Evaluation – Income Tax Rulings Directorate
Final Report
Audit, Evaluation, and Risk Branch
March 2021
Executive summary
The purpose of this evaluation report is to provide Canadians, the Commissioner, Canada Revenue Agency (CRA) management, and the Board of Management with an assessment of the outcomes achieved and the effectiveness of CRA’s administration of the Income Tax Rulings Directorate.
The Income Tax Rulings Directorate is the centre of income tax interpretive expertise within the CRA. The directorate's role is to interpret Canada's income tax laws and explain how they apply to different situations. The directorate provides its interpretations through a variety of products including advance tax rulings, technical interpretations and income tax folios. It also provides the Dedicated Telephone Service for tax practitioners. The directorate also plays a key role consulting with the Department of Finance and the Department of Justice with respect to proposed income tax legislation and litigation.
The evaluation team found that both internal and external stakeholders consistently praised the directorate’s staff and the quality of the interpretive positions issued and that they viewed the directorate as the authoritative voice of income tax interpretive expertise in the Government of Canada. The quality of the directorate’s work provides stakeholders with the support they need to comply with Canada’s income tax laws. In addition, stakeholders see folios and the Dedicated Telephone Service as beneficial to their compliance efforts and abilities to respect their obligations.
The timeliness of the directorate’s interpretive positions was stakeholders’ most cited concern. This issue is impacted by a variety of factors, both within and outside of the directorate’s control. Timeliness was particularly a concern for external interpretations responding to a tax practitioner’s submission because the directorate prioritizes other services, such as urgent internal workloads. Ultimately, a lack of timeliness is impacting requests for interpretive positions. The number of requests decreased over the period reviewed by the evaluation. This decrease could be a sign that taxpayers, practitioners and CRA auditors are relying less on the directorate for guidance and that they are either seeking alternative interpretations from the private sector or risk-managing their tax positions through the appeals process. In the long term, these two scenarios could weaken voluntary compliance.
The evaluation team’s review of other tax administrations found that some use a decentralized program model to develop interpretive positions. The directorate could use some of these practices as a means to leverage technical expertise and address workload challenges. Currently, some gaps in performance measurement practices exist within the directorate such as reporting on service standard results that are more transparent for Canadians with regard to meeting expectations.
Overall, the directorate plays a leading role in the consistent application of the Income Tax Act across the CRA and the Government of Canada. At the same time, opportunities exist to align resources and practices with priorities, which will allow the directorate to achieve its intended outcomes and meet stakeholder expectations.
Summary of recommendations
In order to meet stakeholder expectations, the Income Tax Rulings Directorate should develop a strategy to manage how services are prioritized, delivered, measured and reported on. This strategy should leverage technical capacity across the CRA and incorporate enhanced performance measurement practices.
Management response
The Legislative Policy and Regulatory Affairs Branch agrees with the recommendations in this report and has developed related action plans. The Audit, Evaluation, and Risk Branch has determined that they appear reasonable to address the recommendations.
1. Introduction
This evaluation was included in the Board of Management approved Risk-Based Audit and Evaluation Plan 2018-2021. The evaluation framework was approved by the Management Audit and Evaluation Committee on May 14, 2019.
The purpose of this report is to provide the Commissioner, Canada Revenue Agency (CRA) management, and the Board of Management with information on the effectiveness and the outcomes achieved by CRA’s administration of the Income Tax Rulings Directorate.
1.1. Importance
The CRA administers tax, benefits, and related programs and ensures taxpayer compliance on behalf of governments across Canada. In doing so, it contributes to the ongoing economic and social well-being of Canadians.
This evaluation is important because Canada’s tax system relies on taxpayers to self-assess and pay the income taxes that they owe. Taxpayers’ ability to comply with legislation depends on their understanding of how the rules apply to their circumstances. To reduce uncertainty, the Income Tax Rulings Directorate serves as the authoritative voice of the CRA in interpreting the application of income tax laws for taxpayers, tax auditors, and other government stakeholders. When the intent of income tax laws is not clearly communicated, taxpayers might develop their own interpretations that incentivize tax avoidance. The consequences of not providing accurate and timely interpretive positions could impact the CRA’s ability to support taxpayers in meeting their tax obligations.
2. Background
The Income Tax Rulings Directorate is the centre of income tax interpretive expertise within the CRA. Its mandate is to provide the CRA’s interpretation of the Income Tax Act, the Income Tax Regulations, all related statutes, and the Income Tax Conventions that Canada has with other countries. In the 2018 to 2019 fiscal year, the directorate had 181 staff members, including senior managers, support staff, rulings officers, and managers. The directorate is primarily responsible for providing taxpayers with information through its interpretive positions of technical information relevant to taxpayers’ particular situations.Footnote 1
The directorate also liaises with taxpayers, their authorized representatives, and other CRA employees to improve information sharing, build relationships, and provide technical support and guidance on income tax legislation. The directorate delivers National Technical Capacity Building Forums for employees to develop their technical capacity. The directorate also consults with the Department of Finance and the Department of Justice with respect to proposed income tax legislation and litigation, chairs key committees (such as the General Anti-Avoidance Rule Committee), and participates in roundtable discussions with key external stakeholders.Footnote 2
The directorate provides interpretive positions to internal and external stakeholders through the following key activities:
- Advance income tax rulings: A taxpayer or their representative can request an advance income tax ruling if they would like to understand how the CRA will apply a specific provision of income tax law to a proposed transaction. The directorate charges a fee for this service, and the result is binding on the CRA.
- Technical interpretations: The directorate provides taxpayers, their representatives, and CRA employees (such as Compliance Programs Branch employees) and, at times, other government departments with written technical interpretations on specific provisions of Canada’s income tax law. A fee is not charged for a technical interpretation. The directorate also responds to other enquiries on a range of technical topics, including past interpretations.
- Folios: The directorate publishes folios that provide the CRA’s technical interpretation of and position on certain provisions contained in the Income Tax Act. Folios are organized by chapters; each chapter summarizes the CRA’s interpretations related to a specific subject. Between April 2014 and March 2019, the directorate received over 4.8 million visits to its income tax folios on the CRA website.
