Reporting Compliance

Our Day-to-Day Activities

We undertake examinations, audits, and investigations to ensure compliance with Canada’s tax laws. This includes verification and enforcement activities at the domestic and international level, as well as the administration of international tax agreements. We also provide information to taxpayers to help them comply. We conduct research to better identify non-compliance and develop strategies to address it.

Our goal

In 2009-2010, our goal was to help protect Canada’s tax revenue through a range of verification, audit, and enforcement activities, as well as through education. Our activities focus on the accuracy and completeness of the information taxpayers use to determine their tax liability.

Our outcome

In 2009-2010, we continued our strong enforcement record, promoted public messaging to deter non-compliance, and enhanced the administration of the Voluntary Disclosures Program and the Scientific Research and Experimental Development program. We completed our second Compliance Review, identifying five major compliance priorities, and worked to improve our understanding of compliance risks that challenge the Canadian tax system.

Over the last few years, our assessment of having met our expected result for reporting compliance activities has been based on a variety of performance indicators as we try to find those that most effectively measure achievement of the result. This year, we have introduced several new indicators into the Performance Report Card, that focus on the extent to which our compliance activities resulted in a change to the amount of tax owed, and the revenue recovered through those changes. We see an ongoing challenge in measuring how effective our verification, audit and enforcement activities are in addressing and detecting overall reporting non-compliance

Our challenge

In 2009-2010, as in previous years, the increasing complexity of the Canadian economies presents ongoing challenges to detecting and deterring non-compliance. Although we continue to achieve strong ratings overall for our performance management framework, we recognize the need to further strengthen this area. This challenge is common to tax administrations internationally, but we will continue to work towards using the best measures available to assess that we are achieving the desired result for reporting compliance.

Spending Profile

Our 2009-2010 priorities

We committed to undertake a number of initiatives that focused on strengthening service and tax integrity. This section describes the work we are doing to improve service in compliance programs and address priorities relating to reporting compliance. The following information relating to our audit and enforcement programs illustrates the magnitude of these activities.

Strengthening service

To strengthen service delivery, we focused on increasing the accessibility and efficiency of our programs and services. For example, we began piloting our Electronic Transfer of Accounting Data initiative. This initiative was introduced in 2009-2010 as a pilot project in five of our Tax Services Offices. It includes a tool that allows businesses under audit to electronically send their books and records directly to the auditor by using My Business Account on the CRA Web site. In addition to protecting confidential taxpayer information, this initiative aims to save taxpayers time and increases our efficiency in conducting audits.

We also enhanced the administration of our Voluntary Disclosures Program (VDP) and our Scientific Research and Experimental Development program.

Voluntary Disclosures Program

We worked to improve the administration of the VDP in 2009-2010 through analysis of the current intake and environment. We also completed our annual quality review of the VDP in selected offices across Canada and found that all of the offices reviewed met our 90% internal quality standard. In addition, we promoted the VDP in news releases and tax alerts and incorporated it into our compliance initiatives. During 2009-2010, we saw an increase in both VDP cases received and unreported income identified.

Scientific Research and Experimental Development Program

In the 2008 federal budget, the CRA committed to enhancing the quality assurance methodology of the Scientific Research and Experimental Development (SR&ED) program. In 2008-2009, we consulted with stakeholders and, in turn, developed a national SR&ED quality assurance framework. This framework will help ensure SR&ED claims and decisions are appropriate and consistent with CRA policies and the governing legislation across the country. Based on this framework, the SR&ED Quality Assurance Operations manual and the requisite tools were developed in 2009-2010.

In the 2008 Federal Budget, the CRA also committed to reviewing the SR&ED policies and procedures. In 2009-2010, we analyzed, organized, and clarified all SR&ED policy information. Over the next two years, the SR&ED program will be conducting online consultations to get the public’s feedback on the new policy documents.

In 2009-2010, we expanded the filing capabilities of the CRA’s Corporation Internet Filing service to allow eligible corporations to file their SR&ED claims, with their income tax returns, using the internet.

Tax integrity

We continue to improve our understanding of the compliance risks that challenge the Canadian tax system. The priorities below were identified for Reporting Compliance in the Corporate Business Plan 2009-2010 to 2011-2012.

