Evaluation study – Electronic services – Individual compliance behaviour – Tax return filing

Final Report
Audit, Evaluation, and Risk Branch
November 2017

Executive summary

The Canada Revenue Agency (CRA) promotes and enhances its electronic services as a key component of its commitment to excellence in service delivery. Achieving this goal means keeping pace with the trends that are shaping our environment and transforming the tax administration to align with advancements in electronic services.

The CRA has supplemented the traditional method of paper tax return filing with several paperless electronic options. This provides taxpayers with the ability to use third party software to prepare and file their own tax return using NETFILE or to have their tax return prepared and filed by a registered tax preparer using EFILE. The shift from paper to electronic tax return filing has required the CRA to anticipate, plan, and adjust to the changing nature of the way that Canadians choose to file their tax returns while ensuring that information is protected and used for the purpose for which it was intended.

In June 2016, the Management Audit and Evaluation Committee of the CRA approved the evaluation framework for the Electronic Services – Individual Compliance Behaviour – Tax Return Evaluation Study. The Department of Finance Canada develops and evaluates federal tax policies and legislation, while the CRA is the agency responsible for the administration of tax laws, including the Income Tax Act (ITA) of Canada. As such, the scope of this evaluation was limited to CRA's administration of the provisions of the ITA.

The central focus of this study was to provide CRA senior management with information on the growth and characteristics of T1 individual income tax returns (tax return); and the current state of CRA's tax administration in relation to the shift to electronic tax return filing.

The CRA's administration of tax return filing and compliance validation activities spans multiple programs. The Assessment, Benefit, and Service Branch (ABSB) is responsible for receiving and processing both paper and electronic tax returns and issuing a Notice of Assessment (NoA) or Notice of Reassessment (NoR) to the taxpayer advising them of their tax situation. They are also responsible for the registration and monitoring of tax preparers, and providing service and support to tax preparers, software developers, and taxpayers. The Collections and Verification Branch (CVB) is responsible for the validation of information presented in the tax returns, both before and after a NoA or a NoR has been issued. Through the delivery of a national compliance validation program, CVB validates tax returns and benefit entitlements, and promotes compliance with Canada's tax laws for filing, declaring, withholding, registering, and remitting. These activities support CRA's compliance efforts to ensure that individuals meet their tax obligations in fairness to all Canadians.

This evaluation study has confirmed a major shift from paper to electronic tax return filing occurred from 2005 to 2014 with individuals most frequently using registered tax preparers. The number of electronic tax returns processed has increased by 86% from 11.9 million in 2005 to 22.1 million in 2014. During this same period the number of individuals who filed using a registered tax preparer increased by 91% from 7.8 million in 2005 to 14.9 million in 2014. For compliance activities, there has been an increased emphasis on early compliance validation interventions since fiscal year 2005 to 2006 due to the business intelligence gathered in consideration of taxpayer behaviour. In fiscal year 2005 to 2006, $689 million in additional taxes were assessed in the Confidence Validity, Processing Review and T1 matching programs compared to $1.3 billion assessed in fiscal year 2014 to 2015. This represents a 100% increase in total dollars assessed.

For the most part, no administrative constraints, within the CRA's control, were identified as having negatively impacted individuals from using the electronic tax return filing methods. The CRA has transformed its tax administration – organization, work processes and systems - to align with advancements in electronic tax return filing.

It was also observed that individuals consulted as part of this study, both in headquarters and the regions, are professional; resilient; able to adapt to change; and most importantly demonstrate their commitment to excellence in service delivery.

The 2014 tax return profile and compliance validation analysis are positive with no major constraints identified with the shift from paper to electronic tax return filling. However, to better understand how registered tax preparers impact CRA's tax administration and the individuals who pay for their service, an independent study could provide additional insight on the effectiveness of the EFILE tax return filing method. In addition, with the electronic systems working as intended an opportunity exists to promote electronic tax return filing for certain groups as well as to explore the transmission of data on certain tax forms and schedules to support compliance activities and interactions with Canadians. Employees are the cornerstone of CRA's administration and have strongly voiced the need to take stock of system maintenance upgrades in place as a part of the T1SR project. The goal is to mitigate unintended impacts on employees' health and wellness and to ensure a functional work environment that provides accurate and efficient service to Canadians.

Management responses have been developed for the following three recommendations:

1. ABSB, in consultation with CRA stakeholders, undertake a comprehensive analysis to identify ways to promote electronic tax return filing and increase take-up rate for those groups showing a slower transition from paper to electronic tax return filing.
2. ABSB, in consultation with CRA stakeholders, explore and assess the feasibility to have data on certain tax forms and schedules transmitted to support compliance activities and interactions with Canadians.
3. ABSB, in consultation with CRA stakeholders, take stock of system maintenance upgrades and address employee concerns with the T1SR project.