- Dedicated Telephone Service: During the 2014 Red Tape Reduction consultations, small businesses and their representatives identified a need for greater access to technical expertise to respond to increasingly complex technical enquiries. As a result, the directorate launched the Dedicated Telephone Service pilot project in July 2017.Footnote 3 In 2019, it became a permanent program.
For an overview of these activities and how they support the directorate’s outcomes, see Appendix A for the logic model.
3. Methodologies
The evaluation study covers a five-year period, between fiscal years 2014 to 2015 and fiscal year 2018 to 2019.Footnote 4 The evaluation team used the following methodologies:
- data analysis of the directorate’s workloads
- case studies of advance income tax rulings through the tax continuum
- file and document reviews of the directorate’s published positions and working papers
- internal and external surveys of users of the directorate’s services
- interviews with the directorate’s staff and stakeholders
- review of five other tax administrations and their rulings functions
Evaluation issues and research questions are included in Appendix B, along with a detailed description of the methodologies used. See Appendix C for a list of stakeholders and Appendix D for a glossary of terms. See Appendix E for a high-level summary table of the review of other income tax ruling programs from other tax administrations.
4. Findings, recommendations, and management response
The findings of the evaluation are detailed below along with recommendations to address issues of high significance or mandatory requirements.
The Income Tax Rulings Directorate agrees with the recommendations in this report and has developed related action plans. The Audit, Evaluation, and Risk Branch has determined that these action plans appear reasonable to address the recommendations.
4.1 Stakeholders were generally satisfied with the Income Tax Rulings Directorate staff and the quality of the interpretive positions issued.
One of the most important ways that the directorate serves stakeholders is by providing them with the certainty that they need to make informed decisions. Confidence in the quality of their work and the validity of their positions provide stakeholders with the assurance that they need to voluntarily comply with Canada’s income tax laws.
The evaluation team conducted internal and external surveys among requestors of interpretive positions over the evaluation period to assess user experience and understanding as well as the quality of the directorate’s interpretive positions. For the most part, these survey results were positive across the board, as shown in Figure 1.
| Internal interpretations | Advance income tax rulings | External interpretations | |
|---|---|---|---|
| Overall Satisfaction | 83% | 78% | 80% |
| Ease of submitting request | 81% | 59% | 80% |
| Consistent with other CRA positions | 96% | N/AFootnote 5 | 85% |
| The rationale was clear | 85% | 84% | 76% |
| The position provided me with the clarity I need | 77% | 78% | 73% |
Interviews corroborated the survey findings. Stakeholders found the directorate to be knowledgeable and professional, and they valued the depth of analysis and the overall quality of the interpretive positions.
The directorate credits the quality of their positions to their multi-tiered quality assurance process, which validates analysis of the interpretive positions before they are released to stakeholders. Rulings officers, managers, and directors all hold technical expertise within their specific divisions. As interpretive positions are finalized and reviewed, interpretive positions are vetted at each level of the division. The directorate has a documented procedure to ensure that this process takes place for every file.
4.2. Although the timeliness of the Income Tax Rulings Directorate’s interpretive positions is influenced by a variety of factors, it is a concern for stakeholders.
The timeliness of the directorate’s advance income tax rulings and technical interpretations is a key outcome to ensure that stakeholders have the information they need to interpret and comply with Canada’s income tax laws.
The primary method that the directorate uses to measure its performance is through service standards based on timeliness. The directorate has two service standards to ensure that taxpayers are provided with timely information. The first is that 80% of advance income tax rulings issued by the CRA are provided within 90 business days of receiving all essential information from a requester.Footnote 6 The second is that 85% of technical interpretations issued by the CRA are provided within 90 business days of receiving all essential information from the client. These service standards provide taxpayers, their representatives and internal users with the expectation on when they should receive a response from the directorate.
Figure 2 shows that from 2014 to 2015 fiscal year to 2018 to 2019 fiscal year, in most cases, the directorate either achieved or nearly met its service standards for its rulings and technical positions. One noteworthy outlier is the service offered to tax practitioners for an external interpretation via an individual submission as outlined on the CRA’s website (Information Circular 70-6R9). Besides the directorate’s participation at external conferences, this is the primary service offered to tax practitioners who are seeking a technical interpretation. In the 2018 to 2019 fiscal year, this service met the service standard 68% of the time.
| Advance income tax rulingsFootnote 8 | External interpretationsFootnote 9 | External interpretations via conferences | Internal interpretationsFootnote 10 | Advance Tax Rulings Service Standard | Technical Interpretation Service Standard | |
|---|---|---|---|---|---|---|
| 2014 to 2015 | 77.85% | 80.90% | 88.34% | 85% | 85% | |
| 2015 to 2016 | 85.89% | 77.17% | 87.34% | 85% | 85% | |
| 2016 to 2017 | 76.06% | 74.11% | 96% | 85.14% | 85% | 85% |
| 2017 to 2018 | 82.60% | 69.29% | 94% | 86.69% | 85% | 85% |
| 2018 to 2019 | 88.66% | 68.47% | 96% | 85.81% | 80% | 85% |
It is important to highlight that the directorate’s 90-day target is measured on a basis of “receiving all essential information.” This means that, when calculating the service standard, the directorate does not take into account the time spent waiting for stakeholders to provide additional information that the directorate considers is pertinent to issue a position. Once the request has been received, if the directorate determines that additional information is required, the file is put on hold until the additional information is submitted. Over the review period of the evaluation, 93% of advance income tax rulings, 32% of external interpretations and 41% of internal interpretations were put on hold.
