Evaluation Study - Employer Compliance Audit (ECA) Program
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Audit, Evaluation, and Risk Branch
Table of Contents
- Executive Summary
- 1.0 Introduction
- 1.1 Background
- 2.0 Issues, methods, and approach
- 3.0 Findings regarding outcome achievement
- 4.0 Findings regarding CRA administrative effectiveness
Introduction to the Employer Compliance Audit (ECA) Program
The mandate of the ECA Program is to maintain the integrity of the tax system with respect to employers’ reporting of employment income and taxable benefits, withholding and remitting of payroll related amounts, and proper characterization of workers, through a combination of taxpayer education and responsible enforcement. This program contributes to protecting $255 billion in source deductions annually. As in most organizations, employers in Canada manage payroll on behalf of their employees who assume that all source deductions and calculations are compliant with relevant laws. This makes ECA a one-to-many program, as its audits of employer reporting result in adjustments on multiple individual income tax (T1) accounts.
Overall, this evaluation found that the ECA Program:
- Adequately discharges its mandate with respect to responsible enforcement.
- Averages a high change rate (which is the percentage of audits that detected and corrected non-compliance) of approximately 80% annually.
- Audits impact subsequent reporting compliance in a sustained manner several years after the audit.
- Is the only program to address taxable benefits non-compliance with a budget of about $7.2M in fiscal year 2015-2016 and approximately 113 full-time equivalent (FTEs) employees in the regions, as well as 5 FTEs in Headquarters. PROTECTED
- Faces noteworthy willful non-compliance within its target population.
With respect to taxable benefits, it was found that:
- Reporting has increased significantly over the ten year period 2005-2014.
- Different stakeholders bring different perspectives on how best to communicate guidelines on taxable benefits in the Canada Revenue Agency’s (CRA) guides. Those tasked with creating and editing them try to communicate principles and seek simplicity. However the payroll practitioners who do the calculations and the Business Enquiries Call Centre (BECC) agents who answer their calls seek specificity, clarity, and consistency.
- There are many taxable benefits for payroll practitioners to understand and evidence shows that self-reported confidence in making these calculations drops for less commonly occurring benefits.
It is recommended that the:
- Collections and Verifications Branch (CVB), Legislative Policy and Regulatory Affairs Branch (LPRAB), and Assessment, Benefit, and Service Branch (ABSB) work together to enhance the CRA’s payroll related phone and website supports.
- CRA supports CVB in leading the process to include more guidelines surrounding the definition or substantiation of “reasonable” in the CRA taxable benefit guide.
With respect to the proper characterization of workers, it was found that:
- Issuing T4A slips encourages compliance in the amount of T4A self-employed commissions reported; about one-third of independent contractors were found to have not reported income when they did not receive a T4A slip.
- Approximately one-third of payroll practitioners surveyed acknowledged that they did not issue a T4A slip to report fees for service when they should have.
- Finding relevant information was identified as a challenge by a higher proportion of payroll practitioners than was finding information for other payroll obligations.
- The CRA guide states the CRA is not assessing penalties for failing to complete box 048, or reporting payments made by a person for "fees, commissions or other amounts for services". Some employersFootnote 1 interpret this to mean that they are not obliged to complete this box on the T4A slip. There are two consequences to this interpretation: first, employers may not capture the Social Insurance Number (SIN) or other relevant identifier information of the worker; and second, ECA auditors may have trouble gathering the information necessary to complete the slips. These findings suggest that the current enforcement strategy for box 048 T4A slips is not cost effective.
It is recommended that the:
- CVB and LPRAB clarify employers’ obligations surrounding the filing of box 048 T4A slip, PROTECTED.
- ECA Program adopts more cost effective methods to enforce T4A slip reporting compliance PROTECTED
With respect to the federal tax portion of the Program’s calculated fiscal impact, it was found to be lower than the amounts determined by the Program due to:
- Increases to income identified by the audits having been already reported by the independent contractor or employee on their personal tax returns.
- Using a tax rate of 29% when calculating federal tax results does not reflect the income tax rate paid by all individuals affected by the Program.
It is recommended that the:
- ECA Program works with internal stakeholders to adopt assumptions that better reflect amounts that are being reassessed.
With respect to the collectability of the federal taxes assessed by the Program, it was found that:
- The one-to-many structure of the ECA Program is unaligned with the individual level of analysis conducted by the Appeals Branch’s officers. One of the main reasons for the reversals of ECA results is the different level of analysis between the areas: ECA captures records from employers, Appeals from employees.
- Affected taxpayers (employers, employees, and contractors) pay the majority of amounts owing with relatively little effort expended by Agency resources.
It is recommended that the:
- The ECA Program and Appeals Branch mitigate the factors that contribute to the undesired impacts on ECA program outcomes and monitor the impact of these efforts.
The following factors were identified as challenges to ECA Program delivery:
- Timeliness of training for new employees;
- Communications between Headquarters and field, and cross-region communication; and
- Timeliness of responses to technical and legislative enquiries, which may result in the premature closure of an audit nearing its statute bar dates.
It is recommended that the:
- ECA Program addresses the timeliness and coordination of its support, training, and communication functions in order to improve consistency and responsiveness to the field.
On April 9, 2015, the Employer Compliance Audit (ECA) Program evaluation framework was approved by the Management Audit and Evaluation Committee. The ECA Program evaluation study was included in the Risk-Based Audit and Evaluation Plan (RBAEP) 2013-2016 which was approved by the Board of management on September 17, 2013.
The collection of personal income tax revenue through source deductions is a large source of government revenues. In 2014-2015 alone, the Canada Revenue Agency (CRA) collected approximately $255 billion combined from Canada Pension Plan (CPP), Employment Insurance (EI), and federal and provincial income tax through source deductions remitted by over 1.1 million employers, representing approximately 70% of total revenues and pension contributions for the year. As such, ensuring compliance with these obligations is an important aspect of maintaining integrity in the Canadian tax system. Correct calculation of source deductions relies on the proper reporting of employment income and taxable benefits, withholding and remitting of CPP/EI amounts, and proper characterizations of workers. One program responsible for reviewing these three areas is the ECA Program which is part of the Employer Compliance Division in the Business Compliance Directorate of the Collections and Verification Branch (CVB). The ECA Program had a total annual budget of about $7.2 million in the 2015-2016 fiscal year and approximately 113 full time equivalent (FTE) employees in the regions, as well as 5 FTEs in Headquarters (HQ).
Canadian legislation places several obligations on employers. These obligations include requiring employers to deduct and withhold the employee’s share of personal income tax, as well as their combined portions of the CPP contributions and EI premiums. Those dollars are remitted on the employee’s behalf to the CRA. These payments, which are held in trust by the employer, are commonly known as “at source” deductions. Employers are tasked with identifying, calculating, and reporting taxable remuneration and premiums paid to employees on their Statement of Remuneration Paid slips (i.e. T4 slips) (Appendix 2). In the event of services rendered from another business (i.e. a contract worker), employers, as payers, are required to issue a Statement of Pension, Retirement, Annuity, and Other Income to contract workers ( i.e. T4A slips) (Appendix 3) to report the fees paid to these contractors.
In order to enforce these employer payroll obligations, the mandate of the ECA Program is to maintain the integrity of the tax system with respect to the reporting of employment income and taxable benefits; withholding and remitting of payroll related amounts; and, the proper characterization of workers, through a combination of taxpayer education and responsible enforcement.
The ECA Program promotes employer awareness and understanding of tax laws and obligations as provided in the Income Tax Act (ITA), the Excise Tax Act (ETA), the CPP, the Employment Insurance Act (EIA), and their respective regulations, to increase and enhance voluntary compliance.
The ECA Program can be characterized as a one-to-many program: an audit of one employer’s reporting can, depending on the size of the organization, impact the T4 slips of multiple employees. If employer reporting non-compliance is detected, this could affect many individual taxpayers working with that employer years after the individuals have filed their tax returns for a given tax year.
2.0 Issues, methods, and approach
This evaluation reports on two issues:
Outcomes achievement (section 3): The first issue highlights the outcomes achieved based on the ECA Program mandate to maintain the integrity of the tax system through both responsible enforcement (see section 3.1) and education (section 3.2).
CRA administrative effectiveness (section 4): The second evaluation issue assessed the overall administrative effectiveness. A taxpayer-centric view of the CRA was used to identify the main program areas that contribute directly or indirectly to facilitating compliance among the population targeted by the ECA Program. The main topics covered are the Program’s calculation of fiscal impact (section 4.1), collectability of the reassessed fiscal impact (section 4.2), and barriers and challenges to program delivery (section 4.3).