Introduction

In June 2016, the Management Audit and Evaluation Committee of the Canada Revenue Agency (CRA) approved the evaluation framework for the Electronic Services – Individual Compliance Behaviour – Tax Return Evaluation Study. This study was included in the Audit, Evaluation, and Risk Branch (AERB) 2015 to 2018 Risk-Based Audit and Evaluation Plan which was approved by the Board of Management on June 9, 2015.

The Department of Finance Canada develops and evaluates federal tax policies and legislation, while the CRA is the agency responsible for the administration of tax laws, including the Income Tax Act (ITA) of Canada. As such the scope of this evaluation was limited to CRA's administration of the provisions of the ITA.

The evaluation framework identified the following three evaluation issues:

Issue 1: What is the profile and compliance behaviour of individual taxpayers who file paper and electronic tax returns?

• What is the growth and profile of tax return filers?
• What are the constraints, if any, which impact electronic filing?
• What are the impacts of electronic filing, if any, on compliance activities?

Issue 2: To what extent has the CRA transformed its tax administration to align with advancements in electronic tax return filing for individuals?

• Have the organizational structures and work processes been aligned to support advancements in electronic filing?
• Have systems been aligned to support horizontal tax compliance efforts with advancements in electronic filing?

Issue 3: Are there alternatives or modifications that could enhance the CRA's administration of electronic tax return filing for individuals?

• What changes, if any, could improve the CRA's administration of tax return filing?
• What alternative approaches or modifications could be adopted from strategies or best practices of other tax administrations with a similar form of tax?
• What strategies are in place or planned that could enhance the CRA's administration of tax return filling?

This report summarizes the findings related to these issues and research questions. Findings are to provide CRA senior management with information on the growth and characteristics of T1 individual income tax returns (tax return); and the current state of CRA's tax administration in relation to the shift to electronic tax return filing. The study also identified potential alternatives or modifications that could improve CRA's tax administration. The logic model in Appendix A illustrates the outputs and outcomes related to paper and electronic tax return filing. Appendix E provides definitions of key terms.

Background

Canada's tax system is based on self-assessment. Canada levies personal income tax on the worldwide income of individual residents of Canada and on certain types of Canadian-sourced income earned by non-residents or deemed residents. This means that individuals complete a tax return to report their annual income and claim all deductions or credits that apply to their situation in accordance with the ITA and regulations. Appendix B provides the situations when a tax return is required or when it may benefit an individual to file a tax return.

Generally, tax returns must be filed by April 30 of the year following the tax year. However, in circumstances where an individual, their spouse, or common-law partner carried on a business during the tax year, the tax return must be filed on or before June 15 if there was tax payable or if the individual is claiming a tax credit or benefit. It is important to note that any balance owing is due on or before April 30 regardless of the date the tax return was due to be filed.

The traditional method of paper tax return filing has been supplemented by several paperless electronic options. This provides taxpayers with the ability to use third party software to prepare and file their own tax return using NETFILE^{Footnote 1} or to have their tax return prepared and filed by a registered tax preparer^{Footnote 2}  using EFILE^{Footnote 3} . However, certain exclusions for EFILE and restrictions for NETFILE prevent the use of electronic tax return filing (Appendix C).

A Community Volunteer Income Tax Program, which is a collaboration between community organizations and the CRA, also supports tax return filing for individuals who have a modest income and a simple tax situation. The CRA may also file a tax return on behalf of an individual if they were issued a formal request to file and did not do so. This supports compliance with Canada's ITA and regulations.

The CRA promotes and enhances its electronic services as a key component of its commitment to excellence in service delivery. Achieving this goal means keeping pace with the trends that are shaping our environment and transforming the administration to align with advancements in electronic services. This includes allowing Canadians to choose how they file their tax return. This shift from paper to electronic tax return filing has required the CRA to adjust systems and processes to accept and validate electronic returns while ensuring the confidentiality of taxpayer information.

Functional Authority

The filing, processing, and validation of tax returns are primarily the responsibilities of the Assessment, Benefit, and Service Branch (ABSB), and the Collections and Verification Branch (CVB). All tax returns submitted to the CRA are subject to varying degrees of validation and are processed with a notification of the result in the form of a notice of assessment (NoA) or a notice of reassessment (NoR) being issued to the taxpayer.

Within the CRA, the ABSB is responsible for receiving and processing of both paper and electronic tax returns and for issuing a NoA or NoR to the taxpayer advising them of their tax situation. They are also responsible for the registration and monitoring of tax preparers, and for providing service and support to tax preparers, software developers, and taxpayers. The ABSB was previously responsible for the validation of information submitted on tax returns; however this responsibility was transferred to the CVB in fiscal year 2015 to 2016.

The CVB is responsible for the validation of information presented in the tax returns, both before and after a NoA or a NoR has been issued. Through the delivery of a national compliance validation program, CVB validates tax returns and benefit entitlements, and promotes compliance with Canada's tax laws for filing, declaring, withholding, registering, and remitting. These activities support CRA's compliance efforts to ensure that individuals meet their tax obligations in fairness to all Canadians.