To measure timeliness as an overall outcome, the evaluation team considered the total time that it takes to complete a ruling or a technical position. This duration more closely reflects the time that a stakeholder waits to receive the information that they requested. When considering “on hold” time, the length of time to issue an interpretive position can be significantly longer, as shown in Figure 3. In particular, for an advance income tax ruling, the average on hold time is longer than the actual time the directorate is working on the file. Advance income tax rulings are often highly complex transactions that typically require a large amount of supporting information to ensure that all provisions of income tax laws have been considered. As such, they can take a long period of time to complete.
| Advance income tax ruling | External interpretation | Internal interpretation | |
|---|---|---|---|
| Average length of time on hold | 87 | 16 | 23 |
| Average length of time with the Income Tax Rulings Directorate | 69 | 89 | 59 |
During interviews, stakeholders often noted that the total elapsed time to receive a ruling or technical interpretation was long. A survey among external and internal stakeholders showed that about two-thirds of external stakeholders expressed that responses were timely, while half of internal stakeholders expressed the response was timely (see Figure 4).
| Advance income tax rulings | 64% |
| External interpretations | 67% |
| Internal interpretations | 50% |
4.2.1. Timeliness is at times outside of the Income Tax Rulings Directorate’s direct control.
From the directorate’s perspective, considering the problems of legal uncertainty and its consequences, the directorate must ensure that its rulings and technical interpretations are as accurate as possible. As such, it cannot move forward on a request without having all of the pertinent information. There are instances when taxpayers or their representatives hesitate to provide the directorate with all of the necessary facts without obtaining official assurance of the tax consequences. This behaviour increases the amount of time that a file is on hold.
External stakeholders expressed a range of perspectives in interviews in regard to timeliness. Some communicated that the directorate sometimes requested facts that were not relevant to the transaction, and they believed that they had provided all the required information with the initial submission. Others expressed that a lack of communication regarding expectations early on in the process resulted in additional time being needed to gather information. However, some external stakeholders understood that certain files are complex by nature and require the directorate to do its due diligence and take the time needed.
From an internal stakeholder perspective, particularly that of CRA auditors, the procedures to receive the directorate’s services can present barriers. For certain complex files, field auditors have to go through a series of gating processes before reaching the directorate (such as working through the program area’s technical application teams) before submitting the request to the directorate. This process can result in delays even before the directorate has received the request.
4.2.2. The Income Tax Rulings Directorate’s competing priorities impact some workloads more than others thereby influencing the timeliness of services
The directorate’s staff expressed that the timeliness of issuing advance income tax rulings and technical interpretations is impacted by competing priorities and constraints on capacity. Staff cited a rise in other highly prioritized workloads, such as ministerial mail, media requests, and Assistant Commissioner and Commissioner requests which take precedence over other workloads. As illustrated in Figure 5, an analysis of workloads shows that advance income tax rulings, external interpretations, and internal interpretations represented 74% of recorded hours in the 2014 to 2015 fiscal year for files completed. In fiscal year 2018 to 2019, that number fell to 65%.
| Advance tax rulings, external interpretations, internal interpretations | OtherFootnote 11 | |
|---|---|---|
| 2014 to 2015 | 73.91% | 26.09% |
| 2015 to 2016 | 71.61% | 28.39% |
| 2016 to 2017 | 57.86% | 42.14% |
| 2017 to 2018 | 66.78% | 33.22% |
| 2018 to 2019 | 64.86% | 35.14% |
The directorate’s written procedures state that advance tax rulings should have the highest priority, followed by internal interpretations, and then external interpretations. The evaluation team analyzed the directorate’s case management data and interviewed staff to understand how the directorate prioritizes workloads. The evaluation team found that how the directorate prioritizes their work in practice is not always aligned with their stated priorities. Figure 6 broadly illustrates the evaluation team’s view of how the directorate prioritizes its workloads in practice, with the notable exceptions described below.
In practice, the directorate prioritized interpretations based on a number of factors such as importance, and urgency of each incoming request by assessing when and how much time will be spent on it, as well as the degree of technical expertise required (and available) to do the work.
High profile and time sensitive internal requests receive first priority (queries from the Minister’s office, Commissioner’s office, media enquiries and ATIP requests from the Public Affairs Branch) with other types of internal requests also receiving high priority such as:
- appeal referrals
- audit referrals with pending statute bar dates
- legislative drafting consultations requests from the Department of Finance
- requests for materials or opinions related to the litigation process from the Department of Justice
Other internal referrals with pending deadlines are also prioritized - such as requests for technical reviews of forms and guides that are in final circulation prior to publication. For remaining workloads the directorate considers critical stakeholder deadlines when completing work, with rulings given priority to the extent possible. The directorate also considers the importance and potential impact of the interpretation (number of taxpayers impacted, vulnerability of community etc.).
Given all of these considerations, competing priorities have impacted the directorate’s ability to respond to external interpretations via a taxpayer’s submission as they have become the least prioritized service. As a result, they take longer to complete. Despite being one of the largest recorded activities in terms of hours worked and a publicly offered service, when weighed against other demands, these requests can be pushed down the queue. For external stakeholders, the directorate prioritizes external interpretations delivered through conferences. These technical positions are submitted on behalf of various tax associations, who vet and triage the most pressing areas for the tax community. As such, they are viewed as having a greater impact on the tax system. In turn, the external interpretations delivered through conferences can impact the timeliness of internal interpretations as the directorate must divert resources to meet the influx of work during the time of year where multiple conferences are being held.
| 1 | Ministerial mailFootnote 12, Commissioner and Assistant Commissioner requests, ATIP requests, and media enquiries Prioritized first as they are typically urgent requests on a variety of tax topics from senior management, requiring quick turnaround times. |
| 2 | Advance income tax rulings Prioritized second, as the requestor is paying for the service and the nature of the transactions are time sensitive and can be highly material. May receive lower priority in practice due to competing internal workloads that are critical to CRA programs. |
| 3 | External interpretations via conferences Mid-level priority as these interpretations often impact a large base of the tax community and the directorate is under pressure to deliver its positions in time for the conferences. |
| 4 | Internal interpretations Low priority relative to other services but receive higher priority on a case-by-case basis, as CRA stakeholders must meet their own critical deadlines such as those related to litigation or statute-barred timelines. |
| 5 | External interpretations Generally prioritized last as the directorate responds to all incoming individual requests regardless of their overall impact. May receive significantly higher priority on a case-by-case basis where a wide impact on taxpayers is anticipated or the interpretation is expected to be important for vulnerable persons or communities. There is no fee associated with this service. |
The directorate acknowledges that prioritizing is necessary as the program strives to action all eligible requests with a finite number of resources. An international comparative study conducted by the evaluation team found that the five other tax administrations who were reviewed do not offer interpretations on an individual external request basis; whereas the CRA was the only tax administration to provide this service.Footnote 13
The approach used by other tax administrations is to publish technical positions proactively based on observed trends; consultations with the tax community, the public, and professional bodies; or changes in legislation. This is similar to the directorate’s approach in participating at conferences and working with tax associations to vet the most important tax topics in need of interpretation.