The main methods of analysis employed in support of this evaluation were:
- data analysis of calculated fiscal impact between 2008-2009 and 2013-2014 fiscal years, with particular emphasis on 2010-2011 and 2011-2012 to allow 3 years for the program to complete its audits and for downstream results to be realized. This data included analysis on almost 100% of employers which issued a T-slip, and on matched T-slips created or amended as a result of an ECA audit;
- online consultation that sampled 1,600 payroll practitioners from among organization members of the Canadian Payroll Association (CPA) in March 2016;
- interviews with 40 ECA Program officials at all levels and across all regions and HQ, as well as interviews with numerous other CRA officials; and
- review of documentation provided by various stakeholders and available on the CRA intranet and internet.
This report also contains findings that are outside of the ECA Program’s mandate in order to provide a more holistic view of the CRA’s administration of employer payroll obligations. The premise of such horizontal evaluations is that they take a taxpayer-centric approach, so that they can provide insight into multiple compliance outcomes rather than just the one for which the program being evaluated is accountable. This approach means that there is a need to:
- recognize that there are upstream impacts, or stakeholders across the CRA which may affect the evaluated program’s ability to achieve its mandate; and
- provide insight into the downstream impacts that the evaluated program could have on stakeholders within the Agency. For this evaluation, “downstream impacts” refers to the impact on post ECA audit processes and programs.
3.0 Findings regarding outcome achievement
The first issue summarizes the outcomes achieved based on the ECA Program’s mandate to maintain the integrity of the tax system through both responsible enforcement (sub-sections within 3.1) and education (sub-sections within 3.2).
3.1 Maintaining the integrity of the tax system through responsible enforcement
This section examines the core activities of the ECA Program, namely the impact its audits are having with respect to employers’:
- reporting of employment income and taxable benefits (sections 3.1.2 – 3.1.4);
- proper characterization of workers (sections 3.1.5 – 3.1.7); and
- withholding and remitting of payroll related amounts (section 3.1.8).
3.1.1 The ECA Program covers all aspects of its mandate with respect to detecting and correcting reporting non-compliance.
In most organizations, employers manage payroll on behalf of their employees who assume that all source deductions and calculations are compliant with the relevant laws. As the ECA Program assesses employers’ reporting of workers’ compensation (income, benefits, and premiums), any change from the audit will create reassessments on the workers’ T1 accounts, including penalties and interest owed to the CRA. This means that aside from missing CPP/EI contributions, employers are not directly impacted by the audit results.
Figure 1 illustrates the annual volume of completed audits and the change rates. Between 2009-2010 and 2013-2014, the program conducted PROTECTED employer compliance audits per fiscal year, representing a coverage rate of approximately PROTECTED of the total target population. Since not all employers in Canada offer taxable benefits and incentives to their employees, the coverage rate for taxable benefits and incentives would be higher.
|Number of completed audits||PROTECTED||PROTECTED||PROTECTED||PROTECTED||PROTECTED|
|Number of changes/FY||PROTECTED (84%)||PROTECTED (80%)||PROTECTED (84%)||PROTECTED (87%)||PROTECTED (80%)|
Amongst the key observations from a review of the complete audits during those periods:
- the ECA Program achieved a change rate (which refers to the percentage of files audited where non-compliance was detected and corrected) of at least 80% of selected files per year;
- at least 86% of all change audits identified improper reporting of taxable benefits;
- between 46 and 55% of all change audits required subsequent changes to the withholding and remitting of payroll related amounts, such as CPP or EI as a result of changes made to income or worker status; and,
- 13% or less identified an improper characterization of a worker (where a contractor was changed to an employee).
3.1.2 Employer compliance audits enhance subsequent taxable benefit reporting compliance.
As part of their reporting obligations, employers who provide cash or non-cash benefits or allowances to their employees must complete the following steps:
- determine if the benefit is taxable;
- calculate the value of the benefit;
- calculate payroll deductions; and
- file a statement of remuneration paid (T4 information return).
The ECA Program examines employers’ records to determine whether or not they have accurately identified, calculated, and fully reported the amounts of taxable benefits. According to interviews with ECA auditors, this component of the mandate takes up 70% to 90% of their total audit efforts.
Analysis of reassessed T4 slips found that audited employers increased their reporting compliance in the years following an employer compliance audit including a:
- 45% increase in the audited employer population reporting taxable benefits;
- 147% increase in total taxable benefit amounts reported;
- 46% increase in T4 slips filed with reported taxable benefits; and
- 70% increase in the taxable benefits amounts reported per employee.
3.1.3 Filing trends suggest that an increasing number of employers are reporting taxable benefits.
An analysis of T4 slips from 2005-2014 with and without taxable amounts reported was conducted. Between 17 and 19 million distinct taxpayers were present in the T4 population during each of the years reviewed, with almost 1.5 T4 slips issued for each recipient. Amended slips were excluded in order to focus on voluntarily compliant behaviour.
|With taxable benefits reported||0%||7%||5%||13%|
|No taxable benefits reported||0%||3%||1%||0%|
Over the ten-year period:
- as shown in Figure 2, the number of T4 slips filed that reported taxable benefits on them had increased by 13%, while there was no net change in the number without taxable benefits during the same period of time; and,
- while the aggregate T4 income had increased by 32% among those filings without taxable benefits, the T4 income of those that included taxable benefits had increased by 46%.
Taken together, these results may be interpreted as an indication that there is an increasing awareness of the need to file and report taxable benefits by employees.
3.1.4 Payroll practitioners are confident in their abilities to comply with requirements for the most commonly used taxable benefits. However, concerns were raised regarding those with fewer occurrences.
A large majority (85%) of the payroll practitioners who participated in the consultation indicated that they calculate taxable benefits as part of their payroll-related activities. These respondents were asked to self-assess their level of confidence in properly calculating and reporting taxable benefits applicable to them (out of a list of 14). Where they lacked confidence, they were asked to identify why.
Overall, payroll practitioners averaged 6.9 out of a possible 10 regarding their self-rated confidence in calculating and reporting the taxable benefits examined.
There were three taxable benefits, “group term life insurance“, “accidental death and dismemberment”, and “gifts and awards in cash” which:
- were by far the most widely used (about nine in ten participants indicated they calculated each of these); and
- the average confidence level (between 7.9 and 8.5) of payroll practitioners suggests relative confidence in their abilities to properly calculate and report them.
Conversely, “security/stock options”, “personal and living expenses/purchase of assets”, and “housing, free/low rent, board, and lodging”:
- were among the taxable benefits calculated by a smaller proportion of payroll practitioners (approximately two-thirds of participants); and
- the mean confidence level (between 4.1 and 5.6) in calculating and reporting these suggests a lower level of confidence among payroll practitioners.
3.1.5 ECA audits have found limited non-compliance with respect to the proper characterization of workers, and they enhance future T4A slip reporting.
Defining a worker as either an “employee” or an “independent contractor” can impact an employer’s CPP/EI obligations. An employee is defined as a person who works for an employer under a “contract of services” which provides the employer with total control over the details of the work performance. An independent contractor is a worker who is hired under a “contract for services” for a specific project, but has the freedom to work out the details of how to complete that project. Employers are required to provide CPP/EI payments on behalf of their employees but have no such obligation for independent contract workers they hire. As such, properly characterizing workers is an important part of the ECA Program’s mandate.
If an employer or a worker is not sure of the worker's employment status, a CPP/EI ruling should be requested by the auditor. In the event that an individual worker is treated as a contractor and the auditor has reason to believe they are an employee, the case is referred to the CPP/EI Rulings division who make a determination of that worker’s status. In 2014-2015 CPP/EI Rulings conducted 470 rulings from referrals from the ECA auditors.
The proper characterization of workers found in the ECA Program’s mandate supports the identification of unpaid CPP/EI contributions for workers who are treated as independent contractors even though their relationship with the employer may be that of an employee. Since the 2009-2010 fiscal year, changes to a worker’s status to a contract of services (i.e. an employee) happened in 13% or less of the cases.
For cases where the contract for service is upheld, ECA auditors create T4A information slips to document the fees paid to the contractor on behalf of the employer when no T4A was issued. In order to estimate the net impact of the employer compliance audit on taxpayer T4A filing behaviour, the level of filing for years preceding the audit was compared with T4A slips processed a long time after the audit was completed. Examining the T4A slip counts issued by 590 employers who were audited by ECA in 2010, the data showed that there was a substantial increase, on average, in T4A filing in the years following an employer compliance audit. Over the 2012 to 2015 period:
- the average number of employers to issue T4A slips increased by 105% from the years prior to their 2010 employer compliance audit; and
- these employers issued 98% more T4A slips which represented a 348% increase in the income reported on the slips.
