Our 2005-2006 Results

Achieving Our Tax Services Strategic Outcome

Taxpayers meet their obligations and Canada's revenue base is protected

In Canada, taxes pay for virtually all public goods and services that enhance our quality of life. For this reason, ensuring that taxpayers meet their obligations and protecting Canada's revenue base is our primary focus. We administer income tax programs for governments across Canada and sales tax for three provinces. We also verify taxpayer income levels in support of a wide variety of federal and provincial programs, ranging from student loans to health care initiatives.

In 2005-2006, spending for Tax Services totalled $3.04 billion (35,905 full-time equivalents [FTEs]).

Figure 1 Spending for Tax Services

The CRA is not alone in ensuring that taxpayers meet their obligations and protecting the revenue base. We are aided by legislation that reduces the risks of non-compliance; for example, the Income Tax Act requires employers to withhold and remit deductions at source. Financial institutions offer convenient, accessible services that enable taxpayers to receive and deposit refunds and remit tax payments on time. We also work with international tax administrations and organizations to share expertise and research results, and to discuss emerging compliance issues.

Our approach to achieving this strategic outcome

Canada's tax laws set out taxpayers' obligations; the CRA's fundamental objective and approach to tax administration is to have individuals and businesses comply with their obligations without our intervention. The underlying belief is that most individuals and businesses are willing to comply by correctly self-assessing their tax situation. Therefore, we carry out program activities to proactively provide taxpayers with the information and forms they need—and offer a wide variety of accessibility options for filing and remitting—to allow them to comply with their tax obligations.

Compliance with Canada's tax laws brings with it the obligations to:

• file returns on time;
• register as required under the law in specific circumstances (for example, for the GST);
• pay all amounts when due; and
• report complete and accurate information to determine tax liability.

Non-compliance occurs when any of these obligations are not met. The CRA carries out program activities both to promote compliance and to identify, correct, and deter non-compliance.

To promote compliance, we reach out to communities to raise their awareness of tax administration and to enhance the level of tax knowledge. We provide high quality information at an early stage, using multiple formats for publications and forms, aligning information with the target audience, and continually improving our information services. We respond—primarily by telephone, but also in person or in writing—to enquiries on the filing and status of tax returns and refunds; explain assessment notices; and answer tax questions. Our comprehensive Web site provides individuals with dependable information. Our approach to promoting compliance is aligned with the Government of Canada's Service Vision for Canadians, and includes our work on citizen-focused service standards (see Schedule C for a complete list of our public service standard results for 2005-2006).

The availability of a dispute resolution process is integral to our tax administration. It fosters confidence in the fairness of our self-assessment system, which encourages taxpayers to meet their obligations. When taxpayers do not agree with us on a tax or penalty matter, they are entitled to a formal, objective review of their file. Less than 0.3% of the approximately 30 million income tax and commodity returns filed annually are ever appealed and, of those, we resolve most administratively (i.e., without resorting to the courts). Details on our dispute resolution activities are found on .

Our program activities to identify, correct, and deter non-compliance are designed to protect Canada's revenue base and ensure that Canadians pay their required share of taxes. We have in place a robust set of checks and balances that include both preventive and detective controls, notably:

• source deductions;
• third-party information slip and document matching;
• risk profiling and scoring;
• compliance research;
• examination;
• audits; and
• investigations.

We also have an active collections program to obtain payment of tax debt.

Our achievements related to all of our program activities are discussed in detail beginning on .

We measure and assess our results against our Tax Services strategic outcome under four headings that equate to the broad categories of taxpayer obligations:

• Filing Compliance indicators estimate the proportion of taxpayers that file their returns on time;
• our Registration Compliance indicator estimates the proportion of Canadian businesses that have registered as required by law to collect the GST/HST;
• Remittance Compliance indicators estimate the proportion of taxpayers that paid amounts due on time; and
• Reporting Compliance indicators contribute to our assessment of the degree to which taxpayers report complete and accurate information to allow for the determination of their liability for tax.

