CPRS to stabilize around $125 million per year after 2001-2002. At the same time, it was noted that the impact on voluntary compliance in the construction industry was expected to provide the greatest long-term increase in tax revenues, and that this would be the best long-term performance indicator for the CPRS initiative 4 .

Methodologies

The methodological approach adopted for the evaluation incorporated a high level of involvement from the construction industry in keeping with the Minister's commitment to review the CPRS initiative in consultation with the key stakeholders in the industry. A mix of methodologies was used in the evaluation.

An extensive document review was conducted of records (communiqués, studies, business cases, agency reports etc.) related to the CPRS to acquire a better understanding of the reasoning behind decisions made. General literature research was also undertaken to obtain knowledge on the construction industry in general, and more specifically on initiatives and programs undertaken by other government departments.

An analysis of information returns was conducted at the Ottawa Technology Centre (OTC) to determine characteristics of the filing and processing of returns. A statistical analysis of operational data maintained by CRA was also conducted.

A survey was administered to CRA senior officials in revenue collections and audit in 44 Tax Services Offices across Canada. The survey addressed the strengths and weaknesses of the CPRS design, and the implementation and on-going delivery of CPRS. Interviews were conducted with managers and staff at Headquarters and in four regions. These interviews involved 127 CRA managers and staff from Headquarters and regional operations in Halifax, Toronto-West, Burnaby-Fraser and Ottawa.

Interviews and focus group sessions were also held with a number of contractors, sub-contractors, and construction industry officials to obtain their views on a range of issues related to the evaluation questions. In total, 73 contractors from Halifax, Toronto, Montreal, Ottawa and Calgary were interviewed, and officials representing four of the key associations were consulted. An external consultant was contracted to conduct the interviews and focus group sessions with the industry. Using an external consultant assured an independent review of the opinions of the construction industry.

Findings from the evaluation

The following is a summary of our main evaluation findings. These findings address:

  1. CPRS Concept and Design;
  2. Effectiveness of Implementation; and
  3. CPRS Impacts on Compliance.

1.0 Concept and Design

The first step in our evaluation involved an assessment of the appropriateness of the third-party reporting concept and the design of CPRS itself for improving tax compliance in the construction industry. In summary, the concept of using third party reporting is valid to address compliance issues where transactions are documented and audit trails remain in the contractors' records. While the CPRS design is adequate, some modifications are required to strengthen the program.

1.1 The Concept of Using Third-Party Information From Contractors is a Valid Approach for Improving Tax Compliance where Transactions are Documented and Audit Trails Exist Remain in the Contractors' Records.

The underlying concept of CPRS is the use of third-party information to improve tax compliance in the construction and home renovation industry. The strength of the concept is seen to lie in its capacity to influence taxpayer behaviour thereby promoting voluntary compliance. Its full impact on influencing taxpayer behaviour is, in large part, dependent upon a general awareness within the target population that the information is being reported to the administration and used in its enforcement program.

There is not a lot of empirical data available on the impact of third party reporting on taxpayer behaviour, however, all administrations we examined, including CRA, rely heavily on this concept to achieve voluntary compliance. The CRA recognizes the contribution of third party reporting in the delivery of its programs. In recent annual reports, the Agency notes that third-party reporting is a contributing factor to more than 90% of taxpayers complying voluntarily with their tax responsibilities. An Internal Revenue Service Federal Tax Compliance research study 5 on individual income tax supports these views. It found that under-reported income increased from 4.2% where there was substantial information reporting to 31.8% where there was little or no such reporting. The results of this study, along with the continuing reliance on such programs in various tax administrations, support the view that third-party reporting is instrumental in supporting voluntary compliance.

In addition to supporting voluntary compliance, we found third-party reporting to be effective in enhancing enforcement programs. In situations where taxpayers are reticent to voluntarily fulfill their tax obligations, third-party reporting provides the administration with useful information for identifying taxpayers who do not comply with their tax filing obligations.

Third-party reporting is a logical approach to address non-compliance where invoices, contracts, payment records, and audit trails already exist in the contractors' books and records. It is not seen to be effective, however, for that portion of the underground economy where transactions are purposefully hidden to circumvent tax laws and other legal obligations (commonly known as the 'cash' economy). During our interviews and focus sessions with the private sector, which included large numbers of construction companies and the four main associations representing the industry, it was widely suggested that third-party reporting does not address the cash economy, in both contractor to sub-contractor and business to consumer transactions, that continues to be a serious problem for the construction industry. In fact, some contractors noted in our focus group sessions that CPRS has actually forced some non-compliant sub-contractors into the cash economy to avoid detection by CRA. Similarly, within the Agency, it is generally recognized that CPRS does not address this segment of the underground economy, or at least does not do so effectively. While there is no evidence on the effectiveness of the program in addressing the cash economy, logic supports the perceptions of the industry and the agency officials. Logically, where a contractor and sub-contractor have agreed to hide their transactions to the benefit of both parties, there is nothing in the CPRS program that would necessarily encourage the two parties to change the arrangement as continued non-compliance of this activity would not be identified through CPRS reporting.

While we could not establish documented, stated objectives for CPRS, we were advised by the Office of Primary Interest, Compliance Programs Branch (CPB) that it was recognized that the CPRS would only be effective where contractors maintain records. Other underground economy strategies, including audit strategies and outreach programs, are in place to address situations where records do not exist.

With respect to efficiency, we concluded that third-party reporting represents an efficient process for both the private sector and the Agency. For those in the private sector, information being reported is generally at the core of business financial and accounting systems, and is therefore generally readily available. This minimizes the need for the private sector to implement extensive system or process changes to comply with reporting requirements. In our focus group sessions with industry participants we asked them to quantify the level of effort required to comply with CPRS requirements. The majority of those who responded gave either a time or cost estimate, averaging “a day or less” in the first instance, or $600 or less in the second instance. As a result, implementation and on-going administration costs can be significantly lower for third-party information reporting than for other options, such as withholding taxes, which are considered to be more intrusive and costly for the private sector. Third-party reporting is economical from an agency perspective as well. New third-party reporting systems can be implemented relatively easily and inexpensively given that the infrastructure already exists to support such programs in terms of receiving, matching, and processing information. Furthermore, on-going administrative costs associated with such programs are relatively inexpensive when compared to other options such as increasing the intensity of the audit penetration in the industry.

As a result, we have concluded that the concept of third-party reporting is a valid concept for improving compliance with the exception of that segment of the industry where transactions are purposefully hidden to circumvent tax laws and other legal obligations. Other strategies employed by the Agency exist to improve compliance in in this area and ensure that the totality of underground economy in the construction industry is being adequately addressed.

