Our 2006-2007 Results

Achieving Our Tax Services Strategic Outcome

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

Canada’s revenue base provides funding toward social and economic objectives that enhance our quality of life. A fair and effective tax administration is, therefore, essential to the well-being of all Canadians. Under the Tax Services strategic outcome, the CRA works to promote taxpayer compliance and protect Canada’s revenue base. We do this by delivering a number of programs that help taxpayers meet their obligations, and we detect and address instances where this does not occur.

Our Focus

The Canadian tax system is based on voluntary compliance and self-assessment. Taxpayers are expected to determine their own liability under the law and then pay the correct amount of tax. The CRA’s fundamental approach to tax administration is to have individuals and businesses comply with their obligations without our intervention. We believe that promoting voluntary compliance is the most cost-effective way to administer taxes in Canada.

Compliance with Canada’s tax laws means that taxpayers

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

Non-compliance is the failure by taxpayers to meet any of these obligations.

We strive to minimize the compliance burden for taxpayers by streamlining administrative processes and providing quality service, while respecting the intention of relevant legislation. In those instances where individuals and businesses either unintentionally or intentionally fail to fully comply, we use a wide range of mechanisms in our verification and enforcement programs to induce taxpayer compliance and to protect Canada’s revenue base. When taxpayers disagree with us, we provide them with the opportunity for redress, which is a formal, objective review of their file.[Footnote 1] This fosters taxpayers’ confidence in the fairness of our self-assessment system, and encourages them to meet their obligations voluntarily.

Underpinning this threefold approach is our use of risk management to identify current as well as emerging compliance risks, and to assess them for their potential effect on the revenue base and on compliance in general. We then develop strategies for mitigating the greatest risks to compliance. These strategies address specific segments of the tax population or particular areas of non-compliance, using a mix of instruments and activities, such as outreach activities or audits. Part of our risk management strategy is to maintain an audit presence across all industry sectors and for all types of taxpayers. Overall, we believe this approach helps promote voluntary compliance and deters non-compliance by increasing the credibility and visibility of our compliance programs.

Our Influence on Taxpayer Behaviour

We recognize that taxpayer behaviour is sensitive to multiple factors, such as the public’s perception of government, the values held by society, the economy and people’s ability to pay, all applicable legislation, people’s feelings about the fairness of Canada’s tax regime, and the growing complexity of taxpayer issues.

Other factors also contribute to the outcome we seek to achieve. 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. We also support the Department of Finance as it seeks appropriate legislation by providing information on compliance challenges that we have identified and the costs of administering proposed legislative changes.

In addition, 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, as well as to discuss emerging compliance issues. Notwithstanding these factors, the CRA’s administration of Canada’s tax laws plays a key role in shaping taxpayers’ compliance behaviour. Our efforts toward achieving our expected results contribute significantly toward achieving our strategic outcome. The results identified through our strategic outcome measures provides evidence in support of our conclusion that taxpayers meet their obligations and Canada’s revenue base is protected.

Our Strategic Outcome Measures

We use our Compliance Measurement Framework (CMF) to monitor and measure compliance as well as to evaluate and refine our approaches to addressing compliance issues. Using data from internal and external sources as a baseline of compliance information, the CMF monitors compliance through a series of indicators related to filing, registration, remittance, and reporting requirements.

We group these indicators into four broad categories of taxpayer obligations, which help us measure and assess our results against our Tax Services strategic outcome:

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

To facilitate further research into and analysis of compliance, the CMF partitions the Canadian taxpayer population into the following segments: individuals, self-employed individuals, corporations, GST/HST registrants, and employers. Also included in the CMF are macro-indicators which we use to evaluate reporting compliance trends and to determine if trends in economic data could provide an early indication of a change in the levels of compliance.

Our Tax Services Strategic Outcome Measures

Our Measure: Registration Compliance - Rates of registration for the GST/HST

Our estimates of the rate of registration compliance have climbed steadily over the past several years. By comparing our data with information from Statistics Canada, we estimate that 93.0% of businesses were registered as required by law (or who had done so voluntarily) to collect GST/HST in 2006-2007. This result of 93.0% met our 90% target. In our view, this represents a high degree of registration compliance, considering that many businesses are not required to register for GST/HST, for example, because their gross revenues are below the registration threshold.

Our assessment is also supported by the results from our Non-Registrant program (discussed on ), which seeks to ensure that all businesses that are required to register for the GST/HST meet their obligations. Each year, this program identifies several thousand small businesses that are required to register, mostly those that are new or that recently exceeded the registration threshold. We believe that there is a very low risk that medium-sized or large enterprises are carrying on business without being registered to collect the GST/HST.