Aggressive tax planning

Some tax intermediaries promote aggressive tax plans and schemes that go beyond the spirit of the law and are designed to obtain tax advantages that were not intended by governments. These abusive schemes and transactions are used to reduce, avoid, or evade Canadian taxes, sometimes through international transactions and, in particular, through the use of tax havens. Left unchecked, aggressive tax planning presents a risk to the integrity and fairness of Canada’s tax system.

In 2009-2010, the CRA further addressed aggressive tax planning by implementing the International Tax Compliance Action Plan. We also undertook discussions with other tax administrations on tax information exchange agreements as part of our Exchange of Information initiative. On August 29, 2009, Canada signed its first tax information exchange agreement with the Netherlands Antilles.

The CRA worked with a number of international groups to identify and respond to international compliance threats as well as advance tax administration practices and protocols around the world. The CRA continued to participate in the cooperative analysis of international tax compliance issues through multilateral groups such as the Joint International Tax Shelter Information Centre (JITSIC). Member countries of JITSIC exchange information about specific abusive transactions and their promoters and investors within the framework of each country’s bilateral tax treaties. Some of these exchanges have led to audits relating to offshore debit card accounts, audits of promoters of aggressive tax planning schemes, and the identification of potential tax haven abusers.

Our compliance activities targeted interprovincial tax avoidance. The CRA continued to implement its action plan by engaging the provinces in identifying and challenging interprovincial tax avoidance arrangements. In 2009-2010, the CRA completed 107 interprovincial tax avoidance cases with provincial recoveries of over $190 million.

Underground economy

To combat the underground economy (UE), our goals in 2009-2010 were to increase awareness of this issue among Canadians and to take effective actions to reduce its occurrence. We used a mix of education, outreach, communication, and compliance actions to meet our objectives. We also worked with other federal agencies and departments, provincial governments, tax administrations in other countries, international organizations, professional organizations, and key industry groups to share best practices and to develop innovative strategies to address the UE.

The CRA continued to implement the Underground Economy Compliance Strategy action plan. A number of pilot projects tested innovative compliance approaches to detect and deter UE activity. Nine underground economy projects came to an end in 2009-2010. Their results will be analyzed to determine whether new processes or techniques can be integrated to enhance our program activities, our risk assessment systems, and our strategies.

Final reports of past UE pilot projects will also be reviewed to identify best practices that can be added into our regular compliance activities.

GST/HST high-risk compliance

In 2009-2010, the CRA continued to implement its GST/HST High Risk Compliance Strategy action plan. Our approach to GST/HST compliance includes:

• enhancing our enforcement activities;
• improving our ability to identify high-risk registrants and refund claims before refunds are issued; and
• broadening our engagement of stakeholders.

To strengthen Agency-wide capacity to address willful non-compliance, three
GST/HST high risk pilot projects were completed in 2009-2010. The results of these projects will be analyzed to determine if new processes or techniques can be integrated into our GST/HST compliance activities and strategies.

Expected result

Our expected result is the criteria we use to measure our activities and report to Canadians on their effectiveness. We carry out our Reporting Compliance activity to achieve the following expected result.

Voluntary Disclosures Program

The purpose of the VDP is to promote voluntary compliance by providing taxpayers with an opportunity to correct past omissions, thus rendering themselves compliant. A taxpayer cannot use the VDP to disclose only a current year income tax return simply to avoid paying the late-filing penalty. In some cases, the VDP also brings new taxpayers to the CRA.

As indicated in the above table, in 2009-2010, we took in and processed more disclosures and identified more unreported income than the previous year.

Scientific Research and Experimental Development Program

The Scientific Research and Experimental Development (SR&ED) program is the largest single source of federal government support for industrial research and development. Our service standards relate to the timeliness with which we process SR&ED claims. In 2009-2010, SR&ED continued its strong performance record and exceeded established targets for its four service standards. Please refer to the Performance Report Card on page for further information on the CRA’s performance against service standards.

Aggressive tax planning

Our strategy to focus more of our audit resources in this area has increased the number of aggressive tax planning cases completed. The table to the right provides additional information on the volume of aggressive tax planning activities completed this past year. These results are included in the results table for the international and large business cases completed table on the next page. It is noteworthy that the twelve tax shelter lead audits that we undertook in 2009-2010, exceeding our target of ten such audits, involved almost 46,000 participants.