1.2 CPRS Design is Adequate But Modifications Would Strengthen the Program

In designing CPRS, the CPB consulted within the Agency and with the construction sector and other comparable tax administrations to develop a program that would be both effective in meeting the initiative's objectives and in providing an efficient process for both the private sector and the Agency. The resultant CPRS design represents a comprehensive approach for: identifying the client population; notifying/reminding clients annually of their obligation to report; receiving contractor reports; integrating sub-contractor information with CRA processing systems for data capture, matching, and cross-referencing of reported information; and using the information in CRA risk assessment systems. This design enables the Agency to obtain, process, and use reported information to identify individuals who have not filed tax returns or registered for GST/HST and to identify high-risk cases of unreported income for possible audit attention.

While management and staff fully support CPRS, some concerns were raised about specific aspects of its design that were seen to be having an impact on either the effectiveness of the program or its administrative costs. These included flexible reporting options, voluntary provision of slips to sub-contractors, and exclusion of companies whose construction business represents less than 50% of its total business.

Flexible Reporting Options

During the design process, concessions were made to minimize the burden on contractors having to file information returns in order to gain support of the construction industry. These concessions included format and timing options for the filing of information returns.

Contractors were given the option of reporting in an open format or on an agency-designed form called the T5018 Summary. This option was intended to provide contractors sufficient flexibility to minimize reporting costs. CRA managers and staff maintain that the open format option is administratively inefficient and impedes internal processes. Our review and analysis of CPRS information returns, however, found that over 95% of contractors use the Agency's T5018 format. Also, we analyzed processing times at the Ottawa Technology Centre (OTC) where CPRS returns are processed and found no significant difference in processing times for information received in an open format versus the prescribed format. Given this information, and the fact that the industry sees this feature as a benefit that provides flexibility and results in decreased costs, we found no compelling reason to change this provision.

More problematic to the Agency, however, is the provision allowing contractors the choice of reporting their subcontractor payments to CRA on either a fiscal year or calendar year end basis. This option was allowed to provide flexibility where contractors' accounting cycles vary from calendar year end thereby minimizing the administrative burden on these contractors. The Minister committed to evaluate the issue of fiscal or calendar year reporting as part of a review of the effectiveness of the program.

The Construction Industry is still very supportive of keeping this choice of reporting periods and would strongly resist any change that would limit this flexibility. At the same time, however, in our focus group sessions with industry participants, many recognized the limitations that this option places on the potential effectiveness of the CPRS program. So while this option is sometimes cited as being necessary to maintain industry support for the program, it is also seen as inhibiting the Agency's ability to properly administer the program.

In our interviews and survey, agency officials linked this option with processing complications and delays resulting from difficulties in determining contractors' filing periods and matching T5018 information with sub-contractors' tax returns when contractors and sub-contractors had overlapping filing periods. Also, a CPB–CPRS business case to Treasury Board in 2002 notes that this option results in an inability to readily incorporate the return into existing compliance systems and causes additional matching and risk assessment workloads as fiscal year data must be apportioned to calendar year reports. We found that these difficulties delayed the analysis of the information by an average of 8 months, and in some instances the delays were up to 20 months.

The majority of CPRS information returns are filed on a calendar year basis (CYE) however, a significant and growing portion of the contractor population files on a fiscal year basis (FYE). (See Table 1.) The inefficiencies cited by managers and staff will only be magnified if the trend to fiscal year reporting continues.

Table 1
Calendar vs. Fiscal Year Reporting

 

2000

2001

2002

2003

Calendar Year

77.5%

87%

69%

64%

Fiscal Year

22.5%

13%

31%

36%

Source: Compliance Programs Branch, March 2005

When we compared CPRS with similar agency third-party reporting programs, we noted that other programs require information returns to be submitted on a calendar year basis. This allows the Agency to cross-reference and validate information in an automated environment and to readily identify filing and reporting non-compliance. Having CPRS information returns filed on a calendar year basis would align CPRS reporting to tax returns. This would eliminate the difficulties noted in identifying reporting periods for information returns and in matching information and tax returns thereby facilitating the identification of non-filers/non-registrants and potential under-reporting of income. It would also improve the efficiency, and arguably the effectiveness, of the existing manual targeting process for the audit function by improving the identification of instances where insufficient income has been reported relative to payments included on information returns filed by contractors.

As a result, we have concluded that mandatory filing of information returns on a calendar year end basis should be adopted to improve both the efficiency and effectiveness of the CPRS program.

Voluntary Provision of Information Slips to Sub-Contractors

During the design of CPRS, it was recognized that the provision of information slips to sub-contractors would be beneficial to program effectiveness and would support efforts to maximize voluntary compliance within the industry. Information slips were considered to be effective in supporting voluntary compliance by serving as a helpful reminder to sub-contractors of dollar amounts paid to their businesses and of the fact that the amounts were reported to the Agency. As a concession to the industry to minimize the compliance cost of CPRS reporting requirements, however, contractors were not required to provide slips to sub-contractors but rather were encouraged to do so on a voluntary basis. While the proportion of sub-contractors receiving slips is unknown, it is generally believed by both the industry and CRA officials to be low.

Providing copies of information slips is a key design feature of most third-party reporting programs as it is seen to contribute significantly to improved voluntary compliance. It is a well-established tax administration practice and is included in virtually all T5 and T4 programs in CRA. Issuance of information slips is also consistent with practices followed in other jurisdictions. Exclusion of this feature from the CPRS design detracts from the impact of the program on taxpayer voluntary compliance behaviour.

Management in CRA is convinced that providing information slips to sub-contractors would be key in raising their awareness and voluntary compliance by serving as a reminder and alerting sub-contractors to the fact that the information has been reported to the Agency. This, in turn, would help to reduce the necessity of enforcement action.

In our interviews and focus group sessions with representatives of the construction trade, reservations were expressed about providing slips because of potential costs associated with having to prepare and mail them out. They argue that making information slips to sub-contractors a mandatory requirement will result in substantially increased costs although they had no supporting data. They identified additional costs for researching sub-contractor addresses and for administrative costs such as mailing and postage. Our analysis, however, did not support this view. The majority of returns are filed by small to medium sized enterprises and, based on actual returns and slips received in 2002-2003 and 2003-2004, have an average of fewer than 15 slips per return. Our analysis of information returns at the OTC revealed that at least 70% of all slips received already include the sub-contractor address thereby minimizing the amount of time required to research subcontractor addresses.

When asked how difficult it would be to send slips to sub-contractors, the medium to smaller sized firms said that it would not result in that much extra labour/cost and therefore would not be a significant burden. Larger firms, however, felt that the administrative burden would be larger given the number of sub-contractors with whom they work. Most, if not all, of these large firms, however, would have automation to support their processing which would ease any increased administrative burden. Our preliminary analysis, therefore, indicates that the issuing of slips to sub-contractors would not significantly add to the administrative cost of the program to the industry as a whole.

Given the potential benefits to voluntary compliance by increasing sub-contractor awareness that their income is being reported to the Agency, the issuance of sub-contractor information slips should be adopted as a mandatory requirement. It is to be noted, however, that the issuance of slips to sub-contractors would have an impact on both the reporting format (open vs. closed) and on the format and content of the current T5108 slip.

