Final Report

Corporate Audit and Evaluation Branch
April 2011

Table of Contents

• Executive Summary
• Introduction
• Focus of the audit
• Findings, Recommendations and Action Plans
  • 1.0 Program delivery
    • 1.1 Policies, procedures and guidelines
    • 1.2 Outreach and communication
  • 2.0 Program management
    • 2.1 Performance measurement and reporting
    • 2.2 Quality review
    • 2.3 Segregation of duties
    • 2.4 Compliance with legislation and DTC policies
• Conclusion

Executive summary

Background: The Disability Tax Credit (DTC) is a non-refundable tax credit available to individuals with severe and prolonged impairments in physical or mental functions, as defined under section 118.3 of the Income Tax Act. These impairments would markedly restrict the individual's ability to perform basic activities of daily living, generally for a period of 12 months or longer. The intent of the credit is to provide tax relief to persons with disabilities and their families, as they may incur additional expenses related to their disability that would reduce their ability to pay tax. The program is managed by the Benefit Programs Directorate (BPD) of the Assessment and Benefit Services Branch (ABSB).

The primary DTC program objective is to ensure that confirmation of eligibility is done in a consistent and effective manner on a national basis. In order to make a DTC claim, a completed T2201, Disability Tax Credit Certificate, must be sent to a tax centre (TC) for processing. A qualified practitioner [Footnote 1] must certify that the impairment is severe and prolonged [Footnote 2] by detailing the effects of the impairment applicable to the basic activities of daily living. Based on the information provided by the qualified practitioner, determination of eligibility is completed by Canada Revenue Agency (CRA) staff in the DTC Units of the TCs.

In fiscal year 2009-2010, 547,000 individuals received the DTC. This represented a total federal tax credit of approximately $817M. During the same year, the TCs processed 240,961 DTC certificates of which 90% were approved on a temporary or permanent basis [Footnote 3].

Objective and scope : The objective of this audit was to provide assurance on the effectiveness of the internal controls in place to ensure that the objectives of the program are met.

The examination phase of this audit took place from March 2010 to October 2010 at the Sudbury, Surrey, and Summerside TCs and the BPD in Headquarters.

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

Conclusion: Overall, the BPD's management framework supports the delivery of the DTC program towards the achievement of its objectives. Policies and procedures are in place and communicated to support fair and equitable determinations of DTC eligibility. Outreach and communication tools are in place and used to educate the public and inform claimants about DTC eligibility with respect to BPD priorities and the Disability Tax Measures Section's (DTMS) goals and objectives. Interviews with management and a review of relevant branch documents indicated that the DTMS has initiated various outreach programs and activities. The DTMS has also implemented initiatives to enhance communication with qualified practitioners, tax professionals and persons with disabilities.

Although controls currently in place for the delivery of the DTC program are working as intended, controls relating to program management need to be strengthened. Measures and indicators for quality should be developed and integrated into the performance measurement framework to provide a more comprehensive performance reporting of the DTC program. Existing performance measures for timeliness should be refined to reflect the DTC program's workload and program results should be reported to branch management.

Controls relating to monitoring are sufficient to ensure consistency in program delivery. However, the quality review (QR) process needs to be strengthened. The BPD should implement a uniform method for QR file selection in all TCs that best meets the needs of the program. The BPD should also coordinate program level reporting of QR results for program improvement.

Improvements are needed in front-end controls for coding DTC approvals. Opportunities exist to strengthen controls for segregation of duties relating to an assessor's system access profile. Given that the ABSB's strategy is to increase compliance in branch processes and that there are no post-assessing programs for the DTC, controls need to be strengthened to ensure entitlements are not exceeded and claims are compliant with legislation.

Action plan: The BPD agrees with the recommendations.

The BPD will develop and report operational performance standards related to quality and timeliness.

The BPD has agreed to collect quality review results from the local offices and analyze the data at the program level in order to identify potential program improvements.

By July 2011, the BPD will conduct a post-review project related to entitlement to evaluate if claims are compliant with legislation. By December 2011, the BPD will evaluate the risks associated with grandfathered dependent claims by requesting a sample of impacted accounts and determining the appropriate corrective action.

