Harmonization of the Sales Taxes of Ontario and British Columbia Audit

Final Report

Corporate Audit and Evaluation Branch
October 2011


Executive Summary

Background: The Canada Revenue Agency (CRA) assesses and collects provincial sales taxes and supplies the Department of Finance with information that is used to allocate distributions to the provinces. To facilitate this, the CRA administers Goods and Services Tax (GST) or Harmonized Sales Tax (HST) for all provinces (as applicable) in one revenue pool. A straddle allocation formula is used to calculate each province’s share of the revenue pool.

The provinces of Ontario and British Columbia (BC) implemented the HST on July 1, 2010, replacing the previous Provincial Sales Tax and the GST in those provinces. Registrants in Ontario and BC became responsible to collect and remit the HST to CRA when it was introduced via the Provincial Sales Tax Administration Reform (PSTAR). HST returns from these provinces are processed through existing CRA systems.

In anticipation of the HST implementation date, the Finance and Administration (F&A) Branch prepared a Detailed Business Requirements document, highlighting the required system and process enhancements to facilitate the flow-through of information pertaining to PSTAR.

The F&A Branch asked the Internal Audit Division (IAD) of the Corporate Audit and Evaluation Branch (CAEB) to provide independent assurance that these required system and process enhancements were implemented effectively. Additionally, the work performed by IAD was relied on by the Office of the Auditor General (OAG) in the formulation of its opinion on the CRA Administered Activities Financial Statements approved by the Board of Management in August 2011.

Objective: The objectives of this audit were as follows:

  • Provide assurance with respect to the accuracy and completeness of the automated flow-through of PSTAR related information;
  • Provide assurance that the straddle allocation formula is functioning as intended; and
  • Perform, on behalf of the OAG, specific procedures pertaining to the methodology employed by F&A for their historical GST/HST trend analysis.

The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.

Conclusion: PSTAR related data flows accurately through CRA’s systems, from the source documentation of the sampled returns through to the respective Revenue Ledger accounts. In addition, the straddle allocation formula is functioning as intended.

For the trend analysis, our data extraction results did not match those of F&A, resulting in a difference of 74 large filers. F&A should include only current year large filers as indicated in their current methodology, or revise it to reflect the current practice of including large filers from prior years to yield consistent results in the application of the methodology.

Action Plan: Financial Administration Directorate agrees with the recommendation and will revise the documentation of the trend analysis methodology to reflect the inclusion of large filers from the current year, and the two preceding years. This will allow for better trend analysis and the tracking of large filers that may have influenced comparative data.

Introduction

The Canada Revenue Agency (CRA) assesses and collects provincial sales taxes and supplies the Department of Finance (DOF) with information that is used to allocate distributions to the provinces. The Finance and Administration Branch (F&A) performs trend analysis on the aggregate amount of provincial revenue received. The DOF is responsible for forecasting provincial sales tax payable to the provinces participating in the HST for each taxation year (calendar year), and ensures that appropriate installment payments are made.

Approximately fourteen months after the end of the year, the DOF prepares, on the basis of information provided by the CRA, a reconciliation of assessed amounts payable to installments paid and effects a final payment to, or a recovery from, each participating province.

The CRA administers Goods and Services Tax (GST) or Harmonized Sales Tax (HST) from all provinces (as applicable) in one revenue pool from which each participating province receives its own share of revenue.

A straddle allocation formula is used to calculate each participating province’s share of the revenue pool. The formula is applied to HST returns that straddle the calendar year, or for HST returns that straddle periods when tax rates for GST/HST change either as a result of legislated changes to the GST/HST or additional provinces harmonizing their sales tax with the GST.

On July 1, 2010, the provinces of Ontario and British Columbia (BC) implemented the HST, replacing the previous Provincial Sales Tax (PST) and the GST in those provinces. The new HST rate is 13% for Ontario (the provincial portion is eight per cent and the federal portion is five per cent) and 12% for BC (the provincial portion is seven per cent and the federal portion is five per cent). When the HST was introduced via the Provincial Sales Tax Administration Reform (PSTAR), registrants in Ontario and BC became responsible to collect and remit this tax at the new rate. HST returns are processed through existing CRA GST and Revenue Ledger (RL) systems.

