Our 2006-2007 Results

Our Program Activities

Reporting Compliance (PA4)

As discussed beginning on , it is our strategy to detect non-compliance, take appropriate action, and deter future cases of reporting non-compliance through our audit and enforcement activities. We have in place the expected result below for our Reporting Compliance program activity.

As illustrated in the Performance Report Card on , the results we achieved within this program activity in 2006-2007 demonstrate that we met the expected result. Achieving this expected result contributes to the protection of Canada’s revenue base by detecting, addressing, and deterring taxpayer non-compliance. Our measures were discussed in the Corporate Business Plan 2007-2008 to 2009-2010 and are described below. This is then followed by a discussion of key related compliance activities that were discussed in the plan but are not presented in the Performance Report Card.

Our Measure: Meet our service standards and internal performance targets

Annually, the Scientific Research and Experimental Development (SR&ED) tax incentive program provides more than $3.0 billion in tax credits to over 18,000 claimants as an incentive to conduct qualifying industrial research and development activities in Canada. A prompt and thorough review of the applications for these tax credits demonstrates the CRA’s commitment to effective administration of the related programs and fosters reporting compliance. In 2006-2007, we met all of our external service standards in the SR&ED and Film and Video tax credit programs. A complete list of these, with our performance compared to targets, is on .

In 2006-2007, the number of audits we undertook exceeded our planned volumes across all audit types, notably in International and Large Business audit, which was nearly double the number planned. These audits exceeded planned amounts primarily due to reassessments related to Tax Shelter Gifting Arrangements. These schemes use donations of art and other assets that would result in taxpayers claiming a charitable donation far in excess of the price originally paid for the asset. As well, a number of gifting tax shelter reassessments were carried forward from 2005-2006 pending a court decision. The CRA’s aggressive international tax planning initiatives also increased audit volumes in International and Large Business audit.

Outreach activities raise the CRA’s visibility and profile, help taxpayers meet their obligations through education and assistance, and inform businesses about their responsibilities and obligations. In 2006-2007, we contacted over 13,100 businesses during 63 community visits, exceeding the planned amounts for the period.

Our Measure: Effective assessment of risk and detection of reporting non-compliance

The detection of non-compliance relies on effective risk management to identify emerging compliance risks and to assess them for their potential effect on the revenue base. We then work to mitigate the greatest risks. This may involve adjusting priorities using a mix of instruments and activities to address specific taxpayer segments or particular areas of non-compliance.

We are always working to improve and refine our risk assessments to better identify non-compliance. This year, we incorporated more provincial risk factors into our risk assessment systems. These factors related to provincial residency and income allocation.

To demonstrate the effectiveness of our risk assessment processes, our Core Audit Program (CAP) selects a random sample of tax files for auditing to estimate a reliable compliance rate among Small and Medium Enterprises (SMEs). In 2006-2007, we determined the rate of reporting non-compliance in randomly selected audits from the SME GST/HST population that revealed non-compliance of $5,000 or more. We then compared that rate with the results of targeted audits from our SME audit program over the same period. The improvement ratio is the rate at which targeted audits are more effective than random selection for identifying reporting non-compliance. In this case, targeted audits were four times as effective as random selection in identifying non-compliance.

We also gauge the effectiveness of our risk assessment and other detection processes by measuring the percentage of targeted audits that resulted in detection of non-compliance, for comparison to the findings of the CAP. This allows us to gauge how our audit approach compares to random file selection. In 2006-2007, this approach to audit identified non-compliance in 36.8% of files audited, unchanged from 2000-2001, the last time the CAP studied the GST/HST registrant sector of the SME population. In our view, the lack of change would mean we mostly met this expected result for this indicator.

Our Measure: The Voluntary Disclosures Program is administered in a consistent manner

The Voluntary Disclosures Program (VDP) encourages taxpayers to come forward and correct past errors or omissions and report their tax obligations without penalty. As illustrated in Figure 15, in 2006-2007, we processed 8,244 disclosures, resulting in $527 million in assessed taxes. These results reflect an increase from 7,314 disclosures and $331 million in taxes assessed in 2005-2006.

We are still working to redefine program objectives and performance measurement criteria and fully integrate the VDP with other compliance activities. As stated in the CRA Corporate Business Plan 2006-2007 to 2008-2009, this work is targeted for completion in March 2008.

Figure 15 VDP Cases Completed with Identified Additional Revenue for Each Fiscal Year

Fiscal Impact

In 2006-2007, our Reporting Compliance program activity identified $7.9 billion in fiscal impact. Fiscal impact fluctuates over time for a number of reasons, such as economic conditions and other factors that influence taxpayer behaviour.

As shown in Figure 16, fiscal impact from reporting compliance work increased by 42% in 2006-2007 over that of 2005-2006. In addition to the Aggressive International Tax Planning initiative, in which files generate high fiscal impact, we increased our focus on industries with high risk for reporting non-compliance that resulted in substantial fiscal impact. Our SME sub-activity processed files with an unexpected high fiscal impact that contributed to the increase in fiscal impact from 2005-2006. Our Enforcement and Disclosures sub-activity also increased fiscal impact from 2005-2006.

Since the tax assessments that make up this fiscal impact are subject to appeal, some assessments may be overturned. A portion of this fiscal impact also may be uncollectible.

Figure 16 Fiscal impact of reporting compliance activities

Reporting Compliance Results and Activities

The CRA carries out a number of activities to achieve its expected result of identifying and addressing non-compliance. Our Compliance Review, completed in 2004-2005, confirmed that our priority risk areas include aggressive tax planning, the underground economy, and GST/HST compliance. This was reflected in the Corporate Business Plan 2006-2007 to 2008-2009. Other priorities for PA4 include international partnerships, the Special Enforcement Program, and Investigations.