Evaluation methodologies and approach

• A Working Committee was formed with representatives from ABSB, CVB, the Strategy and Integration Branch (SIB) and the Public Affairs Branch (PAB). This committee supported the gathering of branch specific information and the review of preliminary findings and recommendations.
• Internal interviews were conducted with CRA managers and staff. Participants were selected from ABSB, CVB, SIB, PAB, AERB, the Information Technology Branch (ITB), the Appeals Branch and regional personnel in the Atlantic, Ontario and Prairie regions.
• An examination of CRA policies, procedures, business rules and systems was undertaken with responsible branches.
• A series of macro analyses was undertaken on trends in the volume of paper and electronic tax returns, a profile analysis of the 2013 and 2014 tax returns, an analysis of the exclusions and restrictions to electronic filing, trends in validation activities (pre and post assessment), and estimated costs related to tax return processing and compliance validation activities.
• An examination of best practices and emerging trends in electronic tax return filing from other countries – United States of America (USA), United Kingdom (UK), Australia and Denmark.

Study limitations and constraints

As this study focused on a macro analysis of CRA's administration, the CRA risk assessment and scoring processes for compliance validation activities were not reviewed as they are closely guarded to protect the integrity of Canada's tax administration. ABSB and CVB programs have also evolved from 2005 to 2014, which impacted the ability to provide a comprehensive cost analysis related to the processing and validation of tax returns. Therefore, the cost analysis in this report is intended to provide information on whether the cost to process or validate a tax return has increased or decreased, and should be considered as a baseline estimate. The costs related to operations and maintenance, capital^{Footnote 4}  and systems were also not included as they could not be isolated to a specific program activity.

Findings

This study has confirmed a major shift from paper to electronic tax return filing occurred from 2005 to 2014 with individuals most frequently using registered tax preparers. For the most part, no administrative constraints, within the CRA's control, were identified that inhibited individuals from using the available electronic tax return filing methods. The CRA has also transformed its tax administration – organization, work processes and systems – to align with advancements in electronic tax return filing. Compliance activities continue to be an integral part of Canada's self-assessment tax system. It was also observed that individuals consulted as part of this study, both in headquarters and the regions, are professional, resilient, able to adapt to change, and most importantly are committed to ensuring that all taxpayers meet their tax obligations and pay their fair share of tax.

The next section of the report outlines the results of the evaluation study as well as opportunities that could support CRA's tax administration and improve client service.

1. Electronic tax return processing volumes have increased significantly since 2005

Each year individual taxpayers are required to file their tax returns to report their income and deductions to the CRA. In analyzing processing statistics from the 2005 to 2014 tax return filing seasons, it was confirmed that there has been a major shift from paper to electronic tax return filing.

For the 2005 tax return filing season, 25.0 million tax returns were processed^{Footnote 5}  compared to 28.3 million in 2014. This represents a 13% increase in the total volume of tax returns processed. (Figure 1)

Figure 1 – Trend in paper versus electronic tax returns processed – 2005 to 2014 tax return filing season

Tax returns processed by the CRA can be electronically filed in several different ways. Individuals can choose free NETFILE software depending on their tax situation or can purchase third party software to prepare and file their own tax return using NETFILE. They may also choose to have their tax return prepared and filed by a registered tax preparer and pay the associated cost. In certain circumstances, individuals with modest incomes and simple tax situations can have their tax return prepared through the Community Volunteer Income Tax Program. To better understand the usage of electronic filing by individuals, a review of the electronic tax return filing methods of NETFILE and EFILE was undertaken for the 2005 and 2014 tax return filing seasons.

This analysis revealed that the number of electronic tax returns processed has increased by 86% from 11.9 million in 2005 to 22.1 million in 2014. During this same period the number of individuals who filed using NETFILE^{Footnote 6}  increased by 76% from 4.1 million to 7.2 million, while EFILE with a registered tax preparer increased by 91% from 7.8 million to 14.9 million.

2. Electronic tax return filing is the most frequently used method for individuals to meet their tax filing obligations

To better understand whether electronic tax return filing was consistent across all provinces and territories in Canada, and to ensure that no one segment of the population had been negatively impacted by the shift to electronic filing, the 2014 tax returns were selected from the Agency Data Warehouse^{Footnote 7}  and reviewed.

The analysis of 27.8 million tax returns filed for the 2014 tax year was undertaken recognizing that the non-resident (NR) filing population, of just over 200,000 individuals, were excluded as they must file their tax returns by paper. This analysis revealed that electronic tax return filing was the most frequently used method in all provinces and territories in Canada with a national level of 84%. (Figure 2)

Figure 2 – Percentage of 2014 tax returns filed by provinces, territories and non-residents and by filing method

The national average of 84% for the 2014 electronic tax return filing method, is for the most part, consistent with other countries with similar non-mandatory electronic tax return filing. For example^{Footnote 8}, in 2013 the USA achieved an electronic tax return filing rate of 83% and the UK 85%. Literature research also suggests that the introduction of "auto-fill my return" has increased the level of electronic tax return filing as other countries with this capability have reached beyond 90%. For example Australia achieved 93% and Denmark 98%. Canada introduced this capability for the 2015 tax year which may further support the shift to electronic tax return filing.