We continue to work to develop compliance indicators for both registered plans and charities. Based on recent findings, it is likely that these indicators will focus on risks other than those associated with registration compliance (see ).

Our Measure: Filing Compliance - Rates of filing on time without direct intervention by the CRA

Individual taxpayers include all persons who file or are required to file a T1 Individual Income Tax and Benefit Return. By comparing our data with census data from Statistics Canada, we estimate that filing compliance for the Canadian population aged 18 and over was 93.0%, which exceeded our 90% target. This estimate, in our view, provides assurance that there is a high level of voluntary compliance among individuals when it comes to filing tax returns.

A number of individuals have no legal obligation to file a tax return, for example, because their income is below the filing threshold and they are not subject to any special provisions (e.g., disposition of capital property) that would otherwise require them to file. While some of these individuals file to claim social benefits, such as the Canada Child Tax Benefit and the GST/HST Credit, others are not entitled to these benefits or do not wish to participate. Known individuals who do not file and who we anticipate owe tax at the end of the calendar year are subject to our Non-Filer program (see ). On balance, we consider these estimates to be a demonstration of a high degree of voluntary compliance, and filing rates by individuals as a low risk to the protection of Canada’s tax base.

In the case of corporations, our compliance rate estimates apply only to those that are taxable, which are those corporations that filed a T2 Corporation Income Tax Return showing total tax payable greater than zero. The incidence of timely filing among taxable corporations has increased slightly to 86.4%, which is below our 90% target. The remaining 14% filed their returns after the due date, either voluntarily or as a result of our Non-Filer program. We are in the midst of a study of the downward trend of corporate filing compliance estimates, and expect to improve our reporting of the impact of these estimates in coming years.

The proportion of GST/HST returns that were filed on time during 2006-2007 is estimated to be 91.4%, which meets our target of 90%. As with corporations, the remaining GST/HST returns filed were late.

Employers (which include individuals, corporations, and charities) are legally responsible for deducting, remitting, and reporting federal and provincial income tax, CPP contributions, EI premiums, and employer-provided benefits. During 2006-2007, most employers (96%) filed their T4 Information Returns on time, exceeding our 90% target, which means that only four percent were filed after the deadline.

Our Measure: Reporting Compliance

Our macro indicators (see ) show that growth in personal income reported to the CRA tracks favourably relative to that estimated by Statistics Canada. This leads us to believe that Canadians are accurately reporting changes in personal income to the CRA. Also, the net GST/HST revenue tracks favourably with retail sales and personal expenditures on goods and services, which indicates that the majority of Canadian businesses are reporting and remitting to the CRA the GST/HST they collect (see Figure 1 and Figure 2).

Similarly, growth in corporate income taxes assessed by the CRA tracks favourably with growth in corporate profits before tax estimated by Statistics Canada (see Figure 3) and growth in net income of unincorporated businesses reported to the CRA tracks favourably with National Accounts Estimates of the growth in net income of unincorporated businesses (see Figure 4).

While our macro indicators provide us with assurance that taxpayers, in general, are complying with their obligations, we conduct various studies and reviews to detect areas where non-compliance with reporting obligations may be emerging or increasing. For example, we conduct an annual random sample program to estimate the non-compliance rate for individuals with respect to key deductions and credits that are not subject to third-party reporting.[Footnote 2]

Our Macro Indicators

Figure 1 Growth in Personal Income Reported to the CRA Compared With Personal Income Estimated by Statistics Canada (1998 = 100)	Figure 2 Growth in Net GST/HST Revenue Compared With Retail Sales and Personal Expenditures (1996 = 100)
* Figures for the years 2003 and 2004 have been restated as a result of improved data.	* Figures for the years 2001 and 2002 have been restated as a result of improved data.
Data quality: G ood	Data quality: Good

Figure 3 Comparison of corporate income tax assessed by the CRA relative to corporate profits before tax estimated by Statistics Canada (2000 = 100)	Figure 4 Comparison of net income of unincorporated businesses reported to the CRA relative to net income of unincorporated businesses per Statistics Canada National Accounts estimates (1998 = 100)
Data quality: Good	Data quality: Good

Our sample for 2006-2007 estimated this non-compliance rate for individuals as 14.7%, primarily for 2005 tax returns. This estimate fell slightly between the 2004 and 2005 program year.[Footnote 3] Other studies we conducted suggest that the reporting non-compliance rate for individual income tax returns filed using NETFILE exceeds that of returns filed using paper, EFILE, or TELEFILE. Our findings also show that users of tax software--who ultimately file their returns either by NETFILE or by paper--demonstrate a higher non-compliance rate when compared with tax software users who employed a third-party tax professional, or with individuals who paperfile without the use of tax software. We continue to analyze these findings to identify strategies to promote compliance in this area.