Aggressive Tax Planning

We continue to focus on aggressive tax planning, including the abusive use of tax havens. The 2005 Federal Budget allocated an additional $30 million annually to the CRA for audit and enforcement activities to address aggressive international tax planning. While this investment contributed to the spike in fiscal impact for 2006-2007, illustrated in Figure 16, it is uncertain if similar results will occur in future years. In addition, it is the CRA’s view that this investment also has significant value in deterring reporting non-compliance.

Some of the activities undertaken as a result of the budget announcement include strengthening existing specialized audit groups to focus on aggressive international tax schemes, and enhancing our ability to target entities and individuals who are promoting or participating in abusive tax schemes. In addition, eleven Centres of Expertise in local tax services offices bring together audit professionals and specialists in international tax and tax avoidance. Working in teams, they are defining the scope and nature of abusive international transactions and other aggressive tax planning schemes. They are also determining who participates in and promotes such schemes, and how to identify them.

There are approximately 50 projects underway, with significant tax consequences. Among other things, research is being conducted on residency issues, tax shelters, financial arrangements, employment compensation, and tax treaty abuses. In addition, we are using communications initiatives such as “tax alerts” to advise taxpayers and tax planners about tax arrangements that may contravene the Income Tax Act.

Underground Economy

The underground economy is commercial activity that is unreported for tax purposes. It may take different forms, such as:

• failure to report a business activity (e.g., moonlighting);
• failure to report part of a business activity (skimming);
• failure to report employment income (e.g., tips);
• mischaracterization of employment income as income from self-employment; and
• failure to file or register.

During 2006-2007, over 1,000 CRA employees worked full-time on identification, audit, or enforcement activities to address the underground economy. We also work on an ongoing basis with Canada’s provinces, territories, and other federal agencies and departments to better identify those participating in the underground economy.

This past year, we conducted 20,635 underground economy audits resulting in over $284 million of additional identified taxes. These included over 6,400 books and records reviews to help and inform businesses regarding their responsibility for maintaining proper books and records.

GST/HST Compliance

We promote GST/HST compliance by creating a legislative and administrative environment that reduces the opportunity for making improper or fraudulent refund claims. Our GST/HST compliance strategy focuses on improving our enforcement activities and ability to identify high-risk registrants and refund claims before credit returns are paid.

Further to the Corporate Business Plan 2006-2007 to 2008-2009, we continued improving our methods for combating reporting non-compliance by estimating the value of overpayments through a detailed review of GST/HST credit returns. We also began upgrading the technology used by our High Risk Analysis Team which will provide timelier access to data to better detect suspicious GST/HST refund claims.

International Partnerships

Our approach to compliance is supported through co-operation with other tax administrations and international organizations.

The CRA is a member of the Joint International Tax Shelter Information Centre (JITSIC), which promotes collaboration to counter international aggressive tax planning. The other members are Australia, the United Kingdom, the United States, and most recently Japan. The inclusion of Japan is part of the JITSIC’s plans for a measured expansion to cover North America, Europe, and Asia.

In 2006-2007, one result of the CRA and Internal Revenue Service’s involvement in JITSIC was the unravelling of an abusive cross-border tax scheme involving hundreds of taxpayers and tens of millions of dollars in unreported income.

We also collaborated with tax treaty partners by playing an active role in international forums. These include the OECD’s Working Party 8 on Tax Avoidance and Evasion, the Forum on Tax Administration’s study of the role of intermediaries, and the Seven Country Working Group on Tax Havens. Each provides an opportunity to share knowledge on issues of common concern.

In January 2007, Canada hosted the Leeds Castle Group in Victoria, BC. Established in January 2006, this group is comprised of 10 tax commissioners who work together to combat global compliance risks. The theme for this meeting was Aggressive Tax Planning.

The Special Enforcement Program

The mandate of the Special Enforcement Program is to conduct audits and undertake other civil enforcement actions on individuals who are known to derive or are suspected of deriving income from illegal activities. In 2006-2007, we conducted 1,342 audits of taxpayers suspected of earning income from the illegal economy. The audits identified more than $88 million in additional tax owing.

Investigations

For those involved in tax evasion or tax fraud, the CRA enforces criminal sanctions that are intended to ensure compliance. This also helps deter fraudulent behaviour. Prosecutions are a fundamental part of our enforcement presence and are essential to ensure a level-playing field for all taxpayers and businesses.

In 2006-2007, 259 income tax and GST/HST investigations (including 45 GST cases by the ministère du Revenu du Québec) were referred to the Department of Justice for prosecution. These and referrals from previous years resulted in convictions for tax evasion or fraud in 245 cases in 2006-2007 (including 32 cases in Quebec courts). Courts across Canada imposed close to $13.4 million in fines and sentenced offenders to more than 37 years in prison. We obtained convictions in 98% of the cases prosecuted.

As illustrated in Figure 17, the consistently high rate of convictions for cases referred to the Public Prosecution Service of Canada (PPSC) demonstrates the quality of the investigative and prosecuting work done by the CRA and the PPSC, and this in turn contributes to an effective use of resources in the justice system.

Figure 17 Conviction Rate for Cases Referred to the Public Prosecution Service of Canada by the CRA

A Snapshot of Reporting Compliance (PA4)

Figure 18 Resource Spending	Description
	In 2006-2007, spending for this program activity totalled $1.2 billion (equating to 12,814 FTEs) or 34.2% of the CRA’s overall expenditures (Figure 18).[Footnote 1] Of this $1.2 billion, $879.7 million was for net program expenditures and $286.0 million was allocated to this program activity for corporate services.

Performance Report Card

Meet our Service Standards and internal performance targets

Effective assessment of risk and detection of reporting non-compliance

The VDP is administered in a consistent manner

Date modified:

2007-11-01