Compliance is sensitive to many factors, such as perception of government, values held by society, the economy, legislation, as well as the public's perception of our tax system. As such, the results achieved against our strategic outcome measures not only demonstrate the effectiveness of our approach to fostering compliance with tax laws, but also reflect the willingness of taxpayers to meet their obligations without our intervention.

The following sections discuss the results achieved in 2005-2006 for our key strategic outcome indicators. Additionally, we have included a brief explanation of what we do to facilitate these results, and what we do to address non-compliance. In both cases, links are made to the relevant program activity sections later in this report where further details can be found concerning our achievements in 2005-2006 against our expected results.

Filing Compliance – Rates of filing on time without direct intervention by the CRA

As the basis for establishing each filer's tax liability, a tax return is the first and most important step in the compliance process.

Individuals

Our 2005-2006 estimates show that 92.8% of all Canadian individuals 18 years of age and older filed an individual return on time for the 2004 tax year. This result met our 90% expectation. The rate of individual filing compliance is especially important given that individuals make up a large proportion of Canada's tax base.

Corporations

Of an estimated 1.5 million incorporated Canadian businesses, almost 86% of taxable corporations filed an income tax return on time during 2005-2006, which continues to be a few percentage points short of our 90% goal. For this reason, we consider this result to have mostly met our expectation.

It is notable that the timely filing of income tax returns by taxable corporations is on a slight downward trend. We are taking steps to assess the impact of this trend and to identify any possible causes for it.

GST Registrants

The trend in timely filing of GST/HST returns by businesses remains essentially unchanged from prior years. In 2005-2006, we again met our 90% expectation when an estimated 91.8% of GST/HST returns were filed on time.

Employers

In 2005-2006, 94.5% of employers filed their T4 returns on time, an estimate that is unchanged from last year and well within our 90% expectation.

Facilitating timely filing compliance

While we recognize that taxpayers are motivated by multiple factors to file their returns, we believe the rates of filing compliance are positively affected by access to information and tools that encourage taxpayers to meet their obligations. We work hard to identify ways to simplify the filing process while ensuring that essential information is collected; we consider the continued growth in the popularity of our electronic filing options this past year as evidence of the success of our approach (see Electronic Processing).

For more details on how our actions helped taxpayers comply with their filing obligations in 2005-2006, please refer to the results discussed beginning on relating to our Client Assistance (PA1) and on concerning our Assessment of Returns and Payment Processing (PA2) program activities.

Addressing filing non-compliance

We use filed returns to determine tax owing; entitlement for benefits; and for broader purposes, such as tax policy development and reporting on Canada's economic progress. For these reasons, filing compliance is vital.

When taxpayers do not file a return, we use a variety of data sources to identify high-risk non-filer cases based on potential for revenue loss. More details regarding our Non-Filer Program are on .

Registration Compliance – Rates of registration for the GST/HST

Like individuals who obtain a social insurance number through Service Canada, organizations subject to specific provisions of the law must register their businesses. Registration—and assignment, where applicable, of a Business Number—allows us to identify the organization and establish its compliance profile (including its liability to pay tax).

Registration with the Canada Revenue Agency can be divided into two ¹ major categories:

• registration for corporations and for businesses required (or qualified ² ) to collect and remit the goods and services tax—and, where applicable, the harmonized sales tax—and receive available input tax credits; and,
• registration of qualifying organizations such as charities or pension and other deferred income plans pursuant to specific provisions of the Income Tax Act .
  
  Our estimate of nearly 90% indicates that a high degree of GST/HST registration compliance was achieved in 2005-2006.

Canadian businesses

Although we came very close to achieving our 90% target for GST/HST registration compliance in 2005-2006, our assessment is that we mostly met our expectation. We are encouraged, however, by the upward trend in our estimated results over the past four years.

Facilitating registration compliance

As with filing compliance, we believe the rates of registration compliance are positively influenced by access to the information and tools—such as those available on our Web site—that allow taxpayers to meet their registration obligations. The performance results discussed beginning on for our Client Assistance (PA1) and on for our Assessment of Returns and Payment Processing (PA2) program activities demonstrate how our actions in 2005-2006 influenced businesses to comply with their registration obligations.