Our reporting compliance indicators focus on small business because our risk assessment systems indicate that non-compliance is more prevalent among the self-employed and businesses than among individual wage earners. This is because deductions for individual wage earners are usually withheld at source by employers and submitted to us. Also, we review large businesses (those with a gross income of $250 million or more) every two years and, of those selected for audit, we audit the current and prior years.

Most businesses audited under the Small and Medium-sized Enterprise (SME) audit programs are selected on the basis of risk. Our Core Audit Program (CAP), however, selects a random sample of SMEs for audit to estimate a reliable compliance rate. Different segments of the SME population are selected each year. This approach provides us with accurate compliance estimates that allow for monitoring compliance trends over time.

The CAP also generates information for validating and refining the risk criteria used in our risk assessment system. Non-compliance rate data is available only in multi-year intervals following the CAP research plan. This data is provided in the Reporting Compliance table on . Knowledge gained from this program also helps us review our compliance strategies within and across the segments of the SME population.

Most recently, our CAP examined the GST/HST registrants segment in the SME population. This segment’s estimated rate of significant non-compliance (i.e., $5,000 or more in additional federal tax owing) was 9.1%. CAP results from prior years also found the rate of significant non-compliance to be 8.6% and 8.5% in the SME segments for self-employed individuals and corporations, respectively. These rates support our assessment that non-compliance is at relatively low levels.

Dollar Value of Identified Non-Compliance

Although results against our strategic outcome measures provide evidence that non-compliance is generally at relatively low levels, the results of our program activities demonstrate that such non-compliance is, in total, financially significant. In 2006-2007, our programs to address reporting non-compliance identified a total dollar value of about $12.7 billion (see Figure 5), exceeding our estimates, which we based on historical results combined with available resource levels.

Figure 5 Total Dollar Value of Identified Non-Compliance

* Other Audits include the Special Enforcement Program and reviews of tax incentives.

Our Measure: Remittance Compliance - Rate of timely payments without direct intervention by the CRA

Our remittance compliance estimates reflect the degree to which various taxpayer segments paid all taxes determined through self-assessment on or prior to the filing deadline. Where monies owing were not paid at the time of filing, we initiated a series of steps to obtain payment; these steps are explained beginning on .

We estimate that 94.3% of individuals with taxes owing paid the entire amount of their self-assessed taxes upon filing in 2006-2007. This remittance compliance estimate exceeds our 90% target.

The estimated percentage of tax remitted on time by taxable corporations fell during 2006-2007 to 85.4%, not meeting our expectation. We are currently studying the downward trend of corporate remittance compliance estimates, and expect to improve our reporting of the impact of these estimates in coming years.

Businesses are also an important contributor to the level of remittance compliance in their collection and remittance of GST/HST. In 2006-2007, businesses collected almost $50 billion in GST/HST, which represents a significant portion of the total amount of tax collected during the same period. This figure does not directly demonstrate the level of remittance compliance by businesses. However, the generally consistent upward trend in numbers of businesses registered, combined with our macro indicator showing that net GST/HST revenue tracks favourably with retail sales and personal expenditures on goods and services (Figure 2), provide assurance that businesses are remitting GST/HST as required by law.

Our ability to estimate/assess the level of remittance compliance has been constrained, given limitations with our GST/HST system. As a result, we have used indirect indicators of compliance in this area (such as trends in revenues vis-à-vis retail sales, etc.). As ongoing releases result in increased functionality of the redesigned GST/HST systems, we will have better data and capacity for analyzing compliance.

Our estimates of the rate of remittance compliance by employers for 2006-2007 show the continuation of a trend toward less timely payment of source deductions to the CRA. We estimate that 87.7% of employers remitted on time in 2006-2007; this result did not meet our target of 90%. We have begun to study this trend and anticipate reporting on the results of our research in 2008-2009.

Although we do not establish a target for the ratio of tax debt to gross cash receipts, it is a useful trend indicator. This ratio increased slightly to 5.79% in 2006-2007 from the 5.62% level in the previous year. A discussion of the challenges we face in managing tax debt begins on .

Overall, revenues continued to increase year-over-year (see Canada Revenue Agency Financial Statements - Administered Activities); for example, corporate revenues increased 19% between 2005-2006 and 2006-2007. Although there are areas for improvement related to voluntary compliance by taxpayers with their remittance obligations that have led us to rate this measure as not met, we do not consider there to be an immediate threat to the integrity of Canada’s revenue base, especially in view of our legislated authorities to collect outstanding tax debt.