The BPD commits to completing a thorough analysis to determine if appropriate controls are in place to mitigate risks associated with system approvals of DTC claims. By September 2011, all system changes needed to strengthen existing controls will have been identified and will be ready to be implemented for the 2011 tax year system conversion.

Introduction

The Disability Tax Credit (DTC) is a non-refundable tax credit, defined under section 118.3 of the Income Tax Act (ITA), available to individuals with severe and prolonged impairments in physical or mental functions. These impairments would markedly restrict the individual's ability to perform basic activities of daily living for a period of 12 months or longer. The purpose of the credit is to provide tax relief to persons with disabilities, and their families, as they may incur additional expenses related to their disability that would reduce their ability to pay tax.

The program is managed by the Benefit Programs Directorate (BPD) of the Assessment and Benefit Services Branch (ABSB). The BPD's core objectives are to ensure benefit recipients receive the right benefit at the right time [Footnote 4]. In particular, the primary DTC program objective is to ensure that confirmation of eligibility is completed in a consistent and effective manner on a national basis. The BPD Business Plan 2009-2010 to 2011-2012, identifies "Continuing to improve services for persons with disabilities," as a key objective.

Within the BPD, the Disability Programs Section (DPS) and the Disability Tax Measures Section (DTMS) are responsible for the DTC program. The activities of the DPS are focused on the operations of the DTC program, while the activities of the DTMS are focused on external communications. The DPS is responsible for maintaining the operations and training manuals and for providing operational direction to the tax centres (TC). The DTMS is responsible for preparing updates to the CRA website, reviewing communication materials relating to the DTC, and delivering outreach to DTC stakeholders such as tax practitioners and the medical community.

To make a DTC claim, a person with a disability, or his or her representative, must send a completed T2201, Disability Tax Credit Certificate, to a TC for processing. Determination of eligibility for this credit is completed by Canada Revenue Agency (CRA) staff in the DTC Units, located in the TCs, based on the information provided by a qualified practitioner. If a determination cannot be made at the TC, the file may be referred to the BPD's medical review team. The CRA's eligibility decision impacts the provincial DTC for all provinces other than Quebec. In Quebec, determination of eligibility for the provincial credit is completed by Revenu Québec.

For the fiscal year 2009-2010, 547,000 individuals received the DTC. This represented a total federal tax credit of approximately $817M. During this period, the TCs processed 240,961 DTC certificates of which 90% were approved on a temporary or permanent basis. Program resources for 2009-2010 included 97 full-time equivalents with a budget of approximately $6.7M [Footnote 5].

Focus of the audit

The objective of the audit was to provide assurance on the effectiveness of the internal controls in place to ensure the objectives of the DTC program are met.

The planning phase of the audit took place from October 2009 to February 2010. The examination phase of the audit was conducted at the Sudbury, Surrey, and Summerside TCs and the BPD from March 2010 to October 2010. The audit included interviews with DTC program staff and managers in the TCs and the BPD; documentation review of BPD policies and procedures, and a statistically valid sample testing of T2201s.

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

Findings, recommendations and action plans

1.0 Program delivery

1.1 Policies, procedures and guidelines

The primary DTC program objective is to ensure that determination of eligibility is completed in a consistent and effective manner on a national basis. Given the complexity in DTC eligibility determinations; policies, procedures, and guidelines need to be clear, communicated, and understood. A review of BPD monitoring reports, as well as interviews with staff in the DTC units and the DTC appeals section confirmed adherence to national policies, procedures and guidelines in making eligibility and appeals decisions. A review of BPD communications and updates to operational manuals confirmed that changes to policies, procedures and guidelines are communicated to DTC staff. In 2008, BPD conducted a comprehensive review that included process mapping of DTC program activities for the purpose of identifying and standardizing best practices for consistency and optimum efficiency.

1.2 Outreach and communication

The CRA's goals with respect to outreach activities are to increase awareness and encourage voluntary compliance; as well as to educate, inform and promote all CRA programs and services to the public. The DTMS is responsible for DTC outreach activities to persons with disabilities and the medical community. Interviews with management and reviews of relevant branch documents such as the BPD Business Plan 2009-2010 to 2011-2012 and DTMS reports indicated that the DTMS has initiated a variety of outreach programs and activities to educate the public about DTC eligibility. The DTMS has also made progress on improving communication tools to qualified practitioners and the public through the internet, such as implementing an online self-assessment tool to assist in determining DTC eligibility.