Expansion to Large Retailers - 50% Rule

When CPRS was first implemented, companies and individuals with less than 50% of their business activities in construction were exempted from the CPRS reporting requirement. The impact and rationale for this exemption (also referred to as the 50% rule) was originally planned for review in Phase 2 of the evaluation (after sufficient time had passed for CPRS to reach operational maturity) within the broader context of whether or not the program's coverage was adequate for achieving its tax compliance objectives. However, because the exemption was so frequently questioned, both internally and externally, during this phase of the evaluation and the potential inequitable treatment of many taxpayers so significant, there is now a pressing need for CRA to reconsider the continuing rationale for the exemption.

The exemption effectively excludes a number of business sectors involved in construction and home renovation but whose involvement in the construction industry is not their primary business. Most attention has centered on the retail sector, however others are excluded from the requirement such as the rental, insurance, and utilities sectors. While the rationale for this decision is unclear, adoption of the 50% rule by CRA was intentional and was accompanied with a commitment by the Minister to re-examine the rule.

When CPRS was being designed, large sales volume retailers were not a significant force in the construction and home renovation industry. Since then, however, there has been major expansion by such retailers into the areas of installed sales and construction services. The exclusion of these retailers from the CPRS program has become a particular concern to the industry. Little documented evidence exists on the precise nature and scope of this growth except from journalistic articles and periodic statements from the retailers themselves. The consensus among representatives of the construction sector, and the companies themselves, is that very sizeable proportions of this retail business sector are now related to installed sales and services (even though still less than the 50% marker) and construction and home renovation will continue to be a major growth area for these businesses. For example, in one instance a retailer is reported in The Globe and Mail 6 to have increased its number of stores by 250% from 32 stores in 1997 to 115 in 2004 and has plans to expand by an additional 200 stores within 5 years. This large retailer announced in December 2004 that installed sales increased by 31.4% in 2004 alone. Therefore, unlike when CPRS was first implemented, these retail stores potentially represent a significant and growing share of the construction sector that is not being captured by CPRS. The exemption of these retailers and others could well be impeding compliance objectives by leaving significant volumes of business outside of the program.

Additionally, industry associations have noted that the exemption is creating a strong sense of unfair treatment among construction entities that currently fall under the CPRS reporting requirement. CRA officials share this concern. Interestingly, notwithstanding the associations' concerns, there was little awareness of the filing exemption among construction participants in our focus groups. When they learned of this rule, however, they felt it to be highly inappropriate and unfair. Industry associations and focus group participants noted that the exemption excludes larger companies that do more business than others in the industry who are included in the program and felt that the rule defeated the purpose of the program by excluding a substantial amount of construction activity. They also noted that a competitive advantage in the market place could be created for the exempted companies. Based on their experience, they believe sub-contractors wanting to avoid reporting income would gravitate to those companies who do not report payments to CRA. It was suggested that this could provide the exempted companies with a costing/pricing advantage over those who were not exempted if sub-contractors offered lower prices to exempted companies on the assumption that their income would not be reported to CRA.

While it makes sense to draw such building material retailers, and possibly other sectors currently excluded from the program, into the CPRS reporting requirement to ensure potential tax leakage is captured, the impacts on numbers of information returns, tax revenues and compliance are, as yet, unknown as this group has never been studied. While a commitment was made in 1998 to explore immediately the expansion of the program across the industry, there has been little consultation with the excluded sectors and little research work undertaken to date that would provide any information on the impact of expanding the program. However, even if the impact is not substantial, the arguments for proceeding at this time are still strong considering concerns for fair and equal treatment of all members of the construction sector. Expansion of this requirement would also enhance industry support for the program.

As a result of our analysis, we have concluded that the Agency must begin immediately to explore fully the appropriate expansion of the program with particular attention being directed at the inclusion of the large sales volume retail sector.

2.0 Effectiveness of Implementation

In examining the effectiveness of implementation, we assessed the extent to which CPRS was implemented according to plan and whether sufficient operationalization has occurred to adequately support long-term compliance objectives. In summary, CPRS has generally been implemented as planned and is being delivered in a manner supportive of its objectives. Some implementation issues need to be addressed, however, for the program to be more fully operational and effective.

2.1 CPRS has been Implemented as Planned and is Delivered in a Manner Supportive of its Compliance Objectives

The CPRS implementation plan incorporated all the necessary pieces and linkages that were needed for an effective program, and the program was successfully operationalized. Extensive consultations and communications occurred during development and implementation and are considered to have been successful by both agency officials and the main associations representing the construction trade. Although some operational difficulties were experienced at the beginning, the program was settled in by the end of its second year of operation.

Internally, objectives for the program were understood, roles and responsibilities were clear and carried out. Policies, procedures, forms, and work instruments were developed and implementation included appropriate internal training. As well, keeping in mind that CPRS is in fact just another component added to the already existing CRA Non-filer/Non Registrant and Tax Audit programs, effective linkages with similar programs and processes were established. These programs have sufficiently operationalized CPRS activities. In our interviews with agency officials and representatives of the construction sector, no significant issues were raised with respect to any of the foregoing although regional agency officials indicated that greater involvement on their part in the development of the program would have facilitated its implementation.

Ultimately the test of effective implementation for CPRS is the execution of activities in such a manner as to reasonably achieve the desired outcomes on the compliance objective. For the Agency, this means that key program activities are being carried out as intended. For the construction contractors, it means that they understand and are able to comply with the CPRS information reporting requirements. On both fronts, these implementation objectives have been met. Internally, notices are being sent out to remind contractors to file their information returns. Information returns are being received and processed and are being used as intended by different agency programs to identify and take action against potential non-compliance. Externally, according to our focus groups of construction companies and representatives of the trade associations, the majority of contractors have a good understanding of the CPRS regulations and they considered the filing process to be relatively simple and straightforward.

2.2 Some Operational Issues Still Need to be Addressed

Some issues need to be addressed to achieve full operationalization of the CPRS program. These include addressing compliance concerns with CPRS reporting, defining the contractor population, applying the penalties for late or non-filing of CPRS returns, developing automated support for the program, and improving performance measurement and monitoring.

Compliance Issues with CPRS Reporting

The number of CPRS information returns being filed annually has grown with 83,049 returns being filed in 2003-2004. CRA managers consider the increasing volumes of returns filed to be indicative of increasing levels of awareness of, and compliance to, CPRS reporting requirements throughout the industry. However, 47,077 or 57% of the 83,049 returns filed in 2003-2004, required Revenue Collections Branch (RCB) follow-up action with the contractor to obtain the returns. So, while volumes of CPRS returns have grown, the low level of voluntary filing in 2003-2004 is a cause for concern as it has an impact on the administrative cost of the program.

We noted that a significant number of contractors who potentially should be submitting information returns is not being pursued each year. Revenue Collections Branch (RCB) has estimated that because of insufficient resources it has been unable to follow up with verification of over 37,000 contractors in 2003-2004 and 32,000 in 2004-2005. Further resources being applied to this activity may well provide significant benefit in terms of additional tax assessments. The branch has estimated potential for additional sub-contractor tax assessments of more than $50 million annually from this population.