Achievement of Our Expected Results

On the following pages, we interpret our achievements during 2006-2007 against our expected results. Our expected results are grouped under three headings that equate to our threefold approach to tax administration: service, enforcement, and redress. We further examine how the CRA’s work in these areas influences taxpayer behaviour in meeting their obligations to file, register, and remit on time, and to accurately report their tax circumstances.

Our Approach: Service

We believe that people are more likely to participate in Canada’s tax system and pay the taxes they owe if we provide the services necessary to help them do so. Research shows that rates of compliance are positively affected by access to information, tools, and assistance that encourage taxpayers to meet their obligations.

People find it easier to participate in Canada’s tax regime when the system is accessible, when service is timely, and when tax information is accurate. The accurate and timely processing of returns and payments encourages participation, and shortens the time between filing and the receipt of taxes owing or the distribution of refunds.

These principles shape our expected results related to service.

While maintaining our core business of providing information products and answering enquiries, our strategy is to strengthen our business by investing in more affordable and accessible channels--such as the Internet and our toll-free telephone networks. Our aim is to effectively deliver tax information through innovative and efficient means that are readily available to all taxpayers. As described in detail in our Client Assistance (PA1) section beginning on , it is our assessment that we succeeded in 2006-2007 in providing taxpayers with timely, accurate, and accessible information. This is demonstrated by the following achievements:

• we met key timeliness service standards for answering telephone enquiries;
• accuracy remained high; and
• we met our accessibility expectations.

As noted in our Corporate Business Plan 2006-2007 to 2008-2009, our focus is on maximizing the use of technology to optimize cross-channel service delivery via the following platforms:

• telephone enquiry services at our call centres;
• in-person services at our Tax Services Offices (TSOs); and
• our Web site.

Our use of technology includes intelligent call routing to centres of expertise, and delivering automated content management to create, distribute, and reuse information across all channels.

We continued to implement our strategies to direct taxpayers to more cost-effective service channels. For example, as of January 2007, all of our TSOs offer appointment-only service, resulting in the assurance that agents are matched to the appropriate taxpayer-specific enquiries in a timely and effective manner. Also during 2006-2007, walk-in clients who arrived at one of our offices were informed by TSO staff about the information available via our convenient alternative service-delivery channels. They were then guided to priority-service telephone lines and Web kiosks. Feedback on this strategy was positive. One of our studies showed that 95% of the individuals who were redirected to the telephone had their enquiries resolved that way--without the need for an appointment. The result was that only about 24,000 appointments were needed and almost 60% fewer individuals needed to visit our TSOs in 2006-2007.

We also spent $8 million across all of our program activities this past year to proactively reach out to communities and help ensure that filing and reporting is as straightforward and convenient as possible. Our current focus is to better target and customize our outreach programs, expand taxpayer consultation by focusing on changing demographics, address national and local compliance issues, and ensure that taxpayers receive their entitlements.

Our Web site provides a wide range of updated information and answers to frequently asked questions. The design of our Web site facilitates self-service and taxpayer understanding of their tax obligations, and the site is complemented by telephone and in-person services. The ongoing redesign of our Web site continues to make it easier for users to navigate by taxpayer type, program, or activity. For example, in response to public opinion research and as part of our service improvement strategy, we implemented a new search engine with enhanced functionality in December 2006. Subsequently, there was a marked increase in search traffic on our Web site, which we attribute to the implementation of new search engine. Web site usage statistics suggest that we are achieving positive results in our strategy to encourage taxpayers to move to self-serve options such as the Web. As well, a recent survey[Footnote 4] found the following results among those surveyed:

• overall satisfaction levels were 74% for small business representatives and 80% for third-party intermediaries;
• over 80% of users felt that the information was up-to-date; and
• more than 75% of users indicated that the information on the site was easy to understand.

Further results related to our Web site are discussed on .

In our view, the levels of voluntary compliance discussed earlier are significantly influenced by our commitment to quality service. Our approach to promoting voluntary compliance is consistent with the Government of Canada’s approach to service, and includes our work on citizen-focused service standards (see for a complete discussion and a list of our public service standard results for 2006-2007).

The processing of tax returns and remittances has long been a key strength of the CRA. The achievement of this expected result is critical to our being able to positively influence taxpayers to participate in Canada’s tax system, thereby promoting compliance.

The results discussed in our Assessment of Returns and Payment Processing (PA2) section, beginning on , demonstrate that we met this expected result, by achieving the following in 2006-2007.

• We met all of our key external service standards and most internal performance targets for our key indicators.
• The take-up of electronic filing continued to rise, especially with businesses.
• Our quality assurance results related to processing individual paper returns met our 98% target for accuracy.