As Revenu Quebec administers their own provincial tax, a review was undertaken from statistics on their website to determine how they compared with the federal tax returns that are administered by the CRA. This analysis revealed that 79% of Quebec provincial tax returns were filed electronically in 2014, while 81% of the Quebec federal tax returns were filed electronically with the CRA.

The exclusions and restrictions that are in place that prevent an individual from electronically filing a tax return^{Footnote 9} have also decreased considerably. In 2016, multiyear tax return filing, pre-bankruptcy, amendments, and newcomers^{Footnote 10} can file electronically. What this means for Canadians is that more individuals have the option to use the service and file tax returns electronically. The CRA estimated^{Footnote 11}  that these system modifications will allow 95% of individuals to electronically file their tax return if they choose to do so. The CRA continues to review these exclusions and restrictions to make electronic tax return filing available to more and more Canadians and will make system changes when it makes good business sense to do so.

To understand if the move to electronic tax return filing had an impact on CRA resources for processing of tax returns, a cost analysis was undertaken. This analysis was based on the direct and indirect salary costs according to CRA administrative data that were in existence in 2014 which were then tracked back to 2005. This analysis revealed that the estimated cost of processing a tax return was $1.41 in fiscal year 2005 to 2006 and has decreased to $1.00 in fiscal year 2014 to 2015 or by 29%. This baseline estimate suggests that the tax return processing costs have decreased with the shift to electronic tax return filing^{Footnote 12}.

3. Certain groups profiled showed a lower take-up rate of electronic tax return filing and higher use of registered tax preparers

Profiling of individuals serves as a guide to better understand any variables impacting CRA's tax administration in relation to the shift from paper to electronic tax return filing. For the purposes of this study, seven groups were established and profiled based on the 2014 tax return filing population, CRA interviews and literature research.

Overall the profiled groups were consistent, for the most part, with the national 2014 tax return filing results with electronic at 84% and the use of registered tax preparers at 56%. However, certain groups profiled showed a lower take-up rate of electronic filing and higher use of registered tax preparers. The main observations by group and potential reasons for choosing to use a registered tax preparer are detailed below. Figure 3 provides a summary of the profile analysis for tax year 2014 while Appendix D provides details by province and territory.

Low income

Geographic area - Rural and Urban

Persons with disabilities

Youth and seniors

Self-Employed

Newcomers to Canada

Gender

The results for the profile analysis suggest that no major variables exist for the groups profiled with the shift from paper to electronic tax return filing however rural, persons with disability, seniors, self-employed and newcomers to Canada (in their second year of filing), had a higher use of a registered tax preparer compared to the national total of 56%. CRA interviews revealed that the choice by all groups to use registered tax preparers may point to a lack of expertise or familiarity with the increasing complexity of the ITA, and an individual's desire to ensure they accurately report their income to obtain all deductions and credits to which they are entitled. The ITA and corresponding legislation is developed by the Department of Finance while the CRA is responsible for the administration of the ITA. The CRA recognizes that the ITA is complex and supports individuals in meeting their income tax return filing obligations by providing:

• telephone and written enquiry services;
• tax guides, forms and publications; and
• Community Volunteer Income Tax Program, outreach and other public communications.

Figure 3 – Summary of the profile analysis for tax year 2014

Source: 2014 Tax Returns

An opportunity exists to increase the take-up rate of the electronic tax return filing within certain groups from the profile analysis who show a slower transition from paper to electronic tax return filing. In particular, low income, persons with disabilities, youth and seniors all file paper tax returns at a higher rate than the national total of 16%. It is recognized that ABSB is undertaking initiatives to improve the take-up rate of electronic tax return filing; however a comprehensive analysis to identify ways to promote electronic tax return filing and increase take-up rate for these three groups may improve service to Canadians and help to close the gap between the number of people who can electronically file their tax return and those who choose to do so.

4. Compliance validation activities have increased and adjusted to the shift in electronic tax return filing

Given that the Canadian tax system functions on the basis of self-assessment, the CRA is obliged to review a number of tax returns each year to ensure that taxpayers are entitled to the claims which they have made, and that the amounts have been correctly calculated. These reviews are an important part of CRA's compliance activities to maintain the integrity of and Canadians' confidence in Canada's tax system.

Some tax returns are chosen for review at random, but the majority are selected based on a sophisticated scoring system. This scoring system is designed to incorporate multiple factors to identify those tax returns that carry the highest potential for inaccuracy of certain claims. The CRA neither targets nor excludes any specific category of people or filing method when reviewing tax returns. It treats all Canadians equally by using fair and non-discriminatory criteria in selecting tax returns for review.