4.3. Requests for interpretive positions are decreasing. Stakeholders rely on timely interpretive positions for tax certainty.
Seeking out a ruling or a technical interpretation from the directorate is voluntarily done by stakeholders who wish to have tax certainty from the CRA. From an outcome perspective, the evaluation considered the extent to which stakeholders seek out the directorate for its services in their efforts to voluntarily comply with Canada’s income tax laws.
Figure 7 shows that between fiscal years 2015 to 2016 and 2018 to 2019, requests for rulings and technical positions decreased. Advance income tax rulings decreased by 40%, external interpretations by 26%, and internal interpretations by 22%.
| Advance income tax rulingsFootnote 14 | External interpretationsFootnote 15 | Internal InterpretationsFootnote 16 | |
|---|---|---|---|
| 2015 to 2016 | 183 | 793 | 718 |
| 2016 to 2017 | 127 | 727 | 698 |
| 2017 to 2018 | 102 | 626 | 637 |
| 2018 to 2019 | 110 | 587 | 563 |
4.3.1. Stakeholders identified timeliness as a deterrent to seeking the Income Tax Rulings Directorate’s services due to the increasing speed of business.
Internal and external stakeholders repeatedly mentioned in interviews that the speed of business is increasing and that obtaining clarity on the CRA’s interpretations in a timely manner is becoming more and more critical. Accordingly, stakeholders reported their unwillingness to wait for an interpretive position. Instead, they risk managed their tax position through the appeals process.
External stakeholders suggested that businesses will alter a planned transaction to one with greater tax certainty instead of pursuing a new ruling or a technical position. Alternatively, external stakeholders will forgo certainty from the CRA and come to their own opinion. Or, they will seek alternative sources of information, such as positions offered externally by the private sector, which risk being inconsistent with those of the CRA. External stakeholders suggested that a ruling provides the most value when it meets three key criteria: the materiality of the transaction is high, the uncertainty of tax treatment is high and, most importantly, the transaction is not time-sensitive.
With respect to internal stakeholders in the CRA, field auditors reported their willingness to take a position rather than wait for a response from the directorate. There is a disincentive to seek a technical position as CRA field auditors prioritize completing files or closing audits before statute-barred dates, rather than waiting for an interpretive position. The Appeals Branch expressed anecdotally that audit assessments are at times overturned due to misinterpreted tax legislation and that these cases could have been avoided had the auditor sought an interpretation. The CRA does not track the frequency of these scenarios.
These scenarios might partially explain the decrease in rulings and interpretation requests. Other contributing factors include external stakeholders now having access to all past rulings and technical positions through third-party publishers and stakeholders having greater access to the directorate’s databases. In the long term, a trend of decreasing service requests could undermine the directorate's role in supporting voluntary compliance.
4.4. Folios and the Dedicated Telephone Service support stakeholders in their compliance efforts.
In addition to delivering new rulings or technical positions, the directorate delivers a number of services to provide stakeholders with greater access to the information that they need to support their compliance efforts. In particular, the directorate publishes folios that summarize past CRA positions by topic. Also, in 2017, it launched the Dedicated Telephone Service to provide tax practitioners with access to technical expertise to respond to complex technical enquiries.
4.4.1. A wide range of both internal and external stakeholders rely on folios and request more coverage of tax topics.
Stakeholders, both internal and external, were generally complimentary toward published folios. They found folios comprehensive and easily understood. Figure 8 shows the key survey results.
| CRA stakeholders | External stakeholders | |
|---|---|---|
| Used Income Tax Folios | 87% | 90% |
| The individual folios are comprehensive | 84% | 81% |
| Easily understood | 84% | 81% |
| Coverage of the tax topics supports needs | 52% | 63% |
Interviews revealed that folios are particularly important to both generalist accountants providing advice to a wide range of clients as well as CRA auditors in the field.
As revealed by the survey, respondents felt that there is a lack of topic coverage. When folios were first conceived by the directorate, the intent was to replace the previous practice of interpretation bulletins. However, the goal of widespread coverage of past bulletins has experienced delays. An analysis of workloads showed that folio development dropped after a major push in the 2016 to 2017 fiscal year. The directorate cited a lack of resources and other pressing priorities taking precedence over folio development.
Because folios do not cover all topics, stakeholders are pressed to navigate between the folios and past interpretation bulletins. However, interpretation bulletins are only relevant at the time of publication and are not evergreen like folios. Furthermore, the Treasury Board of Canada Secretariat policy has resulted in the interpretation bulletins being categorized as “Archived Content” on the CRA website. Footnote 18 Therefore, there is confusion about the validity of the interpretation bulletins among the tax community. The 2018 evaluation study, CRA Administration of Domestic T3 Trusts, also highlighted problems of clarity due to archived bulletins.
A survey among tax practitioners that was conducted for the 2020 evaluation study, CRA information resources for small businesses, further supports these findings. This survey revealed that, within the tax community, folios are the most relied upon CRA resource after E-services.
4.4.2. The Dedicated Telephone Service is a value-added practice.
The Dedicated Telephone Service provides small and medium businesses and their representatives access to CRA technical expertise. The Dedicated Telephone Service was launched in 2017 and received funding to become a permanent program in 2019.