3.1.6 T4As appear to positively impact reporting compliance among a portion of the self-employed population, although there may be reason to believe that the majority of the population reports its income regardless.
In the absence of third-party reporting (reporting on behalf of others as employers do for workers), there have been concerns about whether independent contractors accurately report their income. In 2014, for example, approximately 260,000 independent contractors were supposed to report $9.7 billion in commissions, but reported only 88% of that total ($8.5 billion). In order to assess the potential impact of the T4A slip on the independent contractor population, a comparison of the reporting behaviours was conducted between those who received their T4A slips in time for T1 filing and those who did not. The analysis found that while the majority of independent contractors reported the majority of their income regardless of receiving a T4A slip, those who did not receive the slip were nearly twice as likely to report no income as those who received it (31% compared to 17%). On balance, it would appear that issuing T4A slips may increase accuracy in reporting as well as encourage greater compliance in the amount of T4A commissions actually reported.
3.1.7 The consultation with payroll practitioners revealed that about one-third of those who had recently retained a self-employed worker did not voluntarily complete a T4A. This practice has resulted in the Program issuing more slips on the employers’ behalf as part of their audits.
Overall, one-quarter (25%) of consultation participants indicated that they are responsible for determining the status of a worker and would be responsible for issuing T4A slips. Among those who stated their organization had retained the services of a self-employed worker over the past 2 years:
- nearly three-in-ten (28%) indicated “we don’t issue T4As to self-employed workers”;
- another 5% agreed that they “don’t issue T4As to self-employed workers because [they] don’t understand CRA’s requirements.” A review of the demographics revealed that this group was disproportionately represented by those in the public administration sector; and
- another group (3%) said that they issue T4As only when asked by self-employed workers. This small group was dominated by those in the health care and professional, scientific and technical services sectors.
Meanwhile, the Program has evolved to focus more on issuing T4A slips for identified contracts for service in order to capture the potential non-reported income paid to those contractors. The number of audit files in which T4A slips were issued increased from 15% of the change audit files in 2009-2010 to 46% by 2013-2014. This has occurred despite the fact that issuing T4A slips is not a part of the Program’s official mandate. PROTECTED
3.1.8 Employers who are audited by the ECA program are typically fully compliant with their withholding and remitting requirements, and only need to pay the excess amounts resulting from employment income reassessments.
Although part of the ECA Program mandate, employers’ obligation to withhold and remit payroll amounts does not pose a significant area of non-compliance for the employer compliance auditors. Auditors interviewed explained that this is because the employers targeted by the ECA Program are normally up to date in their payroll deductions, and so, correcting CPP/EI amounts requires less relative effort compared to other areas of the mandate. Instead, the majority of the ECA Program’s changes related to payroll remitted amounts are derived from assessed amounts for taxable benefit and employment income as well as changes to workers’ status.
Overall, the ECA Program:
- adequately discharges its mandate by verifying employer’s reporting of employment income and taxable benefits, properly characterizing workers, and withholding and remitting payroll related amounts;
- audits impact subsequent reporting compliance of the vast majority of those employers audited in a sustained manner several years after the audit;
- has presided over increasing taxable benefit filing and reporting over the ten year period 2005-2014; and
- has no major concerns with respect to withholding and remitting payroll amounts.
However, the following reporting compliance concerns emerged:
- payroll practitioners are required to learn and understand numerous taxable benefits, and tend to lack confidence in their ability to calculate those benefits which occur less due in part to concerns with educational resources;
- approximately one-third of those who should have completed a T4A did not; and
- ECA auditors are completing more and more T4A slips that are the obligation of the employer.
3.2 Maintaining the integrity of the tax system through education
The second element of the ECA Program mandate is the provision of educational support to enhance voluntary compliance.
This section also reviews the most commonly used CRA services by examining:
- feedback received for both taxable benefits and T4A slips, how best to communicate clearly, and the ease of finding information in CRA guides and webpages;
- website statistics;
- telephone support service at the Business Enquiry Call Centres (BECC); and,
3.2.1 The ECA Program provides minimal educational support beyond that which is achieved from the audit process.
While ECA Program officials considered audits to be the principal mechanism used to educate employers, their efficacy is limited largely to those who are audited, PROTECTED
CRA audits were cited by 6% of the consultation respondents as providing a source of information or explanation on their payroll related enquiries, and only a small group from those noted concerns with it as a source of information.
The ECA Program has implemented initiatives over the years with the objective of providing outreach and education to the employer population. However, ECA Program officials recognized that these activities did not provide significant coverage and there was limited, if any, follow up. Instead, most key payroll-related educational activities tend to occur in other CRA programs while the ECA Program plays an indirect role in the development of webpage and guide content. For example, in the course of an audit or review, if the ECA Program finds discrepancies or contradictions in the guides it informs relevant stakeholders within the Agency to action the necessary changes.
To facilitate reporting compliance, the CRA provides several resources to employers and their representatives, including telephone support, rulings and interpretations, and numerous guides and webinars all found on the CRA website. The following table highlights key CRA programs that support the ECA Program in facilitating understanding across the payroll community:
|Section||Branch||What they do|
|Policy and Legislative Research Section (PLRS)||CVB||Policy advice and clarification
Present webinars and conferences
|Stakeholder Relations, Issues Management and Services (SRIMS)||CVB||Outreach and liaison with external stakeholders|
|Specialty Information Section (SIS)||ABSB||Updates guides and webpages|
|Business Enquiry Call Centres (BECC)||ABSB||Phone support to taxpayers|
|CPP/EI Rulings||LPRAB||Rules on the status of a worker|
|Income Tax Rulings Directorate (ITRD)||LPRAB||Interprets legislation|
Employer education efforts are also supported by external stakeholders including the CPA, which, in addition to CRA educational efforts, provide their almost 20,000 members with educational materials and responses to enquiries related to employer reporting compliance.
Payroll practitioners participating in the consultation were asked whether they had sought any information on a payroll related issue over the last year. Respondents were provided a list of thirteen possible sources of information, eight of which were from the CRA. 98% of respondents indicated that they had consulted at least one of the eight CRA resources listed. CRA web pages (77%) and the employer guides on the CRA website (76%) were the two most frequently cited sources, and CRA BECC was contacted by almost half of respondents (47%).
3.2.2 Stakeholders have different perspectives on the level of detail required to communicate clearly in the CRA’s guides and webpages.
There are numerous guides and webpages covering employer related payroll obligations such as taxable benefits and characterization of workers.
The main guide for taxable benefits is T4130, Employers' Guide - Taxable Benefits and Allowances. In the event that the Program detects content concerns in the guides and webpages related to employer payroll obligations, it would communicate these concerns with the PLRS who in turn send the changes to the SIS in ABSB which is responsible for updating and developing the online content for CRA programs.
Officials from both PLRS and ECA Program HQ stated that the purpose of the guides is to communicate general principles that can be applied to a broad range of situations in order to allow taxpayers to be compliant. This practice stems from two inter-related concerns:
- it was felt too many specific examples made the guides difficult to follow; and
- providing detailed examples could increase non-compliance because employers may consider specific situations not covered in the guides to mean that, by being omitted, they are not part of their tax obligations.
According to HQ officials interviewed, the guides aim to address 90-95% of situations encountered by taxpayers, and other CRA resources are made available to help resolve extraordinary situations. Given the legislative framework, perfect clarity in all cases is not possible. As a result, over the last few years the T4130 has been updated to include fewer examples and instead focus on assisting employers in how to recognize taxable benefits. Additionally, the Government of Canada’s desire to remove extraneous content from its webpages in preparation for the launch of the Canada.ca multi-departmental website is also a consideration for those who design the webpages.
The Program’s regional staff take a different perspective. Many of those in the field indicated that taxable benefits were generally not well understood by employers or their representatives, in part because their calculation can require appropriately defining “reasonable” amounts, to which there are over 70 references in the taxable benefits guide. Reviewing the information in the guide on the list of 14 taxable benefits included in the consultation with payroll professionals, seven were found to have a reference to “reasonable”. Among those seven, it was found that self-reported confidence in making these calculations was higher for those benefits where either (i) reasonable was defined in the guide or (ii) a link to an interpretation bulletin was provided and generally lower in the instances where reasonable was not defined or no links to bulletins existed. Participants’ written-in concerns with respect to their confidence ratings could be summarized as follows:
- The CRA guides lack clarity and examples that addressed their specific cases. The most commonly cited concern identified was the lack of clarity around how to distinguish between business usage and personal usage, and how this principle can be applied when it comes to automobile and motor vehicle allowances, cell phone/internet usage, and housing and travel allowance taxable benefits.