2.0 Program management

2.1 Performance measurement and reporting

The goals and objectives of the DTC program are defined within the mandate of the BPD, i.e. to ensure that clients receive their full entitlement for the DTC, while respecting the integrity of the legislation.

Comprehensive program performance information is important in order to measure and report on program activities and to ensure an acceptable overall level of service quality and timeliness. The BPD has established internal performance standards for the DTC program that are based on the published T1 processing service standards. However, these performance standards are focused on timeliness and do not include measures for quality. In addition, the BPD has not measured or reported on progress against the established timeliness standards. Management has stated that they are currently working towards a report for fall 2011 to measure and report on progress against the standard.

Analyses of the DTC inventory reports as well as a statistically valid sample of T2201's were conducted to assess actual performance against the established standards. The results of these analyses confirmed that DTC performance standards for timeliness are not being met. Consequently, the performance standards for timeliness may not be reasonably achievable given the operational realities of the DTC workload. Management anticipates that the planned automation of form T2201 in 2013 will improve timeliness by reducing the need to clarify information with qualified practitioners.

Controls currently in place relating to service quality do not provide a sufficient level of assurance that this key service element is met. The internal quality review (QR) program for the DTC is aimed primarily at improving quality at the operational level and to assess individual employee performance; but, quality information is not aggregated or used to measure quality at the program level. As a result, opportunities to identify trends and patterns to improve program delivery on a national basis may be missed.

Recommendations

1. BPD should review current operational performance standards and targets for timeliness to ensure they are measurable and reasonably achievable.

2. BPD should introduce an operational performance standard for quality that is measurable and reasonably achievable.

3. BPD should report timeliness results against operational performance standards.

4. BPD should coordinate program level reporting of quality review results for program improvement.

Action plan

1. In recent years, an increase in the number of DTC requests impacted overall program delivery. The BPD reviews operational performance standards and targets for timeliness on an annual basis. The BPD will continue monitoring the situation and adjust accordingly.

2. The BPD will implement a time code specific to the determination of DTC eligibility effective April 1, 2011. The data collected in the 2011-2012 fiscal year will allow the BPD to develop operational performance standards related to timeliness and quality which will be implemented in the 2012-2013 fiscal year.

3. The BPD will report timeliness and quality results against established operational performance standards.

4. The BPD will collect QR results on a semi-annual basis. The data will be analyzed for potential program improvements.

2.2 Quality review

Within the DTC program, two processes are used to verify the quality of work: QR and monitoring.

Controls relating to monitoring are sufficient to ensure fair and equitable program delivery. However, the quality review process needs to be strengthened with respect to the file selection methodology. While the BPD provides QR guidance to the local TCs through an online manual, the QR process is a TC responsibility. The TCs have the flexibility to choose the method by which files are selected for review. This has resulted in inconsistency in file selection methodology. Although there is a national minimum review standard for QR, the lack of consistency in file selection methodology may result in the inequitable application of the mandatory minimum review policy in terms of the actual number of files reviewed per employee. Since 2007, a QR file selection pilot project has been ongoing at one TC. The BPD has concluded that the file selection methodology followed during the pilot project is the preferred method for QR file selection; however, this method has not been implemented nationally.

Recommendation

5. BPD should implement a uniform method for QR file selection in all TCs that best meets the needs of the program.

Action plan

5. The BPD will implement a system file review functionality for all TCs that will provide a uniform method for QR file selection. Revised instructions will be issued to the field by September 30, 2011.

2.3 Segregation of duties

In the DTC processing environment, segregation of duties must be in place with respect to the processing of a T2201 to minimize the risk of unsubstantiated approvals of DTC eligibility.

Opportunities exist to strengthen controls that require a manager or reviewer to approve DTC eligibility decisions made by employees. A DTC assessor can approve a taxpayer's eligibility for the DTC and complete an initial assessment or reassessment on a taxpayer's account under the same user profile. This lack of segregation of duties represents a risk of unauthorized approvals and/or assessments. Current QR controls do not extend to the detection of unsupported approval of DTC eligibility.