The international comparative study found that the CRA was the only tax administration to provide a specialized and dedicated phone line for complex interpretive tax questions. The directorate also supported the pilot phase of the service through post-call and annual satisfaction surveys. In the 2018 to 2019 fiscal year, the post-call survey showed a satisfaction rate of 98%, and the annual survey of 78%. Most negative feedback from the survey related to the lack of client-specific advice, but this is outside the intended scope of the service (that is, to help callers find the information and guidance they need to resolve their interpretive income tax issues – and not to provide a determination).
When the phone service was first launched, it was estimated that it would process 12,000 calls a year. In the 2017 to 2018 fiscal year, the directorate received 3,102 calls, and in 2018 to 2019 it received 3,730 calls. The directorate associated the low call volumes with the lack of an awareness strategy (given its launch as a pilot), the slow national roll-out of the service, and the restricted eligibility of people who could use the service. At the time of the evaluation, these areas were addressed as the service expanded into a full program. Footnote 19
4.5 Internal and external stakeholders rely on and value the Income Tax Rulings Directorate's expertise in supporting their efforts to voluntarily comply with Canada’s income tax laws.
The directorate delivers a variety of services to bring certainty to Canada’s income tax laws. The ultimate outcome of these activities is to provide the assistance and information stakeholders need to voluntarily comply with their tax obligations.
In interviews, stakeholders were unanimous in highlighting the directorate as the best resource for technical income tax expertise in the Government of Canada, and they emphasized their strong and professional working relationships.
Aside from the core mandate of issuing advance income tax rulings and technical interpretations, the directorate works horizontally across the CRA and with other government departments to ensure an accurate and consistent application of the law. Examples of this work include:
- chairing the CRA’s General Anti-Avoidance Rule committee
- participating as a member of the Audit File Resolution Committee;
- reviewing forms and guides across the CRA to ensure accuracy and consistency
- working with the Department of Finance on the development of new or amended income tax laws
- working with the Department of Justice on matters of tax litigation
The directorate also maintains a repository of its interpretive positions together with other research resources in a searchable format. Internal procedures are in place to ensure that out of date positions and/or reversed positions are flagged, with reference to needed research sources. Internal stakeholders rely on this database to ensure internal consistency and for accuracy in applying the law.
One of the largest benefits cited by CRA stakeholders when working with the directorate was receiving informal advice. This was seen as a more direct and timely means of getting a response. Various stakeholders across the CRA have built informal networks over time with the directorate so that they feel comfortable calling an employee directly at the directorate. The drawback of this approach is that these interactions are entirely dependent on personal networks, informal advice is often not formally or institutionally captured, and some groups are at a disadvantage for not knowing who to speak with. Interviewees reported that the directorate would benefit from having a more formal, albeit simple, form of outreach and networking so that the technical areas across the CRA are aware of whom to contact.
The evaluation team found limits to the directorate’s influence on voluntary compliance when supporting new, or complex legislation. In interviews, some external stakeholders indicated that the directorate does not act proactively enough to support voluntary compliance. In particular, these stakeholders cited the recent new legislation surrounding the tax on split income (TOSI)Footnote 20, where they expressed frustration with both the TOSI legislation itself, and subsequent interpretations provided by the CRA. The evaluation team conducted a case study to examine stakeholder feedback.
Case study of TOSI
External stakeholders said that the published guidelines do not provide clarification for all purposes and that it is difficult for them to provide consistent answers to the clients they represent. External stakeholders reported that they relied on guidance provided by the private sector in the absence of specific direction from the CRA.
The evaluation team conducted a review of TOSI related publications by the directorate. The review found the directorate provided timely guidance to the tax community through consultations during the development of the legislation as well as publishing technical interpretations as early as December of 2017 when the ITRD issued general guidance (the TOSI rule change received royal assent in June of 2018). At the time of the evaluation, the directorate had issued 43 technical interpretations regarding TOSI.
The complex and circumstantial nature of the TOSI legislation results in interpretations that are specific to the unique facts and conditions of the request for interpretation and thus cannot be widely applied by the tax community. As a result, general guidance for TOSI is limited, meaning that external stakeholders must keep submitting individual requests for interpretations for each new scenario and the directorate must in turn respond to each one.
External stakeholders reported that conferences and round tables are value-added exercises for dialogue and getting interpretations out to the community with regard to TOSI. This is highlighted by the fact that of the 43 technical interpretations related to TOSI, 25 of them are from round table questions and answers. However, at the time of the evaluation, TOSI continues to be a dominant agenda topic at conferences and roundtables, indicating that uncertainty remains despite the directorate’s efforts.
The case study highlights that the directorate’s ability to provide guidance is dependent on the legislation itself. Any legislation open to interpretation may result in interpretations being applied inconsistently, which can increase uncertainty. External stakeholders advised the evaluation team that conferences and round tables are value-added exercises for dialogue. The CRA roundtables in particular are well-attended to ensure that the stakeholders understand the CRA’s positions on complex tax matters for the benefit of their clients.
4.6 Technical expertise is in high demand and the Income Tax Rulings Directorate faces internal competition to retain qualified personnel.
During interviews with employees of the directorate, the most prominent challenge cited was ensuring that there was an adequate number of staff with the right technical capacity. The concern is based, in part, on an increase in competition for technical experts across the CRA.
The directorate often linked its ability to retain and develop technical expertise to its ability to deliver interpretive positions in a timely manner. At the time of the evaluation, the directorate was working on a new comprehensive human resources strategy. This strategy included examining business priorities, identifying gaps in the workforce and technical capacity, and bridging these gaps through recruitment and training.
The international comparative study showed that program structures of income tax rulings functions vary across tax administrations. Some tax administrations have a centralized model, such as the directorate. Others are decentralized and a counsel’s office will work horizontally with various compliance functions to issue rulings and technical interpretations. In one case, non-complex rulings are completed by compliance program staff.