It should be noted that just over half (52%) of the respondents who wrote in these concerns had 7 or more years’ experience in their current payroll job and 62% had a payroll-relevant certification, percentages that align with those in the larger participating population. Based on these criteria, this group may even be more knowledgeable than the larger participating sample.
3.2.3 There are differences in messaging regarding penalties for failure to report in Box 048 of the T4A slip.
Employers and their representatives can access two key sources of information to understand their payroll reporting obligations: the ITA and the CRA guide RC4157 Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary. According to the ITA, Regulation 200(1) states that “ […] every person who makes a payment described in subsection 153(1) of the Act […] shall make an information return in prescribed form in respect of the payment.” Paragraph 153(1)(g) includes “fees, commissions or other amounts for services.” which is captured in box 048 of the T4A slip. However, the RC4157 states that while fees for services provided by independent contractors should be reported on a T4A slip in Box 048, it goes on to note later (on p13) that: “the CRA is not assessing penalties for failures relating to the completion of box 048.”
ECA auditors indicated that some employers have incorrectly interpreted the lack of penalty as absolving them of their responsibility to report on fees for service. Given this, and being widely recognized that audit is the most expensive enforcement strategy available to the CRA, ECA auditors expressed concern about their increasing focus on issuing T4A slips. CPA’s representatives on the other hand support increased enforcement in T4A filing because they believe it protects against tax avoidance among non-employee workers. Despite these differences, both the ECA auditors and the CPA representatives did agree that an education strategy regarding the slip would be the most beneficial tool for improving compliance in the area.
3.2.4 Finding relevant information on the proper characterization of workers is a challenge for payroll practitioners.
Achieving reporting compliance depends on the degree to which the practitioner is aware of, understands and is knowledgeable enough to do the desired calculations.
To do so, they need to be able to find relevant information that is clear enough to act on. The consultation revealed that fewer payroll practitioners are finding the information they are looking for with respect to the rules around the proper characterization of workers and issuing T4A slips when compared with other payroll-related obligations.
The vast majority of payroll practitioners seeking information on the calculation, deduction, reporting and remittance of income tax, CPP contributions, EI premiums (90%), and taxable benefits (87%) found the information they sought. In comparison, 71% of those seeking information on deciding the status of a worker (T4As) found the information they were looking for, and this was also the smallest group that indicated it was easy to find.
Several payroll practitioners commented that the key word search function on the CRA web pages retrieved too much irrelevant information, thereby making it difficult to find answers to their specific queries. A review of the CRA website used a payroll practitioners’ perspective searching for this information. This review found that information regarding the status of a worker is accessible through the CRA webpage for businesses under the “CPP/EI rulings” heading where it states: “The CPP/EI Rulings Program is responsible for providing clients with rulings that indicate whether a worker is an employee or is self-employed.” Further interpretative content is provided under a second hyperlink, “CPP/EI Explained”, where users can access specific considerations for determining a worker’s status. Payroll practitioners, however, might be looking for the words “T4A” or the heading “Worker’s Status” and may not recognize the CPP/EI heading as being where they need to look, despite the description provided.
3.2.5 Recent trends suggest that the CPA web site traffic is increasing at the same time that the CRA’s is largely declining.
From the list of thirteen payroll sources mentioned earlier, the CRA’s webpages (77%) and guides (76%) were the only two CRA resources among the top five information resources cited by payroll practitioners in the consultation. After these, the next three most frequently selected sources were:
- entered one or more payroll-related keywords in a commercial search engine (62%);
- contacted a professional association (62%); and,
- asked peers or colleagues (55%).
However, written responses from the consultation noted that clarity and consistency in CRA online content were common areas of concern. Some mentioned that they received conflicting information between CRA resources, or between CRA and CPA resources, particularly with respect to T4A related obligations. Taken together, these responses provide context to a larger shift in web site preferences that appears to be occurring in the payroll community:
- While visits to the two most accessed CRA webpages “Benefits and Allowances” and “T4A-information for payers”, increased by 24% and 46% respectively in the 2014-2015 fiscal year from the previous year, general visits to the CRA payroll-related webpages declined significantly. According to the internal CRA statistics, there was a decline in the number of visits to the webpages related to employer-tax compliance (English visits decreased by 39.5%; French pages by 60%), between fiscal years 2013-2014 and 2014-2015.
- Meanwhile, visits to the CPA resources section tool, which provides guidance on a number of employer-tax related topics, doubled between 2013 and 2014 and increased again in 2015 by 14%.
3.2.6 Lack of a feedback loop between BECC agents and other areas has led to some instances of inconsistent responses to callers regarding employer payroll obligations.
Nearly half of the payroll practitioners (47%) who participated in the consultation called the CRA business enquiries line for employer-tax related enquiries. The BECC agents answer approximately three million enquiries per year, and one in five calls (21%) relate to employer tax obligations. Analysis of the 2013-2014 Profile of Enquiries for the Business Enquiries line revealed:
- Approximately one-third (35%) of the calls related to employer payroll compliance are fairly straightforward enquiries regarding payments/remittances and balance and are handled by front line agents.
- Complex employer payroll enquiries, including enquiries on taxable benefits, represent 15% of Level 2 agents’ workload.
- Among the employer/payroll calls relating to taxable benefits, “insurance premiums” (17%), “gift and awards” (15%), “automobile allowance” (10%) and “automobile benefit” (10%) represented the most frequently enquired about topics.
- In 2013-2014, nearly 10% of payroll related enquiries escalated to Level 2 related to how to complete the payroll related slips.
According to BECC agents interviewed, the more abstract enquiries that relate to taxable benefit obligations are considered more complex and referred to Level 2 agents whose job it is to interpret beyond what is directly stated in the guides.
If BECC agents are unable to resolve the query at the local level, they forward the question to a field support mailbox, which is then responsible for escalating enquiries they cannot answer to the PLRS. The PLRS in CVB may in turn liaise with the LPRAB.
Some BECC agents have noticed that one practice adopted by callers is to call in twice and “go with the answer that they like best.” While BECC agents are expected to probe clients to better understand their information needs, agents interviewed believed that having greater detail on more specific payroll scenarios would improve consistency in responses between Agents.
Almost 100 payroll practitioners commented on concerns they had experienced with the CRA phone service, which could be summarized as follows:
- they received inconsistent responses from enquiries agents;
- the agents “read the guide back to them” and could not provide further information; or,
- their concerns related to the more complex case-specific situations that are not directly covered in the guides which prompted them to make the calls.
Employers also seek out information from the CPA’s telephone enquiries service Infoline. Since 2011, taxable benefits have consistently been the fourth most enquired about topic for the Infoline.
While the ECA Program contributes to the call centres’ reference material used to respond to taxpayer enquiries, there is no mechanism to receive feedback on the input, nor does the Program appear to provide sufficient support to BECC agents in responding to escalated enquiries. This has two consequences:
- call centre agents may be providing callers with incorrect or inconsistent information; and
- program areas miss out on the opportunity to learn about the educational needs which they can use to better design or update the relevant guides.
3.2.7 Webinars are viewed positively and there is growing demand for more.
The PLRS and SRIMS provide upstream support to the ECA Program in achieving the educational component of its mandate through the development and presentation of webinars to key stakeholders such as the CPA. These tools are available to all employers in Canada; at least 55,000 members receive direct notifications from the CRA.
Nearly a quarter of consultation respondents cited the webinars as a source of information. Written comments by this group were positive and revealed a demand for more webinars to be provided. The webinars are particularly popular among employers and are primarily presented to the target population of employers through external stakeholders such as the CPA. According to the PLRS, its webinars are consistently sold out to participants, and it has had to double the participation limit in the last year in order to accommodate the growing interest.
Beyond indirect input through the technical enquiries that reach the PLRS, the ECA Program provides minimal contribution to these outreach activities and tools.
3.2.8 Summary and recommendations
The ECA Program relies heavily on external stakeholders to provide educational support beyond that which is achieved from the audit process. The overall findings were as follows:
- Stakeholders bring different perspectives on how best to communicate clearly in CRA guides and webpages. Those tasked with creating and editing them (i.e. CRA) try to communicate principles and seek simplicity, while those who do the calculation (i.e. payroll practitioners) seek specificity.
- Finding relevant information on the proper characterization of workers is a challenge for payroll practitioners.
- Recent statistics indicate that the CPA web site traffic is increasing at the same time that the CRA’s is largely declining.