The Agency does not have a program, similar to the employer compliance audit program for T4's, to validate the CPRS payment information that is being reported by contractors. Without such validation, there is no assurance that the information being reported is in fact complete and accurate. Given the on-going non-compliance in the construction industry that gave rise to the program, there is no assurance that contractors are reporting payments accurately and completely. In fact, during our focus group sessions with the industry, it was noted that in some instances agreement is reached between contractors and sub-contractors not to include payments in CPRS reporting. Verification of the content of the contractors' CPRS information returns should be undertaken to ensure the integrity of the system.

Definition of the Contractor Population

It is noted that the Agency has not yet found an effective method to accurately identify the total population of contractors who should be filing CPRS returns and that this is resulting in operational inefficiencies. This population is used for establishing an inventory of contractors to whom letters should be mailed out to remind them of the filing requirements. CPB has been using Statistics Canada SIC/NAICS codes in the identification of contractors for CPRS purposes but these have proven to be imprecise. It is noted that Statistics Canada will no longer be providing this information and RCB is now developing an inventory of contractors based on CRA database information.

There are inherent difficulties in identifying, with any precision, the population of contractors who should be filing CPRS returns. However there is a need to establish a baseline and continue to refine this information, to address operational inefficiencies. Agency officials felt that an automated system designed to support the program would improve the development and management of an inventory of contractors. The absence of an accurate inventory of contractors also contributes to an inability to determine the level of voluntary compliance with the CPRS requirements. Until the Agency can more accurately identify the population of contractors, and the subset within that population who need to file CPRS information, it will be unable to determine levels of voluntary compliance with the program requirements.

We have concluded, therefore, that while the level of compliance with the filing requirements has improved, the Agency should continue to improve its methodology for identifying the total population of contractors who should be filing information returns and should verify the accuracy and completeness of the information on the returns that are being filed.

Penalties for Late or Non-Filing of CPRS Returns

Under Subsection 162(7) of the Income Tax Act, contractors who do not file or who late file information returns with the CRA are subject to penalties of $25.00/day with the minimum fine being $100.00 and maximum being $2,500.00 for each infraction. However, introduction of CPRS was accompanied by a period of administrative tolerance with respect to the application of penalties to allow a period of time for the companies to understand fully their responsibilities. Although this period of administrative tolerance ended late in 2004, penalties have been applied in only two situations where contractors deliberately and publicly refused to comply with the reporting requirement.

The incidence of late or non-filing of CPRS information returns remains an issue for the program. As noted earlier, in 2003-2004 less than half of the returns were filed voluntarily. Industry participants in our interviews and focus group sessions recognized that there is still non-reporting of CPRS information occurring within the industry. One of the factors identified as contributing to this problem was that no penalties were being applied for the non-filing of information returns. Based on our study of returns at the OTC, we found that 58% of returns were filed late by an average of 5.5 months. This impacts adversely on the Agency's ability to identify and take action against construction entities that do not comply with the CPRS reporting requirements and adds to administrative costs from having to research and contact contractors to encourage the filing of their returns. The application of penalties should serve as an incentive to contractors to file their information returns or to do so on a timely basis. This would contribute to reducing CRA efforts required to follow up with non- compliant contractors, thus freeing up resources for other activities.

In our focus group sessions, contractors expressed little specific awareness of penalties for late or non-filing of CPRS returns. There was also a clear message from the focus groups that not applying penalties contributes significantly to a perception that the CPRS program is not important and lessens the attention that contractors give to their reporting obligations. Some construction companies in our focus groups said they had not filed an information return specifically because they did not think that the program was important. The CRA managers we interviewed believe that the application of failure to file penalties will send a strong message to contractors on the importance of complying with CPRS filing requirements.

We have concluded, therefore, that the absence of penalties being applied to late and non-filers of CPRS information returns is impacting negatively on the propensity of many companies to file returns, and on program effectiveness. As a result, the CRA needs to urgently focus on applying penalties across the program as a critical step in the process for strengthening compliance with the CPRS reporting requirements.

Measuring Performance and Monitoring Results

Performance measurement for CPRS is underdeveloped and an overall framework for analyzing and reporting performance does not exist. In the early stages of implementing CPRS, some indicators were developed for reporting to the Treasury Board on CPRS performance but these were not meaningful and were used only on a limited basis for reporting. New indicators have since been developed but on-going reporting based on these has not yet occurred. The new indicators measure production and outputs, however, and do not identify the key drivers of performance which are critical for evaluating and reporting on the impacts of the program and for adjusting the program to achieve better performance. Furthermore, there has been a lack of focus on data requirements and new research in areas such as population sizes and levels of compliance to support the indicators established. As a result, sufficient analytics are not available to properly understand and adjust the program to ensure that it is achieving its objectives.

Performance measures should address both CPRS compliance issues and the impact of the program on client behaviour. To provide some perspective, performance indicators should address operational outputs including levels of voluntary and enforced compliance by contractors with CPRS filing requirements, including both late and non-filing of CRPS returns. From a program outcome/impact perspective, indicators should include sub-contractor behavioural indicators such as trends in changes in compliance with the tax filing requirements in terms of voluntary compliance, late and non-filing of tax returns, and recidivism rates. From an operational perspective, measurement of program outputs is still required to track achievements and allow for the analysis of regional and industry sector variances. It is recognized that some of these indicators will require research effort to provide the necessary information to support outcome and impact measurement and a research strategy is required to address these.

A comprehensive performance measurement framework is required for the on-going management of the program. The absence of such a framework inhibits the Agency's ability to measure objectives achievement for CPRS and to make fact-based decisions to improve performance. As a performance measurement system was not in place, some early compliance results from CPRS had to be derived by the evaluation team from performance statistics generated by agency mainframe systems. However, mainframe data was either not easily accessible or not easily manipulated to produce relevant information with which to determine program impacts.

To adequately and accurately demonstrate its worth and lay the foundation for on-going monitoring and management of the program, a comprehensive performance measurement and analytical framework needs to be developed and implemented. The performance measurement framework should address compliance with both CPRS and tax filing requirements and should include the impact on the Non-Filer/Non-Registrant and Tax Audit programs as well as on voluntary compliance. This information would not only support the management of the CPRS program, but could also be used to determine if there would be benefit to expanding the program to other areas of the underground economy.

Automated Functionality to Support Program Delivery

Other than adjustments to integrate CPRS with already existing systems in the CRA Non- Filer/Non-Registrant and Tax Audit programs, there was very little specific automation, i.e. a compliance system or automated information reporting, developed to support CPRS. A decision was taken to delay funding for such automation until it was established that CPRS was producing the desired outcomes. According to the CRA managers we interviewed, not addressing automation requirements immediately has resulted in processing inefficiencies, barriers to effectiveness, and severely underdeveloped performance measurement. During our review, we identified that automated T5018 functionality to support the mail-out process, issue reminder notices, and serve as a workload system, would help the efficiency and effectiveness of the program's administration. Automation to support performance measurement would facilitate the development of timely and accurate information for ongoing program administration, decision-making and planning.