F&A asked the Internal Audit Division (IAD) of the Corporate Audit and Evaluation Branch (CAEB) to provide independent assurance that the required system and process enhancements were implemented effectively and fulfilled the F&A Detailed Business Requirements (DBR). Additionally, the work performed by IAD was relied on by the Office of the Auditor General (OAG) in the formulation of its opinion on the CRA Administered Activities Financial Statements approved by the Board of Management in August 2011.

Focus of the Audit

This audit had three objectives:

  • Provide assurance with respect to the accuracy and completeness of the automated flow-through of PSTAR related information;
  • Provide assurance that the straddle allocation formula is functioning as intended; and
  • Perform, on behalf of the OAG, specific procedures pertaining to the methodology employed by F&A for their historical GST/HST trend analysis.

The examination phase of the audit took place between May and August 2011. This audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.

Findings, Recommendations and Action plans

1.0 Effectiveness of system processes as they relate to the accuracy and completeness of PSTAR related data posted in RL

IAD reviewed the mapping of PSTAR enhancements to determine if the requirements outlined in the F&A DBR had been properly reflected in source systems including RL. IAD interviewed staff at the Information Technology Branch (ITB) and the Acceptance Testing Division (ATD) to identify the process, programming, and system changes that were implemented. The audit team also reviewed and analyzed the detailed testing performed by the ATD, and compared the expected and actual test results. The requirements of the F&A DBR were found to be satisfied in relation to the HST implementation in Ontario and BC.

Furthermore, based on a sample of 112 returns from Ontario and BC, as agreed upon by the OAG, the audit team performed flow-through testing of data. The sample returns were traced from the source documents to the source systems and the RL. Three minor exceptions were noted but these were satisfactorily explained and did not impact the accuracy of the flow of data from source systems to RL.

2.0 Effectiveness of the Straddle Allocation Formula as it relates to the accuracy of F&A revenue allocation and reporting

IAD’s review involved an examination of all change requests pertaining to the Straddle Allocation formula along with all relevant test cases, and related test results from the ATD’s April and October 2010 Business Suite Releases consisting of all PSTAR systems. The audit team identified no evidence of errors or issues that would impact the accuracy of the straddle allocation formula after PSTAR enhancements were implemented for Ontario and BC.

Additionally, recalculations of the posted amounts, incorporating a sample of a monthly, quarterly, and annual filing using the formula, yielded no discrepancies between actual and expected results.

3.0 Verification of GST/HST Trend Analysis

On an annual basis, F&A performs high level trend analysis on year to year net GST/HST fluctuation using economic indicators to support their analysis. Large GST/HST filers, (as determined by net GST/HST assessments over $10,000,000), are grouped by industry codes and are then analyzed for the purpose of adding clarity to the Financial Statements Discussion and Analysis in the CRA Annual Report to Parliament. The number of large filers fluctuates annually, with 354 large filers for 2009-2010 and 459 for 2010-2011 respectively.

Using the same methodology F&A employs, the audit team reperformed testing and extracted 385 large filers for 2010-2011, resulting in a difference of 74 from the 459 large filers F&A reported for the same period. The dollar figure resulting from this difference is immaterial with regard to F&A’s trend analysis.

The audit team noted that this difference in the number of large filers was a result of including some large filers from 2009-2010 in the 2010-2011 fiscal year. F&A has indicated that large filers from previous years should continue to be included in the current year analysis to consider any short-term economic downturn.

Recommendation

F&A should either include only current year large filers as indicated in their current methodology, or revise it to reflect the current practice of including large filers from prior years to yield consistent results in the application of the methodology.

Action Plan

Financial Administration Directorate agrees with the recommendation and will revise the documentation of the trend analysis methodology to reflect the inclusion of large filers from the current year, and the two preceding years. This will allow for better trend analysis and the tracking of large filers that may have influenced comparative data.

Conclusion

PSTAR related data flows accurately through CRA’s systems, from the source documentation of the sampled returns through to the respective RL accounts. In addition, the straddle allocation formula is functioning as intended.

For the trend analysis, our data extraction results did not match those of F&A, resulting in a difference of 74 large filers. F&A should include only current year large filers as indicated in their current methodology, or revise it to reflect the current practice of including large filers from prior years to yield consistent results in the application of the methodology.

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