Addressing registration non-compliance

Registration non-compliance occurs when businesses required to collect and remit GST/HST do not register. Using a variety of identification techniques (such as community visits), our Non-Registrant Program seeks to ensure that all those who are required to register for the GST/HST meet their obligations. Information concerning this activity is on .

Registered Charities

Charities receive tens of billions of dollars annually in donations from individuals and organizations. Audits of registered charities have revealed that most charities are complying with the Income Tax Act, although some charities erred because they misunderstood the requirements of the law. In a few cases, the contraventions were so serious they resulted in the revocation of the registered charitable status of the organizations involved. These findings—along with recent developments such as the passing of the Charities Registration (Security Information) Act—have resulted in a move to develop compliance indicators for registered charities. We will report on these indicators within the next few years.

Our telephone service activities related to registered charities are discussed on pages and .

Registered Plans

Registered plans are important economic, fiscal, and social instruments that benefit millions of Canadians by permitting deferral of tax on savings for retirement and post-secondary education. To better monitor this industry and more accurately report on the $1.25 trillion currently invested and tax-deferred in the various registered plans, we are developing compliance indicators on which we will report in the future.

Results related to our public service standards for specific registered plans activities can be found on .

Remittance Compliance – Rates of timely payments without direct intervention by the CRA

In 2005-2006, the CRA collected almost $330 billion, the large majority of which came from:

• individuals and corporations that made income tax payments;
• businesses that collected and remitted GST/HST; and
• employers that deducted and remitted at-source on behalf of their employees.

Although almost all reported taxes were paid on time, approximately $500 million was added to our total tax debt inventory in 2005-2006, bringing the total to $18.5 billion.

Individuals

For remittances not deducted at source, our estimates show that 93.1% of individual filers paid on time for the 2005 tax year, thereby meeting our target.

Corporations

Among taxable corporations, we estimate that 88.7% of total reported taxes were remitted on time, indicating high levels of compliance in this sector and mostly meeting our target.

As with the filing of income tax returns, timely remittances by taxable corporations is on a slight downward trend. We are taking steps to assess the impact of this trend and to identify any potential causes for it.

GST Registrants

Businesses are also an important contributor to the level of remittance compliance in their collection and remittance of GST/HST. In 2005-2006, businesses collected almost $52 billion in GST/HST, which represents a significant portion of the total amount of tax collected during the same period.

Although this figure does not directly demonstrate the level of remittance compliance by businesses, the generally consistent upward trend in numbers of businesses registered and the total collected provides assurance that businesses are remitting GST/HST as required by law. The limitations of our current automated system do not allow us to estimate remittance compliance for this revenue stream; we anticipate that we will be better able to measure GST/HST remittance compliance within the next few years when our GST redesign initiative is completed.

Employers

We estimate that, in 2005-2006, almost 89% of employers remitted the taxes they withheld on behalf of their employees by the due date. This estimate is slightly less than our 90% goal and mostly met our expectation.

Employers play a vital role in maintaining remittance compliance among the large number of individual taxpayers by:

• making payroll deductions,
• remitting amounts that are deemed “in trust for the Receiver General for Canada,” and
• reporting employment-related earnings to the government.

Of the total collected by the CRA last year, approximately 56% was remitted by employers through source deductions. Since remittances held in trust by employers are key to Canada's revenue base, the slight downward trend in remittance compliance by employers is of concern to us. We are currently assessing the impact of this trend and investigating ways to identify possible causes for it.

Ratio of Outstanding Tax Debt to Gross Cash Receipts

While we do not establish a target for the ratio of tax debt to gross cash receipts, it is a useful trend indicator. In 2005-2006, this ratio increased slightly to 5.62% from the 5.43% level in the previous year, which mostly met our expectation.

In recent years, our tax debt inventory has seen an annual rise, reaching $18.5 billion in 2005-2006 (Figure 2). The continued growth in our tax debt inventory was identified as a key compliance risk area within our Tax Integrity priority in our Corporate Business Plan 2005-2006 to 2007-2008.