- BECC services rely on interpreting the guides and, when necessary, expertise in other areas of the Agency to respond to more complex enquiries that arise from specific taxpayer situations.
- Webinars are the most positively viewed educational resource by users and there is growing demand for more.
The above findings resulted in the following recommendations:
CVB, LPRAB, and ABSB work together to enhance the CRA’s payroll related phone and website supports.
We concur with this recommendation. The Program recognizes the importance of telephone and website support to employers as they seek to fulfill their obligations with respect to the accurate treatment and reporting of taxable benefits.
The Program will work with ABSB to identify gaps in the information and support tools for call centre agents and make adjustments to reference material and scripts as indicated by gap analysis. As is the practice currently, technical queries received by the call centre will continue to be escalated to the PLRS housed in the Business Compliance Directorate for response. The Program will also strengthen collaborative efforts in support of call centres by implementing semi-annual meetings with the Telephone Programs Division (TPD) to determine and analyze the top call drivers with respect to taxable benefits.
Further, the rulings and legislative policy areas in LPRAB will be engaged, as needed, to confirm the consistency of the content provided for use by call centre agents, the website and of responses developed by PLRS in instances where the taxable benefit issues may be outside the scope or mandate of the call centre or business enquiries function.
- Consultations between the Business Enquiries Support Section and the Learning Services Section within the Taxpayer Services Directorate along with CVB to analyze the scope of enquiries and the business enquiries reference and training material in order to address the concerns raised – Q1 2017-2018.
- Consultations and business enquiries reference material changes will be completed by end of Q1 2017-2018. This will continue to be an iterative process between the impacted stakeholders, with semi-annual check points taking into consideration filing season and the demands on the phone program. The first follow-up will be done by end of Q1 2018-2019.
The CRA supports CVB in leading the process to include more guidelines surrounding the definition or substantiation of “reasonable” in the CRA taxable benefit guide.
The T4130 Employer’s Guide – Taxable Benefits, as with all guides, is intended to provide general principles that are applicable to the innumerable situations that may arise in the context of any one taxpayer or employer. As observed in the evaluation report, these guides are intended to address the majority of the situations encountered by the reader. As such, the guides cannot be used to provide exhaustive lists of examples related to taxable benefits and employer reporting obligations.
In recent years guides have been streamlined to respond to Government of Canada requirements for web publication as the CRA has moved to electronic formats.
Where an employer needs further support to understand their obligations in a specific instance, they can avail themselves of the BECC. If the question is outside of the call centre’s capacity, there is a channel by which the more technical questions are routed to the program for analysis and response. In the response to recommendation # 1, the program has undertaken to work with colleagues in ABSB and LPRAB to ensure that call agents have the information they need to respond to taxpayer and employer enquiries regarding taxable benefits.
With respect to the use of the word “reasonable” in the T4130 guide, this reflects the approach taken in the Income Tax Act to recognize that there are many different situations and fact patterns that can exist in respect of taxable benefits.
Additionally, for key taxable benefits, the guide uses the term reasonable not only providing the provision, but also explaining how the term is used and applied for example automobile and motor vehicle benefits, allowances based on the kilometers driven and travel allowable. To this end, the Program view is that the guide properly reflects the law upon which it is founded. CVB continues to work collaboratively with both internal and external stakeholders to ensure guides and other support tools are clear and concise, while respecting the requirement for plain language.
The publication program will continue to work with the CPA with respect to the content of guides, which are reviewed by a committee of CPA members on an annual basis, in advance of publication, for both content and readability.
CVB and LPRAB clarify employers’ obligations surrounding the filing of box 048 T4A slip, PROTECTED
We concur with this recommendation. The CRA has the opportunity to clarify box 048 T4A reporting requirements and this topic has been the subject of questions by key external stakeholders.
To this end, the Program will continue to work collaboratively across the Agency to define the position with respect to the reporting of fees for service, as noted in box 048 of the T4A slip. Further, external consultations with key stakeholders on this topic have recently been approved by the CRA’s Policy and Regulatory Committee and it is expected that the feedback received via these consultations will be important to clarifying obligations for businesses to report fees for services on a T4A.
Once a final position is accepted with respect to T4A reporting of fees for services, the Program will ensure that stakeholders and businesses are made aware of the requirements using outreach on a number of channels including the website, guides, presentations at stakeholder association events, webinars, podcasts, social media, and scripts for call centre agents.
- Consultation plan and products including senior management approval – Q4 2016-2017.
- External Consultations and analysis of results – completion by Q4 2017-2018.
4.0 Findings regarding CRA administrative effectiveness
The second evaluation issue, which assessed overall administrative effectiveness, employed a taxpayer–centric view of the CRA to identify the main ECA Program areas that contribute, either directly or indirectly, to facilitating compliance among the target population. It summarizes the Program’s calculation of its fiscal impact (4.1), collectability of reassessed fiscal impact (4.2), and barriers and challenges associated with program delivery (4.3).
For the PROTECTED of the population covered by the Program, auditors verify employers’ reporting of employment income and taxable benefits on T4 and T4A slips to ensure that the rules governing these payroll-related activities have been properly applied. If non-compliance is detected, the slips of affected taxpayers need to be corrected. The slips are first sent to a tax centre for processing, then are subsequently adjusted on the individual's T1 account which triggers the creation of a Notice of Re-assessment (NoR) sent to the taxpayer. With this step, the analysis of ECA Program “downstream impacts” begins.
A central component of this process is the availability of a valid social insurance number (SIN) which enable processing staff to link slips and adjustments to the correct individual account. While this process is straightforward for employees as the employer gathers their SIN in preparing the T4 slip, employers do not capture the SIN for contract workers if they do not believe they are obligated to issue a T4A slip. As a result, the auditors, who are spending increasing audit time completing these slips on behalf of the employer, face difficulty in finding a valid SIN to be associated with the contract worker. ECA auditors stated that they typically spend at least 10% of their allocated audit hours searching for a SIN, which is a concern considering audit hours are amongst the most costly resources on the enforcement continuum.
Other downstream impacts are also possible: in the event of a taxpayer objection, the audit results may be upheld or overturned by Appeals, and if necessary, the account will go to Collections to be collected.
The table below summarizes the key steps:
|Program area||What they do||Intended impact|
|Process/Adjustments||Adjust T4s and T4As and re-send NoR to taxpayer||Ensure individual taxpayer receives NoR|
|Appeals||Receive ECA-related objections and appeals||Ensure correctness of ECA audit finding|
|Collections||Collect the ECA re-assessments||Outstanding amounts owing to be collected as efficiently as possible|
4.1 Calculating the fiscal impact
The key performance measure of the ECA Program is fiscal impact, which the Program calculates as the sum of:
- federal taxes earned from increases to income found by the audit (approximately 80% of total fiscal impact per year);
- provincial taxes earned from increases to income found by the audit (approximately 16% of total fiscal impact per year);
- associated increased CPP/EI premiums (approximately 2% of total fiscal impact per year); and
- resulting penalties and interests (approximately 1% of total fiscal impact per year).
The following analysis is based exclusively on the federal tax portion of the Program’s calculated fiscal impact, as it represents the majority of results (~80%) and it avoids potential complications in analyzing different provincial tax rates which may have an effect on overall results. For the sake of clarity, references to “fiscal impact” will be replaced with “federal tax” throughout this section.
T4 and T4A slips generated by ECA audits were analyzed over two time periods: slips from 1,669 audits completed in fiscal years 2010-2011 and 2011-2012 (2010-2012), and those from 360 audits completed between April and December 2015. ECA generated T-slip (i.e. T4 and T4A slips) data were analyzed to determine whether the Program’s calculation of federal tax results improved when compared to reassessed amounts.
4.1.1 The Program estimates its federal tax using assumptions that are based on optimal outcomes.
ECA auditors review employers’ books and records to verify that they have reported the correct employment income and payroll amounts. When auditors find income that was not reported, they include these amounts as “increases to income” on the appropriate T-slip (T4 for employees, T4A for self-employed contractors) and send them to be processed, thereby initiating a reassessment on the applicable T1 account. However, for purposes of program administration and monitoring, an estimate of federal tax related to the increase to income is calculated prior to reassessment of the T1 account based on the information available at that time. The following four Program-specific assumptions are used in the estimation of federal tax:
- 100% of the increases to income identified on a T4 slip has not already been reported by the employee;
- 60% of the increases to income identified on a T4A slip has not already been reported by the self-employed contractor;
- all of the T-slips generated or amended by the Program will be processed and reassessed downstream; and
- all of the T-slip recipients will be subject to a federal tax rate of 29% (the marginal tax rate at the time) on the full amount of increases to income assessed.