Compliance activities serve to validate taxpayer information, at the earliest possible moment and at the lowest possible cost, which supports the assessment and collection of tax in Canada's self-assessment tax system. For issues of non-compliance, the CRA works with individuals to ensure they understand their tax obligations, educate them to accurately file their tax returns by correcting errors, and also identify and take enforcement measures, where necessary, for individuals who choose to avoid the full extent of their tax obligations.

Since 2005 the CRA has had to anticipate, plan, and adjust to the changing nature of the way that Canadians choose to file their tax returns while ensuring that information is protected and used for the purpose for which it was intended.

This section of the report outlines the major compliance activities of the pre and post validation programs related to Confidence Validity (CV), Processing Review (PR), and T1 Matching.

To determine if electronic tax return filing had an impact on compliance validation activities, a trend analysis of the overall CV and PR compliance activities^{Footnote 18}  by filing method for fiscal year 2010 to 2011 to fiscal year 2014 to 2015 was undertaken.

The CV program (pre-assessment) selects tax returns for review that have higher risk claims while the remainder are ranked for possible selection by the PR program (post-assessment). This analysis revealed that the PR and CV programs have, for the most part, aligned with the shift from paper to electronic tax return filing. It was noted that the CV activities were not at a level of the PR program; however it is moving in that direction. This may be due in part to the nature of the tax returns selected by CV, and differences in the type of non-compliance identified. This has been recognized by CVB as an area to be addressed as part of their fiscal year 2016 to 2017 planning guidelines^{Footnote 19} . (Figure 4)

Figure 4 – Percentage of tax returns processed in relation to compliance verification activity and by filing method – fiscal year 2010 to 2011 to fiscal year 2014 to 2015

Source: CVB internal program data

CRA interviews revealed that there has been an increased emphasis on early compliance interventions since fiscal year 2005 to 2006 due to the business intelligence gathered with respect to taxpayer behaviour.

In fiscal year 2005 to 2006, $689 million in additional taxes were assessed in the CV, PR and T1 matching programs compared to $1.3 billion assessed in fiscal year 2014 to 2015. This represents a 100% increase in total dollars assessed through early compliance interventions. (Figure 5)

Figure 5 – Compliance results – CV, PR and T1 Matching – additional dollars assessed, fiscal year 2005 to 2006 to fiscal year 2014 to 2015

To better understand the individual contribution of the compliance activities of CV, PR and T1 matching results, each program was analyzed separately to determine if there was any impact with the shift to electronic tax return filing. The analysis was undertaken at the macro level as the CRA risk assessment and scoring processes in relation to compliance verification results were not reviewed as part of this study as they are closely guarded to protect the integrity of Canada's tax administration.

Confidence Validity (CV)

The CV program uses various methods to identify high risk claims before the tax return is assessed, and prevents taxpayers from receiving unwarranted refunds. Preventing taxpayers from receiving unwarranted refunds reduces the cost of post assessment compliance activities. Furthermore it sends a strong message to both the taxpayer and their representative that addressing non-compliance is a high priority for the CRA.

The analysis of CV program results from fiscal year 2010 to 2011 to fiscal year 2014 to 2015 revealed that the volume of work and the additional dollars assessed has increased over this five year period. For the fiscal year 2010 to 2011 program, 222,680 returns were reviewed and $162 million assessed which increased to 230,581 returns and $224 million assessed in fiscal year 2014 to 2015. This represents an increase of 4% in the number of tax returns reviewed and a 38% increase in dollars assessed. (Figure 6)

Figure 6 – Confidence Validity Production – number of returns validated for fiscal year 2010 to 2011 to fiscal year 2014 to 2015

Processing Review (PR)

The PR program reviews the credits and the deductions claimed on tax returns after a NoA has been issued to the taxpayer. The PR program uses a scoring system to calculate a risk value for each tax return assessed and determines the return's ranking for a possible review. Tax returns selected for review are reassessed, where necessary, and taxpayers are notified of their results through a NoR.

The analysis of PR program results from fiscal year 2010 to 2011 to fiscal 2014 to 2015 revealed that the volume of tax returns reviewed and the additional dollars assessed increased over the five year period. For the fiscal year 2010 to 2011 program, 903,435 returns were reviewed and $232 million was assessed which increased to 1.1 million tax returns being reviewed and $323 million assessed in fiscal year 2014 to 2015. This represents an increase of 22% in the number of tax returns reviewed and a 39% increase in dollars assessed. (Figure 7)

Figure 7 – Processing Review Production – number of returns validated for fiscal year 2010 to 2011 to fiscal year 2014 to 2015

T1 Matching

The T1 Matching program compares information filed on tax returns with third party information from employers, government departments, and financial institutions as well as with the tax return of their spouse. This allows for the identification of errors or omissions such as:

• under-reported income and benefits
• over-claimed tax deductions withheld at source
• over-claimed credits
• over-claimed deductions
• net income for the purposes of Canada Child Benefit and Goods and Services Tax Credit, and incorrect Registered Retirement Savings Plan Contribution Limit statements

The T1 Matching program begins in the latter part of the fall to allow for the compilation of all third-party information. Once matches have been found, discrepancies are identified between the amounts claimed by the taxpayer and those provided by the taxpayer's third-parties. For discrepancy cases that are clearly identified, an automatic reassessment may be performed^{Footnote 20} . For discrepancies meeting certain criteria, but having variable conditions requiring further review, cases are identified for manual review and possible reassessment.