This decentralized model was mentioned in interviews with CRA stakeholders. They suggested that it would be beneficial to the CRA if the various technical experts across program areas worked more collaboratively with the directorate. The compliance functions in the CRA commented that increased networking could be a way to share knowledge and build stronger working relationships.
4.7 There are gaps in performance measurement practices.
A common practice in evaluation is to assess the program’s performance measurement practices. This is done to determine the adequacy by which the program measures and reports expected outcomes.
The directorate applies the service standard on technical interpretations to a variety of interpretive services and then aggregates the services into one overall indicator. These services include the core activity of an external interpretation for tax practitioners as described on information circular IC70-6R9, internal interpretations to CRA and other government stakeholders, and a suite of interpretive work that the directorate groups under this indicator when reporting on the CRA’s official performance results.
These other types of services vary significantly, have different clients and expectations, and do not necessarily meet the characteristics of an issued technical interpretation.Footnote 21 Some of these items are high volume and quick turnaround, and as such are responded to promptly (much sooner than the 90-day service standard expectation). As Figure 9 below shows, in the 2018 to 2019 fiscal year, external interpretations via submission only represented 20% of the volume that is amalgamated under the service standard indicator.
| % Volume of files | % who met the service standard | |
|---|---|---|
| External interpretations via submission | 20% | 68% |
| External interpretations via conferences | 5% | 96% |
| Internal interpretations | 25% | 85% |
| Ministerial mail, Assistant Commissioner/ Commissioner and media requests, reviews of forms and guides, in-house requests | 50% | 98% |
According to the CRA website, “Service standards publicly state the level of performance that citizens can reasonably expect to encounter from the Canada Revenue Agency (CRA) under normal circumstances.”Footnote 22 There is a risk that if a tax practitioner seeks a technical interpretation as described in circular IC70-6R9, and the directorate states that it consistently meets its goal of 85% of requests completed within 90 days, this could lead to false expectations. As indicated in Figure 9, the service standard for external interpretations via a tax practitioner’s submission was 68%. However, because the published service standard includes all services, the result published was 89%. A more transparent, client-centered approach, would be to publish the service standard results of the services offered to the public and exclude other workloads.
The international comparative study also highlighted some opportunities for the directorate to adopt alternative practices. Timeliness was the primary measure that tax administrations use to measure the success of their rulings function. During interviews, tax practitioners indicated that they felt 90 days was insufficient to meet their business needs, even if this service standard is comparable to that of other tax administrations. However, the Australian Tax Office as well as Her Majesty's Revenue and Customs (U.K.) both have a service standard of 28 calendar days to provide a ruling upon receipt of all essential information.
The international comparative study identified a best practice of updating a service standard annually, as well as having variable service standard based on complexity. This approach could be viable for the directorate as providing accurate service expectations from the onset of a request helps improve transparency and better responds to client expectations.
Another best practice identified in the comparative study was the use of post-engagement surveys after a ruling is issued or withdrawn. A post-engagement survey is sent to the tax practitioner to measure client expectations, user experience, and the quality of service. This practice ensures an evidenced based, client-centric service is being provided through the rulings function. The use of post-engagement surveys is already a best practice of the directorate’s Dedicated Telephone Service program. There is an opportunity to adopt similar practices in the directorate’s other key services.
Recommendation 1
The Income Tax Rulings Directorate should address timeliness by:
- leveraging technical expertise across the CRA; and
- reviewing how services are delivered and prioritized to provide the most impact to voluntary compliance.
Management response
The Legislative Policy and Regulatory Affairs Branch agrees with this recommendation. The Income Tax Rulings Directorate will work with the Compliance Programs Branch and other implicated branches to explore options for maximizing the technical expertise across the CRA, with a specific focus on timeliness of service.
The directorate will review its service model and priorities to identify options for reducing the average turn-around time for advance tax rulings and technical interpretations. This process will begin with an analysis of workloads and the resources supporting them. The directorate will engage external stakeholders such as tax associations to identify emerging service needs and preferences. The Legislative Policy and Regulatory Affairs Branch will consider alternative service models and will pay close attention to the external technical interpretation service, which may be redefined to enhance the timeliness of guidance that has a broad or material impact on voluntary tax compliance.
While the directorate will continue to accord its highest priority at this time to supporting the CRA’s emergency COVID-19 pandemic response, the directorate will begin taking action under this plan in fiscal year 2021 to 2022. The directorate aims to conclude its reviews and engagement sessions by the end of fiscal year 2022 to 2023, provided this can be done without impacting immediate and urgent service delivery that arose as consequence of the pandemic. The directorate will move forward with changes to its service model following the completion of these activities.
Recommendation 2
The Income Tax Rulings Directorate should adopt performance measurement practices that are transparent and capture client expectations.
Management response
The Legislative Policy and Regulatory Affairs Branch agrees with this recommendation. To increase transparency and understanding for clients, the Income Tax Rulings Directorate will publicly report only those service standard results that reflect the services that it delivered to the public. The directorate will report its results in a manner that delineates between public and internal services beginning with its results for the fiscal year 2021 to 2022.
The directorate will refine its service standard to better capture client expectations. The directorate will develop and publish a variable service standard to complement its current average turnaround time. The new variable service standard will be established by mutual agreement, between ITRD and the taxpayer, on a case-by-case basis in specified circumstances, such as complex questions or transactions. This will ensure that clients facing longer than average turnaround times will have clarity on the process from the beginning. The directorate will redefine and publish its new variable service standard by the end of fiscal year 2021 to 2022.
To improve service, the directorate will re-introduce the practice of sending post-engagement surveys to clients with its issued rulings and interpretations. As the directorate is mindful of the pandemic impacts on its clients, it will consult with associations of tax professionals in late fiscal year 2021 to 2022 on the preferred timing to adopt this practice. The directorate is currently targeting Q1 of fiscal year 2022 to 2023 for the reintroduction of the practice.