The results from testing each of these assumptions are summarized below.
The assumption that 100% of the increases to income identified on a T4 slip have not been reported by the employee has been found to be based on an unattainable ideal. Although reassessments on employment income almost always equalled the T4 increases to income amounts, there were sometimes secondary changes that partially offset the increase. For example, when taxpayers were converted from self-employed to employed status, amounts that had been reported as self-employment income by the individual would have been converted to employment income, but would not have generated additional taxes as calculated by the Program. Therefore, increases to the federal tax were often less than the Program estimated based on the increase to employment income. For fiscal years ending in 2011 and 2012, approximately 20% of the increases to income on T4 slips were offset by credits to self-employed income on the T1 account, and so the associated expected federal tax would not have been reassessed. These findings remained when analyzing 2015 audit results.
The Program’s second assumption is that 60% of the increases to income identified on a T4A slip have not been reported by a self-employed contractor. However, data analysis found that self-employed contractors consistently reported the majority of their income even without a T4A slip. As a result, in the 2010-2012 fiscal years, 13% of the total determined increases to income on T4A slip amounts were reassessed and this percentage increased to 17% in the April and December 2015 period. While these findings suggest that the Program is improving in identifying non-compliance, they also illustrate that this assumption remains an optimistic estimate.
As a result of the findings from the first two assumptions, it follows that the third assumption, that all T-slips are processed and reassessed, would be unlikely. A comparison of the 2010-2012 and more recent 2015 data suggest that approximately four-fifths of the T4 slips generated by the Program resulted in reassessments. The primary reason why the remaining slips had not been reassessed was that the income found on them had already been reported by the employee, which affects the validity of the Program’s second assumption.
Analysis of ECA generated T4A slips also shows that approximately one-quarter of those generated in the 2010-2012 periods was reassessed. PROTECTED
However, given that reassessed T4A slips result in 17% of federal tax amounts calculated by the Program, the decision to invest auditor hours in this activity may not be the most cost-effective approach.
Finally, the assumption that increases to each individual’s income would be taxed at a federal tax rate of 29% (the years’ highest tax bracket) also contributed to the Program estimating higher federal tax results than was reassessed by the Agency (see figure 3). To illustrate the point, during the 2010-2012 period, only 11.0% of taxpayers affected by ECA generated reassessments fell into the highest tax bracket, while almost 18% fell into the lowest tax bracket, resulting in a weighted average federal tax rate of 24.9% for T4 slip recipients. The weighted average federal tax rate was also lower than 29% in the more recent period, coming in at 23.3%. For T4A slip recipients, the average tax rate for the earlier period was 22.6%, increasing to 24% for T4A slip recipients more recently.
|2010 to 2012||April - December 2015||Calculated, all years|
The result of these findings is that the total federal tax reassessed for the populations covered in this study was lower than the amounts determined by the Program using its existing assumptions. On balance, this finding may result from procedures both internal and external to the Program. By estimating its federal tax results based on assumptions rather than waiting for the reassessment process to be completed, the Program is not verifying that the information slips and reassessments were actually processed, nor is it examining the assessing information on the impacted T1 accounts. Looking downstream, the findings could also be related to procedural differences between ECA and other Agency programs. PROTECTED
Notwithstanding the above findings with respect to the Program’s estimation of federal tax, revenue to the Government of Canada is calculated based on actual assessments of tax returns thereby ensuring accurate accounting of these amounts.
4.1.2 Summary and recommendation
The amount of federal tax reassessed for the populations covered by this study was found to be lower than what was estimated by the Program using its existing assumptions. Analysis of reassessed T-slips found that:
- At least 20% of increases to income identified by the audits on T-slips were found to have already been reported by the employee on their personal tax returns, even without a T-slip.
- Only 13% of the identified increases to income from T4A slips were unreported by the self-employed worker, rather than the 60% assumed by the Program.
- Not all T-slips generated by the Program were reassessed. PROTECTED
- Using a tax rate of 29% when calculating federal tax results does not reflect the income tax rate paid by all individuals affected by the Program.
It was also found that:
- The current enforcement strategy of T4A slip compliance is not cost effective.
The above findings resulted in the following recommendations:
ECA Program adopts more cost effective methods to enforce T4A slip reporting compliance PROTECTED
We concur with this recommendation. Over the course of time, box 048 T4A fees for services has become a larger part of the ECA Program and there is the opportunity to increase the focus of the program on employer obligations to report employment income accurately.
Over the coming planning periods the Program will seek to focus the interventions of ECA on the correct reporting of taxable benefits and the proper characterization of workers. For the fiscal year 2017-2018, the Program will ensure that the identification of workload and file selection process decreases the Program focus on box 048 T4A, fees for services by adjusting screening criteria and risk assessment.
In 2015, the Program permitted 60% of the value of any box 48 T4A fees for services to be included in program results. This discount rate will be monitored over time and adjusted as needed. The Program will also use interactions with the regional work planning teams and field managers to monitor the presence of box 048 T4A in overall program results. While this approach will not completely remove Box 048 T4A from the program, it should significantly reduce the percentage of program effort dedicated to T4A. Required adjustments will also be made to program expectations to reflect the renewed program intervention.
As mentioned in the response to recommendation 3, the Program will clarify and communicate box 048 T4A requirements to businesses based on a number of inputs including external consultations. Building on the program’s successful track record for outreach, the most appropriate channels to promote compliance with reporting fees for services will be utilized. Results from the consultations are not expected before fiscal year 2018-2019. Once the consultations are completed, additional compliance activities will be undertaken to promote T4A reporting such as letter campaign pilot.
- Reduction in value of T4A attributed to program results to 50%.
- Emphasis in the 2017-2018 program planning guidelines with respect to the screening of files with a renewed focus on the reporting of taxable benefits and proper characterization of workers.
- Monitor the work in progress to ensure a reduction in at least 10% of T4A files that are screened, based on previous year program results.
- Communicate with the Regions through the 2017-2018 Planning Guidelines and the Regional Program Advisor conference calls starting in Q4 2016-2017.
ECA Program works with internal stakeholders to adopt assumptions that better reflect amounts that are being reassessed.
We concur with this recommendation. The ECA Program will work with internal stakeholders to adopt assumptions used to calculate fiscal impact so that it better reflects amounts that are reassessed.
Additionally, we will be working with internal stakeholders to determine the availability of data to identify assumptions that better reflect the net fiscal amounts of the program. This work will include the impact of Appeals decisions on the program results. Once the availability of the data to improve the Program’s assumptions has been confirmed, we will revise the calculation of program results accordingly. Detailed business requirements for the needed data elements and custom reports will be provided to the Technology and Business Intelligence Directorate in CVB.
- Analysis of availability of data to identify assumptions that better reflect amounts that are reassessed – Q1 2017-2018.
- Implement a new reporting methodology, subject to the availability of the data elements– Q1 2018-2019. This deliverable may be subject to Information Technology Branch or Shared Services Canada availability, if additional system requirements are needed and coding is required.
4.2 Collectability of fiscal impact resulting from ECA generated reassessments
4.2.1 Reversals are another factor effecting reassessed ECA results.
The CRA provides taxpayers with the opportunity to file a formal Notice of Objection and appeal assessments which they disagree with, or when they think the law has been incorrectly applied.
According to Appeals branch representatives, the objections workload resulting from the ECA Program is summarized for 2014-2015 below:
- Approximately 3,400 objections to ECA related reassessments were submitted representing Appeals’ 4.4% of total intake of objections for the fiscal year.
- 67% of the ECA objections that were disposed were allowed in full or in part in the favour of the taxpayer.
These concerns have persisted. In the five year period between 2011 and 2016:
- Over 9,700 objections were processed, 83% of which were allowed in full or in part.
- The total tax involved in the ECA Program triggered objections was $55 million. Out of this total, 64% has been reversed.
These findings are likely a result of the systemic difference in level of analysis between the two programs. Recall that the ECA Program typically audits PROTECTED employers per year, but that these audits can impact the taxes of thousands of individual employees. It should be noted that while the Appeals data tracks the number of T1 objections resulting from the ECA Program, it does not currently link those objections to specific cases. This means that it remains unknown whether the 3,400 objections came from one or multiple audited employers. An attempt to do this was made for objections resulting from ECA audits conducted between April and December 2015. As of the end of September 2016 there was $5.6 million in disputed reassessments filed by 388 individual taxpayers affected by an ECA audit. Once these individuals were linked back to their employers, it was found that the disputed amounts were generated by PROTECTED of the audit cases completed during the period. It should be noted that this provides only a partial picture of the downstream impact on Appeals, as objections can take time to process.