Automation is critical to the review and enforcement process and ultimately to generating additional revenue for CPRS and improving voluntary compliance. The system currently utilized for CPRS processing is very restrictive in its capabilities and cannot provide the necessary information and functions required to properly identify and manage the workload even with system enhancements. During our review, the most notable areas where automation would help the compliance process were: the identification and profiling of those required to file CPRS returns; issuance of reminder notices; application of penalties and interest; and record of actions taken on sub-contractors. Failing to address these automation needs will not optimize the efficiency and effectiveness of the program's enforcement activity, which in turn affects revenue generation.

RCB is proposing the development of an automated compliance system to support the administration of CPRS. The functionality of the proposed system would address the automation requirements identified during this study. While this proposal is the subject of on-going discussions between RCB and the Information Technology Branch, the Agency should pursue the development of appropriate automated support for CPRS as quickly as possible.

In order to effectively report on the performance of CPRS, automation is required to enable the collection, storage and retrieval of program information. Currently information is not readily available, is not easily accessible, and is not easily extracted from the mainframe sources. As a result, the CPRS cannot be measured in any consistent way, but rather those seeking information must rely on various systems, and then devise individualized methods to analyze and report on the information received. This results in a number of inefficiencies, not the least of which is the time required to extract information and analyze results. Automation of CPRS information is required to have reliable, accurate and relevant information to enable reporting, decision-making and planning.

3.0 CPRS Impacts on Compliance

We examined the CPRS results that have been achieved in the five years that it has been operational. Our examination looked at the enforcement results from the Non-Filer/Non-Registrant and Audit programs as well as impacts on voluntary compliance. While the program requires some adjustments and may still need time to mature, enforcement results achieved to date have been significant and underscore the effectiveness of the program in achieving greater compliant behaviour within the industry. We also found that the impact on voluntary compliance with tax requirements has not yet been measured and is unknown. There is also a strong need for the Agency to develop a communication strategy to inform the construction industry about CPRS activities and results.

3.1 Significant Enforcement Results have been Achieved

Enforcement results achieved to date have been significant and strongly support continuing the program. To date, over 100,000 non-filer/non-registrant and audit enforcement actions have resulted in more than $650 million in assessments being generated as a result of CPRS. It is noted that initially the Agency expected CPRS assessments to stabilize around $125 million per year after 2001-2002 for both the construction industry and government contracting programs. In both of the last two years, however, the revenues assessed from the construction industry alone have exceeded $230 million, almost twice the amount initially expected from both programs on an on-going basis.

The most significant CPRS results have come from the identification of individuals and companies who have not filed their returns or who filed them late. To date, the identification of non-filers accounts for 86% of the enforcement actions and 95% of the CPRS revenue. Analysis of audit results suggests less certainty about the early success of CPRS related audits. Further examination of the impacts on the non-filer and tax audit programs follows.

Non-Filer/Non-Registrant Program

The objective of CRA's Non-Filer/Non-Registrant Program is to identify and remedy situations where taxpayers fail to file tax returns or to register for the GST program. It was expected that CPRS would provide a basis for the efficient and effective identification of non-filers in the construction industry. During our review of program data, we found that the number of new income tax returns filed as a result of CPRS has steadily increased since the program was implemented. The number of returns has increased from 25 in the first year to 30,182 in 2004-2005. In total, over 92,000 income tax returns and more than $620 million in assessments are attributable to the program (see Table 2). The 92,000 returns represent approximately 45,000 unique individuals or entities' submitting an average of 2 returns each, with actuals ranging from 1 to 16 returns. T1 individuals account for approximately 79% of returns filed, 76% of the unique individuals or entities filing, and 55% of dollars assessed. While the T2 corporations account for approximately 21% of the returns filed and 24% of the unique individuals or entities filing, they represent 45% of the assessments generated.

Table 2
Non-Filer/Non Registrant Results from CPRS

 

2000-01

2001-02

2002-03

2003-04

2004-05

Total

New income tax returns

25

8,320

21,601

32,099

30,182

92,227

Income tax assessments*

$27,764

$39,710,960

$140,607,606

$220,292,161

$221,305,950

$621,944,441

Average Return

$1,110

$4,773

$6,509

$6,863

$7,332

$6,744

New GST registrants**

   

1,204

623

565

2,392

Source: Revenue Collections Branch

Notes: *Income tax assessments from the non-filer program include both federal and provincial assessments with the federal portion accounting for approximately 75% of the assessments. These amounts did not include GST-related assessments.

**The numbers of GST registrants could not be distinguished between those related to the CPRS T5018 program and those related to the parallel T1204-government program.

Additionally, 2,392 companies were identified for registration in the GST program, although we were unable to determine the extent to which these involved companies in the construction or government contract portions of CPRS. The CPRS related assessments from the new GST registrants could not be identified from CRA systems. These revenues would be incremental to the $620 million already assessed through the Non-Filer/Non-Registrant program.

In the five years since the program was implemented, the average CPRS non-filer assessment has been $6,744. The annual average has increased each year and in 2004-2005 reached $7,332. This compares favourably to the non-CPRS construction non-filer average assessments of $2,529 for the same year.

While these results represent the total assessments resulting from CPRS, they include cases of both non-filing and late filing. The distinction between the two is relevant when attempting to determine the impact of these results on the underground economy. We attempted to determine the extent to which the results could be directly attributed to the underground economy. The lack of appropriate data, however, prevented us from doing so. Efforts to determine a recidivism rate were similarly unsuccessful.

While most of the true benefit of the CPRS relates to bringing non-filers into the system, identification of late-filers within the construction industry may well prevent them from becoming non-filers and slipping into the underground economy. Given that the contribution of assessments from late filers could be seen as having less impact on the underground economy however, a distinction between late and non-filers must be made to understand fully the impact of CPRS. Discussions with officials in RCB underscored the fact that there is no formal definition of a non-filer and therefore no way for them to determine the extent to which their results are having a true impact on the underground economy. Further analysis of the results should be undertaken by RCB in order to determine what portion of the CPRS results can be directly attributed to the underground economy.

We have concluded, therefore, that the program has had a significant impact on identifying the non-filing population, and achieving enforced tax compliance. Further research and analysis is required, however, on a number of fronts. It is required to ensure a full understanding of CPRS results and its impact on the underground economy. This should include clearly identifying the number of unique taxpayers who are non-compliant with their tax filing responsibilities (differentiating between non-filers and late filers) as well as determining and tracking the rate of taxpayer recidivism.

Audit Program

While the non-filer program focuses on bringing more tax returns into the system, the audit program focuses on the accuracy and completeness of the returns filed. For some time, CRA tax audits have placed considerable priority on addressing non-compliance in the construction industry, as it is one of the targeted sectors in its overall underground economy strategy. The audit program uses CPRS information in its risk assessment processes to better target its audit activities. In its simplest terms, sub-contractor payment information provided by contractors, when compared against income reported by sub-contractors, can identify situations of apparent under-reporting of income.