Figure 2 Total Tax Debt Inventory

Despite the fact that we experienced year-over-year increases in production and cash collections, as well as a decrease in the Allowance for Doubtful Accounts (ADA) rate (see for more information on the ADA), these trends are cause for concern at the CRA. As discussed beginning on , stemming the growth in tax debt is a goal of the CRA.

Facilitating timely remittance compliance

Along with the penalty and interest provisions of the various pieces of legislation administered by the CRA, we believe remittance compliance rates are influenced in a positive way by our initiatives to provide taxpayers with the increased convenience of—and accessibility to—electronic payment technology.

The performance results discussed beginning on relating to our Assessment of Returns and Payment Processing (PA2) program activity demonstrate how our actions in 2005-2006 helped taxpayers comply in a timely manner with their remittance obligations.

Addressing remittance non-compliance

Remittance non-compliance occurs when taxes owed are not paid when they become due. In 2005-2006, less than 3.5% of all assessed taxes were referred to our Accounts Receivable Program for collection action. Information concerning this program can be found on .

On August 1, 2005, we became responsible for the collection of debts owed to various programs of Social Development Canada and Human Resources and Skills Development Canada. We recently launched our Revenue Collections Business Transformation Initiative to better position the CRA to integrate the collections workloads of other government departments. Over the past year, we improved our computer systems and developed a framework for researching our remittance compliance data.

Reporting Compliance

Canadian taxpayers are required to self-assess and report their tax obligations to the CRA. This means reporting all taxable income and other information required under the law. It also means claiming only allowable expenses, deductions, and credits in determining one's tax liability.

Based on the results discussed earlier related to filing registration, and remittance compliance, it is our overall assessment that the majority of Canadian individuals and businesses continued to participate voluntarily in Canada's tax system and to meet their obligations in 2005-2006.

Our Compliance Measurement Framework (CMF) is a tool we use to monitor and measure compliance in order to evaluate and refine our approaches to addressing compliance issues. Included in the CMF are indicators that are derived from a variety of external and internal sources, such as macro indicators and the results from program activities.

In addition to the important indicators for filing, registration, and remittance compliance discussed earlier, other examples of key indicators in the Compliance Measurement Framework are discussed below.

Macro indicators

Macro economic analyses are performed by the CRA to evaluate reporting compliance trends and to determine whether the trends in economic data may give an early indication of a change in the levels of compliance. For example, personal income reported to the CRA tracks favourably relative to personal income estimated by Statistics Canada (Figure 3) and net GST/HST collected tracks consistently with retail sales and personal expenditures on goods and services (Figure 4).

Figure 3 Growth in Personal Income Reported to the CRA Compared to Personal Income Estimated by Statistics Canada (1998 = 100)

Figure 4 Growth in Net GST Collected Compared to Retail Sales and Personal Expenditures (1996 =100)

Percentage of total cash receipts resulting from deductions at source by employers and third-party reporting

Canada's tax administration system is greatly aided by employers—who are responsible for a significant portion of the total tax collected by the CRA—and other third-party reporting. Both play a vital role in maintaining compliance among the 25 million Canadian individual taxpayers. Our estimates show that about 74% of total cash receipts in 2005-2006 resulted from deductions at source by employers and third-party reporting. These estimates, coupled with the results of our post-assessment tax review programs ( ), give us confidence that there is a high level of reporting compliance related to income from employment and other sources subject to third-party reporting.

Individuals reporting key tax credits and deductions not subject to third-party reporting – Our analysis of tax returns for individuals shows that the majority of claims for key deductions and credits not subject to third-party reporting are correct, as demonstrated by our random samples conducted through our Processing Review Program. The reporting compliance levels for this indicator, however, have been declining over the past number of years (Figure 5). To address this issue with appropriate measures, studies are being conducted to determine possible reasons for the decline (for example, whether the change is attributable to specific deductions and credits, differences in taxpayer characteristics, or is a general increase in non-compliance).