The analysis of T1 Matching program results from fiscal year 2010 to 2011 to fiscal year 2014 to 2015 revealed that the volume of work and the additional dollars assessed increased over the five year period. For the fiscal year 2010 to 2011 program, 2.2 million returns were reviewed and $600 million was assessed which increased to 2.3 million returns and $797 million being assessed in fiscal year 2014 to 2015. This represents an increase of 5% in the number of tax returns reviewed and a 33% increase in dollars assessed. (Figure 8)

Figure 8 – T1 Matching Production - number of returns validated for fiscal year 2010 to 2011 to fiscal year 2014 to 2015

To understand if the shift to electronic tax return filing has had an impact on CRA resources for compliance validation activities, a cost analysis was undertaken. This analysis was based on the salary costs and the activity codes for the CV, PR and T1 Matching from CRA administrative data and compared to program production volumes.

The compliance validation activities costs, have for the most part, been stable from fiscal year 2010 to 2011 to fiscal year 2014 to 2015^{Footnote 21} . CV decreased from $21.74 to $19.54 (-$2.20 or 10%), PR increased from $16.22 to $16.29 ($0.07 or 0.4%) and T1 Matching increased from $5.58 to $6.26 ($0.68 or 12.1%). However as previously noted in Figure 4, the dollars assessed has substantially increased by 35% from $994 million assessed in fiscal year 2010 to 2011 to $1.3 billion in fiscal year 2014 to 2015^{Footnote 22} .

This analysis has confirmed that both overall and individual results for the CV, PR and T1 Matching programs have adjusted to the shift to electronic tax return filing, and are integral to CRA's tax administration and support Canada's self-assessment tax system.

With respect to changes that could improve compliance activities, regional interviews with CVB and the Appeals Branch strongly expressed that having certain tax forms and schedules transmitted at the time of tax return filing could enhance the taxpayer experience and support compliance activities.

Prior to electronic tax return filing, tax forms and schedules were included with the tax return when filed on paper; however this is not the case with the move to electronic tax return filing. EFILE and NETFILE software provides tax forms and schedules that supports taxpayers in completing and filing their tax return, however they are not transmitted to the CRA. The absence of this information has had an unintended impact on the taxpayer and on CRA's administration of compliance validation activities.

From a taxpayer's perspective they are often confused when the CRA asks them for a form or schedule that they completed and understood was already submitted to the CRA as part of their electronic tax return filing transmission. The inclusion of certain forms or schedules could result in more tailored communication with a taxpayer and improve client service as a result.

From a compliance perspective, including the collection of outstanding amounts, the additional information contained in tax forms and schedules could provide for better business intelligence and risk scoring of taxpayer returns to identify errors and omissions. The availability of this information at the time of tax return filing, would assist CRA with early intervention measures which are the most cost effective methods to address non-compliance.

It is recognized that the CRA can request receipts at any time; thus the decision to not include all data on forms and schedules was based on the low volume of compliance activities that are undertaken in relation to the overall volume of tax returns filed. Now that the system has been working as intended, and there is no issue with electronic storage, an opportunity exists to explore the transmission of data on certain tax forms and schedules to support CRA's tax administration as well as to potentially improve interactions with taxpayers. More importantly, this would send a strong message to both taxpayers and their representatives on the importance of having receipts to support their deductions.

5. Organizational structures, work processes and systems have been aligned with advancements in electronic tax return filing

With the advancements in electronic tax return processing, the CRA recognized the need to modify its organizational structure, work processes and systems.

Organizational Structures

No major organizational restructuring occurred from the period 2005 to 2015; however recognizing the advancements in electronic tax return filing, a CRA renewal initiative was introduced in November 2016. This resulted in the consolidation of tax processing sites and the establishment of new National Verification and Collections Centres (NVCC). This means the CRA went from nine processing centres and two specialized Ottawa sites (International Tax Services Office and the Ottawa Technology Centre) to seven processing centres of which four will remain processing centres and three will become NVCCs.

This service renewal is relatively new, thus was not measureable as part of this study. However, the expected benefits are that it would:

• create a more efficient organization, which maximizes economies of scale;
• modernize internal operations to improve service and deliver better results;
• increase capacity to verify returns and collect tax debts;
• provide greater certainty to a continued presence in all regions;
• better reflect the increasingly digital nature of business processes; and
• fully leverage people.