The audit strategy followed to date has included a blend of high-risk, low-risk, and office audits.

PROTECTED

In our interviews and focus groups, auditors and audit managers gave their unqualified support for CPRS as an enabler of audit effectiveness in respect of underground activity in the construction trade. The vast majority of CRA managers and staff considered agency risk assessment practices for the construction industry to be far more effective and efficient with contractor reporting by providing credible information that facilitates the identification of situations of apparent under-reporting. In particular, they noted that CPRS has improved the effectiveness and efficiency of targeting high-risk sub-contractors for audits. Analysis of audit data, however, suggests less certainty about the early success of CPRS related audits.

Since CPRS was implemented, the numbers of audits supporting the program have increased from 666 in 2001-2002 to 4,221 in 2004-2005 for a total of 14,518 audits over the four-year period (see Table 3). Tax assessments of over $34 million have resulted from these audits, mainly from high-risk audits. The average assessment since inception is $2,366 and like the Non-Filer/Non-Registrant program, the results have generally been increasing year over year with the average assessment for 2004-2005 being $3,089.

Table 3
Number of CPRS audits and related tax assessments

  2000-01

2001-02

2002-03

2003-04

2004-05

Total

Total Audits

5

666

5,192

4,434

4,221

14,518

Total Assessments

$9,980

$1,516,447

$8,074,503

$11,703,875

$13,038,752

$34,343,557

Average Assessments

$1,996

$2,277

$1,555

$2,640

$3,089

$2,366

High risk audits

$9,980

$1,136,303

$4,096,894

$6,539,793

$8,428,991

$20,211,961

Low risk audits

$ -

$ -

$1,157,211

$3,220,246

$3,364,278

$7,741,735

Desk audits (office exams)

$ -

$380,144

$2,820,398

$1,943,836

$1,245,483

$6,389,861

Source: AIMS extractions.

We broke the results down by audit type for 2004-2005 and found that the average tax assessment per audit varies from a low of $1,494 for low-risk audits to a high of $5,684 for high-risk ones (see Table 4). We compared these results with the average cost to conduct the audits and found that the assessments for both high-risk and low-risk audits were not significantly higher than the cost of the audits.

Table 4
Average Tax Assessments and Average Costs for CPRS Audits
(2004-2005)

Audit Type

Average Tax Assessment

Average Cost*

High Risk

$5,684

$2,191

Low Risk

$1,494

$978

Office

$2,563

$562

Source: AIMS extractions.
Based on PM2 salaries and the number of hours worked on the audits.

To gain some perspective on these results, we compared the CPRS high-risk audit results to non-CPRS high-risk audit results completed in the construction industry over the same period of time. This comparison revealed that while the CPRS high-risk audits averaged a return of $4,584, the return for non-CPRS audits was 33% higher at an average of $6,097 (see Table 5). This could be expected given that non-CPRS audits are not restricted to income reporting, as is the case for CPRS high-risk audits. Furthermore, it is noted that the yields from the CPRS audits are improving and by 2004-2005 have almost reached the same level as the non-CPRS audits. The fact that the results of the two audit programs are no longer significantly different may indicate that once sub-contractors are compelled to file returns they become no more risky than others in the industry with respect to accurate reporting. This could bring into question the continuing rationale for a separate audit program for CPRS within the construction industry. Our initial comparison has not taken into account all of the possible differences between the two and further exploration of the effectiveness of the CPRS audit program needs to be undertaken, especially given that these audits are directed at a significant problem that exists in the construction industry.

Table 5
Construction Industry High Risk Audit Results

 

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

Total

CPRS

           

Audits

5

297

1,298

1,326

1,483

4,409

Assessments

$9,980

$1,136,303

$4,096,894

$6,539,793

$8,428,991

$20,211,961

Average Assessment

$1,996

$3,826

$3,156

$4,932

$5,684

$4,584

NON - CPRS

           

Audits

9,111

8,887

10,562

10,807

9,350

48,717

Assessments

$58,616,276

$49,799,295

$62,939,816

$67,189,223

$58,467,155

$297,011,765

Average Assessment

$6,434

$5,604

$5,959

$6,217

$6,253

$6,097

Source: AIMS extractions.

It is acknowledged that the impact of the CPRS audit strategy being pursued (focusing on revenue reporting and visibility) may have had an impact on the program's overall results to date. The restricted nature of the high-risk audit could explain why their results are somewhat lower than those for non-CPRS high-risk audits conducted during the same period given the risk associated with the CPRS program. Given the manner in which low-risk audits were selected, and the restricted nature of the audit itself, significant results could not be expected. It is noted that for the current fiscal year, the CPRS audit program will be focusing its efforts on high-risk rather than low-risk audits, which should improve the overall results. Restricting the scope of the high-risk audit, however, will likely still result in CPRS audits not achieving it full impact on non-compliance.

Nevertheless, it is premature to make definitive judgments on the contribution of the CPRS audit program. Firm conclusions cannot be made on the continued relevance of the CPRS audit program and further analysis should be undertaken by CPB to determine the underlying contributing factors to the level of performance. This would allow the branch to determine if improvements would provide additional benefit or whether there is a need for a separate CPRS audit program for the construction industry. This analysis should include the following elements:

  • assessment of the effectiveness of CPRS audit selection criteria and methodologies;
  • comparison of CPRS related audit results with cost and results in other comparable industry sectors and audit programs;
  • examination of regional results to identify deficiencies and best practices; and
  • examination of compliance levels and trends of sub-contractors in the construction industry.

3.2 Impact on Voluntary Compliance is Unknown

When CPRS was implemented, the impact on voluntary compliance was expected to generate the most significant increase in tax revenues, and this was seen to be the best long-term indicator of the effectiveness of the CPRS initiative. It was not intended that this phase of the evaluation would examine the impact on voluntary compliance as it was recognized that it can take a lengthy period of time to influence taxpayer behaviour, and that considerable methodological preparations are required to undertake such an assessment. Consequently, we have not reached conclusions on the program's achievement of its most important objective.

Managers and officers administering the CPRS are confident, however, that CPRS is positively influencing voluntary compliance by the construction industry although they had no data to support their perceptions. While the logic, underpinning the third-party reporting concepts in general, suggests that an impact on voluntary compliance is likely occurring, the high numbers of non-filers being identified indicate that there may still be significant non-compliance in the industry. Design changes recommended in this report should help to encourage voluntary compliance but the impact of the program in this area still needs to be quantified. Measurement of voluntary compliance, however, is historically as elusive as the underground economy itself and suitable methodologies have not yet been developed to measure impacts on voluntary compliance.

In a 2002 preliminary CPRS review, the CPB suggested that a voluntary compliance impact from CPRS was resulting, as demonstrated by increasing levels of tax returns relative to estimated entities in the construction sector. However, methodological complexities made it difficult for this study to reach firm conclusions on voluntary compliance levels. As difficult as the task may be, it is imperative that it be addressed in order to be able to measure the impact of CPRS, as well as other initiatives and programs, on the underground economy. As the number of annual enforcement actions is increasing, a better understanding of taxpayer behaviour in the construction industry is required to permit the Agency to manage the program and maximize its impacts on the underground economy.