This one-to-many aspect of ECA audits may also partially explain why the ECA Program and Appeals differ on the breadth of information required to complete their respective work. Recall that ECA auditors are mandated to gather information from employers as it is the employer’s responsibility to have records supporting the taxable benefit amounts provided to their employees. Meanwhile, the Appeals Branch deals directly with, and typically requires audit information from, every taxpayer in order to respond to each individual. The different point of interaction between the two programs has two main consequences:
- The likelihood of an auditor relying on a sample of employee files increases with the number of employees in an organization. While Appeals also does quantum negotiations (i.e. apply a decision to a group based on review of a sample) for high volumes of like-cases, only 7% of disposals of objections to ECA related adjustments were quantum negotiated in the 2014-2015 fiscal year.
- Appeals may receive information from employees that was not made available to the ECA auditor at the time of the audit. ECA auditors noted examples where employers were not able to provide logbooks, which are supposed to be kept by employees to track the private and business uses of a motor vehicle for the purposes of calculating auto-standby charges, only to have the employees provide the logbooks to Appeals after the audit adjustments were processed. Since the evidence is produced for the objection, procedure requires the Appeals Branch to consider it in its review of the case, and in these cases it often ends in a partial or full reversal of the reassessment from audit.
It is systemic differences such as these that tend to explain the reversals of ECA generated reassessments by the Appeals program.
To address these findings, both ECA and Appeals HQ are working on implementing a feedback loop initiative which would provide more detail and qualitative information on the facts of cases (i.e. type of disposal, variance, etc.). While this appears to be a positive step, these findings point to systemic differences between the two programs that, at the time of writing, are not yet addressed.
The following table represents the amount of federal tax reversed after reassessments in the 2010-2012 and April-December 2015 periods. As noted in Table 3, in the 2010-2012 period, 30% of federal tax from reassessments was reversed by Appeals. The amounts recorded for the more recent years is based on disputed tax compared to the federal tax calculated by the Program rather than what was reassessed, as there had not been sufficient time for the processes to conclude at the time of writing.
|Year||Reversals to federal tax reassessed||% of federal tax reassessed|
|April – December 2015||$5.8 million||14%|
4.2.2 A review of their collections status at the time of payment reveals that the Agency efficiently collects most of processed ECA reassessments.
The impact of increased taxes owing on an account depends on the status of the account at the time the assessment is made. If the account is already under Tax Service Office (TSO) control, the debt will be added to the amount to be worked under the inventory to which the account belongs. If there is no existing debt, or if the existing debt is under automated control, the entire debt will be evaluated and placed in a collections strategy based on the score given to the taxpayer under one or more “risk” models.
If payment or a Notice of Objection is not received within an established period following the Notice of Assessment (NOA), accounts that have small balances or are perceived to be low-risk will generally receive a letter as the first collections step. Medium-risk accounts will proceed directly to the Debt Management Call Centre (DMCC), while high-risk accounts will receive a legal warning letter prior to proceeding directly to a TSO inventory.
Although many taxpayers were reassessed for multiple tax years, only one collection action at a time would be taken in light of their total debt. Most transactions, including two-thirds of all payments, took place during a period where no collection action was in effect. The remaining third of payments is owed by only 16% of the taxpayers affected by the ECA assessments.
After taking into account additional reassessments from other CRA programs on these same taxpayers, it was found that 70% of total debits were paid off by employees impacted by an employer compliance audit.
4.2.3 Summary and recommendation
- The one-to-many structure of the ECA Program is unaligned with the individual level of analysis conducted by the Appeals Branch’s officers. One of the main reasons for the reversals of ECA results is the different level of analysis between the areas: ECA captures records from employers, Appeals from employees.
- Affected taxpayers (employers, employees, and contractors) pay the majority of amounts owing with relatively little challenge.
The above findings resulted in the following recommendation:
The ECA Program and Appeals Branch mitigate the factors that contribute to the undesired impacts on ECA program outcomes and monitor the impact of these efforts.
We concur with this recommendation. As outlined in the report, the ECA Program is unique given the one to many implications. The employer is the account under audit and the findings may touch the employer, but more importantly there is an impact on the individual employees or workers. The feedback loop will continue to explore ways within the model to alleviate those issues while respecting the mandate of each program.
Consultation between the Appeals Branch and the ECA Program will continue to review what procedural changes could be made within the program to compel the employers to provide the requisite backup documentation during the audit stage. This would include making it incumbent on the employer to go back to the individual employees for the required documentation. The ECA Program will also provide guidance to the field staff on how best to document such requests in the audit file.
Through the Appeals Feedback Loop, the Program will continue to take action to improve the relationship with the appeals function. The feedback loop provides the program with results of objections, leveraging group codes if and when appropriate to do so. This ensures that like files are grouped together for a consistent approach. We will also continue to liaise with respect to the reasons for changes to assessments through quarterly standardized reports and regular discussions. The goal is to provide the program with the basis for the decisions made by Appeals to help identify issues or trends to be addressed, through a change in policy or procedures or through training to improve audit techniques and practices as well as rules of evidence to uphold audit assessments.
Action plans as a result of discussions between Appeals and ECA will be developed outlining proposed course of action and timelines. File specific post mortems have been instituted on certain files to highlight the uniqueness of the ECA Program, but also to give the program an opportunity to review certain assessing positions taken. This allows the program to revisit certain policies and procedures. Processes are being developed to deal with group files in the most efficient way, including advance notice from the program to Appeals regarding large group reassessments and the use of project codes to ensure consistent treatment of cases. All of this will provide better service to Canadians. The Program has also seconded a staff member from the Employer Compliance Section to Appeals Branch as part of its efforts to strengthen the relationship.
- Implement the Feedback loop – Q4 2016-2017.
- Allocate a specific code for large employees assessments as a result of an employer audit – fiscal 2017-2018.
- Review files specific that were reversed – fiscal 2017-2018.
- Share the inventory list, files in progress and completed – starting in fiscal 2017-2018.
- Share files reassessed and number of employees affected – starting in fiscal 2017-2018.
4.3 Challenges and barriers related to program delivery
The ECA Program faces other external (4.3.1) and internal challenges (4.3.2) that impact the Agency’s effectiveness and efficiency in enforcing employer payroll compliance.
4.3.1 External challenges
Non-compliance can occur for a variety of reasons, some of which may be deliberate. While some ECA auditors indicated that the majority of detected non-compliance was a result of misinformation/ misunderstanding of the tax law, including employers disagreeing with what the Agency deemed as “reasonable”, many believed that some employers would wilfully not comply so that their businesses remain competitive.
Findings from the consultation with payroll practitioners corroborated these comments as participants cited “organizational culture” (25%) and “boss/senior management” (18%) as among the key factors hindering their ability to report taxable benefits accurately or to properly characterize a worker. Combined, one-third (34%) of the payroll practitioners selected one of these options or both.
Demographic analysis revealed that these representatives were disproportionately:
- from public administration, utilities, arts, entertainment and recreation and education services industry sectors;
- employed in larger organizations (33%) compared with those from smaller organizations (fewer than 20 employees) (20%); and,
- likely to report to a payroll supervisor/manager (62%), followed by either a VP Accounting/ Finance (38%). The founder/principal of the company and/or the CEO received the lowest percentage (22%).
4.3.2 Internal challenges and barriers
The internal challenges faced by the ECA Program have been classified in two ways:
- challenges in the communication and support between HQ and the field; and
- resources provided for the program.
126.96.36.199 On balance, the Program renewal addressed some concerns previously faced by the Program, but gaps in support still exist/remain.
Prior to 2012, ECA auditors were dispersed across TSOs where they reported to team leaders (TLs) who were accountable for multiple program areas. Considering the relatively smaller size of the ECA Program compared to other programs, TLs under this structure did not develop the specialized expertise required to support their ECA program staff and as a result there was a lack of consistency in program delivery across regional offices. Between 2012 and 2014 the Program went through a renewal which centralized regional management and staff with the aim of:
- providing consistency in file quality;
- providing consistency in performance management; and
- enhancing communications and developing a sense of community among ECA auditors.