Work processes

CRA interviews with employees and review of documents revealed that modifications have occurred to work processes with the shift to electronic tax return filing. First and foremost, the protection of taxpayer information is paramount, thus the CRA restricts changes to addresses, banking and direct deposit information through EFILE or NETFILE to minimize identity theft. Programs are also in place, such as the Special Assessment Program to prevent identity theft and fraud through the review of electronically transmitted tax returns prior to processing.

The CRA also developed and implemented work processes to register, and monitor tax preparers as well as a directory of the registered tax preparers for use by Canadians. CRA interviews revealed some concerns with the practices of registered tax preparers, and how they support CRA's tax administration^{Footnote 23}  and individuals who pay for this service. Concerns were raised on the competencies of the registered tax preparers to complete tax returns in accordance with the ITA and regulations. Others mentioned that some of the registered tax preparers do not use the system as intended. For example, they will file a tax return on behalf of their client as self-employed in order to meet the tax return filing deadline and to avoid a late filing penalty. The registered tax preparer will then follow-up and correct the tax return through a reassessment request once they have time to review the income and receipts. For the CRA, this could result in the need for reassessment of the tax return, additional scrutiny of income, expenses and receipts, and may also result in interest and penalty being charged to a taxpayer if a balance is outstanding as a result of the reassessment.

With 56% of individuals using registered tax preparers to file their tax returns, an opportunity exists to undertake an in-depth review to provide insight on how they support individuals in meeting their tax obligations as well as CRA's tax administration.

Systems

CRA tax administration systems are built, based on Agency IT best practices, to allow for the receipt, verification, processing, validation, third party matching and the assessment or reassessments of individual tax returns. This information also supports collection, appeal and audit activities. As stated earlier, protecting taxpayer information is paramount and all threats to government systems – real or perceived – are taken seriously and responded to with established protocols. This includes suspension of service when warranted.

To ensure systems meets the operational needs of the future, the CRA is also undertaking a T1 system redesign (T1SR) which is a multi-year project that will mitigate the risks associated with an aging T1 Suite by modernizing its software, data and technology components.

Interviews with CRA personnel revealed some strong opinions about the T1SR project and the unintended impacts on employees. A reoccurring comment was that the font on the computer screen is extremely small and many are worried about the impact on their vision and ability to process or validate tax returns accurately and efficiently. ABSB was under the impression that this was an issue with older computers; however the Information Technology Branch advised that this issue resides in the application coding. It was also strongly voiced that the CRA needs to address the current problems with the system prior to further releases, and most importantly increase consultation with the end users. It is recognized that the T1SR is a multi-year project and that system changes are based on system conversion timelines and implications with tax legislative modifications.

The AERB undertook an independent review^{Footnote 24}  of business analyst capacity which revealed that the CRA requires significant improvements in this area which may have attributed to the unintended impacts identified as part of this study. The AERB also plans to undertake an independent review of the T1SR project in fiscal year 2017 to 2018 to provide assurance that controls are in place to support the successful implementation of the project phases.

To mitigate the unintended impacts on employee's accuracy, efficiency, health and wellness identified as part of this study, an opportunity exists to take stock of system maintenance upgrades in place as part of the T1SR project, and ensure that application coding provides a sufficient font size for employees.

Conclusion

The 2014 tax return profile and compliance validation analysis are positive with no major constraints identified with the shift from paper to electronic tax return filling. Considering the higher use of registered tax preparers, and to better understand how the registered tax preparers support CRA's tax administration, an independent study would provide additional insight on the EFILE tax return filing method and the individuals who pay a fee to use this service. This study will be considered in the development of the AERB 2018 to 2021 Risk-based Audit and Evaluation Plan.

In addition, with the electronic systems working as intended an opportunity exists to promote electronic tax return filing for certain groups as well as to explore the transmission of data on certain tax forms and schedules to support compliance activities and interactions with Canadians. Employees are the cornerstone of CRA's administration and have strongly voiced the need to take stock of system maintenance upgrades in place as a part of the T1SR project, and to ensure that application coding provides a sufficient font size for employees. The goal is to mitigate unintended impacts on employee's health and wellness while ensuring accurate, efficient service is provided to Canadians.

Recommendation 1

ABSB, in consultation with other stakeholders, undertake a comprehensive analysis to identify ways to promote electronic tax return filing and increase take-up rate for those groups showing a slower transition from paper to electronic tax return filing.

Management Response:

The CRA's success in promoting and enhancing electronic filing has allowed us to reach an 86% electronic filing rate to date. However, it is understood that some taxpayers may never switch from paper to electronic filing due to many factors, including complexity of their tax situation, technological limitations or socio-economic situation. ABSB is working with Agency stakeholders and gathering information related to the remaining groups of paper filers to ensure we are doing what we can to help those that wish to electronically file, as well as support taxpayers who chose to continue to paper file. We will complete this analysis by Q1 of fiscal year 2018 to 2019. A report detailing the results of this analysis and proposed action plan will be shared with senior management by Q2 of fiscal year 2018 to 2019.