Over the past several years, changes in technology and taxpayer needs have had a significant impact on the way we deliver our processing services. We believe that, by encouraging wider use of electronic filing, we have improved the accessibility and efficiency of our programs. As described on , more than 50% of individual tax returns were filed electronically. The increase in electronic filing by more than one percent over last year means that about an additional 550,000 returns were processed more efficiently in 2006-2007.

We have worked hard over the past several years to promote electronic filing for all sectors. Although the numbers of GST/HST, corporate, and employer returns filed electronically remain modest, two of the three areas experienced a notable percentage increase in 2006-2007, which we anticipate will continue in the future. The proportion of payments processed electronically this past year also increased over 2005-2006 (see Figure 6).

Figure 6 Rates of Electronic Filing and Payments (other than individual income tax returns)

In 2006-2007, we continued to strengthen our core business by enhancing our electronic service channels. For example, on September 25, 2006, we expanded our existing suite of electronic services to provide businesses with self-serve access to real-time account information, through a new service called My Business Account. Initiatives such as this, that tailor tools and information to taxpayers’ needs, encourages them to meet their obligations voluntarily, and reduces the cost and burden of compliance.

We continued to enhance My Account, our secure portal that provides individuals with an online view of their tax information and account history, as well as transactional services. As of February 2007, individuals can arrange for direct deposit of their refunds and benefit payments, set up a pre-authorized payment plan for tax arrears, and view the last seven tax returns they filed. Visits to My Account have increased by approximately 60%.

By increasing convenience and accessibility for taxfilers through electronic filing and payment technology, we encourage compliance in terms of filing and remittance obligations, thereby helping to protect Canada’s revenue base.

Our Approach: Enforcement

Although quality service helps to promote compliance, there will always be some instances where individuals and businesses either unintentionally or intentionally fail to fully comply. Much of our assurance that we are achieving our strategic outcome is based on our robust system of checks and balances--which includes both preventive and detective activities. These activities incorporate a mix of compliance tools--such as outreach, audits, enforcement, and legal measures--to protect Canada’s revenue base from non-compliance. We employ these activities to achieve our expected result that reporting non-compliance is detected and addressed.

We devote more of our compliance and enforcement resources to areas in which our analyses indicate that the risk and potential revenue consequences of non-compliance are highest. The activities we undertake to ensure compliance are guided by research into existing and emerging non-compliance trends and threats to the tax base. This research supports our sophisticated risk assessment systems which examine the characteristics of taxpayers to detect areas of possible non-compliance.

Non-compliance takes many forms, from errors and omissions to deliberate tax evasion. We verify compliance with the law, correct past mistakes, and educate taxpayers on the correct application of the law for the future. Audit and enforcement covers a range of activities--from routine verification procedures (such as matching third-party information), to limited examinations, to full audits. In the most serious cases, we carry out tax evasion and fraud investigations, which can lead to fines and imprisonment.

The integrity of Canada’s tax regime is also compromised by taxpayers who do not honour their obligations to pay the amounts they owe. For this reason, we have a program to collect tax debts. To decrease the risk that a debt will become uncollectable, we focus on collecting outstanding balances in a timely manner. Some of these arrears, however, are not recoverable for various reasons (such as the financial situation of the taxpayer). Consequently, an important element of our management of tax debt is to keep it within targeted levels. These two key aspects of debt management are reflected in our expected result for tax debt.

Our achievements against both of these expected results demonstrate how the CRA contributes to protecting Canada’s revenue base.

Detecting and addressing non-compliance are so vital to the protection of Canada’s revenue base that work toward achieving this result occurs almost everywhere in the CRA. Indeed, efforts toward this expected result are explicitly reported in three of our five program activity sections (PA2, PA3, and PA4), and are implicit in the other two (PA1 and PA5).

As described in our section on the Assessment of Returns and Payment Processing (PA2), we detect and address non-compliance by individuals through pre-assessment and post-assessment reviews.

Pre-assessment reviews

Despite the convenience and compliance benefits that third-party reporting provides, a risk remains that taxpayers will make errors on their tax returns, choose to under-report income, or overstate deductions or tax credits. Once tax returns are filed, we conduct pre-assessment reviews based on a risk-scoring approach to select returns for detailed review.

These reviews detect errors and omissions that result in significant reassessments every year, including $107.4 million in additional tax assessed in 2006-2007.

Post-assessment reviews

Our post-assessment work involves targeted reviews based on risk assessment and random reviews. Our random reviews facilitate both an estimate of the non-compliance rate for deductions and credits (see Figure 11), and continual refinement of our assessment systems.

Through our 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) with the amounts reported on third-party information slips. For the minority of taxpayers who make reporting errors, the matching process allows us to effectively identify and correct these errors.