Those in both HQ and the regions indicated improvements in the program. Specifically, it was recognized that renewal allowed for dedicated TLs to develop program specific expertise which enable them to better support their staff. Having dedicated TLs also made it easier for HQ to identify what people are working on and to provide a consistent national approach. The result is the creation of the National Strategic Objectives (NSOs) which requires regions to plan 30% of their audit inventory over a three-year period on criteria specified by HQ. The purpose of the NSO was to create some degree of consistency in file selection across all regions. It has succeeded in focusing regional efforts on common sectors or risk indicators and encouraged the ECA Program to diversify its coverage beyond the industries they traditionally focused on, thereby decreasing the risk of non-compliance among the non-targeted industries.
The renewal also succeeded in improving consistency in performance management across the regions. HQ provides the field with monthly reports on the progress and budget utilization in each of the regions, which allows regions to compare their progress and adapt their regional work plans accordingly.
Although the renewal was supposed to provide improved file quality across all regions, data from the Quality Assurance Section (QAS), reveal that the renewal has, at the time of the writing of the report, had limited, if any, improvement of file quality across the regions.
While the Program has largely centralized its audit function within the regions, it has not done so in HQ. It is noteworthy that different officials are accountable for the communications, technical inquiries and training functions in support of the ECA Program, areas where the following challenges emerged across all regions:
- Challenges remain with respect to enhancing communications and developing a sense of community.
HQ now communicates directly with dedicated team leaders on a monthly and ad hoc basis to inform them about changes to the ECA Program. However, HQ messages do not appear to be as well understood by auditors as they were intended. PROTECTED Furthermore, ECA staff in the field felt they were not fully consulted with respect to the development of NSOs. This poses concerns for the auditors who felt that the NSOs acted as barriers to their ability to reach their goals. HQ continues to consult regional management teams on NSO development, and believe that they do not pose a significant difficulty to the regions’ meeting their targets given they work out to be just 10% of results per year (30% spread out over three years).
Another concern emerged with respect to the sense of community amongst ECA auditors. While those physically in the same office as their team leaders did not raise it, those in remote offices stated that at times they felt isolated. It was also found that region-to-region communication is limited, with few instances of collaboration or sharing of best practices between team leaders. This gap in regional coordination has left some inconsistencies in program procedures, particularly in the way issuance of T4A slips is understood and handled.
- Responsiveness to technical inquiries.
HQ also provides field support on technical advice and clarification of issues identified in the field. A national electronic mailbox has been established to respond to regional inquiries. However, HQ indicated that it is infrequently used and regional officials corroborated that they seldom used it, citing concerns around the timeliness of the information provided. It was also noted that there is no mechanism for auditors to receive feedback on or track the status of their requests to this mailbox.
The current process requires ECA auditors to contact their team leaders who, in the event that they cannot provide a response to the enquiry, are responsible for escalating the enquiry to HQ through a specified mailbox. HQ then informs the necessary areas (e.g. ITRD in the LPRAB), which have service standards typically ranging from 60 to 90 days. For example, auditors noted concern with the 60 day turnaround time to get rulings on the proper characterization of workers. The concern in the field stems from the risk of losing out on adjustments as a result of statute barred dates. In response CVB and CPP/EI Rulings have agreed on faster processing times (31 days) in cases where there are extenuating circumstances including approaching statute barred dates. HQ’s response time is further impacted by the level of complexity of the enquiries and the ambiguity of some of the rules and policies.
Taken together, representatives from each region indicated that they tend to rely on the advice of colleagues, initiating contact with HQ only when necessary.
Finally, most regions suggested that implementing regional technical advisors as part of the Program would be beneficial.
- ECA auditors require more timely training.
While interviewed auditors noted that they receive relevant training, concern was raised with respect to its timeliness. Regions are accountable for the delivery of in-class training, which tends to be provided when the number of new hires reaches a critical mass, and a trainer is available. Online support was viewed as lacking in some key areas. PROTECTED A review of the data identified a need for further training on how to properly key results and follow audit procedure.
188.8.131.52 Summary and recommendation
The following factors were identified as challenges to ECA Program delivery:
- Timeliness of training for new employees;
- Communications between HQ and field, and cross-region communication; and
- Timely responses to technical and legislative enquiries, which may result in the premature closure of an audit nearing its statute bar dates.
The above findings resulted in the following recommendation:
ECA Program addresses the timeliness and coordination of its support, training, and communication functions in order to improve consistency and responsiveness to the field.
We concur with this recommendation. The support provided to field operations is an important contributor to the success of the employer compliance audit program. The function is currently well positioned to provide the needed support through the PLRS that responds to technical questions and a newly formed, dedicated, field support team that is part of the Business Compliance Directorate. Where necessary, these Headquarters teams are able to seek the support of the CRA ruling functions and the advice of Justice Canada when issues are beyond their expertise. HQ seeks to keep these teams staffed to the level necessary to provide the support the field needs, recognizing the knowledge needed on the part of the section is quite specialized.
At the time of the program evaluation, employer compliance audit and trust accounts examination were consolidated and reporting to one manager in HQ. After the reorganization and realignment in April 2016, employer compliance audit has a dedicated HQ manager with a field support team that is well positioned to provide the requisite support, communication and responsiveness to field enquiries.
Communication with the field is undertaken through regular calls with the regional programs advisors, semi-annual Operations Committee Meetings held in Ottawa, ad hoc meetings with program staff as well as the presence of headquarters staff and management in the regions. Improvements to communications are always a priority to the program and options to increase the availability of information on the status of requests from the field will be examined. While the development of training products is the responsibility of the program, the provision of training is a regional responsibility for which they are resourced.
- Institute a process for monitoring queries received from the field – Q4 2016-2017.
- Inform field staff of the status of their enquiries; such as reasons for delays, escalation to PLRS or LPRAB by Q4 2016-2017.
- Collaborate with CVB learning services section to ensure requisite ECA training products (taxable benefit training product is currently under technical review as well as a team leader training product) are updated and released to field staff – Q2 2017-2018.
- Monitor, through the use of quarterly reports, the timeliness of responses to the field – Q1 2017-2018.
We would first like to thank all our CRA colleagues that we interviewed, and in particular the ECA field and HQ staff, who from coast to coast spoke to us about the Program they are so passionate about. We would also like to thank the management team of the Canadian Payroll Association for their professionalism and insights as well as its 1,597 members who took the time to thoughtfully complete our survey. We also want to recognize the support we received from Public Affairs Branch in obtaining approvals and managing the survey contract in a responsive fashion. Finally, we are indebted to the data analysis team whose knowledge, energy, and patience provided us with extraordinary value from start to finish.
Appendix 1: Glossary of terms
|ABSB||Assessment, Benefit, and Service Branch|
|AIMS||Audit Information Management System|
|BECC||Business Enquiries Call Centre|
|CPA||Canadian Payroll Association|
|CPP||Canada Pension Plan|
|CRA||Canada Revenue Agency|
|CVB||Collections and Verifications Branch|
|DCPB||Domestic Compliance Programs Branch|
|DMCC||Debt Management Call Centre|
|ECA||Employer Compliance Audit|
|EIA||Employment Insurance Act|
|ETA||Excise Tax Act|
|Fiscal Impact||Calculated results of the ECA Program including recoveries from federal and provincial taxes, penalties and interest, increases to CPP/EI and associated penalties and interest. Based on assumptions unique to the Program.|
|ITRD||Income Tax Rulings Directorate|
|ITA||Income Tax Act|
|LPRAB||Legislative Policy and Regulatory Affairs Branch|
|NOA||Notice of Assessment|
|NOR||Notice of Re-assessment|
|NSO||National Strategic Objectives|
|PLRS||Policy and Legislative Research Section|
|QAS||Quality Assurance Section|
|RC4157||Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary|
|SIN||Social Insurance Number|
|SIS||Specialty Information Section|
|SRIMS||Stakeholder Relations, Issues Management and Services|
|T1||Individual Income Tax|
|T4 Slip||Statement of Remuneration Paid|
|T4A Slip||Statement of Pension, Retirement, Annuity, and Other Income to contract workers|
|TSO||Tax Services Office|
Appendix 2 - Example of a Statement of Remuneration Paid (T4 slip)
A T4 slip with the title “Statement of Remuneration Paid” showing all blank fields, such as Employer’s name, employee’s name and address, Year, and box numbers from 14 to 56. You have to fill out a T4 slip to report employment income, taxable benefits or allowances, and deductions withheld during the year (i.e. CPP/QPP contributions, EI premiums).
Appendix 3 - Example of a Statement of Pension, Retirement, Annuity, and Other Income (T4A Slip)
A T4A slip with the title “Statement of Pension, Retirement, Annuity, and Other Income” showing all blank fields, such as Payer’s name, Recipient’s name and address, Year, and box numbers from 12 to 61. You have to fill out a T4A slip to report self-employed commissions and fees or other amounts for services.
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