Underground Economy

We furthered activities during 2009-2010 to address the underground economy (UE), examples of which are found in sectors including construction, home renovations, hospitality, taxi, automotive repairs and sales, and tourism. Under the Contract Payment Reporting System (CPRS), individuals, partnerships, and corporations whose primary activity is construction, are required to annually report their payments to sub-contractors for construction services to the CRA. The information received is matched against data maintained by CRA to identify those who have not filed tax returns or have under-reported their income.

During 2009-2010 our small and medium -sized enterprises UE audit activities detected unreported gross income of $521 million. The table above provides additional information on the volume of UE activities completed this past year. These results are a sub-set of the results for small and medium enterprise audits presented in the table on the next page.

Audit teams in tax service offices carry out local outreach initiatives, focusing on business sectors where cash transactions are prevalent. These activities raise the visibility and profile of the CRA, help taxpayers meet their obligations through education and assistance, and inform businesses about their responsibilities and obligations. During 2009-2010, these activities included participation at 42 trade shows and 38 community and wharf visits.

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. The Federal/Provincial/Territorial UE Working Group continues to explore new opportunities to jointly address the UE through research studies, information sharing, communication, education, and compliance initiatives.

Our 2009-2010 Program Results

International and large business

International audits tackle issues of transfer pricing and residency, primarily as it relates to multi-national corporations. Our large business audit activities focus on corporations with annual revenues over $50 million. The table shows the volumes of cases completed this past year. As indicated in our Performance Report Card on , overall, we far exceeded our estimates during 2009-2010 of the number of international and large business files we planned to complete.

Small and medium-sized enterprises

Activities related to Small and medium enterprises (SME) are directed at a variety of taxpayer segments. Office Audit examines a large number of cases handled through telephone, letter, or face-to-face interviews. Small business audits include owner-operated businesses, small corporations, and partnerships that have revenues of less than one million dollars. Medium-sized business audits, which encompass individuals with revenues over one million dollars and corporations with revenue between $1 million and $50 million, can include trusts, non residents, and public service bodies. Other SME-related activities include such programs as the Prepayment Risk Assessment Program, Specialty Audit Program, Film Industry Services Program, GST/HST Non-Resident Audits, and International Waivers and Dispositions. The table on the prior page shows the volumes of cases completed this past year. As indicated in our Performance Report Card on , overall, we exceeded our estimates during 2009-2010 of the number of SME files we planned to complete.

Enforcement

Tax fraud and evasion represent the most flagrant instances of non-compliance with tax statutes. Our Special Enforcement Program (SEP) conducts audits and undertakes other civil enforcement actions against individuals and businesses who are known or suspected of deriving income from illegal activities. Suspected significant cases of fraudulent non-compliance with the legislation we administer are dealt with by our Criminal Investigations Program, who investigate and refer cases for prosecution to the Public Prosecution Service of Canada. We also publicize each case which results in a conviction for wilful non-compliance with this legislation. Court convictions are publicized in local, regional, and national media to communicate the consequences of fraud committed against the Canadian public and to maximize the deterrent effect of these convictions. The table above summarizes key enforcement activities carried out in 2009-2010.

To help protect Canada’s revenue base, we work to detect non-compliance, take appropriate action, and deter future cases of reporting non-compliance through our audit and enforcement activities. We strive to establish a relationship based on co-operation, openness, and transparency—key factors in an efficient audit. The Canadian public and the CRA have a mutual interest in making sure our audits are conducted efficiently and concluded in a timely fashion.

Fiscal impact

Fiscal impact refers to the additional amounts of taxes owing that are identified through our compliance activities. It also includes the present value of future tax assessments (including interest and penalties). Our audit programs detected a total of $9.9 billion in fiscal impact during 2009-2010. This amount included $7.2 billion identified through international and large businesses audits; $2.1 billion resulting from audits and examinations in small and medium-sized enterprises; $448 million from special-incentive audits; and $150.5 million as a result of audits related to our Special Enforcement Program. Additionally, $866.3 million that had been included in our program results in prior years was refunded during 2009-2010 to Canadian taxpayers because of double taxation issues with foreign taxpayers.

Figure 14 Fiscal Impact of Reporting Compliance Activities

Data quality: Good

Performance Report Card

Date modified:

2010-11-02