Non-filing

The tax return is the basis for establishing filers’ tax liability and their entitlement to benefit programs (see for more information on the benefit programs we administer). The CRA supports filing compliance not only through the broad assortment of service programs discussed earlier, but also by conducting responsible compliance actions when taxpayers fail to file their tax returns. Our non-filer program is aimed at detecting high-risk cases based on danger of revenue loss and assessment potential. Our main strategy is to conduct a data match using third-party information and undertake enforcement actions as appropriate--including prosecution.

In 2006-2007, we identified a total dollar value of $2.4 billion from T1/T2 Non-filers and GST non-registrants, as well as about 7,400 GST/HST registrants who failed to file (see PA3, ).

Employer compliance

Canada’s tax administration system is greatly aided by employers and other third-party information reporting. Both play a vital role in maintaining compliance among the 25 million individual taxpayers. The relative risk of individual non-compliance related to deductions at source is very low.

There are, however, a number of compliance challenges associated with the obligation of employers to deduct payroll taxes from their employees, to remit these amounts periodically to the CRA, and to report those earnings to us on information slips. To promote compliance among employers, we use a variety of approaches, such as education, rulings, legislative instruments, computer-assisted enforcement reviews, audits, and prosecutions.

In 2006-2007, we identified a dollar value of $2.3 billion in Employer/Payroll/GST non-compliance (see PA3, ).

Audit and investigations

Generally speaking, our audit activities begin after tax returns are processed and assessments are sent to taxpayers. We manage our audit approach through a range of different programs tailored to the characteristics of specific groups. For example, large corporations conduct transactions worth many millions of dollars; they are also subject to complex elements of tax legislation. The dollars involved and the legislation at issue elevate the risk factors for large companies. As a result, we audit all large corporation files (where material tax-at-risk exists) over a two-year audit cycle. In 2006-2007, these audits identified a dollar value of $3.2 billion.

As mentioned earlier, part of our risk management strategy is to maintain an audit presence across all industry sectors and types of taxpayers. The section on Reporting Compliance (PA4) beginning on describes the measures that offer us assurance that reporting non-compliance is detected and addressed.

The Compliance Review, which we completed in 2004-2005, confirmed that the greatest risks to compliance include aggressive tax planning, the underground economy, and GST/HST fraud. As described in our section on Reporting Compliance (PA4), we have focused much of our audit and investigation resources on these types of non-compliance.

Our Special Enforcement Program conducts audits and undertakes other civil enforcement actions on individuals who derive or are suspected of deriving income from illegal activities. Our section on Reporting Compliance (PA4) provides more details on this program. In cases of suspected tax evasion and fraud, we conduct investigations to accumulate sufficient evidence to support conviction for deliberate or wilful evasion of Canada’s tax laws. These activities are a fundamental part of the CRA’s enforcement presence, and are essential to ensure a level-playing field for all taxpayers and businesses.

In addition to our regular ongoing audit and investigation activities to detect non-compliance, we also continued to focus on specific projects to strengthen our core business, which are described in our Corporate Business Plan 2006-2007 to 2008-2009. For example, as a result of an announcement in the 2005 federal budget, the CRA was allocated $8 million over five years as part of the Tobacco Compliance initiative. This past year, we conducted 175 compliance visits to tobacco manufacturers to promote compliance. Although we had planned to complete 300 such visits over the 2005-2006 and 2006-2007 fiscal years, we faced some challenges in hiring and training the staff required to undertake these additional compliance activities. We were also required to divert resources to the one-time Tobacco Products Inventory Tax introduced in the May 2006 federal budget. We intend to complete the remaining visits in 2007-2008. Overall, these compliance visits have demonstrated that licensees were generally compliant with their legislative and administrative obligations.

The registered plans sector: An emerging risk

Registered plans is another sector in which we have identified emerging compliance risks. These plans are important economic, fiscal, and social instruments that benefit millions of Canadians by permitting the deferral of tax on savings for retirement and post-secondary education. Based on risk assessments, we decided to streamline our registration processes in order to realign our resources to compliance activities. This realignment--coupled with audits undertaken through our random sampling compliance project--resulted in a 35% increase in the total number of audits conducted in 2006-2007. Once the materiality and program integrity impacts of these audits have been assessed, we should be in a better position to determine the scope of non-compliance in the sector.

Charities

The charitable sector has recently been the focus of ongoing regulatory review by the CRA. In 2006-2007, the overall results of our charities audits led us to the following conclusions:

• We need to continue to enhance our outreach and education efforts to registered charities in order to facilitate voluntary compliance.
• Cases of wilful non-compliance are minimal but do exist.
• The proper and timely completion of the T3010 registered charities information return remains a concern.

We will use these results to fine-tune our regulatory approach to the charitable sector.