While we continue to analyze the potential reasons for the rising incidence of taxpayer errors, we consider these results to have mostly met our expectation of a 90% reporting compliance rate for the Processing Review Program.

Figure 5 Estimated Rate of Individual Income Tax Non-Compliance

GST/HST Prepayment Compliance Rate – GST/HST fraud is one of the key compliance risks identified under our tax integrity priority in our Corporate Business Plan (see ). In response to this risk, we put in place our GST/HST Prepayment Program to:

• identify credit returns that have a high risk of reporting non-compliance prior to payment;
• review these claims individually; and
• decide to either approve the claim without further review or to assign it for prepayment audit.

The results of this program are demonstrated by using the GST/HST prepayment compliance ratio, which is the percentage of GST/HST refunds approved per total GST/HST refunds claimed. We use this percentage as an indicator of the degree to which registrants are meeting their legislated reporting obligations.

For the 2004 tax year, registrants achieved a GST/HST prepayment compliance rate of 92.2% against our target of 90%, which is consistent with results achieved in previous years.

Fiscal Impact

While the above indicators inform our assessment that reporting non-compliance is generally at relatively low levels, the results of our program activities discussed on pages and demonstrate that such non-compliance is, in total, financially significant. In 2005-2006, our programs to address reporting non-compliance identified a total fiscal impact of over $10.4 billion ³ (Figure 6). This total exceeded our estimate of $7.2 billion for 2005-2006.

Figure 6 Total Fiscal Impact

* Other Audit Programs include tax avoidance, international tax programs, tax incentives, and investigations.

Facilitating reporting compliance

Through activities such as outreach, we aim to ensure that the reporting of taxes is as straightforward and convenient as possible, in order to foster high levels of reporting compliance and assist taxpayers in meeting their obligations under the law. The performance results discussed beginning on relating to our Client Assistance program activity (PA1) provide further details regarding how our actions in 2005-2006 helped taxpayers comply without further intervention on our part, with their reporting obligations.

Addressing reporting non-compliance

Non-compliance with reporting requirements takes many forms, ranging from errors and unintentional omissions to wilful tax evasion; a small minority of people will choose not to comply with the law. We manage our approach to non-compliance through a range of different programs tailored to the characteristics of specific groups. The CRA carries out preventative and detective activities using a mix of compliance tools to protect the revenue base from non-compliance. Depending on the nature of the non-compliance, our approach may involve outreach, audits, enforcement, or a combination of these elements.

Three of our program activities discuss actions taken in 2005-2006 to identify and address non-compliance:

• Assessment of Returns and Payment Processing (PA2) on ;
• Filing and Remittance Compliance (PA3) on ; and
• Reporting Compliance (PA4) on .

Conclusion

The results we have achieved in 2005-2006 against our strategic outcome measures for filing, registration, and remittance compliance lead us to conclude that the majority of Canadian individuals and businesses continued to participate voluntarily in Canada's tax system and to meet their obligations this past year.

The reporting compliance results we have achieved in 2005-2006 provide the foundation for our overall assessment that, for the vast majority of Canadians, the incidence and magnitude of non-compliance are relatively low, although in total it is financially significant. Based on this assessment, we conclude that the CRA in 2005-2006 met its strategic outcome: Taxpayers meet their obligations and Canada's revenue base is protected .

The strong performance against our tax-related program activities discussed beginning on lends additional support to our conclusion that the CRA promoted compliance with taxpayer obligations and protected Canada's revenue base in 2005-2006.

¹ There is no risk related to registration compliance in regard to businesses (including corporations) for income tax purposes.

² Generally speaking, businesses are not required to register under the Excise Tax Act if, for example, their annual revenues do not exceed $30,000. Regardless of whether they may have taxable sales of less than $30,000, certain businesses engaged in GST/HST taxable activities may choose to voluntarily register for GST/HST, thus enabling them to benefit from the input tax credits.

³ We recognize that a portion of our fiscal impact results will be overturned on appeal or will be uncollectible.

Unaudited

Date modified:

2006-11-23