Nevertheless, there is one step that could be taken now to establish one proxy measure of the level of voluntary compliance. Contractor information returns define a known population of sub-contractors from which a rate of voluntary compliance can be determined by analyzing the filing behaviour of this population. This serves only as a proxy measure, however, and would overstate the level of voluntary compliance to the extent that sub-contractors are not being identified on CPRS information returns. Although not pure, this analysis would allow the Agency to estimate the level of voluntary compliance on an annual basis, thereby providing an indication of the impact of the program on sub-contractor behaviour over time. Analysis of the tax filing and reporting patterns of these sub-contractors before and after the introduction of CPRS could also provide further insights into their behaviour and help to measure the impact of CPRS.

Because the complexities of underground economy and voluntary compliance measurement are so significant to this and other underground economy programs, CPB should increase its efforts to research and analyze compliance behaviour in the underground economy. This becomes increasingly important if the CPRS approach is to be considered for other major sectors of the underground economy.

3.3 Compliance Results Should be Communicated to the Construction Industry

During our focus group sessions and interviews, it was clear that both companies and associations continue to believe that the program is ineffective or are uncertain of its effectiveness. By their own admission, this perceived ineffectiveness of CPRS undermines their support for the program and reduces the worth the industry sees in efforts to comply with their tax obligations. As one association official stated “if industry saw results and benefits from CPRS, if we perceived the system to be leveling the playing field, then we would view the costs of CPRS not as a burden, but as an investment.”

As outlined above, enforcement results to date from CPRS have been significant, and have exceeded expectations, yet the industry has not been apprised of the results. Since the likelihood of support for CPRS is strongly driven by the perceived effectiveness of the program, there is a need for the Agency to communicate information to associations and individuals/companies about its CPRS activities and results. This would help to gain support for the program from within the industry and potentially lead to increased compliance with CPRS-specific and tax requirements. The Agency should develop a communication strategy that is designed to increase industry support for the program, in part by releasing CPRS achievements to the construction industry on a regular basis.

Conclusions

Overall, we have concluded that CPRS results achieved to date strongly support the continuation of the program although some program changes are warranted to enhance its effectiveness.

We found that the concept of using third party reporting is valid for addressing compliance issues where documented transactions and audit trails already exist in the contractors' books and records but is not effective for addressing non-compliance where transactions are purposefully hidden by both the contractor and sub-contractor to circumvent tax laws and other legal obligations (commonly known as the 'cash' economy). This segment is addressed by other elements of the Agency's underground economy strategy.

Furthermore, we found that while the design of CPRS is adequate, modifications are required to strengthen the program. The program should be adjusted to require contractors to file information returns on a calendar year basis and to provide information slips to sub-contractors. There is also an urgent need to re-examine the scope of the program to determine the appropriateness of including sectors not currently included, especially the retail sector.

Implementation has generally been achieved as planned and the program is being delivered in a manner supportive of its tax compliance objectives. To obtain full benefit from the program, the Agency needs to apply penalties consistently for late or non-filing of CPRS information returns in order to encourage voluntary compliance with the program's requirements. Since the Agency has not yet validated the accuracy of the information being provided by contractors, there is no assurance that payments to sub-contractors is being reported. Efficient delivery of the program suffers from a lack of automated support that should be developed. Attention is required to developing and providing program monitoring, performance measurement, and research results to support evaluation and informed program delivery improvement.

Significant benefits have been achieved through enforcement actions that have resulted in an additional $650 million in assessments over the last five years. The identification of the non-filing of tax returns has had the greatest impact and has accounted for 95% of these assessments. Results from the audit program suggest a need for a review of the CPRS audit program to ensure that it is achieving acceptable results in addressing the underground economy. Compliance Programs Branch should conduct the necessary research and analysis to identify the factors underlying the performance achieved to date. Voluntary compliance levels and impact on taxpayer behaviour resulting from the program have not been established but must be addressed to measure the full impact of the program. To foster industry support for CPRS, which is driven in part by the perceived effectiveness of the program, there is a strong need for the Agency to develop a communication strategy to inform the construction industry about CPRS activities and results.

Recommendations

In order to improve the effectiveness of the program in both encouraging voluntary compliance and in addressing non-compliance, it is recommended that the Agency:

1. require contractors to report CPRS information on a calendar year basis and to provide copies of information slips to sub-contractors on whom they are reporting payment information to the Agency;

2. re-examine the scope of the program to determine the appropriateness of including sectors of the industry, particularly the retail sector involving installed sales and construction services, that have been excluded by application of the 50% rule;

3. verify the accuracy of the information being reported for CPRS to ensure the integrity of the CPRS reporting process;

4. begin applying penalties for late and non-filing of information returns on a consistent basis;

5. develop automated support for CPRS processes to issue the annual mail-out process to notify contractors of their reporting obligations, issue reminder notices and serve as a workload system. Develop automated support to enable the collection, storage and retrieval of CPRS related information for performance measurement and analysis;

6. develop and implement a comprehensive performance measurement and monitoring framework for the CPRS program and actively monitor the impact of the program on an on-going basis;

7. review the current audit program and results to identify potential improvements and/or the appropriateness of re-allocating resources to activities that have demonstrated better cost-effectiveness;

8. develop and implement a research and analysis program to support CPRS performance measurement including examination of voluntary compliance issues with respect to both CPRS and tax filing requirements and of the impact of CPRS on taxpayer behaviour; and

9. communicate the results being achieved by CPRS to the construction industry.

Recommended follow-up action

The approved framework for evaluating CPRS called for a Phase 2 evaluation to be undertaken after the completion of this first study. Phase 2 is to focus on program results in relation to costs, the approach and coverage for achieving tax compliance, and alternative program delivery mechanisms to achieve objectives. Program results achieved to date far exceed stated expectations and are sufficiently impressive that the benefits from further addressing performance in a phase 2 evaluation is questionable. In recognition of these positive results, and the fact that many of the issues identified for examination in Phase 2 have already been addressed, or will be addressed by other studies, the need for a Phase 2 evaluation is significantly lessened.

It is recommended, therefore, that the Phase 2 evaluation be cancelled and that further work on this program focus on a detailed follow-up of the implementation of the action plans developed to address the recommendations contained within the report. This review, to be undertaken in fiscal year 2007-2008, would focus on the extent to which the action plans have been implemented and, to the extent necessary, the effectiveness of the changes. At that time, a review of program performance data could also be undertaken to ensure that the program is still achieving results.

Action plans

Responses and action plans to the nine recommendations proposed by Corporate Audit and Evaluation are provided below. While the intention of both Revenue Collections Branch (RCB) and Compliance Programs Branch (CPB) is to carry out the plans, it must be noted that most of the actions require additional funding or the need to shift resources. Some of the funding requirements could be significant; however, this will be determined once further analysis as cited in the action plans has been completed. Should funding not become available, implementation of some of the action plans may not be carried out in full, or may be delayed.