Recommendation 2

ABSB, in consultation with CRA stakeholders, explore and assess the feasibility to have data on certain tax forms and schedules transmitted to support compliance activities and interactions with Canadians.

Management Response:

ABSB actively participates, on an ongoing basis, on an inter-branch working group and DG steering committee (DISC) that formally reviews data that is captured and transmitted on the T1 Return. The working group (led by SIB) balances the value of obtaining and holding tax data vs. the cost, burden and impact of collecting that data. At the next working group meeting, ABSB will work with other CRA stakeholders to assess the feasibility and impacts of transmitting more data to support compliance activities and interactions with Canadians. ABSB will provide an update in June 2018, following the May 2018 DISC meeting.

Recommendation 3

ABSB, in consultation with CRA stakeholders, take stock of system maintenance and upgrades and address employee concerns with the T1SR project.

Management Response:

ABSB recognizes that field users are adapting to new technological tools and will continue to support them by working with local management to identify improvements and corrections that will assist them with the transition. As display irritants remain for some users, specifically with the T1 Case system, ABSB, in consultation with CRA stakeholders, will reassess the instructions provided to the field, modify if necessary, and reissue to field users by Q4 of fiscal year 2017 to 2018. We will also continue to support regional management in implementing local ergonomic improvements as identified in a study by the National Health and Safety Committee.

Moving forward, after assessing the impact of display changes included in the February 2018 release, ABSB will work with ITB and other CRA stakeholders to prioritize further enhancements for the February 2019 and if necessary, the February 2020 release. This is the earliest possible timing as these system releases are aligned with the release calendar for the T1 Suite of programs which occurs once a year in February. ABSB will provide status updates on the February 2019 T1 Case system enhancements in Q1 of fiscal year 2019 to 2020 and Q1 of fiscal year 2020 to 2021, if necessary.

Acknowledgement

We would like to acknowledge and thank all CRA stakeholders interviewed for their support during the evaluation study. We observed that employees, both in headquarters and the regions, are professional, resilient, able to adapt to change, and most importantly are committed to providing quality service to Canadians and to ensuring that all taxpayers meet their tax obligations and pay their fair share of tax.

Appendices

Appendix A: Logic model

Appendix B: Reasons to file a tax return^{Footnote 25}

Appendix C: Restrictions and exclusions^{Footnote 26}

Appendix D: Profile analysis - methodology and data results by province and territory

Low Income

The established WITB income values were used to define and segment the low income group from the 2014 tax returns. This program defines low net income thresholds as $37,195 for Nunavut, $20,072 for Quebec, $19,721 for British Columbia, $19,139 for Alberta, and $17,986 for the rest of Canada. (Figure D.1)

Figure D.1 – Number and percentage of tax returns filed for low income by filing method and by province and territory for tax year 2014

Source: 2014 Tax Returns

Geographic area - Rural and Urban

For the rural and urban group, the postal code, as assigned by Canada Post^{Footnote 27}, were used to define and segment these two groups from the 2014 tax return population to better understand their filing behaviour. (Figure D.2)

Figure D.2 – Number and percentage of tax returns filed by geographic area - rural and urban and by filing method for tax year 2014

Source: 2014 Tax Returns

Persons with disabilities

The persons with disabilities group was created by selecting individuals who received a DTC on their 2014 tax return. (Figure D.3)

Figure D.3 – Number and percentage of tax returns filed by persons with disabilities by province and territory and by filing method for tax year 2014

Source: 2014 Tax Returns

Youths and seniors

Youths were defined as those who had filed a tax returns who were under the age of 20 while seniors were defined as 65 years or older. This criteria was selected as CRA commonly uses these thresholds to determine eligibility for various benefits and services such as the CVITP. (Figure D.4)

Figure D.4 – Number and percentage of tax returns filed by youth and seniors and by filing method for tax year 2014

Source: 2014 Tax Returns

Self-Employed

The self-employed group was created by using the major source of income as reported on the 2014 tax return. (Figure D.5)

Figure D.5 – Number and percentage of tax returns by filing method for self-employed individuals for tax year 2014

Source: 2014 Tax Returns

Newcomers to Canada

For income tax purposes, an immigrant is considered a newcomer to Canada only for the first year that they are a new resident of Canada. The newcomer group was created from data reported on the tax returns in 2013 and the same group was tracked in 2014 to assess any change to their tax return filing behaviour. (Figure D.6)

Figure D.6 – Number and percentage of tax returns filed for newcomers by province and territory and by filing method for tax years 2013 and 2014

Source: 2013 and 2014 Tax Returns

Gender

The gender group was identified by the gender field in the T1 master database of the 2014 tax return filing population. (Figure D.7)

Figure D.7 – Number and percentage of tax returns by filing method and gender for tax year 2014

Source: 2014 Tax Returns

Appendix E: Glossary