The results discussed in the preceding pages demonstrate that we have continued in 2006-2007 to detect and address non-compliance.

As discussed in the section on Filing and Remittance Compliance (PA3), details of which begin on , we achieved the following in 2006-2007:

• we met our timeliness targets for the resolution of receivables;
• we exceeded our plans to resolve more than $10.4 billion in accounts with outstanding tax owing; and
• we resolved more than 90% in terms of the value of new intake as a result of collections activities in our TSOs.

We did not, however, achieve our expectation to reduce to less than 16% the proportion of tax debt that is greater than five years of age.

Overall, it is our assessment that we mostly met this Expected Result.

Managing Tax Debt

We work hard to encourage taxpayers to voluntarily comply with their obligation to pay on time. We also apply responsible enforcement remedies where needed to provide assurance to taxpayers who pay their taxes when due that the CRA manages outstanding debts effectively.

Unlike a private sector business that has processes in place to select and pre-screen its clients, the CRA deals with all taxpayers, whether they are good or bad risks, in remitting amounts owed. We have strategies in place to manage tax debt--which totalled $20 billion at the end of March 2007, an increase from the March 2006 balance of $18.5 billion. We use risk assessment and modern techniques to maximize our return on investment, while treating all taxpayers fairly and equally. Our strategy is designed to identify the millions of dollars of new tax debt arising every year, assess the risk represented by these accounts in terms of danger of loss, and identify the need for the appropriate actions to protect the Crown’s interests. These actions are a series of escalating strategies designed to manage both low-risk, high-volume accounts and lower-volume, high-risk accounts.

With most new tax debt, immediate forceful measures are not warranted, because many debts are paid once the taxpayer is notified of the amount owing. After a suitable period to allow for late payments, however, remaining debts are subject to a graduated series of measures that are applied to remind and encourage debtors to pay their arrears.

• An automated notice cycle and agents at our outbound call centre remind taxpayers of their obligations.
• Self-service telephone and Internet options are available to assist taxpayers who desire to manage their affairs themselves.
• A process is in place to automatically set off tax refunds against the outstanding low-dollar tax debt of low-risk, individual tax debtors.

We manage millions of low-risk accounts (representing income tax, corporate tax, GST/HST, and payroll source deductions) in this fashion on an ongoing basis, at a very low cost per file. As of March 31, 2007, the value of low-risk accounts managed through these strategies was $3.0 billion (see Figure 7).

Figure 7 Accounts Receivable Inventory Components

Accounts that present a greater risk are assigned to our TSOs for more intensive analysis and investigation. Here, the files are actioned on the basis of complexity, with the more complex files being assigned to our most experienced staff. More than 90% of our tax debt resources are located in our TSOs working with these higher-risk files.

At any given point in time, a portion of the outstanding tax debt being worked on is either resolved by negotiated acceptable payment arrangements or legal actions initiated by the CRA, such as garnishments or writs; or they are determined to be uncollectible and are written off. Over and above this, the remaining accounts include debts that we have secured, estimated bad debt that will ultimately be written off, work in progress, and accounts yet to be assigned.

We estimate that, of $14.0 billion in TSO tax debt inventories as of March 31, 2007, measures were in place on $6.7 billion in debt to generate payments or write off the accounts (see Figure 7). The remaining $7.3 billion represents work in progress, bad debts, secured amounts, and accounts yet to be assigned. Fundamentally, our tax collections program continues to improve inventory turnover, shifting accounts from “work in progress” to “actioned” as quickly and efficiently as possible. As reported to the Public Accounts Committee in 2006, we are constantly enhancing and improving our approach to the management of accounts receivable inventory, with significant focus being directed in the area of technological innovation and process improvements.

Tax administrations around the world have reported marked increases in tax debt inventories, a trend reported in various Organisation for Economic Co-operation and Development (OECD) studies. The contributing factors are acknowledged to be numerous and complex, as the impact of increased efficiencies in collection efforts are offset by large shifts in the intake of new debts, due to variables such as changing taxpayer compliance patterns, economic factors affecting business viability, and the impact of heightened compliance activity. Our focus on compliance activities has resulted in additional revenue for the Government of Canada, some of which is reflected in our accounts receivable.

This trend has been noted in Canada as well (see Figure 8). In the Auditor General’s May 16, 2006, Status Report, the growth in tax debt is noted, despite an increase in our collections productivity. The Auditor General’s recommendations reinforced the need for investment in debt management research to understand the make-up of tax debt and the reasons for its growth. In addition, the report recommended improvements to our tax debt performance information; risk-scoring and file management systems; and business processes--explaining that further increases in productivity could result in additional revenue recovery.

