Tax Services

Expected Outcome

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

• accomplished our annual education and outreach objectives (e.g., 68 community visits)
• did not achieve all of our audit coverage targets, although coverage rates increased across all major tax lines
• increased participation in audit protocol agreements by 10%
• exceeded our fiscal impact commitment to the Government of Canada by 15.2%

To properly manage the compliance continuum, it is essential to have a range of programs tailored to the needs of specific client groups. The appropriate compliance program may involve education, outreach, service, review, enforcement, or a combination of these elements. Below, we highlight some of our key programs to address compliance issues.

Underground economy initiatives – Addressing non-compliance in the underground sector continues to be a high priority for the CCRA in our efforts to promote a level playing field among Canadian individuals and businesses. In order to increase taxpayer awareness of the underlying risks associated with participation in the underground economy, we collaborate with our federal, provincial, territorial, and First Nations partners and industry representatives to target specific sectors in each province and territory. Some of our initiatives in this area are indicated in the following chart.

Applying penalties and publicizing enforcement actions are other key components of our underground economy strategy. We identify cases of possible GST/HST fraud and other illegal underground activities through the profiling of high-risk registrants, informant leads, partnerships with other law-enforcement agencies, and audits and investigations. All suspected cases of fraud are evaluated for prosecution potential and where further investigation reveals sufficient evidence to support a conviction of wilful non-compliance, cases are referred to the Department of Justice for prosecution. Through our Web site, publications, and news releases, we publicize the results of our efforts to build public confidence in the integrity of the tax system and to deter non-compliance.

Audits – Before becoming an agency, the CCRA experienced a sustained period of increasing workload volumes and return complexity without a compensating increase in compliance resources. This contributed to a declining trend in audit coverage, which if sustained, had, in our judgement, the potential to undermine the confidence of Canadians that the tax system is equitable and that more serious cases of non-compliance are being addressed. With additional funding from the Government of Canada, we have been working to reverse this trend and gradually raise audit coverage rates in line with a series of increasing targets over the 2001-2002 to 2005-2006 period. Coverage rates for each of our major tax lines are now uniformly higher than in 2001-2002, and we have exceeded this year's targets for GST/HST taxpayers, unincorporated businesses (Fig. 5-1), and medium sized corporations (basic files) (Fig. 5-2). However, audit coverage on small corporations (corporate files) and large corporations (large files) fell somewhat short of targeted levels (Fig. 5-1 and 5-2).

To address growing concern over potentially abusive tax avoidance arrangements, approximately 54% of the 384 unique large-file audit cases screened have lead to 52 audits of avoidance issues so far, with another 80 cases still in the consultation stage.

Given the size and complexity of large-file cases and the high frequency with which large corporations are audited, we have in place an audit protocol agreement program to promote co-operation, openness, and flexibility in the audit process. The participation rate for protocol agreements increased by ten percentage points this year.

5-1 Estimated Audit Coverage Rates: Small and Medium-Sized Businesses and GST/HST Files

5-2 Estimated Audit Coverage Rates: Large Corporations

Investigations – Evasion and fraud represent the most flagrant aspects of non-compliance. In response, 374 income tax, GST/HST, and customs investigations were referred to the Department of Justice for prosecution, compared to 351 cases in the previous year. In addition, prior referrals resulted in 377 convictions of individuals and businesses this year, relating to revenue losses of $17.9 million. The courts imposed $15.9 million in fines and sentenced 54 persons to prison terms totalling 68 years. In addition, the ministère du Revenu du Québec (MRQ), on behalf of the CCRA, referred 26 GST investigation cases for prosecution, and Quebec courts levied $3.6 million in fines. Customs investigations further contributed by investigating 649 non-prosecution cases, which resulted in $29.5 million in Customs civil assessments. Recent Supreme Court decisions have instituted limitations on certain tools used by investigators to obtain information in support of criminal prosecutions of tax and duty evasion and fraud. We are in the process of revising our policies and procedures to ensure that our activities comply with the guidance provided by the Court.