Recommendation #1 - require contractors to report CPRS information on a calendar year basis and to provide copies of information slips to sub-contractors on whom they are reporting payment information to the Agency.

Program Branch response: CPB, in conjunction with RCB, will undertake additional research on the impact of making these changes. We will consult with stakeholders to advise them of these findings, and work with them to consider how best to address the changes that would be required. As well, we will review the content/format of the T5018 slip to determine areas for improvement from the perspective of contractors, sub-contractors, and the CRA, including the fact that amounts that are reported are often “blended payments” (goods, services, GST/HST, provincial taxes). The research, and consultative process with the industry, is targeted for completion by March 31, 2006.

Recommendation #2 - re-examine the scope of the program to determine the appropriateness of including sectors of the industry, particularly the retail sector involving installed sales and construction services, that have been excluded by application of the 50% rule.

Program Branch response: CPB, in consultation with RCB, will undertake to examine the scope of the program to determine the appropriateness of including other sectors of the industry that deal with construction or home renovation (e.g. installed sales, the insurance industry). The study is planned for completion by March 31, 2006 at which time recommendations with respect to expansion will be made (including a strategy for communication to any new sectors or industries). The study will also identify any requirements for legislative or regulatory changes, and will describe resource implications. It should be noted that any expansion of the program's scope will result in additional workload for all program areas. As stated earlier, additional funding will be required to address the growth in the program.

Recommendation #3 - verify the accuracy of the information being reported for the CPRS to ensure the integrity of the CPRS reporting process.

Program Branch response: CPB and RCB will develop a plan to verify the accuracy of the information being reported for the CPRS by March 31, 2006. Implementation will be scheduled for 2006-2007, contingent on availability of resources.

Recommendation #4 - begin applying penalties for late and non-filing of information returns on a consistent basis.

Program Branch response: As of January 2004, RCB developed and disseminated policy procedures to their staff with respect to applying penalties to non-filers of T5018 summaries.

We agree that the application of penalties needs to be consistent, and that these penalties act as a deterrent to non-compliance. However, given the limited resources currently available, focus of the application of penalties for the CPRS is primarily related to contractors who refuse to file their summary.

RCB will enhance the application of penalties to non-compliant contractors.

PROTECTED

Recommendation #5 - develop automated support for CPRS processes to issue the annual mail-out process to notify contractors of their reporting obligation, issue reminder notices and serve as a workload system. Develop automated support to enable the collection, storage and retrieval of CPRS related information for performance measurement and analysis.

Program Branch response: RCB, in consultation with CPB, has submitted a High Level Business Requirement (HLBR) to the Information Technology Branch (ITB) to create a CPRS compliance system that will automate the annual mail-out, issue reminder notices and serve as a workload system. This system will have the capability to assess late filing penalties and generate production and filing statistics at the contractor level. Once ITB provides a cost estimate for the system, discussions will be required to determine how the system will be funded. RCB will produce updates on the advancement of the compliance system on a quarterly basis. Expectations are to have the compliance system operational for the 2007/08 fiscal year, provided funding is available, and subject to ITB being able to accommodate additional system releases that year.

As development of the performance measurement framework proceeds and information requirements are identified, RCB in consultation with CPB will approach ITB to develop automated support to enable the collection, storage and retrieval of CPRS related information for performance measurement and analysis.

Recommendation #6 - develop and implement a comprehensive performance measurement and monitoring framework for the CPRS program and actively monitor the impact of the program on an on-going basis.

Program Branch response: CPB, in consultation with RCB, will develop a performance measurement framework by March 31, 2006 that will include performance indicators measuring outputs, outcomes and impacts to support analyzing program performance and improving program delivery. Program performance will be monitored on an on-going basis through annual reporting of results.

Recommendation #7 - review the current CPRS audit program and results to identify potential improvements and/or the appropriateness of continuing with a separate audit program for the construction industry.

Program Branch response: We concur that a review of the audit program to identify potential improvements is prudent, and would add that maintaining an audit program presence for the CPRS is important. CPB will:

  • study risk assessment and workload development procedures and implement changes as appropriate for 2006-2007;
  • in 2006-2007 expand the scope of audit for high-risk files to include all non-compliance (note that low-risk files have been discontinued in 2005);
  • work with RCB to ensure that appropriate consideration is given to referrals from NF/NR, effective fall 2005;
  • consult with field operations with respect to all of the above beginning summer 2005.

Recommendation #8 - develop and implement a research and analysis program to support the CPRS performance measurement including examination of voluntary compliance issues with respect to both CPRS and tax filing requirements and of the impact of CPRS on taxpayer behaviour.

Program Branch response: CPB, in conjunction with RCB, will undertake research and analysis to support the CPRS performance measurement, which will include examination of voluntary compliance issues as follows:

  • CPRS and tax filing requirements:
    • by December 31, 2005--develop proxy measures to use as a baseline to determine future year compliance (using 2004-2005 baseline year) and analyze the breakdown of the Non-Filer statistics.
    • by March 31, 2006: examine the feasibility of identifying the contractor and subcontractor populations and of determining their compliance levels with the CPRS.
  • the impact of the CPRS on taxpayer behaviour:
    • over the next several years, determine compliance rates of the known population of sub contractors.

The introduction of the proposed compliance system (as described in the Program Branch Response under recommendation #5) will assist in identifying the contractor population which will in turn support the measurement of the sub contractor voluntary compliance rate.

Recommendation #9 - communicate the results being achieved by the CPRS to the construction industry.

Program Branch response: We agree that it would be beneficial for the construction industry to be aware of the strong results achieved through the CPRS. CPB and RCB are developing a strategy for the communication of results to the construction industry. This strategy will build upon existing communication activities and will include the following:

  • inform at conferences and meetings on an on-going basis;
  • produce stand-alone documents for distribution on an on-going/ad hoc basis beginning with the pamphlet “Will you do it for cash?” which was included in the May 2005 mail out of the T5018 package to contractors;
  • include results in official CRA documents beginning with 2004-2005;
  • include results on the CRA website by January 2006; and
  • explore other opportunities and means for communicating the CPRS results on an on-going basis.

CPB will measure the effectiveness of the distribution channels to determine those that should be continued on an on-going basis.


1 June 2004, Statistics Canada information

2 The Construction Sector Council, Building Tomorrows Workforce: The Industry, www.csc-ca.org/english/industry.html, 2004 and www.statscan.ca

3 Compliance Program Branch-Audit Program Strategy Division - estimate resource utilization of T5018 versus T1204 portion of the CPRS

4 1998 Omnibus Submission for CPRS, p.p.6

5 Internal Revenue Service, (1996), Federal Tax Compliance Research , IRS publication 1415 (rev 4-96)

6 Marina Strauss, The Globe and Mail, Toronto, Home Depot Woos Do-It-For-Me Crowd, June 8, 2004

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