Making Non-compliance More Difficult

Introduction

Canadians enjoy a tax and benefits system that boasts a high rate of voluntary compliance. Serious non-compliance, however, has emerged as a significant challenge to this system and its sustainability. Non-compliance creates unfair conditions for compliant individuals and businesses and, if not appropriately addressed, imperils the sustainability of the self-assessment system over the longer term.

Of special concern for us are trends in forms of non-compliance like underground economic activity, the increasing use of aggressive tax planning arrangements, as well as wilful non-compliant actions like deliberate tax evasion. Payment non-compliance is also a concern, whether it occurs when taxpayers are unable to remit income taxes due to unanticipated economic circumstances, or strategically seek insolvency protection from the Crown and other creditors.

Over the planning period, we put forth the following initiatives to address our challenges and opportunities for making non-compliance more difficult.

Enhance strategies to manage payment non-compliance

Our corporate risk inventory identifies payment non-compliance as a significant business risk. The accumulation of new debt depends on several factors that are outside of our control. This includes domestic and international economic situations, aggressive tax planning and strategic insolvencies, as well as various socio-economic factors that may influence taxpayer compliance behaviours.

We continue to experience a significant impact from debts arising from various targeted audits and reassessment activities. In addition, taxes resulting from tax harmonization activities in Ontario and British Columbia are expected to add billions of dollars in new receivables on an annual basis.

We will refine our management of the tax debt through a variety of means, including an approach to address the underlying causes of payment non-compliance at the behavioural level. We will increase our attention on the need for earlier interventions with potential debtors to prevent debts from arising or to proactively help taxpayers meet their obligations. We are continuing to develop and implement strategies to address specific segments of the inventory, like insolvencies and high-risk accounts, that present particular challenges.

Identify aggressive tax planning arrangements more effectively

Aggressive tax planning is a challenge confronting all developed countries and can involve very complex structures with both domestic and international elements. The objective of this type of tax planning is to realize tax benefits that were never intended under the normal application of the tax laws.

Over the planning period, we will continue to take actions to counter aggressive tax planning. We will advise taxpayers of unacceptable tax planning practices and will continue to work closely with tax administrations of other countries and international organizations to identify offensive arrangements and take corrective action. In addition, we will enhance our technical capacity and our ability to identify high-risk files.

Identify non-compliance in the underground economy more effectively

The underground economy (UE) undermines the competitiveness of Canadian businesses because it offers an unfair advantage to those who fail to comply with Canada’s tax laws. We use a mix of education, outreach, communication, and compliance actions to combat the UE. We also work with other federal departments, provincial and territorial governments, tax administrations in other countries, international organizations, professional organizations, and key industry groups to share best practices and develop innovative strategies.

Studies show that the UE is heavily concentrated in sectors where cash transactions are prevalent. Our UE audits focus on identifying unreported income, primarily in industries where there has been a higher level of non-compliance. Over the planning period, we will work with other jurisdictions to broaden our exchange of information to help us identify UE activity.

Use enhanced risk assessment to identify non-compliance by employers
and gst/hst registrants

We will improve compliance with remittance, filing, and withholding rules through changes in our internal quality review process, as well as improved file selection for examinations based on research, analytics, and data-mining risk models.

We will develop a risk-based approach to the tax treatment of personal service corporations to review this sector’s compliance.

In addition, we will expand the allocation of cases using national pools. This will allow workload allocation based on a standardized risk-scoring model that is consistent across the country.

We continue to improve our GST/HST risk-assessment processes by enhancing our reviews of new registrations, conducting pilot projects to identify areas of risk, and implementing new and innovative tools and procedures.

Implement an enhanced tobacco stamping regime

We collect the excise duty on tobacco products manufactured domestically, while the Canada Border Services Agency collects it on imported tobacco products. Protecting the duty revenue from tobacco products ensures that high prices on such goods can be maintained, thereby contributing to the Government’s overall health objective to reduce smoking among Canadians.

The new regime will provide a stronger legal framework for tobacco product stamping with stronger ministerial powers and will also provide enhanced tools for the Royal Canadian Mounted Police, to enforce the Act.

We will continue to consult with the tobacco industry (manufacturers and importers), provincial and territorial governments, and other federal agencies and departments in furtherance of ensuring compliance with Excise Act, 2001. We will work closely with the Department of Finance Canada officials to complete the necessary legislative amendments for the new regime, including the drafting of supporting regulatory amendments and guidelines. Should these steps proceed according to our expectations, the CRA will establish and implement the new stamping regime so that all tobacco products manufactured and imported into Canada bear the new stamp. At the same time, we will encourage provinces and territories to adopt the new regime.

Enhance the administration of the sr&ed Program

The federal Scientific Research and Experimental Development (SR&ED) Program provides broadly based support for all types of SR&ED activities performed in Canada. This program is one of the most advantageous systems in the industrialized world, providing over $4 billion in tax assistance in 2008.

We are continuing our work towards increasing the program’s scientific capacity. This includes providing training and technical support to research and technology staff, enhancing the quality assurance methodology, and reviewing the dispute resolution procedures. In addition, we are reviewing our risk and workload management system and consolidating and clarifying our SR&ED policies and related guidance documents.

These measures will facilitate access to the program, improve the program’s consistency and predictability, and enhance the quality of the SR&ED claims process, resulting in a more effective program for Canadian businesses.

Use better risk assessment to detect and correct reporting non-compliance

We conduct reviews, audits, and investigations of individuals, businesses, and non-profit organizations to detect and correct non-compliance. We are engaged in a major business transformation initiative that will improve our capacity to deliver and manage compliance programs more effectively. Our Compliance System Redesign initiative will improve research and risk assessment capabilities through the development of an analytical environment and the use of investigative tools.

We are developing a first-level review process for corporate returns to proactively identify discrepancies in the information reported on returns and contact representatives to resolve them. We will also enhance our post-assessing review programs. There will be an enhanced focus on validating claims and helping taxpayers comply in the areas of new legislation.

Improve the detection and deterrence of non-compliance in our charities program

Registered charities in Canada are tax-exempt and can issue charitable donation receipts to donors. To maintain these privileges, registered charities must satisfy an annual disbursement quota requirement, file a Registered Charity Information Return and financial statements, and operate within the parameters of the Income Tax Act.

Although cases of serious and intentional non-compliance by registered charities are not wide-spread, they do exist. Examples include illegal tax shelter donation arrangements, false receipting, and unacceptable fund raising practices

Over the planning period, the focus of our Charities Program will be to address identified non-compliance in a timely manner.

Date modified:

2010-05-06