International tax and e-commerce compliance initiatives – Fuelled by the rapid growth in foreign trade and electronic commerce, international tax compliance issues have become more prominent in recent years. A key compliance issue in international transactions is the price that should be reported between a corporation and its foreign affiliates. To promote compliance and reduce the burden associated with reporting such transactions, the CCRA has an Advance Pricing Arrangement (APA) program. We completed 15 APAs in 2002-2003, raising the total number of agreements to 55. Work to promote the program continues. We also continue to support and co-ordinate Canada's strategic partnerships with tax-treaty partners to promote international co-operation, protect Canada's tax base, and share common problems and best practices. This support is reflected in our participation in international forums such as OECD, PATA, the Seven Country Tax Haven Group, and CIAT.

Another important compliance area involves the level of awareness of non-residents and prospective immigrants about their tax obligations and entitlements. In response to a recommendation from the Standing Committee on Public Accounts, the CCRA agreed to begin to report on methodologies, tools and strategies used to identify and challenge offshore tax planning arrangements, and on the number of treaties that it administers and those under negotiation. For the purposes of this reporting, the CCRA understands income to be income earned outside of Canada by residents of Canada. We will also report on the tax-at-risk and amounts reassessed in identified cases involving the use of offshore tax planning arrangements and the amount of tax collected from non-residents who earned income in Canada. Methodologies and strategies include analysis and risk assessment, quality service, outreach and education, strategic partnerships, legislative, policy and regulatory changes and credible and targeted enforcement. Tools include tax haven audit guides, foreign reporting information returns, a disposition audit guide and tax haven country overviews (referred to as Tax Haven Grids).

Currently, Canada has 79 tax treaties concluded, signed by the Department of Finance and in force in 2003, eight treaties have been signed but are not yet in force, and 19 are under negotiation or renegotiation. This year, all off-shore tax cases resulted in $1 billion in fiscal impact. The amount of tax-at-risk in cases presently under review involving the use of offshore tax planning is estimated at $200 million, and we have a number of “indirect loan cases” that have a potential tax recovery of $250 million.

The most recent figures show approximately $3.7 billion in tax was paid by non-residents of Canada on income earned from Canadian contract services, investments, pensions, dispositions of taxable Canadian property and other taxable sources. As part of our outreach effort to prospective immigrants, our Newcomers to Canada brochure and our Are you a Newcomer to Canada? brochure have recently been translated into Chinese, and to date have been accessed approximately 50,000 times on our Web site. Enhancements to our outreach services have been planned to better support Canadian expatriates, trade missions, and potential foreign investors.

As the Internet becomes a more prevalent means of doing business, we are building a dedicated team of Internet Business Audit specialists. Work progresses on the auditing of the 200 businesses targeted.

Fiscal impact – The total gross fiscal impact of our programs was approximately $9.2 billion (Fig. 5-3), exceeding our commitment to the Government of Canada by 15.2%. We estimate that approximately 16% of this amount will be subject to appeals and another 6% will be uncollectable, for a net fiscal impact of over $7 billion. Approximately $2.0 billion out of the $9.2 billion gross fiscal impact was generated through programs that were not reported on in our previous annual reports; specifically, GST/HST and Employer Trust Accounts, Charities, and Registered Plans. Excluding these programs, the gross fiscal impact exceeded our commitment to the Government of Canada by approximately 12% supported by an additional 7.6% increase in FTEs.

5-3 Tax Compliance Activities – 2002-2003
Total Gross Fiscal Impact* of $9.2 billion

* Total gross fiscal impact includes federal and provincial tax (participating provinces only), federal tax refunds offset or reduced, interest and penalties, and present value of future tax assessable where appropriate. Our net fiscal impact after appeals (16%) and collection actions (6%) is over $7 billion.

* Other Audit Programs includes Tax Avoidance, International Tax Programs, Verification Programs, Tax Incentives, Investigations, Registered Plans, and Charities.

Date modified:

2003-10-29