5. Conclusion
Overall, the evaluation team found that stakeholders both within and outside the Government of Canada recognized the Income Tax Rulings Directorate as an authoritative voice on matters requiring income tax technical expertise. The directorate plays a critical role in Canada’s tax system by providing the tax certainty Canadians need to comply with their obligations. The directorate works with taxpayers, their authorized representatives, other government departments and within the CRA itself to improve information sharing, build relationships, and provide technical support and guidance on income tax legislation.
The directorate was consistently praised for the quality of its work, but it is under increasing scrutiny to deliver positions in a timely manner. External and internal pressures, such as the increasing speed of business and the difficulty of developing and retaining technical expertise, are putting more and more pressure on the directorate and the CRA to work more quickly and develop new approaches to meet expectations.
The directorate can potentially mitigate these pressures by understanding which workloads or services provide the most value and exploring how the CRA can work better horizontally.
6. Acknowledgements
In closing, we would like to acknowledge, recognize, and thank the Income Tax Rulings Directorate; the Assessment, Benefit, and Service Branch; the Appeals Branch; the Collections and Verification Branch; the Compliance Programs Branch; the Legal Services Branch; the Department of Finance; the Canadian Bar Association; l’Association de planification fiscale et financière; the Canadian Tax Foundation; and the Department of Justice for the time dedicated and the information provided during the course of this engagement.
7. Appendices
Appendix A: Logic model
Appendix B: Evaluation issues and methodologies
Issue 1: To what extent are the Income Tax Rulings Directorate’s activities achieving expected outcomes?
- To what extent do the Directorate’s programs provide stakeholders with timely, consistent, and accurateFootnote 23 interpretations of Canada’s income tax laws?
- To what extent do the Directorate’s programs support stakeholders’ application of Canada’s income tax laws?
- To what extent does the assistance and information provided by the Directorate support stakeholders in their effort to voluntarily comply with Canada’s income tax laws?
- To what extent does the Directorate contribute to taxpayers’ compliance with Canada’s tax laws?
Issue 2: Are there alternatives that could strengthen the Income Tax Rulings Directorate’s administration of its programs?
- What changes, if any, could make it easier for taxpayers to meet their tax obligations through the services provided by the Income Tax Ruling Directorate?
- What alternative strategies or best practices could be adopted from other tax administrations?
Methodology
The methodology for examination included the following:
| Methodology | Description |
|---|---|
| Data analysis | The evaluation team used WebCIMS and the Tax Rulings Information Database (TRID) to gather and analyze the data for the evaluation study. A total of 22,817 cases in WebCIMS were identified between the fiscal years 2014 to 2015 and 2018 to 2019. A series of analyses were conducted to categorize the various types of files, determine processing timeframes (including controllable and non-controllable time), identify the overall number of hours required to complete a file, and provide a breakdown of hours spent on all work activities. |
| Case study | A case file review was completed on 169 cases to determine the extent to which rulings are applied by taxpayers and the CRA. A statistically valid randomized sample with a 95% confidence level was selected from all rulings files processed for the fiscal years 2014 to 2015 to fiscal year 2018 to 2019.
The files were reviewed using the Correspondence and Issues Management System, Automated Collections and Source Deductions Enforcement System, T1 Case System, Random Access Personal Information Data, CORTAX, Standardized Accounting, and Tax Ruling Information Database. Files were reviewed to assess the extent to which a ruling could be identified and followed from receipt of the request by the CRA to the application of the ruling by the client and compliance result of the ruling, if used by the taxpayer. Over the course of the case studies, the evaluation team encountered a limitation: a specific ruling could not be linked to a single account or tax year as the CRA does not record the year the proposed transaction is ultimately used. Despite the limitation, the review found that organizations who had used a ruling demonstrated strong compliance behaviour. This suggests that there is a low compliance risk from taxpayers who request a ruling and that rulings are used to support voluntary compliance. |
| File and document review | CRA documents, policies, procedures, related studies and literature from other external sources including similar tax jurisdictions and countries were reviewed. |
| Quality review | The evaluation team could not evaluate the consistent and accurate application of requested interpretive positions by taxpayers because tax positions are based on an individual’s unique set of facts and particular needs. Specifically, it was difficult to ascertain whether current and proposed legislation was applied uniformly across taxpayers’ requests as the application of tax legislation depends on the legality of issues and taxpayer expectations. |
| Internal interviews | Interviews were conducted with a total of 110 senior managers and staff located in the National Capital region from the Appeals Branch; Compliance Programs Branch; Collections and Verifications Branch; Assessment, Benefit, and Service Branch; Service, Innovation and Integration Branch; Public Affairs Branch; Legislative Policy and Regulatory Affairs Branch; and the Legal Services Branch to obtain their views about their experiences requesting, developing, and responding to interpretive positions. A set of common questions was asked. |
| External interviews | Interviews were conducted with external stakeholders, including the Department of Justice; Department of Finance; Canadian Bar Association; Canadian Tax Foundation; Chartered Professional Accountants of Canada; and l’Association de planification fiscale et financière and various other tax practitioners concerning their satisfaction with the service provided by the Income Tax Rulings Directorate, and to gauge feedback concerning accuracy, consistency, and timeliness of information received. A set of common questions was asked. |
| Internal survey | An online survey was conducted in October 2019 among 220 respondents who used the Income Tax Rulings Directorate services from fiscal year 2014 to 2015 to fiscal year 2018 to 2019. The purpose of the survey was to assess the degree to which respondents were satisfied with the service provided. |
| External survey | A telephone survey was conducted during the period of September 2019 to October 2019 and included 185 correspondents who used the Income Tax Rulings Directorate’s services from April 2016 to March 2019. The purpose of the survey was to assess the degree to which respondents were satisfied with the service provided. |
| International comparative study | The methodologies used to identify the practices of international tax administration income tax rulings programs were a literature review and interviews. The literature review consisted of analyzing publically available international frameworks, policies, and legislation as well as information provided by tax administrations with comparable demographics to those of Canada to determine how they administer their rulings program. To address specific questions, the program evaluation team interviewed the following tax administrations in September 2019 and October 2019:
|
Appendix C: Stakeholders
| Stakeholder | Responsibility |
|---|---|
| Appeals Branch | Responsible for the income tax, commodity taxes, and charity business lines of the Appeals Branch. |
| Assessment, Benefit, and Service Branch | Responsible for creating and editing CRA information products and providing clients with information in relation to interpretive positions. |
| Collections and Verification Branch | Responsible for legislative change proposals and the impact analysis of legislative changes for the Collections Directorate. |
| Compliance Programs Branch | Responsible for leading and directing the effective development and delivery of audit programs for the business sector. Provides expertise for income tax compliance to other areas within the CRA. Responsible for the identification of emerging tax avoidance issues, business equity valuations, and the general anti-avoidance rule (GAAR). |
| Legislative Policy and Regulatory Affairs Branch | Responsible for providing the ultimate authority for the interpretation of tax and benefits related legislation. It establishes and clarifies the interpretation of tax laws and is responsible for recommending legislative amendments to the Department of Finance on behalf of the CRA. |
| Department of Finance | Responsible for drafting all new tax legislation, and providing the Government of Canada with analyses and advice on broad economic and financial affairs of Canada. |
| Canadian Bar Association | Responsible for engaging with the Canadian legal community, partnering with stakeholders within the legal profession to support the rule of law, and improving the administration of justice in Canada. |
| L’Association de planification fiscale et financière | A non-profit, independent and non-governmental organization. It represents its members before both federal and provincial tax authorities and participates in public consultations on proposed amendments to tax laws. |
| Canadian Tax Foundation | Responsible for promoting understanding of the Canadian tax system through analysis and research. It provides different perspectives and impartial recommendations. |
| Department of Justice | Responsible for providing legal advice related to tax laws and for conducting tax litigation. |
| Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada | Responsible for offering the federal government input on tax laws in collaboration with the Canadian Bar Association, through the Joint Committee on Taxation and the Chartered Professional Accountants of Canada. |
Appendix D: Glossary of terms
| Term | Definition |
|---|---|
| Advance income tax ruling | A written statement that the CRA gives to a taxpayer indicating how the CRA will interpret and apply specific provisions of income tax law to a proposed transaction that the taxpayer is seriously contemplating; generally requested by tax professionals on behalf of their clients. |
| Dedicated Telephone Service | A telephone line that gives service providers direct access to CRA staff members (telephone officers) who have the technical expertise to help resolve complex tax enquiries. |
| Folios | Technical publications that provide the CRA’s technical interpretations and positions on certain provisions contained in the Income Tax Act. |
| Income tax laws | The Income Tax Act and Income Tax Regulations. |
| Income Tax Rulings Directorate | The CRA’s ultimate technical authority on the interpretation of the Income Tax Act, the Income Tax Regulations, and other sources of Canadian income tax laws. |
| Information circular | Tax Information circulars give information and guidance on the application and administration of provisions of the Income Tax Act. A tax information circular generally provides information about administrative, enforcement, or procedural matters relating to income tax law. |
| Interpretive Position | A written statement that discusses, explains, or confirms how provisions of Canada’s income tax law apply to general or specific situations. The Directorate shares its interpretive positions through a variety of service channels including advance tax rulings, technical interpretations, folios, and the Dedicated Telephone Service. |
| Technical Interpretation | A free-of-charge generic written statement that provides taxpayers with the CRA’s interpretation of specific provisions of Canada’s income tax laws; technical interpretations are not income tax rulings and are not binding on the CRA. |
| WebCIMS | An internal case management system used by the Income Tax Rulings Division to retain cases, working payers, and correspondence for workload management purposes. |
Appendix E: Comparison of income tax ruling programs across international tax administrations
| Characteristic | Canada Revenue Agency (Canada) | Australian Taxation Office (Australia) | Inland Revenue (New Zealand) | Her Majesty’s Revenue and Customs (United Kingdom) | Internal Revenue Services (United States) | Revenu Québec (Quebec) |
|---|---|---|---|---|---|---|
| Ruling terminology | Advance Income Tax Ruling | Private Ruling | Binding (Private) Ruling | Clearance | Private Letter Ruling | Advanced rulings |
| Technical Interpretation Requests | Yes - External/Internal Interpretations | No – Public Rulings | No – Public Rulings | Yes – but only in certain cases | No – Provide public guidance on topic of interest | Yes – External/Internal Interpretations |
| Service Standard to issue the ruling | 90 business days, where the 90 business days accounts for only the amount of time the file is with the rulings officer, and excludes when it is on hold with the taxpayer | 28 calendar days, once all information is received | 10 weeks to come up with a draft | Substantive reply on 75% of rulings received within 28 calendar days | Determined annually on complexity where service standard is mostly 180 days but financial institutions section is 270 days for example | Determined on scale of completion and are only for interpretations and none for rulings |
| Are fees charged to the taxpayer for a ruling? | Yes | No | Yes | No | Yes | Yes |
| Is the ruling binding to the tax administration once issued? | Yes | Yes | Yes | Yes | Yes | Yes |
| Publishing of rulings once issued | Rulings are published on a third party publisher, access to view is by subscription | Public Rulings – Published on the ATO legal database Private Rulings – edited versions published on the ATO legal database | Public Rulings – Published on their website Binding (Private) Rulings – not published or publicly available | Rulings are not, in general, published on their website nor are they publicly available. However, certain technical interpretations are published in guidance on website. | Rulings are published on their website | Rulings are not published Interpretations are published on website |
| Phone service for ruling and interpretation advice | Yes - Dedicated Telephone Service | No | No | No | No | No |
| Program Structure | Centralized model in CRA within the Legislative Policy and Regulatory Affairs Branch | Decentralized model with assistance from the Chief Counsel Office where needed | Hybrid model between the Chief Counsel Office with assistance from the compliance program staff | Decentralized model within the tax administration | Centralized model within the Chief Counsel Office | Centralized model within the legislation area |
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