Coding of DTC eligibility in the system leaves an audit trail; however, a key finding from the internal audit on Mainframe Access to Taxpayer Information completed in 2010 was that a national monitoring program within the CRA was not evident.

Recommendation

6. BPD should strengthen controls over coding of DTC eligibility status in taxpayers' accounts, including segregation of duties.

Action plan

6. DTC assessors, medical advisors and appeals officers are the only employees with system access to code DTC eligibility status in taxpayers' accounts on the CRA mainframe. In May 2011, the BPD will begin an analysis of a random sample of accounts in order to identify and quantify issues and risks associated with the current process. By September 2011, all system changes needed to strengthen existing controls will have been identified and will be ready to be implemented for the 2011 tax year system conversion.

2.4 Compliance with legislation and DTC policies

Given that entitlement to the DTC enables taxpayers to realize tax savings PROTECTED validity controls are necessary to ensure entitlements are not exceeded and claims are compliant with legislation. The CRA assessing system uses automated validities to ensure entitlement amounts are not exceeded on an individual basis. PROTECTED.

In 2007, the BPD completed an ad-hoc dependent identification number [Footnote 6] (DIN) compliance project to assess if over-claiming or double-claiming was an issue, by reviewing 500 dependent claims. The results indicated that 57 of the 500 (11.5%) claims sampled had over-claimed or double-claimed. Management stated that actions were not taken because in some cases, there were no tax implications as one of the claimants did not have sufficient income to be taxable.

Controls must be enhanced to prevent a spouse or supporting person from making a claim for the full amount of the DTC even if the person with the disability (PWD) has taxable income. Section 118.3 of the ITA requires the PWD to use the claim first, to the extent required.

As a result of the Child Disability Benefit that was announced in the federal budget of February 18, 2003, system changes were made and all dependents were assigned a DIN, linking them to the PWD. However, prior to this date, there was no link between the claimant and the PWD. These records are referred to as grandfathered [Footnote 7]. The BPD is not confident that they have the correct PWD information for grandfathered dependent claims due to lack of associated DINs. Currently, there are approximately 50,000 grandfathered dependents. Research has not been conducted to establish the extent of risk associated with these claims.

Recommendations

7. BPD should implement controls for entitlement to ensure claims are compliant with legislation and to better align with branch compliance priorities.

8. BPD should evaluate the risks associated with grandfathered dependent claims.

Action plan

7. By July 2011, the BPD will conduct a post-review project related to entitlement to evaluate if claims are compliant with legislation.

6. By December 2011, the BPD will evaluate the risks associated with grandfathered dependent claims by requesting a sample of impacted accounts and determining the appropriate corrective action.

Conclusion

Overall, the BPD's management framework supports the delivery of the DTC program towards the achievement of its objectives. Policies and procedures are in place and communicated to support fair and equitable determinations of DTC eligibility. Outreach and communication tools are in place and used to educate the public and inform claimants about DTC eligibility with respect to BPD priorities and the DTMS's goals and objectives. Interviews with management and a review of relevant branch documents indicated that the DTMS has initiated various outreach programs and activities. The DTMS has also implemented initiatives to enhance communication with qualified practitioners, tax professionals and persons with disabilities.

Although controls currently in place for the delivery of the DTC program are working as intended, controls relating to program management need to be strengthened. Measures and indicators for quality should be developed and integrated into the performance measurement framework to provide a more comprehensive performance reporting of the DTC program. Existing performance measures for timeliness should be refined to reflect the DTC program's workload and program results should be reported to branch management.

Controls relating to monitoring are sufficient to ensure consistency in program delivery. However, the QR process needs to be strengthened. The BPD should implement a uniform method for QR file selection in all TCs that best meets the needs of the program. The BPD should also coordinate program level reporting of QR results for program improvement.

Improvements are needed in front-end controls for coding DTC approvals. Opportunities exist to strengthen controls for segregation of duties relating to an assessor's system access profile. Given that the ABSB's strategy is to increase compliance in branch processes and that there are no post-assessing programs for the DTC, controls need to be strengthened to ensure entitlements are not exceeded and claims are compliant with legislation.