Figure 8 TSO Tax Debt Growth Due to Unresolved Intake

We concurred with these recommendations and have taken significant steps to continue existing efforts to strengthen our core business by improving our collections productivity through enhancements in these areas. Detailed action plans (see Schedule B) were provided to the Public Accounts Committee in 2006. Activities that are under way focus on significantly refining our program delivery model, improving our processes and systems infrastructure through the Integrated Revenue Collections (IRC) Project, and undertaking improvements designed to manage our tax debt workloads more effectively.

Our Approach: Redress

The availability of a dispute resolution process is integral to our tax administration. To earn and maintain the trust of taxpayers, we must have a redress process that is fair and is seen to be fair. Taxpayers who feel that they have been treated fairly have increased confidence in their dealings with us. In turn, taxpayer confidence in the CRA enhances our capacity to protect Canada’s revenue base, a benefit to all Canadians. A basic aspect of fairness is ensuring that taxpayers are informed of their rights to redress and how to exercise them.[Footnote 5] Making sure that the redress process is timely, accessible, and consistent also contributes to its actual and perceived fairness.

In addition, since the 1990s, taxpayer relief provisions have permitted the CRA in certain situations to be more flexible and responsive to taxpayers’ circumstances when it would be unreasonable or unfair to penalize them.

When taxpayers do not agree with us on a tax or penalty matter, they are entitled to a formal, objective review of their file. Our aim is to ensure that all taxpayers have access to responsive and impartial redress, as we discuss in our section on Appeals (PA5).

This past year, we again achieved positive results from our Quality Assurance Program. Our 2006-2007 results indicate some improvement in areas previously identified as deficient, although, in specific instances, they still require significant improvement to meet our benchmarks.

Overall, we feel we have mostly met our expected result related to redress activities. In doing so, we believe, we have fostered confidence in the fairness of Canada’s self-assessment system, thereby encouraging taxpayers to meet their obligations and promoting voluntary compliance.

Conclusion

Although we did not achieve our expectations related to some indicators, our estimates of taxpayers’ filing and registration compliance indicate that overall levels of voluntary compliance with Canada’s tax laws continued to be high in 2006-2007. We also recognize that improvements are needed in the area of remittance compliance, where our overall assessment is that we did not meet our expectations.

Most importantly, the reporting compliance results we have reported for 2006-2007 provide the foundation for our overall assessment that, for the majority of Canadians, the incidence and magnitude of non-compliance are relatively low, although in total this non-compliance is financially significant. Our conclusion, therefore, is that, in 2006-2007, the CRA continued to meet its strategic outcome, namely that taxpayers meet their obligations and Canada’s revenue base is protected.

Based on our achievements this past year in relation to our expected results, as well as the steps we have taken to strengthen our core business, we believe that we are delivering an appropriate mix of activities to fulfil our role in protecting Canada’s revenue base. On balance, we met our expectations in 2006-2007 in terms of information and processing and mostly met our Redress-related result. We feel that these results continued to have a positive influence on taxpayer behaviour, as reflected in the high levels of voluntary compliance discussed beginning on .

In 2006-2007, we also continued to achieve our expectations related to the detection and addressing of non-compliance. The effectiveness of our compliance programs results in additional revenues for the Crown; a portion of this additional revenue is accounted for as a receivable. We recognize that challenges remain in our management of the tax debt that results from this compliance activity. Our long-term tax debt collection strategies are yet to be fully implemented, while our short-term approach--though resolving more dollars each year--has not stemmed the growth of our tax debt inventory.

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

[Footnote 1] On May 28, 2007, the Minister of National Revenue announced two new redress initiatives, a Taxpayer Bill of Rights and a Taxpayers’ Ombudsman.

[Footnote 2] It should be noted that this emerging non-compliance is found in a relatively small segment of the population of individual taxpayers.

[Footnote 3] In 2006-2007, we removed the RRSP component of the key deduction and credit claims that were reported by individuals because we obtained third-party matching for this component. Since the RRSP claim population is very large, and has a relatively low non-compliance rate, the inclusion of this component had the effect of reducing the overall non-compliance rate for all claims as reported in our previous annual reports. To facilitate comparison of the 2005 rate of 14.7% with previous years, the overall non-compliance rate was recalculated without the RRSP component for program years 2003 and 2004. This resulted in rates of 13.9% and 15.5%, respectively.

[Footnote 4] Web Site Business User Survey, March 2007. We are cautious in attributing too much significance to the results, due to the response rate (34.5%).

[Footnote 5] On May 28, 2007, the Minister of National Revenue announced two new redress initiatives, a Taxpayer Bill of Rights and a Taxpayers’ Ombudsman. In addition to introducing these two new measures, the CRA will now track the types and number of complaints received through a new service complaints process.

Date modified:

2007-11-01