Tax Services

Expected Outcome

Performance Summary – We have mostly met this Anticipated Result, as demonstrated by the following performance against expectations:

• prompt analysis and reporting of compliance behaviour assisted in the development, refinement and targeting of compliance programs
• identified reporting discrepancies on key income and deduction items reported on tax returns and by third parties
• incorporated new criteria into our national risk assessment system; however, further work is needed to improve our capacity to assess and respond to compliance risks

To guide the allocation of our compliance and enforcement resources, we conduct research to assess compliance risks and understand the sources and causes of tax under- reporting. Our experience suggests that non-compliance is most prevalent within our self-employed and corporate accounts. Informed by our experience and judgement, our national risk assessment system employs automated criteria to flag business accounts that are deemed to be at substantive risk of non-compliance with respect to over 180 compliance indicators (Fig. 4-1). This year, 31 new criteria were added to our national risk assessment system and more refinements were made to existing criteria to improve our capacity to evaluate risks and target non-compliance for a variety of international and domestic tax issues. All income tax returns and goods and services accounts are examined against a series of criteria to determine whether there are characteristics indicating possible non-compliance. Largely as a result of the refinement and inclusion of new criteria, the percentages of individual self-employed (27%) and corporate accounts (38%) flagged by our system were somewhat higher than in the previous year (22% and 31%, respectively). We have been working to expand our understanding of compliance through the design and implementation of a comprehensive Compliance Measurement Framework.

4-1 Estimated Percentage of Business Accounts Deemed to be at Substantive Risk of Non-Compliance

Through our T1 matching program, we compare amounts reported by individuals for a wide range of income and deduction items (such as wages and registered pension plan contributions) to the amounts reported on third-party information slips. Compliance with respect to these items is high overall, and for the minority of taxpayers who do make reporting errors, the matching process allows us to effectively identify and correct these errors. This year, we assessed an additional $340 million in taxes under the program. Further $50.6 million was refunded to 175,000 individuals. For key credit and deduction items not subject to third-party reporting, we conduct random verifications both to assess compliance risks and to guide our targeted validation efforts. Based on the 2001 tax year, compliance overall for these items is also reasonably high at 91.1%, but has declined somewhat from the previous year's 92.8%.

Our evaluation of compliance risks includes an assessment of filing and registration compliance within each of our major business lines. Our most recent analysis indicates that most individuals and businesses continue to file their required returns on time (Fig. 4-2). Over 82% of known Canadian businesses (excluding Quebec) registered for the GST/HST as appropriate—a high degree of registration compliance given that not all businesses are required to register. As well, we have recently conducted an analysis of compliance by employers with their requirement to file T4 information returns. The results indicate that most employers file their returns and remit the taxes they have withheld on behalf of their employees without any direct intervention from the CCRA. For the minority of individuals and businesses who are not in compliance, we maintain an active program to identify and target non-filers and non-registrants. Last year, this program was successful in bringing nearly 647,000 individuals and businesses into compliance with their filing and registration requirements.

4-2 Filing Rates*

* Prior year rates have been revised for taxable corporations and all corporations, due to a system change. Most recent available estimates for individuals are based on 2001 census information and prior year rates have been revised accordingly.

The above programs help us understand compliance behaviour and serve as a guide for the allocation of our compliance and enforcement resources. In an April 2002 benchmarking study of best practices in enforcement by a major independent consulting firm, the CCRA was judged to have the most advanced statistically-based risk assessment system among the 12 respondent government organizations, including the United States, the United Kingdom, Australia, and New Zealand, that rely on inspections and investigations for enforcement. Our targeting criteria based on these programs are regularly refined and updated to account for observed changes in compliance behaviour and to address newly identified compliance indicators. For example, there is a risk that Canadians' confidence in the charities program may be compromised if groups supporting terrorism are not prevented from registering under the program. This has led to the creation of a dedicated team that conducts intensive screening and review of applications, and has culminated in a number of referrals to CSIS and the RCMP.

We devote more of our compliance and enforcement resources to those areas where our assessments indicate that the risk and potential revenue consequences of non-compliance are higher—a strategy designed to make the tax system more equitable, recover more revenue, and impose a smaller burden on compliant taxpayers. For instance, our target audit coverage rates call for a much larger audit presence among large corporations than among individuals and small businesses. An expanded discussion on audit coverage can be found under Anticipated Result 5. Within a given program area, accounts flagged as high risk by our targeting criteria are far more likely to be selected for validation and audit. Such accounts consistently show a higher frequency and average magnitude of tax adjustments than those that are selected at random, which indicates that our targeting criteria are generally effective.

Our current risk-assessment systems do not cover all compliance issues, and we are not aware of any accurate and reliable methodology for estimating the overall level of tax compliance. Nevertheless, our qualitative assessment— based on our experience and guided by available evidence and estimates—is that while non-compliance overall is certainly material, it remains at relatively low levels, consistent with prior years and in relation to other countries. Much of our assurance comes from our robust system of checks and balances (particularly our withholding, prepayment, information matching, validation, and audit programs) that promotes accurate reporting and facilitates the early detection of reporting errors. As our Compliance Measurement Framework matures, we anticipate that our assessment will be guided by a more comprehensive set of compliance indicators.

Date modified:

2003-10-29